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1 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

CONTENTS:
TO BE SCANNED IN STILL....................................................................................................................................................................................5
(A)…..SHORT NOTES ON FRAMEWORK ETC..................................................................................................................................................6
(B)…..QUESTIONS:.................................................................................................................................................................................................13
OWN QUESTIONS & ANSWERS.......................................................................................................................................................................13
PASTEL/and own stuff........................................................................................................................................................................................13
Close corporations:............................................................................................................................................................................................15
Revenue-ias 18....................................................................................................................................................................................................15
THE FRAMEWORK OF ACCOUNTING...........................................................................................................................................................19
PRESENTATION OF FIN STATS.......................................................................................................................................................................19
INCOME TAX.....................................................................................................................................................................................................21
PPE:....................................................................................................................................................................................................................23
intangible assest; ias38.......................................................................................................................................................................................31
Gov grants:.........................................................................................................................................................................................................31
investment property.............................................................................................................................................................................................32
CURRENT PLACE OF LAST QUESTION.........................................................................................................................................................32
Some questions from another notes page - mixed up, some may be repeated here in places, look up and down.............................................32
changes in accounting policies and errors.........................................................................................................................................................34
PARTNERSHIPS:...............................................................................................................................................................................................35
COMPANIES......................................................................................................................................................................................................37
BASIC EARNINGS PER SHARE:.......................................................................................................................................................................41
1)INVENTORIES:...............................................................................................................................................................................................42
borrowing costs:.................................................................................................................................................................................................44
related parties.....................................................................................................................................................................................................44
EARNINGS PER SHARE:...................................................................................................................................................................................44
GROUP STATEMENTS:....................................................................................................................................................................................44
GROUP COMPANIES:......................................................................................................................................................................................44
LEASES...............................................................................................................................................................................................................47
cash flow ias 7.....................................................................................................................................................................................................47
(C)TERMS:.............................................................................................................................................................................................................48
(D) TRICKS:...........................................................................................................................................................................................................48
(E) EXAM TIPS:.....................................................................................................................................................................................................49
1…..FRAMEWORK.................................................................................................................................................................................................50
The South African Institute of Chartered Accountants includes the following study objectives, for external financial reporting, that students
must learn in their curriculum:...........................................................................................................................................................................50
KEY QUESTIONS TO BE ABLE TO ANSWER : as per SAICA, and UNISA “key questions” for this chapter:.............................................50
THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE REQUIRED TO BE ABLE TO
BE ANSWERED , GIVEN NEARLY VERTABIM BY SAICA AND UNISA, FOR STUDENTS TO BE ABLE TO ANSWER(syllabus key
points):................................................................................................................................................................................................................51
The Application of statements of GAAP.............................................................................................................................................................57
UNIVERSAL ACCOUNTING DENOMINATOR The common unit of measurement in Acc. is money..............................................................58
2..…PRESENTATION : IAS1.................................................................................................................................................................................59
1) Background SCOPE AND OBJECTIVES OF FIN. STATS............................................................................................................................59
2)General Features for the Presentation of Fin Stats........................................................................................................................................59
5)Jse Listing Requirements:................................................................................................................................................................................60
ACTUAL FINANCIAL STATEMENTS : STRUCTURE AND CONTENT OF FINANCIAL STATEMENTS.............................................................................................61
GENERAL ACCOUNTING POLICY IN THE NOTES:......................................................................................................................................61
Profit before tax note :........................................................................................................................................................................................61
1) IDENTIFICATION OF FINANCIAL STATEMENTS:...................................................................................................................................62
) COMPONENTS OF FIN STATS......................................................................................................................................................................62
SFP......................................................................................................................................................................................................................62
SCI......................................................................................................................................................................................................................69
3…..REVENUE : IAS 18 (AC111) ; SIC31(AC431); ED204; CIRCULAR09/06; IFRIC12(AC445); IFRIC13(AC446); IFRIC 15 (AC448)
.....................................................................................................................................................................................................................................74
EXAM QUESTIONS GUIDE:.............................................................................................................................................................................74
BACKGROUND:................................................................................................................................................................................................74
scope...................................................................................................................................................................................................................74
Recent important changes...................................................................................................................................................................................74
definition:............................................................................................................................................................................................................75
MEASUREMENT AND RECOGNITION REQUIREMENTS OF REVENUE: per IAS18.................................................................................75
1- measurement of revenue:................................................................................................................................................................................75
2- Recognition of revenuE..................................................................................................................................................................................80
7-DISCLOSURES...............................................................................................................................................................................................93
2 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
INCOME TAXES IAS 12 , SIC 21, SIC 25 , AC501 , AC502 & CIRCULAR 1/2006........................................................................................95
SPECIAL OWN NOTES................................................................................................................................................................................................95
BACKGROUND.............................................................................................................................................................................................................96
CURRENT AND DEFERRED TAX:....................................................................................................................................................................96
CURRENT TAX.....................................................................................................................................................................................................96
Disclosure of Current Tax in Financial Statements...........................................................................................................................................96
If SARS Grants Extended Payment Terms Specially To A Specific Company....................................................................................................97
Current Income Tax on Companies:...................................................................................................................................................................97
Capital Gains on Companies..............................................................................................................................................................................97
Secondary Tax on Companies:...........................................................................................................................................................................97
DEFERRED TAX:..................................................................................................................................................................................................98
METHOD OF DOING DEFERRED TAX:.........................................................................................................................................................99
STEP 2 : GET THE TEMPORARY DIFFERENCE..........................................................................................................................................105
STEP 3 : CHECK FOR EXEMPTIONS FROM RECOGNITION OF DEFERRED TAX for certain temp .differences..................................106
STEP 3 :CONSIDER LIMITATIONS FOR DEFERRED TAX ASSET FOR DEUCTABLE TEMPORARY DIFFERENCES AND UNUSED
TAX LOSSES OR CREDITS.............................................................................................................................................................................107
STEP 4 : APPROPRIATE TAX RATES & LAWS.............................................................................................................................................108
STEP 5: RECOGNITION OF THE DEFERRED TAX INCOME OR EXPENDITURE...................................................................................109
SPECIFIC ISSUES...............................................................................................................................................................................................109
FINANCIAL STATEMENT PREPARATION:...................................................................................................................................................110
Rules 1: ias 1 REQUIREMENTS.....................................................................................................................................................................110
Rules 2: IAS 12 REQUIREMENTS : OFFSETTING.......................................................................................................................................110
1 Of 3 : Disclosure : IAS 12 REQUIREMENTS : PRESENTATION & DISCLOSURE.................................................................................110
2 Of 3 : Discosure : IAS 12 REQUIREMENTS : THE TAX RECONCILLIATION or TAX RATE RECONCILLIATION............................110
3 Of 3 : Disclosure : CIRCULAR 1 / 2006 : DISCLOSURE OF CHANGE IN MANNER OF RECOVERY ( Eg: Use To Sale)...........110
UNUSED TAX LOSSES AND CREDITS ............................................................................................................................................................................116
PRESENTATION AND DISCLOSURE:...........................................................................................................................................................123
Extra parts added from each chapter where there is a section on deferred tax for that particular ‘ias’........................................................128
INCOME STATEMENT METHOD (for interest sakes)...................................................................................................................................129
IAS PROPERTY PLANT & EQUIPMENT.........................................................................................................................................................131
IAS 16 PROPERTY PLANT & EQUIPMENT.....................................................................................................................................................................131
HOW TO JOURNALISE SALE OF PPE , REALISATION ACCOUNT ETC...................................................................................................................................131
SPECIAL NOTES.........................................................................................................................................................................................................132
SCOPE:.....................................................................................................................................................................................................................134
DEFINITIONS:............................................................................................................................................................................................................134
NATURE OF PPE.......................................................................................................................................................................................................135
RECOGNITION:...............................................................................................................................................................................................135
MEASUREMENT:............................................................................................................................................................................................139
revaluation model:............................................................................................................................................................................................147
DEPRECIATION:.............................................................................................................................................................................................152
IMPAIRMENT LOSSES AND COMPANSATION FOR LOSS:........................................................................................................................154
DERECOGNITION:.........................................................................................................................................................................................155
TAX IMPLICATIONS:......................................................................................................................................................................................155
DISCLOSURE:.................................................................................................................................................................................................155
INTANGIBLE ASSETS: IAS38 & SIC 32...........................................................................................................................................................159
INCLUSIONS & EXCLUSIONS.........................................................................................................................................................................159
EXCLUSIONS...................................................................................................................................................................................................159
INCLUSIONS:..................................................................................................................................................................................................159
DEFINITION OF INTANGIBLE ASSET:..........................................................................................................................................................159
RECOGNITION...................................................................................................................................................................................................160
MEASUREMENT................................................................................................................................................................................................160
INITIAL MEASSUREMENT.............................................................................................................................................................................160
SUBSEQUENT MEASUREMENT:....................................................................................................................................................................163
INDEFINITE USEFUL LIFE...............................................................................................................................................................................163
FINITE USEFUL LIFE.........................................................................................................................................................................................164
USEFUL LIFE..................................................................................................................................................................................................164
RESIDUAL VALUE:.........................................................................................................................................................................................164
AMORTISATION METHODS..........................................................................................................................................................................164
IMPAIRMENTS...................................................................................................................................................................................................164
RETIREMENTS AND DISPOSALS...................................................................................................................................................................164
If separate COMPONENTS ARE REPLACED / ETC......................................................................................................................................164
TAXATION..........................................................................................................................................................................................................164
FINANCIAL STATEMENT PRESENTATION:.................................................................................................................................................164
GOVERNMENT GRANTS IAS 20 , SIC10.........................................................................................................................................................166
3 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
SCOPE:.................................................................................................................................................................................................................166
DEFINTIONS :............................................................................................................................................................................................................166
RECOGNITION:..................................................................................................................................................................................................166
GENERAL ACC. ASPECTS................................................................................................................................................................................166
GRANTS RELATED TO ASSETS:.....................................................................................................................................................................166
GRANTS RELATED TO INCOME :..................................................................................................................................................................167
REPAYMENTS OF GRANTS:............................................................................................................................................................................168
SPECIFIC FORMS OF GOVERNMENT GRANTS:..........................................................................................................................................168
TAX SPECIAL IMPLICATIONS........................................................................................................................................................................169
DISCLOSURE......................................................................................................................................................................................................169
IAS 36 IMPAIRMENT...........................................................................................................................................................................................170
SCOPE..................................................................................................................................................................................................................170
WHEN TO TEST FOR IMPAIRMENT:..............................................................................................................................................................170
RECOGNITION AND MEASUREMENT..........................................................................................................................................................170
MEASUREMENT:...............................................................................................................................................................................................171
measuring value of INTANGIBLE asset with indefinite useful life.................................................................................................................171
FAIR VALUE LESS COSTS TO SELL:............................................................................................................................................................171
VALUE IN USE:...............................................................................................................................................................................................171
INDIVIDUAL ASSET : RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS....................................................................171
REVERSAL OF AN IMPAIRMENT LOSS FOR AN INDIVIDUAL ASSET:....................................................................................................172
CGU: CASH GENERATING UNITS................................................................................................................................................................172
CORPORATE ASSETS :...................................................................................................................................................................................172
TAXATION........................................................................................................................................................................................................172
DISCLOSURE: Impairments...........................................................................................................................................................................173
INVESTMENT INCOME......................................................................................................................................................................................177
DEFINITIONS:.....................................................................................................................................................................................................177
SCOPE:.................................................................................................................................................................................................................177
DISTINGUISH BETWEEN INVESTMENT & OWNER OCCUPIED PROPERTY................................................................................................................................177
RECOGNITION & MEASUREMENT:...............................................................................................................................................................177
RECOGNITION :.................................................................................................................................................................................................178
MEASUREMENT:...............................................................................................................................................................................................178
TRANSFERS:.......................................................................................................................................................................................................179
TRANSFERS TO INVENTORIES.....................................................................................................................................................................179
Transfers from inventoties................................................................................................................................................................................179
TRANSFERS TO PPE.......................................................................................................................................................................................179
TRANSFER FROM PPE...................................................................................................................................................................................179
DISPOSALS.........................................................................................................................................................................................................179
INTRAGROUP INVESTMENT PROPERTY.....................................................................................................................................................179
DISCLOSURES....................................................................................................................................................................................................179
DEFERRED TAX.................................................................................................................................................................................................180
CHANGE IN ACCOUNTING ESTIMATE/ERRORS.......................................................................................................................................181
SCOPE:.................................................................................................................................................................................................................181
DEFINITIONS:.....................................................................................................................................................................................................181
ACCOUNTING POLICIES:.................................................................................................................................................................................181
IS IT COMPULSORY TO AAPLY AN ACCOUNTING POLICY PRESCRIBED BY A STATEMENT:...........................................................182
IS IT COMPULSORY TO AAPLY AN ACCOUNTING POLICY PRESCRIBED BY A STATEMENT:
4 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

To be scanned in still
1. Government grants :grants related to income section : see example of complex salaries on page 328 gaap text. SCAN it in !
2.
5 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

(A)…..SHORT NOTES ON FRAMEWORK ETC.


Note : any question which asks if something may be recognized in the accounting records MUST HAVE 3 THINGS :Remember this in any
question like this (1 point per item below) this is universal, it is the ‘Framework’ recognition points.
1.1.1.Definition of elements of fin stats
1.1.2.Probability of economic benefit flow out/in
1.1.3.Must be able to be Reliably measured

INCOME TAX
1. Definition : TAX BASE : lAS 12: The Tax Base of an asset or a liability is the amount attributed to that asset or liability for tax
purposes
2. Definition : TAX BASE OF ASSET: The tax base of an asset is the amount that will be deductible [ you can deduct it from your
future taxable income eg you can deduct : future wear & tear from future income for tax purposes] for tax purposes against any
taxable economic benefits that will flow to an entity when it recovers the carrying amount of the asset ..[ in future periods] . If those
economic benefits will not be taxable, the tax base of the asset is equal to its carrying amount.
3. Definition : TAX BASE OF LIABILITY: The tax base of a liability is its carrying amount, less any amount that will be deductible[ future tax
deduction : you can deduct it from your future taxable income eg for a future warranty costs liability , you can deduct any actually paid
future warranty costs from future taxable income ] for tax purposes in respect of that liability in future periods ..[when that liability is
settled] . In the case of revenue which is received in advance, the tax base of the resulting liability is its carrying amount, less any
amount of the revenue that will not be taxable in future periods.
4. Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in advance, the tax base of the
resulting liability is its carrying amount, less any amount of the revenue that will not be taxable in future periods.
5. Temporary differences are differences between the carrying amount of an asset or liability in the statement of financial position and
its tax base. Temporary differences may be either:
6. Taxable temporary differences : which are temporary differences that will result in taxable amounts in determining taxable profit (tax
loss) of future periods when the carrying amount of the asset or liability is recovered or settled; or
7. Deductible temporary differences : which are temporary differences that will result in amounts that are deductible in determining
taxable profit (tax loss) of future periods
8. EXAMPLES OF TAX BASES OF ASSETS:that will be deductable, unless not taxable future benefits
8.1. TRADE RECEIVABLES :
Tax Base = Carrying amount : because future economic benefits are not taxable , because it was
already included in sales, so in taxable income, when it was recoded , so rule 2.
Unless: (unless on you are on SARS payments basis, not invoice basis, of income tax, then full
amount will be taxable in the future, then tax base is = zero, unless some deductions are
allowed for tax, then tax base will be the amount of those deductions.

8.2. SPECIAL CASE :eg: RESEARCH COSTS WRITTEN OFF AS PERIOD COST :IN FIRST YEAR, WHERE SARS
ALLOWS A 50/30/20 DEDUCTION.

Tax Base = 10000 – 50% aleady written off, leaves 5000 deductable in future.
Carrying Zero (it was written off as period costs)DO NOT JUST DEEM IT TO BE 10000 in your
Amount head!!!!
Less : Tax Base R5000
=Temp.Diff (5000) negative - 5000, where if you had said ‘carrying amount was 10000 and
not 0, you would have had positive +5000 .

8.3. DEPRECIATION : Tax Base Cost


Less: Accumulated depreciation
Less: Scrap Value Residual Amount ( if this will not be deductable for tax in that country)
= Tax Base (wear & tear to be claimed in the future
6 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

9. EXAMPLES OF TAX BASES OF LIABILITIES:less that will be deductable


9.1. FINANCE LEASE :
Start with: Carrying Amount in books eg : R1140
LESS: R140 VAT included in it, because it is all deductable immediately on cash value of lease
,so VAT won’t be deductable in the future.
= R1000 Amount that will be deductable …it is taken as if SARS will allow this as a deduction
Deductable in the future by textbook, to make it simple.
:
Tax Base= “Carrying amount “ less “Deductable in Future”
= R1140
less R1000 ( without non-deductable part in it)
Tax Base = R140

9.2. PROVISION FOR WARRANT COSTS:


Start with: Carrying Amount in books eg : R5000
LESS: 0
Deductable =R5000 Amount that will be deductable = all future warranty costs = so it is the full
: amount, since it will all be deductable as an expense if paid out in the future. ( if you are
not sure if it will be paid out or not, just take it as if it will be paid out..it is a liability mos)
Tax Base= 0, Zero

9.3. LOAN:
Start with: Carrying Amount in books eg : R5000
Deductable 0, Zero : since the repayment of the loan itself will have no tax consequences. If interest
: is payable it may be tax deductable OR MAY NOT ,NOT SURE????ask lecturerl
LESS: 0
Tax Base= “Carrying amount “ less “Deductable in Future”
= R5000
less 0
Tax Base = R5000 Full Value of Liability , so it is the full amount, since it will all be deductable as an
expense if paid out in the future.
7 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

1. EXAMPLES OF TAX BASES OF REVENUE RECEIVED IN ADVANCE: less that will not be taxable
a. DEPOSIT for manufacturing job to be done. :
1st Calc. :
LESS:
=Not Taxable
2nd Calc. Tax “Carrying amount “ less “Not Taxable in Future”
Base
Start With R1000
Less 0 ( if it is assumed [by textbook] that the deposit will only be taxed in the future when the
job is completed)
Tax Base = 0

b. RENT :
1st Calc.:
LESS:
= Not Taxable
2nd Calc. Tax “Carrying amount “ less “Not Taxable in Future”
Base
Start With R1000
less R1000 none of the carrying amount will be taxable in future, since SARS taxes it all on
“Receipt” of cash immediately)
Tax Base = 0

1.1.Most important user of fin. stats. = shareholders : investors/equity holders/risk capital providers.
DEFINITIONS OF THE ONLY 5 ELEMENTS OF FIN STATS.
a) ASSETS:
i) Definition : An Asset of an Entity is :
(1) A resource
(2) that is under the control of the entity
(3) that will result in future economic benefits flowing to the entity
(4) that originated as a result of past events.

b) LIABILITIES:
i) Definition : A liability of an entity is:
(1) A present obligation
(2) Arising from past events
(3) The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

c) EQUITY;
i) Definition: The residual interest in the assets of the entity after deducting all its liabilities.

d) INCOME:
i) Definition :Income is described as
(1) Increases in economic benefits during the accounting period
(2) In the form of inflows or enhancements of assets or decreases of liabilities
(3) That result in increases in equity other than those relating to contribution from equity participants.

e) EXPENSES:
i) Definition : expenses are defined as
(1) Decreases in economic benefits during the accounting period,
8 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(2) In the form of outflows or depletion of assets or incurrance of liabilities
(3) That result in decreases in equity other than those relating to distributions to equity participants.

f) REVENUE:
i) The GROSS INFLOW of economic benefits during the(? Accounting?) period
ii) That arises in the course of ORDINARY ACTIVITIES of the entity
iii) That results in increases in equity , excluding the contributions of equity participants.

g) FAIR VALUE
i) is the amount for which
ii) an asset could be exchanged
iii) or a liability settled
iv) between knowledgeable, willing parties in an arm’s length transaction.

h) PROVISION : a PROVISION IS : A LIABILITY of uncertain timing and amount . (get contingent liability etc right too!,
REM if you do not OWE money no PROVISION can be created somehow.)
i) So it MUST SATISFY THE DEFINITION OF LIABILITY , AND OF PROVISION …BOTH OF …, to qualify .
ii) A provision may be recognised:
iii) If it is a liability of uncertain timing and amount …and definition of liability is as follows :
iv) • if a company has a present obligation; (½)
v) • as a result of a past event; (½)
vi) • where it is probable that there will be an outflow of economic benefits to settle the obligation; and (½)
vii) • a reliable estimate of the obligation can be made.
MEASUREMENT AND RECOGNITION CRITERIA (for elements of fin stats, in order to be part on SCI or SFP)

i) FIRSTLY IT MUST SATISFY THE REQUIREMENTS OF THE DEFINITION OF THE 5 ELEMENTS of fin stats.-assets,liabilities,etc.

ii) Then , for each of the following types it must ALSO satisfy the following Recognition & Measurement criteria.

iii) REVENUE (from IAS18)


(1) MEASUREMENT:
(a) At Fair Value of Consideration received or receivable.(see definition of fair value)
(2) RECOGNITION:
(a) Probability of Future Economic Benefit (flowing to the entity- there must be probability of)
(b) Requirement of Reliable Measurement (must be able to be measured)
iv) PPE:
(1) MEASUREMENT:
(a) IAS 16. 15 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its
cost
(2) RECOGNITION:
(a) IAS 12. 7 The cost of an item of property, plant and equipment shall be recognised as an asset if, and only if:
(i) (a) it is probable that future economic benefits associated with the item will flow to the entity; (it is not
unsaleable or useles)
(ii) (b) and the cost of the item can be measured reliably.
v) INTANGIBLE ASSETS :
(1) MEASUREMENT: An intangible asset shall be measured initially at cost .
(2) RECOGNITION:
(a) IAS38. 18 The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
(i) (a) the Definition of an intangible asset
1. Definition : An Intangible asset is an Identifiable, Non-Monetary Asset without physical presence.
(ii) (b) the Recognition criteria ….(which are as follows:)
1. An intangible asset shall be recognised if, and only if:
a. (a) it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity; and
b. (b) the cost of the asset can be measured reliably.
2. 22 An entity shall assess the probability of expected future economic benefits using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist over
the useful life of the asset.
3. 23 An entity uses judgement to assess the degree of certainty attached to the flow of future economic benefits
that are attributable to the use of the asset on the basis of the evidence available at the time of initial
recognition, giving greater weight to external evidence..

IAS NUMBERING:
FRAMEWORK FRAMEWORK
IAS 1 PRESENTATION
IAS 2 INVENTORIES
IAS12 INCOME TAX
IAs 18 + circ09/06 + REVENUE
IAS 38 +SIC 32 Intangible assets.
IAS 16 PPE
IAS 20 GOCERNEMNT
GRANTS
9 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
QUALITATIVE CHARACTERISTICS OF FIN STATS.
1.1.1. Understandability (reasonable knowledge & willingness study reasonable diligence)
1.1.2. Relevance (predictive,confirmatory roles ,does influence economic decisions,relevant to econ.decis.)
1.1.2.1. Material
1.1.3. Reliability (It Is Reliable when free of 1-material errors and 2-bias 3-faithfullly represents what purports)
1.1.3.1. Fair Presentation
1.1.3.2. Prudent
1.1.3.3. Complete
1.1.3.4. Neutral
1.1.3.5. Substance over Form
1.1.4. Comparability (through time & against other entities , similar transactions/events , acc. policies)
UNDERLYING ASSUMPTIONS
1.1.1. Accrual basis : when they occur and not as cash or its equivalent is received or paid , and also within the accounting period to
which they relate.
1.1.2. Going concern Assumption : intention + need
OBJECTIVES OF FIN STATS. (vertabim from framework itself)
1.1. To provide info about the fin pos fin perf + ch in fin pos
1.2. of an enterprise
1.3. that would be usefull to a wide range of users
1.4. in making economic decisions
COMPONENTS OF FIN STATS
1.1. SFP
1.2. SCI
1.3. St of Cash Flows
1.4. St Ch EQ
1.5. Notes to the fin stats
GENERAL FEATURES OF FIN STATS. IAS 1.15 -.46
1.1. Fair Presentation & Compliance with IFRS
1.2. Going Concern
1.3. Accrual Basis
1.4. Materiality & Aggregation
1.5. Offsetting
1.5.1. Frequency of Reporting
1.5.2. Comparative Information
1.5.3. Consistency Of Presentation

CONCEPTS OF CAPITAL MAINTENANCE


1.5.4. Financial :
1.5.4.1. CAPITAL IS EQUAL TO THE NET ASSETS OF A COMPANY: in money amount value of.
1.5.4.2. Historical cost
1.5.4.3.2 methods of measurement:
1.5.4.3.1. Incl. inflation :Nominal Monetary Units : ie: inflation
1.5.4.3.2. Excl. inflation :Units of constant Purchasing
1.5.4.4. In terms of this, capital is maintained if net assets at the beginning of the period is equal to net assets at end of period,
after excluding any distributions to or contributions from owners of the equity
1.5.5. Physical
1.5.5.1. CAPITAL IS EQUAL TO THE PRODUCTION CAPACITY OF A COMPANY eg: number of units produced per day
1.5.5.2. Current cost measurement basis

IDENTIFY THE PURPOSE AND STATUS OF THE FRAMEWORK


A) PURPOSE OF THE FRAMEWORK
The purpose of the Framework is to:

(a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing
International Accounting Standards;
(b) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation
of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International
Accounting Standards;
(c) assist national standard-setting bodies in developing national standards;
(d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form
the subject of an International Accounting Standard;
(e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;
(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with
International Accounting Standards; and
(g) provide those who are interested in the work of IASC with information about its approach to the formulation of International
Accounting Standards.
B) STATUS OF THE FRAMEWORK
1. The Status of the framework is that :
a. It is not as IAS and thus does not give any standards for any measurement or disclosure issue.
b. If there is a dispute between the framework and an IAS, then the IAS is the one that must be followed.
2. USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY INVESTORS, THE GENERAL INFORMATION
NEEDS OF OTHER USERS , specify the users and their need for information .

Most important users = 1-Providers of finance eg banks 2- Equity investors, namely shareholders.
10 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(a) EQUITY INVESTORS. : Ability of the entity to pay 1-Dividends & 2-Buy, Hold or Sell : The providers of risk capital and their advisers
are concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they
should buy, hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.

(b) GENERAL INFO NEEDS OF OTHER USERS


The framework mentions that if the fin stats provide sufficiently for needs of equity investors, that it should be good enough for all other
users as well.
(a) Employees. Stability and profitability remuneration, retirement benefits and employment opportunities.
(b) Lenders. Paid when due.
(c) Suppliers and other trade creditors.: Paid when due
(d) Customers. continuance of an entity , some are quite dependent on entity.
(e) Governments and their agencies. regulate the activities of entities, determine taxation statistics allocation of resources.
(f) Public. Local economy , people they employ , and their patronage of local suppliers
SPECIFY THE FOUR DIFFERENT MEASUREMENT BASES TO MEASURE THE ELEMENTS.
1.1.1. The following measurement bases are identified in Para.100 of Framework.:( ‘cash’ always means ‘cash or cash equivalents’)
1.1.1.1. HISTORICAL COST: assets: at amount paid/value exchanged for it / liabilities : valued at the amount of proceeds
received in exchange for the obligation(????? What about if you overpaid & owe this now ??) or in some circumstances eg
income taxes at amounts of cash /cash equivalents expected to be paid to satisfy the liability in the normal course of
business.
1.1.1.2. CURRENT COST : assets: cash that would have to be paid if same or equivalent asset were acquired currently. Liabilities :
Undiscounted cash that would be required to settle it currently.
1.1.1.3. REALISABLE VALUE (SETTLEMENT VALUE) ; liabilities :undiscounted cash payable in normal course of business.
Assets : at an orderly disposal. Basicly the amount for which an asset can be exchanged between willing parties in an arms
length transaction (not NRV but RV)
1.1.1.1. PRESENT VALUE : assets carried at present discounted values of net cash inflows that item is expected to generate in
normal course of business Liabilities are carried at the present discounted value of future net cash outflows that are
expected to be required to settle the liabilities in the normal course of business. (framework para 100)

KNOW OF, UNDERSTAND AND EXPLAIN THE MEANING OF FAIR PRESENTATION.


By:fair presentation is achieved by : 1- Application of the principal “qualitative” characteristics
2- And of “appropriate accounting standards”
CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES
1. There are 2 Methods of Presenting Current & Non- Current :
a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings.
b. Method 2: “Liquidity Approach” : Assets&liabilities are presented broadly in order of liquidity. However there is a rule that if
any 1 amount/item covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be
specially disclosed separately as well for that one amount/item.
c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like
financial institutions.
2. Method 1: Current and Non – Current assets / liabilities headings:
a. A CURRENT ASSET IS :
i. Is expected to be realized in, or is held for sale or consumption in the normal course of the entities operating cycle eg
inventories.
ii. Is held primarily for trading purposes ( eg some financial assets held for trading)
iii.Is expected to be realized within 12 mnths (eg non-current assets held for sale.)
iv.Is cash or a cash equivalent that is not restricted from being exchanged or used to settle a liability for the whole of at
least 12 mnths from reporting date.,( eg call account
b. A NON-CURRENT ASSET IS : all other assets are classified as non-current.
c. Definition: operating cycle is the time of acquisition of raw materials and their realization as cash . Thus if the operating cycle
is longer than 12 mnths the “current assets” may include items that are not expected to be realized within 12 mnths. If
operating cycle is not clearly identifiable it should be assumed to be 12 mnths.

d. A CURRENT LIABILITY IS:


i. Is expected to be settled in the normal course of the entities operating cycle.( eg trade payables)
ii. Is held primarily for trading purposes(eg some financial liabilities held for trading)
iii.Is due to be settled in 12 mnths from reporting date (eg dividends payable, income tax payable)
iv.The entity does NOT have the unconditional right to defer payment to after 12 mnths from reporting date.( eg bank
overdraft) (if terms say ‘convertible to share settlement’ at option of counterparty, the share settlement should not affect the classification as current or
non-c. here classification should be based on expected transfer of cash OR other assets,)
e. NON CURRENT LIABILITY: all other liabilities are Non-Current.
i. Note: if non-adjusting event after reporting period says agreement to refinance a current’ , it stays current in old
period , do not change.
ii. Any refinancing/periods of grace etc all get classified into the period they fall into.

OTHER GENERAL DEFINITIONS FROM THE all the IAS’s /IFRS ‘s

i) AC108.6 :Inventories include all items Intangible or Tangible :


(1) Held for sale in the ordinary course of business
(2) In the process of production for such sale
(3) Consumed during the production of saleable goods & services (eg shampoo in a hair salon)
(4) To include the cost of labour and other expenses such as supervision or attributable service provider costs not yet invoiced eg
interim audit costs
11 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
ii) Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale.
Definitions from IAS 8 (acc policies/errors/estimates)
5 The following terms are used in this Standard with the meanings specified:
Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting
financial statements.
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability, or the amount of the periodic
consumption of an asset, that results from the assessment of the present status of, and expected future benefits and obligations
associated with, assets and liabilities. Changes in accounting estimates result from new information or new developments and,
accordingly, are not corrections of errors.

International Financial Reporting Standards (IFRSs) are Standards and


Interpretations adopted by the International Accounting Standards Board (IASB).
They comprise:
(a) International Financial Reporting Standards;
(b) International Accounting Standards; and
(c) Interpretations developed by the International Financial Reporting
Interpretations Committee (IFRIC) or the former Standing Interpretations
Committee (SIC).

Material Omissions or misstatements of items are material if they could,


individually or collectively, influence the economic decisions that users make on
the basis of the financial statements. Materiality depends on the size and nature
of the omission or misstatement judged in the surrounding circumstances.
The size or nature of the item, or a combination of both, could be the determining
factor.

Prior period errors are omissions from, and misstatements in, the entity’s financial
statements for one or more prior periods arising from a failure to use, or misuse
of, reliable information that:
(a) was available when financial statements for those periods were authorised
for issue; and
(b) could reasonably be expected to have been obtained and taken into account
in the preparation and presentation of those financial statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.

Retrospective application is applying a new accounting policy to transactions, other


events and conditions as if that policy had always been applied.

Retrospective restatement is correcting the recognition, measurement and


disclosure of amounts of elements of financial statements as if a prior period
error had never occurred.

Impracticable Applying a requirement is impracticable when the entity cannot


apply it after making every reasonable effort to do so. For a particular prior
period, it is impracticable to apply a change in an accounting policy
retrospectively or to make a retrospective restatement to correct an error if:
(a) the effects of the retrospective application or retrospective restatement are
not determinable;
(b) the retrospective application or retrospective restatement requires
assumptions about what management’s intent would have been in that
period; or
(c) the retrospective application or retrospective restatement requires
significant estimates of amounts and it is impossible to distinguish
objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at
which those amounts are to be recognised, measured or disclosed; and
(ii) would have been available when the financial statements for that
prior period were authorised for issue
from other information.

Prospective application of a change in accounting policy and of recognising the


effect of a change in an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed; and
(b) recognising the effect of the change in the accounting estimate in the
current and future periods affected by the change.
Definitions per IAS 18:
INTEREST—charges for the use of cash or cash equivalents or amounts due to the entity;
Preference Dividends : These can be seen as “interest’ , but ONLY if they ARE classified as financial liabilities as per IAS 32 at the
time. Eg cumulative redeemeable preference dividends which of course accrue on a time-proportion basis per textbook.
ROYALTIES—charges for the use of long-term assets of the entity, for example,patents, trademarks, copyrights and computer software; and
DIVIDENDS—distributions of profits to holders of equity investments in proportion to their holdings of a particular class of capital.
Preference Dividends : These are also seen as dividends as long as they are NOT classified as financial liabilities as per IAS 32.
12 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

(B)…..QUESTIONS:
OWN QUESTIONS & ANSWERS

PASTEL/AND OWN STUFF


PASTEL
1. If you have a supplier who is also a customer, and you get paid R40 by them one day , but they actually owed you 50 and minused 10 for what
you owed them as a supplier, how do you enter the 40 you received in the cash books? Do you split it and put 10 on the payments side of cash
book and 50 on amount received side or just put 40 as the amount on the received side? How are you going to do the bank recon- it will be very
tricky if there are lots of entries!!! This is all in say”nedbank” cash book.

2. How does the possible discount on a sale work with revenue – how does pastel split the 1- if terms are granted like 3 months, the finance
charges built into the price of the goods sold, 2- possible discount for early payment for a sale where credit was granted .ie split the sale amount
on invoice between finance charges and ‘revenue’.????

3. If one supplier sells to you and also receives cash as an agent for you (like a bank) and charges you a fee for every transaction, but is not a bank
– can you open a separate account for its OWING YOU MONEY so it can only be a ‘customer then’ in pastel, and a separate one as a supplier
– for the fee it always charges you for each transaction. OR do you ONLY open a supplier account – and all the fees and any money they
receive for you goes in here – which means the supplier account will MOSTLY owe you a lot and MOSTLY be a debtor?

4. Google ads : if you get R100 free credit to use to make ads, do you record it as an income or what?

5. Why is petty cash in same account number as bank-exmple in text book of pastel..ANS:Can you do it in its own account and basicly transfer
from bank by cheque and from petty cash by bank deposit.? It should have its own account number, and you can choose either way to to
transfers- by cheque OR by the transfer button on the cash books screen.
6. How does rounding off work in pastel- you got a field for it in customers setup- what happens to the rounding account you setup at the end of
year? And what happens to rounding field on the customers invoice that it says it will print? And what happens to massive decimals from
discounts or other things in the books? Where does it go to in the system?ANS: the system ALLWAYS rounds down- so you dint cheat the
customer, and thus is goes to an expense account in your books.
7. pastel to lookup on web help
a. service item - what is service items income stat account & ANS : you caqn make a new separate account under the ‘sales’ account
(with its completely own different accountnumber) – so if sales is no.1000 then make it say 1100 or so to keep them in the same
area.
b. consignment accounts ANS: some people make an inventory item , but cost stays zero till you sell it, then only then do you “BUY
IT” in your books and record it as sold at same time.
c. make average cost 0 when 0 on hand for 'inventory setup'.- how does this work ?? not know yet!
d. allow invenbtory to fall below zero- how do you do end of year adjustment account for this? not know yet!
8. How do you do BoB in pastel –as a supplier or customer or both? Bank/credit card FEES/LISTING FEES/HOLD FUNDS FROM
CUSTOMER ETC ANS : yes you make a supplier and a customer account, then at year end just transfer and dr or cr to the appropriate
account with a general journal entry – easy!
9. For pastel, how does it do the settlement discount and vat that must go to an ‘Allowance account’ and reduce total of sale until
customer either pays early or late, and if late then it must be transferred back to Sales from there.

Also Since you are supposed to charge interest by the day after a sale , and if you intent to give them 10 days to pay then write
this up as an interest income allowance, WHAT ABOUT WHERE THEY SAY it is assumed that all terms periods start FROM
END OF MONTH STATEMENT DAY – SO YOU COULD BE GIVING 25 DAYS INTEREST FREE IF HE BUYS AT
BEGINNING OF THE MONTH?? DO YOU HAVE TO MAKE AN ALLOWANCE HERE FROM DATE OF SALE UP TO
DATE OF STATEMENT OR WHAT??? This is a terrific mix up on PASTEL – which computer systems can do this
automaticly?
10.

11. HOW DO YOU TRANSFER A DEBIT BALANCE IN SUPPLIERS CONTROL ACCOUNT TO DEBTORS CONTROL ACC AT YEAR
END, OR AT INTERIM FINANCIAL STATEMENT PRINTING- SO YOU CAN STILL LOOK AT THE SAME CREDITOR ACCOUJNT
AND SEE OH YOU STILL HAVE A POSITVCE BALANCE HERE , WHEN YOU CHECK ALL THE ACCOUNTS EACH MONTH TO
SEE WHO YOU MIGHT OWE. ANS : yes you make a supplier and a customer account, then at year end just transfer and dr or cr to the
appropriate account with a general journal entry – easy!
12. Where is the trading account and profit/loss account? It does not show? Ans: no patel uses ret earnings only- it does not have the other 2
accounts really per lecturer.
13. Why does the profit loss acoount not get auto transferred to retained income in equity at year end function? It shows up in ret income in the
general legdger acc but not on the tiral balance or balance sheet of the firat month of the new year? Must you ytransfer it manually?
14. For Bid or buy account – they are 1- customers all sales pass through them 2- suppliers they charge a fee for each item sold and for credit card
transactions , they also act as a bank so customers pay the money to them and they then pay it to you – so your payment does not come from the
customer , it comes from them but only after all deductions.
a. SO do you make a both a separate customer + a supplier account for them , or just a supplier account or just a customer account? And
the day the customer pays them – they are an agent receiving money for you here- do you enter it in your books at that time as money
13 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
received or do you record BoB as a debtor on that day? (they provide a service by receiving some of the money – customers can
elect to pay through them or directly to you)
b. If some company is a customer and a supplier for real – what do you name their account in “pastel” – and if they only pay you the set-
off amount each month(balance) then how do you enter the money received in cash book? Only enter the balance or the full amount
paid and full amount received that the set-off balance represents.

15. Say last year you had 3 accounts – one as customer/debtor for sales that they acted as agent for & processed payment for,one as
supplier/creditor for transaction fees ,and one as customer for affiliate fees(you advertise for them on your website – if you want to change it all
this year to just one account – as supplier cause that is the main thing – then do you remove the old accounts from pastel, and what do you state
in the notes: do you have to make a note of this change in accounting policy or not? And must this change be applied retrospectively or not?
How do you apply it retrospectively in pastel?

OWN QUESTIONS: NOT PASTEL


16. how do you do a reversal of an unpaid item in your bank statement. Eg: bank charges or a debit order were debited to your account, but due to
lack of funds , the next day they were reversed by the bank.Your first transaction goes to the cash payments journal, and where does the second
one go?cash receipts journal OR purchase returns journal or ANY of the 2.Which is best?

a. Where do you R100 put free credits which you may use any time in the future,which you get for just opening a service/ or advertising
account with some agency. – IT IS NOT TRADE DISCOUNT, BECAUSE AT end of year they might still owe you this R100 free
credits, and you do not have to buy anything to get them – so they are creditor!!!

b. By the way if somebody eg Telkom for telephone charges ,who you paid, refunds you R100 because they later find out they
overcharged you, can that also go to cash receipts journal,or only to purchase returns journal? Is'nt the purchase returns journal there
so you can subtract it from your purchases(of products for sale) when you do the Income statement – to show the correct figure so you
can work out cost of sales properly? So if you put things in the purchase returns journal like telephone charges, thenyou get an
incorrect figure for your cost of sales if you sell eg: only groceries ,like checkers or so.

c. If an entity has separate bank accounts under the same name , or even at different banks, - do you put a note in journals as to which
taccount each transfer is to/from or do you have separate bank ledger accounts –more than 1- and separate columns in the journals?

d. What is a 3 column cash journal(at cna)

e. What is a cash book – cpj or crj. What other odd jurnals do you get and their format/setup?

f. If you do a year end adjustment for bank charges, where you have received the statement but the bank only charges you in january for
all your december banking charges,so it only appears on your january statement as well(that is their method) – if you do a year end
adjustment so you credit accrued bank charges and debit bank charges , when the bank does charge you in january, you debit accrued
bank charges and credit bank, or can you somehow reverse (by debit accrued bank charges and debit bank)before they actually charge
you , so on first day of new fin year? If you reverse before they charge you then when they charge it will happen that you will have to
write in the date as january and dr the bank charges expense account for january because the expense account from last year is
already closed off? So it will appear wrongly on your next yrs fin statement AGAIN? So may one not reverse an income/or expense
adjustment untill that expense/ income is actualy received or paid?

g. For a year end adjustment is it so that all transactions must show up in correct year but not in correct month, so if you reverse
income rec. in advance at beginning of year then when you put it back into the correct income account eg: services rendered ,then it
can show up in january( for dec year end) in the books but the work can only be done in july- so wrong month?

h. BAD debts : if a bad debt occours in 2007 but the sale took place in 2006 –dos'nt it show up wrongly on the 2007 income statement?

16: also for pastel, same as above , how does the the accrued finance income in a credit sale work?

1. if a creditors account gets a DEBIT Balance due to a refund which happens after end of the month and after you have ALREADY paid the
invoice in question, do you have to transfer this balance to the Debtors Ledger and open a new Debtors account for the same debtor before
you record any refund in cash from the supplier- or can you just do the whole thing in the creditors ledger (instead of just reducing your next
purchase by this amount)

2. If you buy from and sell to the same customer, do you have to have a debors and also a creditors account for the same supplier?

3. For the purchase returns journal – if you have returns for maybe overcharged electricity account, or telephone account, do you have to have a
“electricity returns” account like the purchase returns account so you do not mix the 2 up in cost of sales, or do you just have a “sundries
returns” account for all exept ‘purchases ‘ of stock , or 3- do you just debit the ‘electricity account’ directly instead of first going through the
‘purchase returns’ account?( to not mix up cost of sales)

CLOSE CORPORATIONS:
14 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
4. A cc must by law keep its records in such a way as to prevent falsification and to fqacilitate discovery of such falsification.What method / what
are all the points 1 to 10 etc.-that must be used to do this as per saica / trade usage accepted by courts.(exactly , not sort of)?

5. What must the legally required ‘report’ of the financial officer , to be included with the AFS of a cc, contain exactly(not sort of).
6. The AFS must be 1-approved 2- signed by or on behalf of every member of the cc. – IT ALSO SAYS –the AFS must be approved &signed by
or on behalf of a member or members who together hold an interest of at least 51% in the corporation.(check this up – which is correct. )

7.
REVENUE-IAS 18
1.1. 1-see hw t do rebates on pg15 tut1. how do you recgnse it if the rebate is later not granted? Or what if yu make a mistake and
he is never charged - must you keep a separate recrd of debtors just fr this 1 thing?
1.2. Ask lecturer: there is no example question to try including SETTLEMENT DISCOUNT or credit terms where you actually work
it out and do the general journals. Is .neither in the tutotial NOR in IFRS applications ther is only 1 simple ! one and no journals . Is it
included in exams and in what year does it get done (it can VERY tricky)
1.3. Can lecturer get answers for IFRS application for question where no answer is given – there is 1 question for revenue here with
some numbers/figures but it has no answers./ try UNILIM.
1.4. Swapping similar goods eg milk for milk or oil for oil to facilitate delivery : it is NOT recorded as Revenue, so : .(how will you
record this is in your books?- Sale invoice = sold = 1 truck of milk , price charged =1 truck of milk. , or do you issue no invoice- what
will your General Journal entry be?)

1.5. SETTLEMENT DISCOUNT GIVEN :

1.5.1. For method 1 & 2 separately , how does it work with “5% for 30 days or 10 % for 10 days “ discount terms offered on the
sale depending when you pay , and writing back if they take the 30 days after you made (prudence) provision for 10%.
1.5.2. BIG QUESTION : pg 336& 337 descr. Acc book : For method 1 & 2 separately, how does VAT get accounted for
together with the other entries, esp. for the write back of both if the discount is not taken? REM you charge 100% VAT
(without deducting the discount)on INVOICE and must pay sars this BEFORE the customer even decides whether is is
going to take the discount or not ---???
1.5.3.
See circled point in blue pen pg 337 descr. Acc book, how are sales shown at the “net” amount? – ONLY in fin stats by
just subtracting settlement disc. Granted, or is settlement disc granted a separate item in SCI (UNDER WHAT
HEADING IN SCI DOES IT GO?) – OR IS sales reduced in the general ledger by a journal entry to follow the IAS 18
revenue rule?how can it be left at pre- discount level for this rule?
How does pastel accounting deal with this – auto or manual – how does one do manual for 100000 transactions?what
about other accounting packages?

1.5.4. 2 METHODS OF JOURNALISING :


1.5.4.1. NET METHOD : The “allowance account for settlement discount’ method .(Preferred by UNISA).
1.5.4.1.1. See example below. For method
1.5.4.1.2. VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
1.5.5. Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or not?) or is it a
debtor contra account for the SFP fin stats- just to be written off directly against debtors and only debtors nothing else at all (no
end of year adjustments etc) when transferring from Trial Balance to SFP at year end.? And why is ‘allowance acc’ on ph 336
descriptive acc also (SFP)??
1.5.5.1.1. WRITEING BACK : If Discount is Not taken: simple :you write ‘allowance account’ back into ‘sales’ONLY. No
VAT adj. because Vat is Originally accounted at full 100% per SARS rules - and even paid already probably.
1.5.5.2. GROSS METHOD :
1.5.5.2.1. See Example below for method
1.5.5.2.2. VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
1.5.5.2.3. Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or
not?) –or is it a contra account that does not show separately in fin stats?
1.5.5.2.4. “Settlement Discount Granted Account “: this is either 1- a revenue contra account like ‘acc depr’ is to assets and
never shows in SCI , only in the books , or it is a 2- account that show in the SCI under ‘admin expenses’ and 3- is it
cleared each year end to ‘trading account’ to get profit so it is zero at begin new year (BUT what happens to
transactions where it has not been decided yet if customer takes discount or not at year end?)
15 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1.5.5.3. WRITEING BACK : If Discount is Not taken: simple :you write ‘Allowance for Settlement Discount account’ off
against CONTRA ‘Settlement Discount Granted ’ account ONLY. No VAT adj. because Vat is Originally accounted at full
100% per SARS rules - and even paid already probably.

1.5.5.4. As per tutotial letter, this is another way of doing the gross method:(how does this work exactly, which is the right
one and what does one do here??)

1.5.6. Matching Principle : The allowance is just written back against sales if the debtor does not pay in time- so it could cause an
increase in sales in a future year if the period allowed extended into a future period. So if the write –back to sales occours in a
future period this is half logical because you now earned “interest” of sorts in a follow up period for the guy not paying in time so
you cancelled his discount ,but half not logical because this discount cancelled which is more similar to “interest” now has to get
written up into “sales” ???but it is not shown as interest but as sales so the matching principle seems to go a bit wrong here????.

1. Note : in the Gross methods PG 336 FOR DISCOUNT ALLOWANCE ACCOUNT at bottom, the “settlement discount
granted” account is an income-contra account, ie a contra account like ‘accumulated depreciation. It does not go into the
SCI /SFP etc, it brings down the value of “SALES/Revneue” before ‘sales’ goes to the SCI – is this true? And DOES IT GET
WRTITTEN OUT TO TRADING ACCOUNT, OR TO SALES OR WHAT? AT YEAR END PROCEDURES???

TIME VALUE OF MONEY /CREDIT TERMS GRANTED /DEFERRED PAYMENT: IAS 39.43 as well as Circular 09/06 confirm that
the time value of money must be taken into account when the fair value of money and an associated debtor is measured. Circular 09/06 also
specifically refers to interest free credit terms eg 6 mnths interest free : here it refers us to : IAS 39(AC 133) – Financial Instruments:
Recognition and Measurement : it applies to the receivable in such circumstances, and the effect of the time value of money should be taken into
account in these instances as well .(if it is a low interest rate must you go and find out what he current standard rate for those transactions is and
use only the difference as your financeing allowance/deduction in revenue?)
1.1.1. JOURNALISATION method :The amount you work out as being the “finance charges” per circular 09/06 must deducted from
REVENUE/ SALES and be separately transferred to an allowance account called “Accrued Finance Income” UNTIL the debtor
pays,and then transferred again to “Finance Income(interest)” account after the debtor pays : The reason you use an allowance
account is because you are not sure if the debtor will pay earlier than his 6 months, because if he DOES PAY EARLIER than the
credit term granted ,then part must go back to SALES and part to FINANCE (INTEREST) INCOME.
1.1.1.1. IF THE DEBTOR PAYS EARLY :for the months he DID get credit, that % part of the “allowance account” must go to
“interest income”, and for the months he did not take credit due to paying early, that part must go BACK to
SALES/REVENUE?tru or not?.So if he pays early then the amount you deducted from SALES to treat as an interest charge
in order to ‘pretend’ it is interest to'satisfy circular09/06, would be wrong. So you send the ‘wrong’ part back to
“SALES” .Note: this does NEVER apply where you actually charge a customer interest as part of his credit terms. That
would be treated as a normal ‘loan’ and no ‘accrued finance income’ would be raised- this “accrued finance income” is only
for no finance charges are actually openly charged and you have to “pretend” that they are for the sake of circular 09/06 and
IAS 18
1.1.1.2. see example below for JOURNALISATION.
1.1.2. NB : EVERY END OF MONTH MUST ?? the months finance charges are transferred from “ACCRUED INTEREST
INCOME” to “INTERESTS INCOME” , not just all at end of term or when debtor pays , or only at end of term/or payment
date??when/how? AND at end of Fin YEAR do you have to do any adjustments to account for interest actually earned to date or
not? – if it is not done monthly but at end of term? How does this work?
1.1.3. from “Accrued Finance Income”.( it is just a temporary holding account)This only happens till end of term granted, thereafter it
would be a separate penalty interest that would be raised only !(WHERE DOES any ‘ACCRUED FINANCE INCOME” LEFT
AT FIN YEAR END , ACTUALLY GO TO????- TRANSFERRED AS A ‘adjustment to FINANCE INCOME or to SALES
through the General Journal or just added to finance income WITHOUT JOURNALISING AN year end adjustment like some
other stuff is done.?)
1.1.4. GOODS RETURNS: if goods are returned for a credit both revenue + interest + accrued interest must be written back! Tru or not?
– is interest non-refundable?

REBATES : There are many different kinds of intricate rebates which companies may give. (like special arrangements) Generally
ALL the rebates need to be estimated at the time of sale and be shown as a reduction in revenue. ( per circular reimbursments of selling
expenses are not included in cost of sales/inventory per circular 09/06.21 ?)– so if you give a rebate like this to someone – not sure if
you must deduct from revenue or not-

1.1.1.1. Why is the ‘accrued finance income account ‘ on page 334 called accrued , can you not call it “ allowance”?

2. Since you are supposed to charge interest by the day after a sale , and if you intent to give them 10 days to pay then write this up
as an interest income allowance, WHAT ABOUT WHERE THEY SAY it is assumed that all terms periods start FROM END OF
MONTH STATEMENT DAY – SO YOU COULD BE GIVING 25 DAYS INTEREST FREE IF HE BUYS AT BEGINNING OF
THE MONTH?? DO YOU HAVE TO MAKE AN ALLOWANCE HERE FROM DATE OF SALE UP TO DATE OF
STATEMENT OR WHAT??? This is a terrific mix up on PASTEL – which computer systems can do this automaticly?

1.
16 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1.1. Similarly, if a bank /money lender lends at interest rate BELOW market rate, the market rate must be used to determine the
separate credit component of the transaction and the transaction must somehow be split up like for a sale with a credit
component to it? How would one do that?
1.2. If credit is given and incl. in sales price :DISCOUNT RATE USED if terms are given is EITHER :
1.2.1. The current interest rate applicable to similar circumstances with a similar risk OR
1.2.2. Or the interest rate implicit in the transaction , in other words , the rate that discounts the transaction amount to the current cash
price. (it seems if the implicit interest rate is 0 or lower than ‘ruling interest rate’ then use the “ruling similar type interest rate” –
is this true?)
1.3. Also for if credit is given: if you grant customer 3 months, so split the sales price into interest + revenue, But customer pays early after
1 month –even though he DOES NOT get any early payment discount or anything , just by himself – then do you have tyo go back and
adjust the interest portion to be less and the revenue portion to be more – is this to be done in test/ and in practice? – or just take it like
you would be going to charge him the interest anyway(non- negotiable”) and its his own problem if he paid early – type of idea?
1.4. Edgars for example : sells for both cash or 6 mnths interest free credit at the same price. Here the implicit interest rate OR the ruling
interest rate for similar transactions must be used to determine the fair value of revenue&the debtor, taking into account the time value
of money.(WHAT DO THEY END UP USING- IMPLICIT=0 or RULING = 29% etc)
1.5. See example 13.2 pg 333 – why do they deduct interest IF THE IMPLICIT RATE IS not 1% or 2% but 0%. Ie I make you a better deal
than the other guy, I give you 5% instead of 12 %. So jonny says he will give you even better , 0%, so why do you recognize it as 12 %
then????
2. FOR journalizing 1- finance charges and 2- settlement discounts:
2.1. FINANCE CHARGES

2.2. For finance charges imagined out of a credit sale : WHERE DOES the ‘ACCRUED FINANCE INCOME” suspense/holding account
that has not been allotted to ‘revenue’ or to ‘interest income’ LEFT AT FIN YEAR END , ACTUALLY GO TO in the Fin Stats.????-
TRANSFERRED AS A ‘adjustment to FINANCE INCOME or to SALES or just added to finance income WITHOUT
JOURNALISING AN year end adjustment like some other stuff is done.?)
2.2.1. For compounded YEARLY = if you are working in years as period there is no problem , just use the method above , but if you
are working in months : same as above in (i) EXCEPT you must first work out your APR interest rate from your EFF annual one
they give you.(since it is compounded yearly then the yearly quoted rate is a eff not a apr , but it would be seen as a apr if
compounding was mnthly ie: just visa versa.) So just enter 12(x,y) & 2ndFuncAPR. (I think, not sure!) Then above method
after.Then you can divide this apr by 12 to get the monthly interest rate to use in (i) above method as usual from there on.
2.3. Why is ‘accrued fin inc. ‘ noted as (SFP) and ‘fin inc.’ as (SCI) in the descriptive acc book pg 334 top?

RECOGNITION REQUIREMENTS:
3. WHEN EXPENSES CANNOT BE MEASURED RELIABLY :YOU ARE NOT ALLOWED TO RECOGNISE INVENTORY :
MATCHING CONCEPT :: Revenue and expenses that relate to the same transaction or other event are recognised simultaneously; this
process is commonly referred to as the matching of revenues and expenses. Expenses, including warranties and other costs to be incurred
after the shipment of the goods can normally be measured reliably when the other conditions for the recognition of revenue have been
satisfied. However, revenue cannot be recognised when the expenses cannot be measured reliably; in such circumstances, any consideration
already received for the sale of the goods is recognised as a liability ie: as ”Income Received in Advance”.????????what is this as an
example- WHAT EXPENSES DO THEY MEAN- EVEN LIKE RENT OR WHAT –BUT ARE NOT SURE YET????????

4. SUBSTANCE OVER FORM For example, an entity may sell goods and,at the same time, enter into a separate agreement to repurchase the
goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two transactions are dealt with together –
WHERE can this happen so there is NO revenue recorded- how do you journalise this sort of transaction
INTEREST / ROYALTIES & DIVIDENDS :
32 When unpaid interest has accrued before the acquisition of an interest-bearing investment, the subsequent receipt of interest is allocated between pre-acquisition and
post-acquisition periods; only the post-acquisition portion is recognised as revenue, the pre-acquisition interest is part of the purchase price.( eg consolidated group
statements, where you incorporate a newly acquired subsidiary into your statements )(how do you journalise and FIN STAT this pre-acquisition interest?)

CUSTOMER LOYALTY PROGRAMS (IFRIC 13)(see all the yellow below)


1. IFRIC 13 adresses loyalty award credits.These are incentives to buy their products. It applies whether entity runs its own loyalty program or
participates in one run by another entity as outsourced service.
2. RULE: one must apply IAS 18.13 and account for any and all award credits as a separately identifiable component of the transaction in
which those credits are earned. The value received from initial sale shall be allocated between award credits and other components of the
sale.
3. RECOGNISING REVENUE If the entity supplies the awards itself, it shall recognise the consideration allocated to award credits as revenue when award credits are
redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised shall be based on the number of award credits that have been redeemed in
exchange for awards, relative to the total number expected to be redeemed
4. MEASUREMENT :
4.1. The value of the credits can be measured in 2 ways :
4.1.1. Fair Value of the Credits ( means the amount for which the award credits can be sold separately.) To be “calc.” or “estimated”
4.1.2. Or On a Pro-Rata Basis : Based on the fair value of the credits relative to the fair value of the goods and services (this is if the
goods are sold at a very cheap price compared to their normal price, then it is unfair to say the award credits are worth a greater %
of the sale than the % part they would be at the normal price.)
17 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
4.2. A If customers can choose from a range of different awards, the fair value of the award credits will reflect the fair values of the range of available awards, weighted
in proportion to the frequency with which each award is expected to be selected.
4.3. An entity may estimate the fair value of award credits by reference to the fair value of the awards for which they could be redeemed. The fair value of these awards
would be reduced to take into account:
4.3.1.1. The fair value of awards that would be offered to customers who have not earned award credits from an initial sale; and
4.3.1.2. The proportion of award credits that are not expected to be redeemed by customers.
5. ONEROUS CONTRACTS : If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received
and receivable for them (ie the consideration allocated to the award credits at the time of the initial sale that has not yet been recognised as revenue plus any further
consideration receivable when the customer redeems the award credits), the entity has onerous contracts. A liability shall be recognised for the excess in accordance
with IAS 37. The need to recognise such a liability could arise if the expected costs of supplying awards increase, for example if the entity revises its expectations
about the number of award credits that will be redeemed.
.
6. AGENTS :If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account (ie as
the principal in the transaction) or on behalf of the third party (ie as an agent for the third party).
6.1. If the entity is collecting the consideration on behalf of the third party, it shall:
6.1.1. measure its revenue as the net amount retained on its own account, ie the difference between the ??consideration?? allocated to the award credits and the
amount payable to the third party for supplying the awards;
6.1.2. recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration for
doing so. These events may occur as soon as the award credits are granted. Alternatively, if the customer can choose to claim awards from either the
entity or a third party, these events may occur only when the customer chooses to claim awards from the third party.??no idea how this works???
6.1.3. If the entity is collecting the consideration on its own account, it shall measure its revenue (not costs?) as the gross consideration allocated to the award
credits and recognise the revenue (not costs?) when it fulfils its obligations in respect of the awards.
7. OTHER ESTIMATION TECHNIQUES : In some circumstances, other estimation techniques may be available. For example, if a third party will supply the
awards and the entity pays the third party for each award credit it grants, it could estimate the fair value of the award credits by reference to the amount it pays the
third party, adding a reasonable profit margin. Judgement is required to select and apply the estimation technique that satisfies the requirements of paragraph 6 of the
consensus and is most appropriate in the circumstances.
SERVICE CONCESSION ARRANGEMENTS (IFRIC 12 AC445) (just yellow below)
1. This applies where a government(only) has given an operator the right to charge for a service(eg a toll road) in return for maintaining &
operating the service.
2. This Interpretation applies to public-to-private service concession arrangements if:
3. the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price and
4. the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of the
arrangement.
5. Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Interpretation if the
conditions in paragraph -2.1- above are met. Paragraphs AG1–AG8 provide guidance on determining whether, and to what extent, public-to-private service
concession arrangements are within the scope of this Interpretation.
6. This Interpretation applies to both: (a) infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement and (b)
existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.
7. This Interpretation does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering
the service arrangement. The derecognition requirements of IFRSs (set out in IAS 16) apply to such infrastructure.
8. METHOD:
8.1. The operator may receive 1-financial (guarantee of full payment or shortfall payment by Gov.) or 2- intangible asset (right to charge
eg toll fees) in return for his services. The fair value of these must be recognized as revenue, as per IAS11 (construction) and IAS 18.
Costs are also accounted for per IAS18.
8.2. If there are more than 1 job done by operator eg construction & operating, , consideration received or receivable shall be allocated by reference
to the relative fair values of the services delivered,
8.3. I think this means you must ‘value’ the asset at fair value by using formula in mngmnt acc. For calc. value of an investment ie: per
returns expected to come in over no. of years formula

EXCHANGE TRANSACTIONS /BARTER

9. FOR EXCHANGE TRANSACTIONS INVOLVING similar goods, eg milk for milk or different colur cars, then how do you put this in the
actual accounts? In inventory and in creditors account? To take out blue cars and put in a green one from another dealer???
10. SEE page 349 bottom. In 2nd last paragrapg entry, where does the extra 10 000 for revenue for tin ltd come from. ERROR in book? 6 th line
from bottom.
11. For interest charges – if an entity must pay back 400 in 5 years + 100 extra as finance charge : do you calculate the interest you charge every
month( for month end ledger closing off /trial balance procedures) or every year only- I mean must it ne journalized each month or only
yearly?.
-DISCLOSURES
IAS18. 35 An entity shall disclose:
(a) the accounting policies adopted for the recognition of revenue, including
the methods adopted to determine the stage of completion of transactions
involving the rendering of services;
(b) the amount of each significant category of revenue recognised during the
period, including revenue arising from:
(i) the sale of goods;
(ii) the rendering of services;
1. (iii) interest; ( only if it is an investment company , otherwise it forms part of ‘finance costs’ per book ??not other income??? See IFRS7.IG13)
1.1. WHAT DOES “ IFRS 7 . IG 13 “ mean? See page 353 last word on page. ie: the IG 13 part – what is that???? And if interest income is finance costs – then
how can income be a cost???
18 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

THE FRAMEWORK OF ACCOUNTING.


1. WHAT IS THE FOLLOWING- WHEN ONE measures assets/liabilities at historical cost or present value or net realizable value etc :
1.1.1.1. HISTORICAL COST: assets: at amount paid/value exchanged for it / liabilities : ………>>>>valued at the amount of proceeds
received in exchange for the obligation<<<<< (????? What kind of funny definition to be taken literally is that, What about if you
overpaid & owe this now, or if fair value is 100 and you paid 10, how can you value your R100 liability at R10 now in your
books? Very weird!??) or in some circumastances eg income taxes at amounts of cash /cash equivalents expected to be paid to
satisfy the liability in the normal course of business.
2. The South African Institute of Chartered Accountants includes the following objectives for external financial reporting:
2.1. 9. Identify measurement criteria and models and ??apply them to the incorporation of items in primary financial statements.
2.2. 10. Understand the concepts of capital maintenance and the determination of ?? profit.
2.3. 12.?? Analyse financial statements to assess the financial position and performance. ? Whats that exactly ? PS :Note this somewhere to
know all ratios max limits both ways – ie solvency = 2 min 1 max 3.5 or something! (More mngmnt acc.)after you get an answer from
lecturer as to what it is ! somewhere in ch 1 before questions of Acc Dipac.)
3.

PRESENTATION OF FIN STATS


1. On pg 14 of tut 1 , if they say income tax (assume corrct) , then why is the answer different n the next page pg 43?
2. For the S.C.I.(income stat.) : Remember the other comprehensive income is always disclosed with tax already taken out of it ie net of tax. So
whether tax expense includes the tax of other comprehensive income or not, I do not know? Ask . (or is the tax for other comprehensive
income not disclosed – maybe only in the notes? – if ‘tax expense” does include it -it would be a bit wrong so profit before other
comprehensive income would have a problem with the “matching principle”???
m)
2) STATEMENT OF COMPREHENSIVE INCOME for The YEAR ended 28 Feb 2007 (over a specific period)
NOTES R
REVENUE COMPLEX IAS 18
Cost of Sales :Rem: for WIP work in progress accounting type, REM to (xxxxxx)
1- Depreciation on FACTORY PLANT (not buildings or delivery vehicles) is included in cost of sales, leave
out of anywhere else in the SCI , not in admin expenses with all the other depreciation costs like cars etc!!!
2-Salaries of Factory Workers is Included here (not admin staff , or marketing staff). eg not in “administration
expenses” with other salaries! Does this happen in NON- WIP type account as well.-no matter what type of
entity, you always do this or not?? For both of these?

Next : IAS 1.104 says certain things get incl. in this note for ‘function’ method , but not for “nature “ method . See ias 1!!!!!?? Can you add them
in the “nature” not withu tloosing marks, or NOT??? Ie : staff costs &depreciation?

SoCL :INCOME STATEMENT:

i) In unisa 201q book pg 41 :


(1) In “INCOME” e=why put Profit on financial instruments (: if you have put listed and unlisted investments again a bit later anyway –
why put it twice?
(2) Why put {fair value adjustment –financial asset at fair value through profit or loss.} there as well, see just above (1) stuff on pg 41
unisa –now you have 3 places for financial instruments.
(3) what is meaning of: yellow-fair value adjustment –financial asset at fair value through profit or loss.
(4) NOTES TO INCOME statement; which type of directors remuneration notes do we do- the one in unisa or IFRS book????? Both are
different???
(5) How do you amortise share issue expenses over a number of years? How do you show it as an asset?Is it N-C or current?how do you
write this asset off against share premium acc.?
(6) How do you divide up – in the notes- any change in the market value of 1-non-current - available for sale financial assets (ie shares !!
from Non-current assets) and 2-current financial assets – shares where the market value went up or down. Also where does it go in
the income statement?
(7) Also – for the 2nd bottom section of income statement – what is ‘available for sale financial asssets? Is it only non-current shares as
per balance sheet or is it also current shares : ie ie financial assets like those for speculation/trading
(8) In the note: unisa book pg 41- why does it say; in notes to income stat: for : Income from financial assets- 1- listed
investments:financial asset at fair value through profit & loss 2- unlisted investment s: available for sale financial assets.? See yellow
– this doe s not make sense- either of these yellow could be listed or unlisted – any of the 2. So what is the sense in this??quite some
confusion!!!

n) STATEMENT OF CHANGES IN EQUITY:


i) For changes in accounting policy- do you do a new line for each change.?or all in one line only.Must it be on first line of the statement or
on any line? Must one do a ‘restate balances’ line below it or not?
ii) You seem to have to do a “Revaluation Reserve” column in statement of change in equities, for any asset revaluations done. (Must you or
is it optional?)
o) BALANCE SHEET
19 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
p) Does share premium get added to “ share capital “ or to “ other components of equity”? in the balance sheet?
q) IN NOTES TO BALANCE SHEET:
Current Financial Assets
1. Financial Asset at Fair Value through Profit & Loss
UNLISTED INVESTMENTS
LISTED INVESTMENTS
10000 Ordinary Shares in BCD(ltd) at R2 (cost 20000) 40000 (you seem to only put name .
for listed companies , not unlisted as done in UNISA manual pg 67?)
i) Do you put the cost value per share next to number of shares , [eg 200 of R0.50 each (cost 100) 4000 ]and the market value as the main
value?as in example above ? then also cost in brackets as well? Why this confusion – in unisa acn 201q pg 75 why not actual for ‘R20 each
(cost 100)
ii) Where does share premium go in the balance sheet? – this year just own line for share permiunm
iii) Where does share premium go in the notes?
iv) Intellectual property & investment property- do you do separate breakdowns or all in 1
v) Dividends payable- to own line or to trage & other payables? –fakiri says own line for this year
vi) At what price are shares shown in : subsidiary 2- balance sheet -3-listed / unlisted: and what do you write for ‘ 474 ordinary shares of
R100 (cost 2937) 27890 : so what is the R100 – at cost less/incl. share premium or at market value , and what is the 2397 – incl or excl
share premium??
vii) FOR CURRENT LOANS TO SUBSIDIARIES, do you put it as other financial assets or as subsidiary loans or as what in the current
section

n) GOING CONCERN : for 12 mnths from fin. Stat. date : or


i) IF There Is Just Of Material Uncertainties That May Cast Significant Doubt 1-disclose this in notes
ii) IF IT IS Really NOT A Going Concern : Disclose That It Is Not Prepared On A Going Concern Basis, And Then On What Basis
It Is Prepared.(what other types of basis’s do you get?)+2-provision for liquidation costs+possible LIQUIDATION VALUATION
METHOD

1.1. 1-Nameof Entity 2-if any change in Name of Entity from last reporting date then disclose that(??on every page in heading , or hidden in
notes?).
2. There are 2 Methods of Presenting Current & Non- Current ( see framework chapter before for details of rules for methods below)
2.1. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings.
Method 2: “Liquidity Approach” : Assets&liabilities are presented broadly in order of liquidity on face of SFP instead of ‘current&non-
current headings’.(??example??)
Distribution Expenses.
Discount Allowed (where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Depreciation(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Carriage on "Sales" (not purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other
Packaging (also not in purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other
Advertisements(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Wages and salaries(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Water and lights(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Administrative Expenses what goes in here?

INCOME TAX
Questions from last year
1. Add still : how does the deferred tax Liability cause profit to drop, and where do you calc. Profit before tax
? is it after putting in deferred tax liability or before? If before then how can your calc. work for profit
before tax and tax – if you don’t even know the deferred tax yet???
2. So add: how does deferred tax liability account to finstats work exactly –what is the process
3. Over/under provision ledger&journal entries :
4. Provisional tax “ledger& journal”- see if you did nit pay last year (underprovide) then the extra you pay to
sars this year (you only pay sars final pay ment in the next year so you don’t know last year ) is the
underprovision from last year! Note
5. You never put deferred tax in ‘sars liability account” you put it in deferred taxCONTRA tax expense acc.,
so it will never show as a liability to sars itself, it only shows as a liability to /in ‘deferred tax’- BUT in SCI
you do add deferred tax to the ‘INCOME TAX EXPENSE” after profit before tax, and deduct it to get
‘profit after tax’ But this is just a theoretical calc. , it is not real life. The real life is that ‘sars liability
account’ will have a DIFFERENT ENTRY + AMOUNT to SCI ‘tax expense ‘amount’ , they are 2
completely different things, because of the ‘deferred tax’ PROVISION that is made.( it is a PROVISION
LIABILITY, not a TRUE LIABILITY)
20 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
6. What is recoupment ? /sect 12c of act/ how does recoupment allowance? work.
7. What is scrapping allowance? Tax act etc ??
8. ASK LECTURER:
a. Legal costs for debt collection is NOT DEDUCTABLE quest 1 handout why
b. Ques 1 handount why is new machine tax only 20 % not 40 % per notes sec12c thing
9. Note: deferred tax will always balance itself out in the recon of tax rates- till it seems like it is not there. So
that’s why you do not put it in this recon of tax rates. You see this SCI tax total has the deferred tax taken
out then added in again already, so it is invisible there- it (deferred tax)is the same as if it never happened
in the SCI total. You see you take it out with temporary differences, calc the current tax payable to sars
after that, then add deferred back to this figure afterwards – so the tax in sci is always completely void of
any deferred tax anyway- unless you made amistake and added a permanent diff as a temp diff.
Main questions from last year
1. Do you have to split up deferred tax into the Non-Current Assets and Current Assets according to whether it will be realised within the next
12 months or not.(say certain things can only be realized in the next 12 mnths, never any other time) …[ANS: IAS 12 says somewhere it
must all be in current assets/liabilities only ever.]
2. The tax base of a liability is: see gray for question
(lAS 12 (AC 102)08). The tax base of a liability is its carrying amount, (for accounting purposes) less any
amount that will be (read ‘could’) deductible for tax purposes in respect of that liability in future periods.
(?so if carr amt- deduct fut per = tax base , THEN carr amt-tax base =ded fut per AGAIN ??or what)In the
case of revenue which is received in advance, (this is treated more like an asset you see- same
method in effect) the tax base of the resulting liability is its carrying amount, less any amount of the
revenue that will not be taxable in future periods.
3. See page 165 : for land and admin.buildings – the big question is what does: Initial recognition of an asset which affects neither accounting
nor tax profit/loss mean ??? the admin building was recognized 4 years ago and is used to generate future economic benefits? Does this
mean that since initial recognition SARS may not have allowed even R1 deduction at all , or this rule does not apply?
3.1. What happens in this case where the same admin building is only allowed say a 25000 once off deduction in its first and second year to
compensate for something or other? Then you get a sudden ‘deferred tax’ of 150 000 from nowhere which you have to say is now part
of your companies loss? So now you could get a net loss that year from such a stupid thing, just because SARS decided you can deduct
only 50000 in the first year, or even worse say maybe 1000 in the first and second year because of maybe some licencing admin that
has to take place so they give you this as a deduction or another stupid reason!
4. See income tax handout SLIDES page 8- for the income rec in advance exearcise:
4.1. Is it taxed by sars when received or when recognised
4.2. How do you do te IFRS book column method for year 2? Where would you get the reversal ie: (6000) from? Is it automaitic due to
“movement in P/L” column or is it from a Temporary difference- my calcs say the temp diff is 0 because Carrying amnt is 0 and tax
base is also 0 in year 2.
5. SEE THE GREY PART : IF “DEFERRED TAX ASSET” from depreciation causes an “INCOME” and causes you to pay more
tax :IF THERE WILL BE NO PROFIT NEXT YEAR/S : You may not show any ‘Deferred Tax Asset“ as an asset because there will be
no profit to claim it back from , BUT you MUST still show the extra tax you must pay in SoCI on the “DEFERRED TAX ASSET” - so the
DEFERRED TAX ASSET may not appear in the books as a debtor but you must still pay the tax on the TEMPORARY DIFFERENCE
which caused the DEFERRED TAX ASSET – even if you made a loss and the only profit you made comes from the DEFERRED TAX
ASSET extra tax payable on the ‘deferred tax asset’ , you must still pay it and show it.! – this means just because you have a different
depreciation rate than SARS, you can end up paying 14000 rand tax on the DEFERRED TAX ASSET (you would be able to subtract it from
TAX next year) created by the difference – even when you actually make a loss one year , now you make a loss and even more of a loss by
paying this tax on an ‘IDEA”! that’s what it means to use depreciation rates different to SARS depreciation rates!!!!
5.1. See page 173/4 example 9,17 : why is the deferred tax asset not recognized but you still have to pay tax on it , so in effect if you make a
loss you could still pay tax of 14000 on a deferred tax asset you probably will not be able to use anyway- just you using a different
deoreciation rate to SARS can cost you 14000 in tax???
5.1.1. Why in notes to FinStats- in the recon of tax- they say the 14500 comes from currect tax expense – dosnt it come from defrerred
tax expense???printing error year 1? Also year 2 is part deferred part current- what is the reason they only show current as the
reason?? What is the difference?
5.1.2.
Next: SEE yellow only :Circular 1/2006 Special DISCLOSURES IN RELATION TO DEFERRED TAX:

1. It says entities need to consider whether the carrying amount is recovered through use , sale, or liabilities settled, because each cound
cause different material differences in the deferred tax balance.
2. Circular 1/2006 requires additional disclosures only:
a. If the manner of recovery of a component of deferred tax can CHANGE (eg from sale to use etc)
b. If expected recovery manner changes, in which event will the deferred tax for that component be materially different AND
c. when the user of the fin stats is not capable of determining the rate at which deferred tax has been raised on that component
from the info provided in the fin stats
3. THE FOLLOWING EXACT DISCLOSURES SHOULD BE PROVIDED OR BE CAPABLE where If expected recovery manner
changes the deferred tax for that component could become be materially different:
a. The expected manner of recovery and the tax rate used to calc. the deferred tax balance( the one you went and used so far)
21 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
b. Where more than 1 tax rate is used for each category of temp diff(if more than 1 tax rate in 1 categ. Or if each categ has a
different tax rate?), the components of the deferred tax at the various rates incl. those components on which no tax is expected
to be paid.(is a component a category or what? And what does ‘no tax expected to be paid mean?- all exempt things to to be
listed or what?)
7- SA only : AC501.22 : ABOUT STC in the NOTES:
c. The amount provided for STC
d. An explanation that assists in understanding the factors affecting the STC
charge(what can be the factors at all), escpecially where STC is a significant
component of the total tax charge , or the effective STC rate varies
substantially from the standard rate. ( you only get 1 stc rate ie 10%, so what
other rates are there?)
e. The STC on dividends declared after year end but brfore the fin stats were
authorised for issue.
f. The nature of potential income tax consequences that would result from a
dividend payout to shareholders.where practicabley dtererminable the
amounts should also be disclosed- where not practicably determinable an
explanation is required. (also see IAS 12.82a)??what doe sthis mean? The
exact same as pont b above orwhat??)
g. The amount of deferred STC credits that arise to the extent that it is not
raised as a deferred tax asset. ( does this means ANY STC credits at all
because STC is never allowed to be a deferred tax asset)

Start of TAX questions from this year (dipac)


1. What kind of a liability is interest on a loan, what will be its tax base? Was it already deducted from sales when booked,
or it there is a liability for interest from before the last sars return was done, and you deducted it from income in that
sars return already, what do you do with it. Or if it was booked this year but you have not used it in a SARS return yet,
then is it 100% deductable from carrying amount af liability?????
2. If you are doing the fin stats for the year, and the final tax return has not yet been handed in , but it is after reporting
date, or say midnight. Is Interest or water & lights , which is a you owe liability, which you have incurred this year,
without paying tax on it yet, regarded as ‘ deductable in future periods’ or not –see descriptive pg 162
1) Provision for Depreciation Liability : if SARS allows 3000 that year, and you do your own depr. Of
12000, then WHAT WILL be left that can be deducted in the future is –ie future deductions possible from
carrying amount – is only 9000 (say there are bad debts or something. ) THAT is the logic behind
depreciation, so do it that way, if you tryu figure it out your own way you will make an error.
a) To do the depreciation & debtors together : study example below from ‘descriptive’ book , and ask
lecturer to explain when you visit him.
What is Income & expenses for tax base : liability or asset? Like : depreciation for deferred
tax quick calc., or income from dividends, etc. on page 39 tut 1, see c4 calc, if deferred tax
had been calculated on the building , would you still put depreciation in this calc. again? And
if an asset is not recognsed on initial recognition because eit does not affect acc or tax profit
, next year for depreciation on that asset , how do you d the Temp.Diff and tax base for it??
Where does that depreciation go fpr tax? What about trade receivables prvisin for bad
debts?
22 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

1. GOODWILL : Per IAS 12.15 goodwill may not berecognised for temp.diff or deferred tax . in SA
goodwill may not be claimed as a deducton for tax purposes either . Thus : for goodwill the tax base
will be 0 (no deductions allowable in SA) and TempDiff=full goodwill as a “deferred tax
liability”(carrying-0=full carrying)…. But IAS 12.15 disallows the recognition of goodwill and also of
any future impairment of this goodwill, as it would reduce the net asset value (through the deferred
tax liability) of the entity- leading to a circle of this increasing the “carrying amount” of goodwill (to
balance), round & round etc etc So you just ignore it completely when calc. deferred tax.
1.1.Any future impairment of this goodwill is also not allowed to be recognized for deferred tax at all -

1.1.1. REVALUATIONS : because it no longer relates to a ” initial recognition” : any Temp.diff of


revaluations must have deferred tax taken into account. (see PPE chapter for how?? Not sure
what the tax base is here! What is the tax base here?) (EXCEPT for goodwill (I think)
impairments can not , but can revaluations of goodwill create a tempo. Diff? when EVER is
goodwill allowed to get a temp.diff????) what if you buy goodwill from someone(a brand) ??is
it never allowed to be recognized.
1.2.I think there is an error in gaap handbook, pg129- example3.2…see ias12.66 or ias12.15 : you
may NOT recognize goodwill in a business combination!!! The textbook says you must!!!
PPE:

QUESTIONS FROM LAST YEAR


1. ITEMS TO BE INCLUDED IN COST:
i. Initial estimate of dismantling , removing, restoring site - ??a related obligation would arise when item is acquired
or as a result of use of item for purposes other than the mnftring of inventory during that period??whats this book pg
211 top DESCRIPTIVE

NB: ask this one first :


2. If components are depreciated separately, do you have 2 separate accounts in journal/legder for accumulated depreciation or
just 1 account- AND do you have 2 separate accounts for the compnenet and asset or just 1 account for both???

REPLACEMENT OF COMPONENTS AT REGULAR INTERVALS: eg relining a


a.
furnace,seats&galley of aircraft&interior walls of a building eg office block.
i. Depreciate major components separately : You depreciate each major
component like these separately from the rest
ii. capitalize the replacement cost : When you relace a component, you can
capitalize the replacement cost.(as long as the recognition criteria of it are met) and
depreciate it separately from there on. The remaining carrying amount of the old
component that was replaced shall be derecognized at this stage.(old one )
(how do you de-recognise things? Loss on derecognition or what?)
1. If not initially recognized : If it is not possible to estimate the cost of the replaced component
to derecognize it, (eg where the component has not been depreciated separately) then the cost
23 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
of the new component (less pro-rata depreciation) may be used as an indication(can
you deduct it all in current yr profit loss as a depreciatipon write up, if you never did it
before? An will SARS accept that? – ie last yrs depreciation all written up this yr?) of
what

2. If last inspection not depreciated / or initially not estimated : use same method as for
major component separate depreciations: If not initially recognized : If it is not possible to
estimate the cost of the replaced ‘inspection’ to derecognize it, (eg where the ‘inspection’ has not
been depreciated separately or it was not initially at purchase recognized as a separate
‘component’ ) then the cost of the new ‘inspection’ (less pro-rata depreciation) may be
used as an indication of what the cost of the replaced ‘inspection’ would have been.(IAS 16.70)
YOU MUST take off deemed depreciation to date from the inspection cost before you
derecognise that amount. The depreciation you take off the deemed cost must be at the rate you
depreciated THE REST OF THE ASSET SO FAR AT – not at a special new faster rate . (if inspection
life = 5 yrs,and plane life = 20 yrs, but you did not depreciate separately, now you do inspection
after first 5 yrs of life, you deduct depreciation at old rate (rate you used so far on rest of plane)
so Inspection/20 * 5= depreciation, from deemed cost of old inspection to get it’s derecognition
value) This answer amount must now be derecognised before the new inspection is capitalized.
(can/do you make a loss on this derecognition????)

1. ALL THIS IS ONE QUES see yellow:


(4)BARTER / EXCHANGE OF ASSETS (PPE ITEMS )
Note: IT IS VERY COMPLEX!
AS PER IAS 16.24-28:
24 (what does whole last part here mean? Very mixed up)One or more items of property, plant and equipment may be
acquired in exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The
following discussion refers simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges
described in the preceding sentence. The cost of such an item of property, plant and equipment is measured at fair value unless
(which one , both or asset given or asset received? And when? After the asset is booked at cost being value of item given up
then you revalue it at fair value or what? See yellow below in ias 16.26 ie the RULE as per textbook pg 215 yellow )
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is
measured in this way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not
measured at fair value, its cost is measured at the carrying amount of the asset given up.

25 An entity determines whether an exchange transaction has commercial substance by considering the extent to which its
future cash flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of
the cash flows of the asset
transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the
exchange; and
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the
portion of the entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may
be clear without an entity having to perform detailed calculations.

26 The fair value of an asset for which comparable market transactions do not exist is reliably measurable if
(a) the variability in the range of reasonable fair value estimates is not significant for that asset or
(b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair
value.
If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value
of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more
clearly evident. ( textbook yellow pg 215, and what happens with the fair value of asset received- if you reliably know fair
value of asset given up? Do you just ignore it completely and utterly, and if you want to book a profit on the barter then
you must basicly do a full ‘revaluation’ AFTER you have booked the new asset as per the “rule” in -textbook pg 215
yellow- so is that the ONLY place at all any fair value of asset recived will be used at all? So if your carrying amount of
asset given is 100 but its fair vaue is 10, then you record a loss even if asset received is worth 1000? – and to get the profit
you must after this do a full ‘revaluation’ of your new asset, or what? )
24 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

27 The cost of an item of property, plant and equipment held by a lessee under a finance lease is determined in accordance
with IAS 17.

28 The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance.

1. This is all the IAS 16 stuff for asset exchanges(barter), it means:


a. THE RULE FOR BOOKING NEW COST PRICE OF ASSET BOUGHT : If both items fair value can
be reliably determined, the fair value of asset given up is used as the NEW COST PRICE OF ASSET
BOUGHT IN ASSETS & PPE TABLE (in notes), unless the fair value of asset received is more evident.
THIS IS THE RULE ! So it does not matter what the value of asset received is worth, you book the cost
price you paid ( asset given up) as the new book value of new asset recived in own asset register. You can do
a REVALUATION of asset received later if you are not happy with this cost price- but first follow the rule. (
textbook yellow pg 215, and what happens with the dfair value of asset received- if you reliably know fair
value of asset given up? Do you just ignore it completely and utterly, and if you want to book a profit on the
barter then you must basicly do a full ‘revaluation’ AFTER you have booked the new asset as per the “rule”
in -textbook pg 215 yellow- so is that the ONLY place at all any fair value of asset recived will be used at
all? So if your carrying amount of asset given is 100 but its fair vaue is 10, then you record a loss even if
asset received is worth 1000? – and to get the profit you must after this do a full ‘revaluation’ of your new
asset, or what? )

i. If CASH IS PART PAYMENT: if any cash exchanges hands as well in transaction , you just
increase or decrease the relevant assets value by this amount as you go along ( so you journalise
“cash to bank & asset given in 2 lines s” against CONTRA “cash from bank & asset received in
another 2 lines“
b. A GAIN OR LOSS (capital gains) is recognized as difference between fair value (of which asset – you
must use asset received’s fair value here or what? See textbook pg 215 yellow highlighter ) and carrying
amount of asset given up, where applicable.

c. EXCEPTIONS TO THE RULE :There are only 2 exceptions( below), in both cases the asset that is
acquired is measured at the carrying amount of the asset given up, and no gain or loss is recognized.
i. Exception 1: exchange transaction lacks commercial value ( see IAS 16.25 for definition of )
ii.Exception 2:if fair values of both asset given-up & asset received cannot be measured reliably.a
2. Ask yellow below- this is vertabim IAS 16.25
25 An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash
flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash
flows of the asset
transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the
exchange; and(ask why is transaction 4 in example pg 216 textbook not commercial- value is significant 50-20=30000
difference, and fair value is higher so entty-specific is higher –you can sell it for more if you want! )
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of
the entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without
an entity having to perform detailed calculations.

NEXT QUES : NB : Restoration Costs for LAND : IAS16 . 59 vetrabim :If the cost of land includes the costs of site dismantlement, removal
and restoration, that portion of the land asset is depreciated over the period of benefits obtained by incurring those costs. In some cases, the land
itself may have a limited useful life, in which case it is depreciated in a manner that reflects the benefits to be derived from it. (SO IT SEEMS
FOR LAND YOU DEPRECIATE A PORION OF THE COST PRICE, BUT FOR ANY OTHER ASSET YOU ADD THE PV OF THE
FUTURE ESTIMATE OF RESTORATION COSTS TO THE COST PRICE & ADD INTEREST(INFLATION) TO IT EVERY YEAR AS
WELL–SEE ias 16.16c now is this the rule for all non-depreciable assets or only land? And if land is depreciable in a special circumstance
which of the 2 methods do you use?)
25 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

26 The fair value of an asset for which comparable market transactions do not exist is reliably measurable if
(a) the variability in the range of reasonable fair value estimates is not significant for that asset or
(b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.
If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value of the asset given
up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident. ( textbook yellow pg
215, and what happens with the fair value of asset received- if you reliably know fair value of asset given up? Do you just ignore it
completely and utterly, and if you want to book a profit on the barter then you must basicly do a full ‘revaluation’ AFTER you have booked
the new asset as per the “rule” in -textbook pg 215 yellow- so is that the ONLY place at all any fair value of asset recived will be used at all?
So if your carrying amount of asset given is 100 but its fair vaue is 10, then you record a loss even if asset received is worth 1000? – and to
get the profit you must after this do a full ‘revaluation’ of your new asset, or what? )

A GAIN OR LOSS (capital gains) is recognized as difference between fair value (of which asset – you must use asset received’s fair value here
or what? See textbook pg 215 yellow highlighter ) and carrying amount of asset given up, where applicable.

a. REVALUATION MODEL: this method works exactly the same as the one above except for the COST price in the ASSET account eg
‘machine account’ is not at the original cost but at a REVALUED AMOUNT- ie it gets revalued.(so if you ever dare to revalue say a flat,
then for ever more all flats in your business must be revalued and again every year? What if no money for valuers one year- what do you do
then?)

i. There are just 2 special rules: if you ever use this method for any asset:
1. All Assets In Same Category Get Same Treatment: all the assets in the same category eg: machines/boats/buildings etc,
must get treated in the same way – ie they must all be revalued.
2. Done Again On Regular Basis: all these assets using this method must be revalued regularly.there are certain rules as to
how soon after each other all assets in one class must get revalued etc – see IAS 16.31-42 for details.
ii.Revaluation Surplus / Other Comprehensive Income.(IMPORTANT)
1. IAS16.39 If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other
comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall
be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised
in profit or loss. ???whats this mean -same year only or any of last years before derease as well???

2. 40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in
the revaluation surplus in respect of that asset. ( what if this amount goes below zero- do you go over to the profit/loss
then for the balance?) The decrease recognised in other comprehensive income reduces the amount accumulated in equity
under the heading of revaluation surplus.

1) REVALUATION SURPLUS:
a) The revaluation surpluss account is a funny thing- it does not come into equity via profit nor owners contributions,and once it is in
equity cannot get out of equity by a transfer of loss to equity(retained earnings) , but only by issue of capitalization shares or specially
going and writing out the portion of each asset in there due to depreciation or selling the asset. So this account must be handled
specially and separately, and a record kept of all the things which make up a part of it – and a record next to each asset which ever got
revalued as to the portions involved- so you can control it . it is a absolute cow- so note
b) It is viewed as part of equity.
c) It is shown as perhaps a non-distributable reserve in the StCHEQ in its own column.
d) It is always unrealized and unused and once it gets realised it is gone and becomes something else . It can only either be 1-USED up or
2-REALISED, or it just stays there and does nothing.
i) It may be USED only for:
(1) Capitalisation issues(how do you do this?? And how do youtake it out agin for sale/depreciation? If asset gets depreciated ,
how do you know which assets stuff was used for shaeres/ so which asset may you not write off depreciation throuhh thos
account?)
26 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

(2) OR to absorb subsequent revaluation deficits ( if reval. Of some asset goes down)
(i) REVALUATION DEFICIT : THIS IS IF A REVALUATION is downward/less, then YOU MAY ONLY
DECREASE THE REVALUATION ACCOUNT BY THE PORTION OF THAT ASSET THAT IS IN THE
REVALUATION ACCOUNT FROM A PREVIOUS REVALUATION upwards. Any excess over whats left of a
previous revaluation surplus for that one asset , or if “that particular” asset has no positive revaluation balance in this
account at all , then that part goes directly to profit/loss account as a loss for the year- period cost/expense- YOU
CANNOT MAKE A REVALUATION SURPLUSS ACCOUNT NEGATIVE EVER!
(ii) Deficits of one item can not be set off against surplusses of another item, even if such items are from the same
category
(iii) IF AN ASSET IS REVALUED UPWARDS(a impairment reversal works same way), you first have to go check if
that asset ever had a deficit revaluation that resulted in a loss going direct to the profit/loss section of SCI ( NOT
Other Comprehensive Income decrease but a normal loss) due to the reasons in (i) above. Then you must first add a
profit to the exact same value as that previous loss to the normal profit/loss in SCI –so profit /loss account-(even if its
10 years later) , then only the balance may be credited as REVALUATION SURPLUS-this is some funny rule to stop
cockeyed things happening with these matters!

ii) It may be REALISED only by:


(1) Disposal Immediatly (you sell the asset and (where / how do you keep a record of the revalued part of each asset so you can
go back and revese this part of it in the books it once it gets sold?)
(a) JOURNAL ENTRIES: once sold you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings
Acc.it seems that the profit/loss calc. as usual in accounts will end up balancing this reval thing once it all gets to the
ret.earn. account. It SEEMS YOU ARE SAYING THE REVALUATION COULD HAVE BEEN A OWNER S
CONTRIBUTION, LIKE HE GAVE AN ASSET EG: CAR, TO THE ENTITY- SO CR owners equity AND DR asset
account!. How that work I don’t know Now you have a extra amount in here that comes from nowhere! (tax/profit/sale at
aloss etc etc) but that’s it.
(b) For De-Recognition: same, you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings Acc
(c) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line!

(2) Usage Gradually : this is before you sell the asset while its still yours, you say:
(a) ONLY the difference in depreciation between what the old depreciation amount that year would have been and the new
depreciation amount that year is allowed to be deducted from Revaluation Surplass Account from the amount that
particular asset caused to be in there of course- no more. See example below.
(b) Journal Entries: this depreciation charge is COMPLETELY separate from normal depreciation account – it is just : lessen
DR Reval Surplus. Acc. And move it into CR Retained Earnings. These 2 accounts are both equity accounts.so both
increase on the CR side. You just move it out SURPLUS.. and into RETAINED.. (so it does not get used as an expense
depreciation?? OR go through tax , I mean depreciation is an expense so it should decrease retained earnings.THIS
NORMALLY HAPPENS BY IT BEING WRITTEN AS AN EXPENSE THEN GOING TO RETAINED EANINGS
THROUGH PROFIT/LOSS ACCOUNT. But What happens here?)
(c) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line!
(d) ALSO ;what s this mean?: see textbook page 225 yellow- must still transfer this to notes but cannot understand it.
(e) What do ou do when you have a sale- what happens to the reval.surpluss then??
27 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

2) DEPRECIATION AND PROFIT AND LOSS


a) Depreciation is calc. on the revalued amount less any residual value
b) Gains/losses on disposal are calc. using principles in IFRS5.
c) An asset should not be revalued shortly before disposal in order to manipulate the gain/loss unless the revaluaton forms part of a
systematic revaluation program.
d) An item held for sale will seldom be revalued because of cost of revaluation.& bookkeeping needed eg updating asset register.
e) PPE items must be evaluated as a class/group. To bear in mind requirement that fin stats should not be misleading, if it is not possible
to revalue all items in a group simultaneously for all items in a group, then do some internal valuations which should be supported by
external valuations from time to time.
3) TIMING OF REVALUATION
a) It is better to revalue at begin or end of a period (not middle cause then there are 2 depreciation amounts that year , one to halfway the
next from halfway onwards), so the user can compare depreciation to the carrying amount more plainly and clearly.
4) Disclosure
a) A full record in the asset register of all revaluations and transfers in/out to reval.surp.acc. eg depreciation etc and the historical cost
must be kept very well so that one can comply with the disclosure requirements eg you must show carrying amount at cost method +
reval method every time.
b) Reval at end year appears to be the better option by SFP needs for comparability but aggravates the workload at end of year.
c) THER seems to be a huge bugger up about the begin/end of year story. If reval is done at begin of year there is no problem,everything
works out just fine and depreciation for tht year is just calc. from this new amount. But if done at end of year , instead of just doing
things logicly step by step, the book says if REVAL done at end of year you must roll this back to begin year before you do the
depreciation for the year. (I am not sure about if done in middle of year – it does not say what do you do then????roll back or do half
/half. If done at end why cant you also do half/ half?)

i) REVAL DONE BEGIN OF YEAR:


ii) REVAL DONE END OF YEAR: you roll the reval back to begin year, so you try add back any depreciation that that revalued
amount WOULD have had the whole year – so if reval amount at end is 100, you say what depreciation would that 100 have been
subject to the whole year to get to 100- if there is a useful life of 2 years left at end year on straight line basis – you say 100*3/2=
150. So depreciation was R50 that year. NEVER use the old carrying anmount depreciation, ALLWAYS roll back if the revaluation
was dome at year end.And rem: the reval.surpluss you add as a line item in the PPE table must not just be the actual reval surplus,
but it must get increased by the depreciation you work out as being for that year!! It is higher!! So you make it more from the roll-
back!! see example below (WHY I DON’T KNOW?)

Can you make a new class of assets for IAS16 , so you can do revaluationon some machines and on
another group not do revaluations? And can you make anew class for each type of depreciation method
used?

Are you not allowed more than 1 depreciation type and rate in one class of PPE? How do you show useful ives in the notes- one figure per class
of PPE? Or what ? for 1 class of PPE of 10000 PPE machines in the notes? As one figure. Or 10000 amounts.?
For when you sell/depreciate/derecognize an asset and the revaluation surpluss is transferred to the retained earnings account, they say you can
also leave it in the revaluation surplus account if you want –in textbook as well as ias16 somewhere- how does this work , if you leave it in there
wont it confuse the issue with how much of the rela.surpluss account is depreciate write-offable, or still even owned by the entity, or whatever?
What is the reason to leave it in there?? When you sell the asset
28 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

-------------
Disclosure
73 The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount;(what is a measurement basis?)
PPE QUESTIONS FROM THIS YEAR.
1. ENTITY-SPECIFIC VALUE is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from its disposal at the end of its useful life or expects
to incur when settling a liability.(does this incl repairs& maintenance ie ‘ cash outflows as well’
and can you set-off liabilities vs positive- what does it mean ‘expects to incur when settling a
liability?)

2. Question: how can you move it to ret earn. from reval. Surpluss, if it is GONE now- I mean it has been depreciaqted, it is gone,out
the door , no more. So how come it gets moved to retained earnings ? ANS: when the depreciation you did in P&L SCI moves
through to retained earnings for the year, it will AUTO reduce the amount you transferred there from reval. Acc. another
QUES: what if they spend all profit before they move it and don’t move it to ret.earn. first to balance out the thing , now you have
some ‘deprecciation’ in ret. Earn. which must be taken out ? it is used up – gone? My own ANS ask if correct :: I think they moved
it there magically since depreciation reduced profit (deprec. is just imaginary anyway) so that part of profit was not able to be
‘spent’ before it got to ret.earn , and thus what could have gone to ret.earn. if you had forced it (profit) did not go, so ret. Earn. is
auto. Poorer by that amount, no matter what you do with the profit after tax! Is this correct??or not?

a. REPLACEMENT OF COMPONENTS AT REGULAR INTERVALS: eg relining a


furnace,seats&galley of aircraft&interior walls of a building eg office block.
i. Depreciate major components separately : You depreciate each major
component like these separately from the rest
ii. Capitalize the replacement cost : When you replace a component, you can
capitalize the replacement cost.(as long as the recognition criteria of it are met)
and depreciate it separately from there on. The remaining carrying amount of the
old component that was replaced shall be derecognized at this stage.(old
one ).. note : derecognition is the same process as a sale of an asset :treat it as a
sale where you got paid 0. (ie transfer asset + acc.depr. to ‘Asset Realisation’
account, then get profit/loss and transfer to profit/loss on sales of asset account)
iii.If not initially recognized : If it is not possible to estimate the cost of the
replaced component to derecognize it, (eg where the component has not been
depreciated separately) then the cost of the new component (less pro-rata
depreciation) may be used as an indication of what the cost of the replaced
component would have been.(IAS 16.70) YOU MUST take off deemed depreciation
to date from that new ‘replacement cost’ before you derecognise that amount.
The depreciation you take off the deemed cost must be at the rate you
depreciated THE REST OF THE ASSET SO FAR AT – not at the new rate you are
going to start depreciating the new replacement part at . (if seats life = 5 yrs,and
bus life = 20 yrs, but you did not depreciate separately, now you relace seats,
you first deduct depreciation at old rate (rate you used so far on rest of bus) over
20 yrs, but if the seats were replace 5 yrs after buying bus then only for 5 yrs of
course but at 20yr rate ie cost/20 * 5 yrs= depreciation, from deemed cost of old
seats to get their derecognition value) see example below .Also note, from now on
the new asset gets depreciated at it’s OWN rate, don’t use the bus’s old rate for it
anymore.
a. ???How do you do this in the books?raise a new asset from scratch at
current date and acc .depr and depr. For year , all in one go , and
then “sell” it ie derecognize it? Or what . Also, must this depreciation
show in P&L SCI ? or does it not show???

3. If not initially recognized : If it is not possible to estimate the cost of the replaced
component to derecognize it, (eg where the component has not been depreciated separately)
then the cost of the new component (less pro-rata depreciation) may be used as an
indication of what the cost of the replaced component would have been.(IAS 16.70) YOU
MUST take off deemed depreciation to date from that new ‘replacement cost’ before you
29 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
derecognise that amount. The depreciation you take off the deemed cost must be at the rate
you depreciated THE REST OF THE ASSET SO FAR AT – not at the new rate you are going to
start depreciating the new replacement part at . (if seats life = 5 yrs,and bus life = 20 yrs, but
you did not depreciate separately, now you relace seats, you first deduct depreciation at old
rate (rate you used so far on rest of bus) over 20 yrs, but if the seats were replace 5 yrs after
buying bus then only for 5 yrs of course but at 20yr rate ie cost/20 * 5 yrs= depreciation, from
deemed cost of old seats to get their derecognition value) see example below .Also note, from
now on the new asset gets depreciated at it’s OWN rate, don’t use the bus’s old rate for it
anymore.
1. ???How do you do this in the books?raise a new asset from scratch at
current date and acc .depr and depr. For year , all in one go , and then
“sell” it ie derecognize

4. Initial estimate of dismantling , removing, restoring site on which asset is located- IAS16.16 (c) the initial estimate of the
costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity
incurs either when the item is acquired OR as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period. (??a related obligation would arise when item is acquired or
as a result of use of item for purposes other than the mnftring of inventory during that period . ??whats this to the left?-
means if inventory was produced in same period as dismantle/restore/remove asset then capitalize costs to inventory and NOT to
PPE as per IAS2.- so how do you know? - all machines produce inventories ! when you buy machine and its going to be used for
making inventories later on, do you still capitalize these costs or not.(what if it only very distantly will be used for inventories ie:
acts in a very remote supporting role)

5. ITEMS TO BE EXCLUDED FROM COST


a. INITIAL OPERATING LOSSES MAY NOT BE CAPITALISED- eg losses incurred while demand is growing is NOT
capitalised.
b. Costs of opening a new facility (new factory for machine? Or what)
c. Costs of introducing a new product : eg advertising & promotional costs
d. Costs of conducting business in a new location or new class of customer : eg staff training
e. Admin & general overhead costs ( ?/electricity used in testing phase?yes or no)
f. Costs incurred after capable of being brought into operation as intended by mngmnt: eg has yet to be brought into
use or is used at less than full capacity. (say it cannot go at full capacity because it is not working properly, so they run at
half capacity for both testing&profit ie trying to get it to go properly– and it is loss/profit –what about electricity because
it is being tested and fixed still etc??)
g. Costs of re-organising /relocating part or all of entities operations.
h. If the testing phase not quite JUST a test : ie if it is that the machine is to sink an operational shaft over 2 years and in this
time we will see if it works properly- this is NOT incl. as capitalized costs.But where it is a bit confusing , like in this
example ,book says if it is possible to apportion the testing costsand say 10% of costs sre testing, then one can capitalize
that part only, that is allowed.

(2)ASSET DISMANTLING, REMOVAL & RESTORATION COSTS


a. If INVENTORY WAS PRODUCED IN SAME PERIOD BY THE ASSET AS period of restore/dismantle/removal : then it
is added to costs of inventory, not to costs of PPE per IAS2 (but what about if it was capitalized at the begin when you bought
it , what do you do to that then later? )
b. ELSE per IAS16.16 Entity must have a legal or constructive obligation (‘at acquisition’ ,like years before, when initially
bought) (see IAS37) , to restore/dismantle/removal , then it can be added to PPE- IAS16.16 (c) the initial estimate of the
costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an
entity incurs either when the item is acquired or as a consequence of having used the item during a particular period
for purposes other than to produce inventories during that period.. [So it must be ONLY 1 of 2 things : either on DATE of
buying , or if not on DATE of buying, but sometime after that , then only if not used to produce inventory in that period (IAS2)
]
DISCOUNTING THE COSTS TO PV: The interest does not get capitalized, it is charged as an expense each year to profit/loss. :(Q-?are
you not allowed to capitalize interest generally speaking?)

1) IF DISMANTLING COSTS which have been capitalized ARE RE-ASSESED: different for each cost model type:
i. UNDER COST MODEL :per IFRIC 1 you just re-work out the Present Value of the changed dismantling costs, and
if the amount in you books is different you change it by capitalizing the difference : so “Building asset account”
CONTRA “Provsion for dismantling etc account” add/subtract the change in costs to the asset. Do NOT book this
change as interstest expense , that is completely sepatarate- just keep the 2 apart and treat this change as capital, and
the interest has nothing to do with it , it is a separate charge each year calculated from the balance of the “Provision”
liability account. These changes are disclosed as changes in estimate ALSO see IFRIC 1 for there should be testing of
impairment when cost estimates go down due to higher discount rate or declining costs..(if it goes up do you do
30 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
anything special with ‘IAS change in accounting estimate’ ? and if it goes down do you de-recognise it or just change
it and finished?)
ii. UNDER REVALUATION MODEL: increases in provision set off against revaluation surpluss by debiting other
comprehensive income./decreases by crediting it. Remaining balances after debiting are written off to profit /loss of
OtherComInc, what doe sthis mean ? no clue! ?example 11.17 in descriptive book Very complex- see book again no
2. See example below for method(:In this example 11.8 in descriptive book, may one capitalize the interest payments?yes or no) this is
where the price of a building has to be paid in 6 mnths, and deemed interest is exctracted etc from price.
3.

1. 40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation
surplus in respect of that asset. ( do you first reduce any balance of that asset left in reval acc.and THEN send the rest to P&L, or do you
do both qat the same time? -what if this amount goes below zero- do you go over to the profit/loss then for the balance?) The decrease
recognised in other comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
2. CHANGE IN ACC POLICY :AS PER IAS 8 if you change from cost to reval method it is a IAS8 change in acc. Policy , BUT as per
IAS 16 it need only be treated as a common revaluation. SO THE FIGHT between the 2 ends by saying one must follow IAS16- just
treat it as a “revaluation” as per IAS16, not as a change in acc policy. As per IAS8.(???? Do you NOT treat it as a change in acc. Policy
or do you?i think it could be disclosed but ends up just becomng a revaluation)

3. GROSS and NET method of doing a REVALUATION:


a. GROSS METHOD: you adjust acc.depr. so that the CARRYING amount of the asset is equal to the new revaluated amount.
i. The Acc.Depr. must be adjusted by bring it to the level of : by recalculating depreciation from scratch for the asset,
as if it was bought at the new revaluated amount when it was bought many years ago, and using the EXACT same
depreciation rate as used from then till now(old rate) up to now. (as if it was always depreciated at that level.) (If you
wish to change depreciation rate you must do it from now onwards , not in the past. )This method is normally used
where you do not want to do a revaluation for some reason, so you take the current replacement value of the asset,
and make that your ‘cost’(bring the asset book cost to that level) .then you also adjust depreciation so your carrying
amount is the new depreciated revalued rate
1. Depreciation & Acc Depr & Reval. : this method never affects the ‘depreciation ‘ line item in the SCI. Funny
thing: for Acc Dep. You just add/less from acc dep account, and the CONTRA is the PPE asset account that
will always be on the opposite side. It is a natural contra – just make these 2 opposing entries in 1 journal
entry. Then the reval. Account ONLY gets the balance of what the 2 entries (reval + acc dep) on one side
need to balance out the PPE entry on other side: it is just some weird method they work out somehow –
notice acc dep is a CR and reval .acc. is also Cr. (can you say [acc dep. Contra depreciation in P/L for year]
why must [acc dep & reval surp. CONTRA asset], why cant [reval.surp. CONTRA PPE asset account]
alone. How does this funny method work?not sure.)
i. .
INTANGIBLE ASSEST; IAS38
1) (so what is goodwill then if it is NOT an intangible asset , and under what ias does it fall for a non-business combination. .AND could it
maybe be an intabngibe asset if some kind of goodwill could be sold separately,or if it comes from a legal right somehow?-or NOT?)

a) PREPAYMENTS : they are an asset until you obtain the right to access the related goods or receive the service.( are they Intangibke
assets per definition? Do tyhey fall undere ias38 – and in intangibele items line item in the SFP? Why do they have thois here???
2) How do you do the following disclosures (orange highlighter in book – tip at inside edge of page) : in green IFRS book, pg A962-5 ,118e(i)
+(ii) (in PPE table in 3 line items for additions?) ,122 abcde writing under ppe table? , 124b
GOV GRANTS:
1. The text book GAAp doe sa massive ‘cchange in acc.estimate thing for 1 of the 4 types of repayments of gov grant in pg 328 see
sentence just efore example 13.5 – in ex.3.5 – do we have to do it this way or is it optiona;l – and same treatment is not done to
“income’ grants because of income/expenses problem, so it is not consistent either?
2. How does pg 33o gaap , 3rd journal entry – finance costs – work? Not sure why bank is a cr for 100000, of 5%, and why half goes to
finance costs, and half to loan ? cannot understand any 1 of the entries.then fpor asset s method below that , they do exactly the same
thing, so – there is no ‘defreed income’ there, now how can it be the same entry????
3. See Tut 103 : pg 98 , top, current tax & deferred tax entry. , as well as deferred tax calc. on next page.
a. They do current tax & deferred tax in different journal entries. But in text book & IAS they say all deferred tax is included in
the “INCOME TAX FOR PERIOD” item in the SCI. and they normally debit deferred tax CONTRA “income tax expense
account” , instead of CONTRA “deferred tax SCI” account. , like it was dione in this exercise(maybe to show). In exam , can
we do a jounal like that ie ; first Dr deferred tax SFP Cr Curent tax P&L , then Dr current tax SCI , Cr : SARS
b. In the C1 calc. on same page 98 , the depreciation & Section 13 sex deduction : CAN ONE NOT DO THAT IN DEFERRED
TAX, AND THEN TRANSFER THE DEFERRED TAX DR OR CR TO CURRENT TAX ? the text book seems to indicate
that all accounting entries for tax , are ONLY corrected by the deferred tax entry/calc. ? can one not do it that way
c. They seem to have done the deferred tax for depreciation TWICE – I get a different answer every time here. They first
accounted for the SARS tax base difference in calculation – so C1 – THEN they did it AGAIN in the deferred tax calc. So you
it was done twice. If you add the 2 up like it seems to indicate you do(the 2 journal entries) you get a wrong answer???
31 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
i. If you leave out the deprec. thing in the C1 calc, you get exactly 141000, and if you incl the deferred tasx on deprec. =
(1400 ) you get exactly 140000- like the journal entry says – then its just the other deferred tax asset to ADD ie
25200for deferred income-see C2 calc.) I am sure they double included it he by accident, to show an accounting
principle, but forgot to add the ‘deferred income part ‘ in the thing in C1.!
4. Tut 102, pg 102, note 3 profit before tax – they forgot the Gov.grant income entry – in textbook pg 334 they do a grant income entry.
Here.
INVESTMENT PROPERTY
1. You must choose whether to hold items using the COST model or the REVALUATION model .it all works exactly same as PPE.(it is
doubtful whether the change from cost model to reval. Model can be performed, as it is not evr likely to result in more relevant &
reliable reporting. – per book) if it is too expensive every year for firm to revalue all its asssets in class- is it more relvant to change to
cost from reval. , due to firm cannot afford proper reval. , and thus values are not shown at a relevant & reliable rate, so the costs model
is better?)

CURRENT PLACE OF LAST QUESTION.


SOME QUESTIONS FROM ANOTHER NOTES PAGE - MIXED UP, SOME MAY BE REPEATED HERE IN
PLACES, LOOK UP AND DOWN
Journals:
1. For purchase ret. Jour. – how does discount received get treated- both before and after creditor has already been paid.
2. 2purchase ret.jour – how does vat input/output get treated?Why to reverse out of vat input instead of add to vat output instead ??can you
do any? What about you have already paid the vat input+creditor – then you reverse from a possible zero balance in vat input- same
principle as for discount reverse should apply here is'nt it ie:you might already have paid the vat to SARS –so it goes to the opposite
account- why not here.
3. 2purchase ret.jour- do you do a purchase returns jour, for a debt already paid to creditor?or how?
4. How to reverse an attempted debit by bank that did not work- do you journalsie it both ways like the bank does or just ignore it? For
bank recon etc?
General:
1. Provision bad debtors – where go to bad debts in income statement?
2. Where does bank overdraft go in income statement? To 1-current liabilities 2- interest bearing borrowings 3-both ie: both headings in
current liabilities.
3. Must provision for bad debts be written off against debtors at year end in fin stats.? Yes
4. where does prov for bad debts go at year end closing procedure?1 as an income if decreases ,or2- as an expense if increases
5. you write off bad debts for 2001 in 2003 and show in income statement for 2003?? Not reflect accurately!!!!! Earnings for 2003 then ??
how does this work
6. How many decimal places for ratios answers in ixam.
7. Inventory opening/closing operartion for closing entries type? How does it work?
8. Where does income from a loan to others go in income stat. "income from other fin assets" or not?
9. How does redeemable pref shares under ' non-distrib. reserves work'
10.
Clubs
1. difference between receipts& payments account or rec & pay statement? Which is t- account / which goes as a narrative form(one
column like Fin.Stat. type)
2.

Companies :
1. No par value ordinary shares –do they get a share premium account? Esp.if some were issued later at a higher value than some
previously issued?
2. Pref. shares- no par value possible yes or no?
3. No par value shares do they go to same acc as ordinary shares? – can not have ordinary & no par at same time.
4. Redeemable pref shares- how does it go in the balance sheet for companies.
5. Where does income from a loan or debentures go in the NEW STYLE TYPE of income statment.
6. Which other income & expense gets separated from operational income / expense. For new style income statement- next years syllabus
7. HOW work if par value shares authorised but no par value issued.
8. Ordinary & pref shares – do they have same or different share premium & shared dividends accounts.
9. What deo you do to SARS account at year end if they owe you?what is contra account for this Credit-"Tax expense" ?Bank is
contra(you paid them) and they are treated as a normal debtor(with set-off possible though) At year end.
10. Non-distributable reserves- does 'revaluation fund' come from 'depreciation account' if it is credit balance.
11. Is capital redemption reserve fund a ledger account?
12. Tax- how do you record 'tax accounting date" – is that 1 per year /per 6mnthys/ per mnth.?pg 416 16.6.2 for the genuine actual tax
payment date ?- 1 per year for company tax –or per 2 mnths for vat.
13. Do provisional Tax payment ever go to "tax expense account"? No.
14. Capital and Reserves :do all the issued shares go under "issued shares" including Preference shares?
15. How does Preliminary Costs and share issue costs get put in ledger accounts as an asset and as an expense (DOES IT GO TO Income
Statement ) HOW DOES IT get written off over a few years (matching principle +SARS)(because it is seen as an asset to get written off
over a few years?)
16. What is put shares for "redeemable pref shares" in shares or "borrowings "
17. What is "Minority interest" in Income statment Pg 408.
32 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
18. Do you put 'capital redemption reserve fund' in 'Stat of changes in equity'
19. for 'New style income stat' where do the terms: "Distribution" "Administration" &" other" expenses" WHERE does each one go /or
dissapear into?
20. Tax for "extra-ordinary items' for income stat of companies,must it be included in income stat. under Tax ' or "extraordinary items"
21. Stat. of changes in equity page: 413 1- what order must items be in? 2- CAN ISSUE OF SHARES GO FIRST 3- CAN TRANSFER GO
BEFORE others?
22. Does "redemption of capital reserve" go in statement of changes in equity or where?
23. Is interim dividends separate to normal dividends in accounts and in fin stats?
24. What about Trade& other payables /trade & other receivables go in new style inc.stat.
25. For the new Inc. stat. Style : Where does income from a loan to others go in income stat. "income from other fin assets" or not?
26. How do you do closing off procedure for companies - closing off to – Capital account and current account?

Partnerships
1. If provision for bad debts is created+ put in revaluation acc. ,where does it appear/go to bad debts acc. for the year end financial stat. to
reflect correctly.
2. If you write bad debts off to prov. For bad debts acc, when prov. Acc. goes negative what do you do? Carry on or start the 'bad debts
acc' balance now only?
3. Gradual Liquidation :'amount allowed to draw'Page 383 of Intro.To Fin.Acc. how do you work out the Gradual Liquidation –amounts of
partners equity which exeed profit sharing ratio?
4. My book-Intro to fin acc. says profits by common law shared by capital ratio- while prescribed book says "equally"- what is right here?
pg 354 top 2nd sentance own ,5th page prescr.
5. ??what do you tell creditors when you merge 2 partnership with liabilities?Nothing or what- now 4 people each owe less ,before it was 2
people now you must fight 4,also it may weaken firm etc???
6. How does merge partnerships work? Close all books/keep one set open to build on/transfer all liabilities/etc etc???
7. For insurance policy on lives of partner-why give dead c the share of surrender values of policies of a+b ,when his policy pays out???
Why this?see prescribed book under life policies partnership
8. Revaluation: Do we transfer Acc.Depr. to Mach Acc. first ,before we transfer mach. acc to revaluation acc to get revaluated ?And start
acc dep. at zero again?
9. Do you do closing entry from 1- profit & loss acc or 2 from Appropriation ACCOUNT.answ-from profit loss acc TO appropriation acc
10. Do partners monthly salaries normally go to all other salaries + profit&loss account or to Appropriation acc?
11.
Cash Flow STATEMENTS:
1. To calculate the 'cash received from customers' as heading 1 of the 'operations section' : if increase in receivables=you subtract this from
sales-BUT for decrease in inventories –do you add this to sales?matching principle=you are now showing last years income as this
years cash flow?? Is this correct??should it not be also subtracted from 'sales for this year'????
2. What happens to income received in advance for 'cash receipts from customers' ?or anywhere else –(see the +1000 part of question 1
handout exercises in answer from lecturer-next to balance c/d )
3. How does this work: cash payments to suppliers&customers? 1- all suppliers incl water&lights,services eg fix the roof&stationary
&true goods for sale(your revenue)suppliers? 2- what about other income page 492 text book own for 495 solution 3- is 495
solution or cost of sales solution Q2 answer correst-which? 3-how to do :why is inventory increase to be added?decrease to be
subtracted? 4-why payables incr-add /decr. Minus????? 5-waht about other expenses/ income/insurance etcetc?
4. For 'investments cash flow' do you do a full 1- equipment 2 – acc dep 3- profit/loss account for each item? Yes or no or how?
5. Separate profit /loss on sale of each asset class or all in 1 sum for eventual profit or loss?
6. SEPARATE THE PURCHASE /:1-addition 2- replacement for each asset class or all in 1 go/sum
7. For Recon.- do you do a 'payables account' for purchASES or what ? just difference?
8. For payables account– if depreciation is taken out – is interest taken out too?
9. For payables account: profit on sale of asset? Loss on sale of asset ? where do these two go.
10. Payables inventory increase/decrease- which side to go on and why?
11.

(1) Cash payments to SUPPLIERS & EMPLOYEES:(Cost of Sales)


1- REMEMBER:Suppliers includes all suppliers as well as goods for sale suppliers ,water & lights,stationary,services like fix the roof
suppliers,etc etc , OR what is a supplier?
2- You only take
Revenue – netr profit before tax = net expenses
ADD :Interest/dividends income
Profit on disposal of assets
Profit on revaluation of assets
Other income
INVENTORIES Increase (you ??????sold it so you paid that to your suppliers)
PAYABLES Decrease
LESS: Interest paid
Depreciation /revaluation loss+ loss on disposals of assets +any other type of payment not=su
INVENTORIES Decrease
PAYABLES Increase
1. FINANCE COSTS :heading –(put no totals here-just a heading)
33 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
Dividends Received/Paid
Or how do you do this – what is this?

1- AC118 –Cash flow from interest& dividends to be disclosed separately ,each classified as either ????operating,investment or financing
activities???????? I thought only as operating activities –see page 496 own book for Ac118 description given here!
2- Can you do 3 0r 4 acc.depr. accounts in one: ie for vehicles+ equip+ other??or separate only.?
3- What about "other income';does it get added to revenue or subtracted later or what???
4- DIRECT METHOD (method used in acc 102) why is admin expenses on cr side in your "payables" t account (used to get the figure for
'paid to suppliers &employees' ) ,why not on dr side .Also why is cost of sales on cr side as well. Also how does it all work- this account?
Which side and where and from which accounts to logically make up the total you want here.? Please explain this account!!!!and total!!!!
5- Where does 'increase/decrease in pre-paid expenses ' go ? how do you know if it is a cash or non-cash transaction? or if it is a non cash '
other income ' item to be subtracted?or if it is shown elsewhere on the face of the cash flow statement.
6- Where does 'increase/decrease in accrued expenses ' go ?what is it here exactly? Is it to be removed/added to expenses or creditors? With
which does it go? how do you know if it is a cash or non-cash transaction? or if it is a non cash ' other income ' item to be subtracted?or if it
is shown elsewhere on the face of the cash flow statement.
7-
Budgets
1. Is transport cost part of materials input costs for materials budget?
2. What is a cash budget
RATIOS
1. Roe:include pref shares & share premium? No only ordinary ,not preference,no share premiums
2. Many of the ratios do not understand principle or which values to use???? Recheck through all of the ratios to be sure.
3.

CHANGES IN ACCOUNTING POLICIES AND ERRORS

1. Per IAS8.26 , Retrospective application to a prior period is not practicable unless it is practicable to determine the cumulative effect on the amounts in both the
opening and closing statements of financial position for that period. This means that??????what?????
2. For disclosure requirements as to changes in acc policy – note answer for voluntary & statutory types : just the yellow at bottom :
DISCLOSURE STATUTORY CHANGE due to IFRS CHANGE
IAS 8 .28 When initial application of an IFRS has an effect on the current period or any prior period, would have such an effect except that
it is impracticable to determine the amount of the adjustment, or might have an effect on future periods, an entity shall disclose:
(a)Title : the title of the IFRS;
(b) Transitional Title : when applicable, that the change in accounting policy is made in accordance with its transitional provisions;
(c) Main Description :the nature of the change in accounting policy;
(d) Transitional Description :when applicable, a description of the transitional provisions;
(e)Future Period Possible Transitional Effects : when applicable, the transitional provisions that might have an effect on future
periods;
(f) Current&Comparatives Changed Amounts On Fin Stats Face :for the current period and each prior period presented, to the
extent practicable, the amount of the adjustment:
(i) Fin Stat Line items :for each financial statement line item affected; and
(ii) EPS : if IAS 33 Earnings per Share applies to the entity, for basic and diluted earnings per share;
(g) Prior Periods : ??same as above-in the notes or what –what amounts to be shown – all relevant info or??the amount of the
adjustment relating to periods before those presented, to the extent practicable;
3. See yellow at end : When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial
statements or when it reclassifies items in its financial statements, it shall present, as a minimum, three statements of financial position, two
of each of the other statements, and related notes. An entity presents statements of financial position as at:
(a) the end of the current period,
(b) the end of the previous period (which is the same as the beginning of the
current period), and
(c) the beginning of the earliest comparative period.(or is this the end of the period before this??what difference???)
4. What is the difference between do not know the cumulative effect and ‘impracticable’ dosnt both mean exactly he same thing?IAS 8.25
5. IF IT SAYS YOU MUST CHANGE SOMETHING RETROSPECTIVELY, DOES IT MEAN YOU GO TO YOUR BOOKS, AND CHANGE EVERY ACCOUNT
WITH A NEW JOURNAL ENTRY WHICH SAYS” CHANGE DUE TO ‘SO AND SO’ FROM AS FAR back as 1850 , and open every tax assessments up with SARS
as far back as 1850 for those they might want to re-open for some reason or whatever, and re-issue every financial statement as far back as 1850 in the newspaper for public
listed entities, and also post all of then to all shareholders and submit to the JSE.?? Also , how do you journalise changes , do you reverse all old figures first and replace them
or do you just add/subtract the difference like one does with ‘provision for bad debts’ type calculation thing?
6. SARS does not normally go back and re-open assesmensts for previos years for changes in acc. Policies. This means the tax base of
inventories in prior years will be determined using the “old method” of valuation. IAS 8 (AC103) however requires that the carrying
amounts of inventories be chabged retrospectively so that the prior years values will be in accordance with the new basis of valuation. This
gives rise to a temporary difference for deferred tax purposes.-(where will this temporary difference ever disappear? Will it just stay there
forever? Or how will it disappear? )
7. SEE page 105 textbook – example no 4&5 . cannot understand why they add the temporary differences of 900 of opening inventory new/old balances – why do they
add it to the taxable income for 2003.? Why is it added to current taxexpense here but not in the sci of page 103? Must they pay this or not? It says at bottom of block
on same page 105 that sars does not reopen assessments for previous years? So how doe sthis work
7.1. Also cannot understand (5) - ie the calc of deferred tax.
8. See page 106/108 highlighter – what does SARS mean by this- cannot understand where the deductions come from?
9. See page 111/112 own textbook – yellow highlighter – what did they do here????
34 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
10. FOR ERROR CORRECTION : do you write back all errors and then write in corrected version after, or do you just cr/dr the difference like with bad debt
provision changes. Do some errors work on way and others another.
10.1. How do you journalise error corrections properly?
10.2. For expense/income items that were closed off at end of last year- how do you journalise and post to the relevant ledger account? Since you are not allowed to
add the error change to current years profit/loss – how do you add it to last years ledger account if it is closed off already and continued with this year?
10.3. What about if the ledger account is no longer used – say it is a closed account- do you re-open it or what in the General ledger.

PARTNERSHIPS:
1-if you want to revalue property,which ledger account do you put this revaluation in: like accumulated depression or ‘accumulated (upward)
revaluations’ etc or what
2-Partnerships : Revaluation account:do you cr /dr all the asset accounts contra reval.acc.
a. Is the REVAL. Acc a profit&loss acc(like in closing off procedure) or is it an "asset contra account" like acc. depreciation is ?what
are all the other entries for a reval. –i mean in the asset accounts, acc.depr. accounts ,and profit&loss accounts etc?
b. Can any kind of expenses or income ever go to the reval.account.
c. If a new partner is admitted, does one first have to close off all expense and income acc.'s to the profit &loss acc and distribute the
profit etc , and calculate depreciation etc- so old partners do not loose their share of profit befor new entrant?
d. How would one do a normal (not for partnerships-but rather for companies etc.) upwards revaluation to an asset – use an acc. depr.acc
to do this? ,or can you open a new type of account –revaluation acc.- to do this.
2. If you dr the reval account instead of the bad debts account – to create a Prov. for Bad Debts –then how does the 'bad debts' go to the Income
statment at the end of the year? Wont one leave out this singular +/- now because its not visible?
3. If there are expenses and income for the period before the new partner comes in- say he enters in march and the fin year ends in dec.Those
expenses+income –must they not be closed off to the profit&loss account and full year end closing procedures done before new partners come
in –to make sure any profit/loss is distributed in the old ratios befor the new partners get there? How much of closing off procedure can/ must
one do –trading account? Can you do profit & loss account or not at all? Must it all go to the revaluation account? Or can it go in reval. Acc. if
you want or NOT possible?and must it first go through profit/loss account(year end type) or not?
a. THEN – must you write it all back in the new ratios or NOT at all- i mean write it all back to the relevant expense/income accounts so
your year end calculations all work out right?
b. What else should one know here?
4. What is GARNER vs MURRAY (loss goes in profit ratio to others?) BUT what do you do if this rule is NOT applied? Eg miles,lindsay,nelson
question?
a. Is garner/murray to use capital ratios just before liquidation or after all realisations?
b. Do you use capital ratios OR profit/loss ratios in middle of distribution schedule,while there is assets to be sold still ,or only at end.
c. What is fixed/ variable Balances type of partnership : in conjunction with Garner Murphy rule:ALSO what is the method hereunder:
please read and say it it is correct for us(check this method some things you dont understand (solvents must add cash according to
loss)

According to Garner vs Murray Rule: from http://basiccollegeaccounting.com

• The loss on account of insolvency of a partner is a CAPITAL loss which should be borne by the solvent partners in the ratio of their
capitals standing in the balance sheet on the date of dissolution of the firm.

Notes:
• “Capital” in this case relates to the real capital of the partners and not capital as may be standing in the books of partnership firm
in the names of different partners. This distinction is especially critical when the partners are maintaining their capital accounts on
fluctuation capital system. The true capitals according to this rule will be ascertained after making all adjustments regarding
reserves, drawings, unrecorded assets on the date of the balance sheet on the date of dissolution of the partnership firm. When the
capitals are FIXED, no such adjustment is required.
• Where a partner is solvent but has a debit balance in his/her capital account, just before the dissolution of the partnership firm, such a
partner will not be required to bear the loss on account of insolvency of a partner.
35 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

The rules dictates that:-


• The solvent partners should bring in cash equivalent to their respective share of loss on realization and
• The loss due to the insolvency of a partner should be then be divided among the solvent partners in the ratio of capitals standing
after the partners have brought in cash equal to their share of loss on realization.

1. What is a “fluctuating” and a “fixed” ‘capital account’ system , so the difference between the 2, in partnerships accounts. As per the internet
stuff on garner-murray rule above.
2. Do you re-open reval acc. To write back all reval if not wanted in books ie: asset back to reval.acc back to out of capital acc . ANSWER =
YES
3. For transfer of general reserve- must it first go to current acc;s of partners or straight to capital acc;s.
4. What happens to the
5. Do we have to write date in ledger all way down ,or only at top of column till it changes.
6. For revaluation acc.s – and also for general transferring-eg if one partner must increase/decrease his capital to bring it in line with new ratios
etc, must all/some of these amounts first go to current acc.s of partners or straight to capital?Should' nt everything first go through current
acc,s instead of straight to capital? Where would one use a current acc? – in a gradual liquidation.
7. Must all current acc.s first be closed off to capital acc;s before the new ratio’s and all revaluations etc when new partner is admitted or how?
When does one not do this? In gradual liquidation or change to company /cc etc?
8. How can capital ratios (the actual amounts in the Capital accounts of partners) of partners change in fin.year/end fin.year.? Only on retire/new
etc or when?
9. For the following –(less used methods)- how do they work ?
a. INSURING a PARTNERS INTEREST: for the adjustment method of : capitalised value vs surrender value adjustment ,how does itr
work?
b. `for the second method – where you debit the premiums to the life insurance policy accounts –which are definitely treated as "assets?"
– then credited with policy amount when paid out- how can you debit an asset account with policy premiums – or even credit the
account with a payout( should'nt it be debited?) i mean if you credit the acc. with payout – then that is an income/expense acc. ,they
get credited with income-not an asset acc.?
c. With the more common method- premiums debited to inc/.expense of firm – and 'surrender value' only taken into account when new
partner is admitted, or if profit ratios change( as an asset value to be evenly balanced between ratios to –capital. – how is this
surrender value taken into account- at end of each year revalued + debited with extra- or only RAISE this surrender value when new
partner joins etc, then write it back out again? Shouldnt surrender value be in balance sheet + income statement each year end or fin
position is understated?
i. Where premiums borne more by firm- is payout credited to firm or individuals.
d. Isnt premiums paid from operating expense(dissapear in profit ratio) and ____surrender value re-calc end fin year-as asset – and
payout disclosed as note or visa versa._____ best method for treating this? How can you get payout and surrender value shown as
assets at same time?
(a) ((((ACCOUNTING POINT OF VIEW: 4 WAYS OF TREATING ACCOUNTING :
(i) Less used in Practice Methods.
1. Premiums paid from partnership funds, debited to life policy accounts which are treated as assets.Policy Payouts are
credited to same policy account.Surplass yielded by policy "above amount of capitalised premiums????" is credited to
capital acc.s in profit share ratio.
2. Alternative method- annual adjustment of capitalised total on policy to surrender value of policy at
fin.end.year.Normally amounts to a write offon balance of policy acc.Corresponding debit can go direct to profit&loss
or current acc's of partners.
(ii) More encountered in Practice Methods.
1. Premiums debited to income ,but not capitalised at all ?whats this?????,Payout cerited to capital acc.s in profit share
ratio.This method is SUPPOSED TO BE More conservative than asset method since partners all bear share of ???????
premiums since it is treated as operating expense –so dissapears in profit ratio payout.-thus limits amount available for
with drawal by partners.??????(other too!!!!?)Disadvantage is fin position understated to extent of surrender value-can
overcome by showing in 'notes'.
2. Where premiums borne by firm(???no 1 not or what??)not by partners,and debited against income, the surrender value
of different policies must be taken into account an retirement/ new admission / profit ratio change/etc.AS is the case
withy any other asset this requires approriate valuation and adjustment –for each circumstance mentioned.(??/what
about year end???)
i. )))))
2. For partnerships –what goes to realisation acc- only n-c assets or also c-assets ,what about expenses-are there any special types that go here?Or
once one has closed off all expense accounts-do the expenses go to reval. Account or where? What about other income from services etc??
ANSWER: so far: Prov.doubt.debts YES ,Goodwill YES ,
3. What is GARNER vs MURRAY rule?
4. Could Accumulated Depreciation And profit /loss on change in asset value also go to asset accounts only.- then just profit/loss to realisation
acc.? or not allowed at all(note this method ffor normal mach. Realisations)?what about if all is first transfered to 'realisation of machinery
acc'- and then just profit to realisation acc?
36 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
5. Does profit/loss on sale of asset go to revaluation acc(not realisation acc) ,also if an asset is transferred to a partner- through reval.acc?And its
profit/loss –through reval.acc ?
6. When do all the expense accounts and income accounts get closed off to profit/loss accounts and final year end procedures happen in a
liquidation? Do expenses and income start going straight to the realisation account after all other accounts are closed off or not.Can one put
expenses in the realisation account or not eg:liquidation expenses?
7. How does one round off decimal fractions to get correct answer?
a. How do you balance accounts if you get eg 2.15372- do you move up or down.say a gets 2.33333 ,b gets 2.43333333 and c gets
2.233333- where does the extra 0.1 go to balance out?
8. If a partnership is legally terminated , just to let one partner leave/ or enter(as per law of partnerships) how do the books legally effect this : I
mean you go to GOV, deregister , then reregister with new/ erased partner : Then what? Can your "new company '" books start half way in the
middle of all accounts etc? Or should all expense/income be closed off to profit/loss acc. +trading acc then all profit apportioned, then all
current accounts closed off etc?
a. Do you show Fin.Statements at next year end for only eg; last 7 months from partnership new enrant/old leave or for full Fin.Year
incl eg first 5 mnths before new partner entered?
b. Does one have to Do Full Fin. Statements like a proper year end closing procedure for the exact time the second before new partner
was admitted? So for a new/retiring partner 2 sets of fin. Stat. should be prepared: 1-just before start of procedure (to get figures of
deprec.+asset carrying values + actual capital/(+profit/loss) before revaluations etc., 2-just before new guy enters, after all closing off
and revaluations., to show as a Financial year end+Termination of partnership Official Records? Or is there a shorter way?
c.
COMPANIES
1) If assets are taken in as capital for a new shareholder, at less than their valued amount, for non-par shares,but still must be recorded at valued
amount, so you must - dr asset real value , but cr new shareholder at lesser amount – then where does balance go? – to other shareholders as extra
shares for them or what?ANSWER: I think bring in at lower amount, then revalue/have them revalued to a higher amount thereafter.
2) Is it possible to have a "INCOME TAX ACCOUNT" Or is ther never any Tax account in Ledger? If so, how does it work? If tax is transferred from
the appropriation account at year end, then how does it go to DR "Taxs expense acc." and CR : SARS if all the expense accounts for the year are
closed off, and any new entries go through to the following years Fin. Stats. And end up showing there.Must it be closed off again before new year
entries or what/how?
3) The share premium account may be used for :
a) Paying up the unissued share capital of the company as fully paid up capitalisation shares which may be issued to members of the company, ???
or may be used as a write off???, or
b) The provisional expenses of the company.(that is , expenses incurred with the founding of the company)
c) The expenses relating to either the commission paid or discount allowed on the creation or issue of shares or ???obligations.???
d) Provision of the premium payable on the redemption of redeemable preference shares or debentures of the company.
4) REDEEMABLE PREF SHARES:
a) If a company redeems pref shares without re-issuing new shares, must it then have double the capital at the ready , once to pay person back, and
2nd to create a CRRF.Or must it first transfer the money to be paid to the CRRF, and from there use it to pay the person who it is being
redeemed from?Which way around?
i) If shares are sold to fund redemption – must the sale price first be transferred to a CRRF before redeeming , or just to Bank ?
b) Can the capital in the CRRF be used for any business purposes or not?
c) Can the amount you pay the person who you are redeeming the shares from be more or less than the current book value of the shares? Ie – at
their original value paid ? (less= from dilution of last (his)high price paid), if not, then the person could get more or less than he paid for them!
d) If the above is true – then only the book value of the shares may go to the CRRF fund- so it could be more or less than the capital actually paid
out?
e) HOW DO ALL THE COMPANIES ONE ALLWAYS HEAR ABOUT – BUYING THEIR OWN SHARES BACK – DO THIS? Is it allways
Red.Pref Shares that get redeemed or any type they want?As per law against buying back own shares – how do they do this?
f) Pg 462 IFRS book : the highlighted in yellow on page 462 IFRS: is this actually : preincorporation profits go to appropriation account, then go
to goodwill account? Or straight from pre-inc,profits to goodwill? Why cant you just transfer straight from nominal acc. Eg: SALES, to
goodwill, why must it first go through the Pre-Inc.Profits account? How does this whole ‘offset against goodwill’ process work exactly –see
other highlight on page.! By the way,as a separate question, can one transfer profit to appropriation account and then to reserves etc. in middle
of year as well,or only at end of year?
(1) See yellow here : what is it? Alternatively, if purchase price in purchase contract includes UNVALUED GOODWILL and
PURCHASE PRICE is NOT payable in SHARES ((1-I think if shares are not involved here-not sure), AND 2- : ,if part payment
in shares-not sure then if use ratio or just 1 of either method???), the pre-incorporation profits can be offset against goodwill (means
you reduce UNVALUED GOODWILL total by value of pre-incorporation profits).Once UNVALUED GOODWILL=0, treat the
excess pre-inc. profits as a RESERVE. Whether this reserve is distributable depends on what the Articles say about the distribution of
‘Capital Profits’.So if not distributable - will form part of non-distributable reserves, and if Articles allow distribution , then part of
non-distributable reserves/profits.
(2) I do not understand the yellow- why and how is this so? “ pg 53 own notes, pg 463 Intro to IFRS book : for profits/losses from
effective date of purchase to actual date of purchase-accounting treatment thereof :“Purchase price is determined by bringing into
account profits as NON-DISTRIBUTABLE RESERVES, since these profits represent in effect a DIVIDEND PAYMENT out of
CAPITAL.The profits referred to here means profits from EFFECTIVE date of purchase per contract to ACTUAL date of purchase.(I
think I know,not 100% sure)
(3) To transfer to “Pre-Incorporation profits :Distributable Reserves” , must you
(4) For pre-acquisition profits etc :”note in last example at end-these profits go to retained earnings, so it seems there is an end-of year
type transfer to appropriation account then to retained earnings,not just to profit in appropriation account but a full retained earnings
thing just before certificate to commence business.” So where exactly is must a set of fin. Stats. Be prepared here, and where a year
end closing procedure etc etc, and where transfers to appropriation account , then to retained earnings etc??
g) If you buy shares in a company for 5000 rand, how can you get your 5000 rand back and return the shares, with all the laws against reduction
of capital etc.
i) And if a company wants to sell some of its assets and distribute the profits, how can it do that?
37 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
ii) So if one ever uses profits to buy eg : some asset, then it is gone forever into capital? How is one to distinguish which assets are capital
and which just converted profits.Where do you make a mark or something to show this?
iii) How can one convert profit into capital?
iv) What is a member of a company – where do they pass a special resolution?
v) What is a special resolution?
vi) Where else other than AGM may shareholders vote / and where may they exercise their authority otherwise.
h) See yellow : can all the rest be converted so long , or how does this work? Does these stay as unissued yet or how/what does this mean :a
Conversion of ordinary or preference shares having a par value to stated capital.:a
Par value of 1 class(ordinary or preference) made be converted to Non-Par value of the same class.All Share Premium is simply also converted at
same time,as if it were part of the share value.If there is any ‘share premium’ then naturally the value of the ‘non-par ‘ will be higher than the ‘par ‘
were,if not then the values should stay the same. Provided that any share capital not fully paid up cannot be converted.(see section 78.1)how does
this work? Can only all ,or also just some, be converted ,any other rules and regulations?

Next question :

i) See yellow for question :My notes:The share premium account may only be used for the following purposes :
i) A capitalization issue : you just take the share premium and issue shares to its’s value (or part) (how it is done /shared between other
shareholders I do not know exactly) does each one get in proportion, and any fractions of full share value left /unissueable due being less
than full share value just remain in premium acc? Like that? Or how.And for no-par –say you are issuing from retained earnings instead of
paying dividends-can you just transfer it to stated capital and finished –to increase value of shares –or must you issue individual shares one
by one, at old book value?And can you issue them at a premium?esp. for unissueable fractions of book value left over-just include it as a
premium?
ii) Writing off preliminary expenses : done directly against the share premium account ,see example below , and not via the income
statement (I think means not via first share premium to appropriation acc. Or something??)
iii) Writing off commissions paid and discount allowed on issue of shares.(if you give a discount or pay bank etc commission?????)
iv) Payment of the premium over the par value of shares acquired in accordance with section 85(company may under certain circumstances
aquire shares in itself)
(1) New amendment to act “It is further provided that if ordinary shares are converted to redeemable preference shares, only that portion
of the share premium account which arose on the issue of these ordinary shares may be applied to the provision of the redemption
premium on the redemption of redeemable preference shares.” See question below:
(a) How does one convert ordinary shares to redeemable pref.shares? can just afew be converted or must all at once? Must the
premium paid on those exact few each time they changed hands, or just the last time they changed hands, also be converted to
redeemable pref shares, or not?If you convert all ordinary to redeemable pref.,do you have to convert the share premium account
too or can you choose to if you want? NOTE : see previous question for inleiding to this question before you ask it–new law they
passed etc

NEXT QUESTION: see yellow below for question:


conversion of ordinary or preference shares having a par value to non par value shares (npv) stated capital.
i) Par value of 1 class(ordinary or preference) made be converted to Non-Par value of the same class.All Share Premium is simply also converted
at same time,as if it were part of the share value.If there is any ‘share premium’ then naturally the value of the ‘non-par ‘ will be higher than
the ‘par ‘ were,if not then the values should stay the same. Provided that any share capital not fully paid up cannot be converted.(see section
78.1)

i) Section 77 -effect of conversion of par value shares into no par value shares and visa-versa.
(1) If a company converts its ordinary or preference shares with a par value into no par value shares, then the following must be
transferred to the Stated Capital Acc.
(a) The total ordinary or preference share capital amount
(b) The portion of the share premium account attributable to the shares so converted where it has not been used for the write off of
those items per section 76(3)
38 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

Question for all of above : how do you know what part of the share premium account has been used for what? If for preliminary expenses , does one
work it out proportionally just use whats left? If whats left in share premium account is less than the amount attributable to those shares converted then
what? What if shares that were recently just issued at a premium are converted but those shares ‘share issue expenses’ were written off ‘share premium
account’ ?, if there is enough in share premium account do you put the full premium amount of those converted to stated capital account or only portion
less the issue expenses written off? But to be fair –how will you know for very old shares and issue expenses etc and other old costs written off what to
take off and what not??
END OF QUESTION

NEXT QUESTION:
j) SECTION 78 – effect of conversion of no par to par
i) All Stated capital transfers to share capital acc., none to any share premium acc.
ii) Fractions arising on conversion must be rounded off and if material in value, must be transferred to a non-distributable reserve.(what is
material : 0.1c ?or 0.001c,? what happens to the non-distributable reserve later,stays forever?) AND how do you do the transfer ie: name of
new account,(just ‘NDR rounding off’ ?) AND if a rounding off account is able to get R1 shares out, what do you do with it? Share it out
as shares?What can this account be used for to write-off eg: preliminary expenses etc?)

NEXT QUESTION :

k) HIPPO ltd- does share premium get used for debenture expenses? new law page 472/473
l) If the shares book value of stated capital includes fractions of cents, what do you do? i mean how do you value the shares for a transaction? Or
if it is R65, 80c then can you issue more at R66,00 or not , as per the law.What about other transactions? Where would the rounding off go
then?
m) Sections 85—90 discuss circumstances in which a company can repurchase shares issued by it .see yellow below for the question:
it. The procedures that must be followed, plus the directors’ and shareholders’ liability are discussed.
A company may acquire shares issued by itself provided that
n) a special resolution is passed (general approval or specific approval); and
o) the acquisition is authorised by its articles.
5) A company may not pay for these shares in any way if there are reasonable grounds for
believing that
j) once the company has paid for these shares, it will not be able to settle its debts in the normal course of business (liquidity requirements), or
k) the consolidated assets fairly valued following the payment would be less than the consolidated liabilities of the company (solvency
requirements).
6) Shares acquired by a company in itself may not be acquired under this section, if after such acquisition, there would be
no shares in issue other than convertible or redeemable shares. In other words, the company must have ordinary share
capital.
7) If par-value shares are acquired at a premium over the par value,premium may be paid out of reserves,incl.statutory
non-distributable reserves(refer section 76 –Share premium and section 98-capital redemption reserve fund.
8) ( it does not say anything about reduction of capital here ie:CRRF , but it should it seems ?? ask or check up about
this!!! Page 476 IFRS book)See section 98 for CRRF – ie a CRRF must be created and the same share capital that was
bought back /redeemed, must go to this fund, to prevent reduction of a companies share capital( not allowed).
9) The company does not hold the voting rights and shares afterwards- it simply writes them out/cancels them so there are
less shares afterwards,but the authorized share capital remains the same.
10) See example below for entries in journal.
j) If a company issues 1 share for every 5 held to all shareholders out of profits – ie distributable reserves, then what happens to people who only
have 1 or 2 shares(too few) , or if you have 7 or 8(odd number)
k) See page 470 in IFRS book. Can you have par ordinary shares 500 of R1 and 500 of R2 issued? Can you have 500 authorised but not issued at
R1 but 500 issued at R1.80? then you can issue at R1 and and you have 2 shares of different value for same class ie ordinary.?From conversion
from par to no par, then transfer general reserve to stated capital, then convert back to par, scheme. ANSWER: no, you cannot have par and no
par at the same time.so all authorised must also be changed back and forth at the same time.
i) For the above scheme, could one also only convert half the issued shares to no par?ANSWER: no, you cannot have par and no par at the
same time.
ii) The “Proceeds” of new issue of shares made for the purposes of the redemption up to the nominal value of the Par-Value shares which are
redeemed, or in the case of No-Par value shares, equal to the BOOK VALUE, here the “Proceeds” =premium+nominal amount as
defined before : so you can use part of premium from the new issue of shares, which have been issued to pay for the redemption of
redeemable pref. shares, to pay for the nominal part/the shares themselves of Redeemable Preference Shares but you cannot use part of the
Nominal value of the newly issued shares to pay for the premium part of the Redeemable Pref Shares.(or can you –question????)
l) NEXT QUESTION: see yellow

ConsolIdate share capital and reduce the number of issued shares in the process.
39 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
A company can decide to decrease the No. and thereby increase the value of its shares.All that happens is that the TOTAL CAPITAL remains
exactly the same but for:
PAR VALUE SHARES: the value of each share increases in proportion, and the number of shares issued and authorized of course
decreases in proportion.
NON PAR VALUE SHARES: the TOTAL VALUE remains the same but NUMBER of shares is reduced proportionally.
The share capital remains the same, just disclosure of share capital is different.So in notes and on balance sheet the new figures are disclosed.
(sodoes one journalise this? Is there some share register where this just goes to, or also to journalise / or somewhere else as a record)

m) If you change from par to no par (or visa versa but the book example says yes for no par to par), can you change the number of shares at the
same time in one go or must that be a different journalisation transaction.
n) For redeemable pref shares, to issue new shares to pay for the remmption, do you have to re-authorise new shares, or can you just issue shares
that were authorized years before for other reasons?
o) ,for RPF redeemed from distributable reserves ,(must all profit first go through books +appropriation account to become retained earnings
before it can be used to write off/pay any redemption of redeemable pref shares? Can this be done in mid fin year or only from last financial
stats/ fin year end profit/transfers)
p) Per unisa ACN 201 Q manual pg 22 :for a capitalisation issue, where shares are issued to shareholders in proportion to their shareholding from
retained earnings, The total value of share portfolio will remain the same, but the value per share will drop because more shares have been
issued.The investor then , in his books(the actual shareholders books) in his “Investment Account” will increase the number of shares held and
reduce their value.(why does this happen – why does the value drop? If you transferred retained earnings , and issued shares for its value , then
the value should stay the same????)
q) Arrear and current cumulative dividends get paid first, then preference shares then ordinary.: what is current at yellow highlight- is it in arrears
or not in arrears???
r) For appropriation account- do you get a retained earnings Ledger account? Do you ever transfer from retained earnings for expenses during the
year?
s) If you use a ‘general reserve’ do you write it out against the expense account used immediately? This will decrease your tax deductions- ie it
will mean you pay more tax, so you “pay” tax twice anything that gets written out of the general reserve ( you also loose if you write out
against share premium or stated capital account s – or not?)
t) To pay for 1- premium 2- nominal on redemption , if paud from profits, must it come from the after tax profits (ie Distributable reserves) or
from before tax profits – ie from bank ? Must the premium be written off against disributable reserves or against retained earnings? Where is
the retained earnings account- is there a ledger account for it?When do things go to that account or out of it (ie at year end appropriation –how
does it work?)
u) Can ordinary shares be issued after the redemption of /payment for preference shares has taken place in order to pay for them so you don’t
have to transfer to CRRF, or not?,and how long after is it still allowed( past fin year end or not- what if not all were taken up by year end etc?)
v) DIRECTORS EMOLUMENTS IN NOTES:
i) What can be a 3rd party which pays a pension to past directors: ie it is definitely not an independent pension fund of the same company eg
independant ‘Anglo American pension fund’per example in IFRS book pg 493 – so who could a 3rd party be??? Maybe The holding
company of a subsidiary for whom we are now drawing up the Fin Stats, or who else too????
BASIC EARNINGS PER SHARE:
1. WHAT IS THE YELLOW BELOW??
a. Basic earnings per share are calculated as follows:
i. PROFIT
1. AFTER
a. Tax
b. Preference share dividends –the fixed portion incl. any from cumulative pref. shares.
c. ????Attributable profit after tax of associates and non-consolidated subsidiaries which has been
accounted for by the equity method.????
2. What is yellow :
i. BASIC EARNINGS: Definition: Basic Earnings are the profit or loss for the period attributable to ordinary shareholders
after deducting preference dividends. All items of income and expense that are recognised in a period, including tax expense
and {???non-controlling interests???} are included in the determination of the profit or loss for the period. The amount of
preference dividends that is deducted from the profit for the period is as follows:
3. FOR THE CALCULATION OF EPS AND DIVIDENDS FROM SHARES WHICH WERE ISSUED FOR FREE : HOW DOES THE
FOLLOWING BELOW WORK?SEE YELLOW BELOW:
a. 1-Basic Earnings:
b. The only thing that could have any effect on the calc. of Basic Earnings in these cases is if Pref.Shares were issued as a Bonus Issue
or Capitalisation issue and the dividends paid to them must be subtracted from Basic Earnings somehow. IT DOES NOT SAY IN
THE BOOK BUT I THINK JUST TREAT THEM AND THEIR DIVIDENDS AS IF PAID FROM BEGINNING OF ANY YEAR
DEALT WITH-exactly the same as in (2-) below.
c. 2-Weighted Average number of Shares.
d. You Treat the Extra shares which were issued for free by the Capitalisation issue as if they were issued at the beginning of the year
of the Financial stats. or if there is a Comparative Year shown in the fin.stats. then as if they were issued at beginning of that year.
The logic behind this is that the equity of the shares issued was part of reserves anyway at the time so it must then get shown
e. , if the 2 years are to be comparable.(but what happens if the reserves only appeared halfway through this period?- so they were NOT
there at the beginning of the years??)
4. SEE YELLOW FOR QUESTION :If a company raises capital by means of a rights issue and the issue price is less than the fair value of the
company's shares when issued, a bonus element arises.
a. 1-BASIC EARNINGS :
b. Done as per usual-nothing special (remember to deduct Pref.Dividends) ????Pref. Dividends is probabley calculated in the same way
as done below for ordinary shares if the Pref.Dividends were also “Issued at less than fair value”???
40 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
5. Do you have to disclose every type of shares EPS and dividends separately: incl cumulative pref shares &non-cumulative pref shares &
participating pref shares of each of those 2 types & any other ones? Which can you lump together and which must go separate.
6. As to the fair value of shares when working out the theoretical ex-rights value of shares for a ‘rights issue at below fair value’-see yellow below
for question:
a. Note: Fair Value means what the management judge to be what the shares are worth at the time, not the Current Book Value of the
shares or also not the current plain market value- just the Fair Value in managements estimation at the time.-(not quite sure- must ask)
7. See yellow below- this is if you issued shares in payment for other shares at a later/before date than you gat theirs – so matching concept does
not work out lekker
BASIC EARNINGS :
To calc. the Preference Dividend which must be subtracted from the Net Profit to get “Basic
Earnings” you can do any of the following : To accomplish the matching of cost with profit,
the preference dividend should be provided for by one of
following methods :
1. Use The Date To Calculate Pref. Dividends. as if it were from the time the shares in the other company become
yours (actually the time you can include profits from their shares in your SCI), so even if you issued your own
Pref. shares in return 2 months later/before and in reality only pay dividends from then, you ignore this and ‘use
false figures’ and make as if you pay dividends from date you ‘acquired’ the interest.(???where do you disclose
this fact that you used fanciful figures)???
8. For shares issued at less than fair value – for the calc. of basic earniongs: can pref.shares be issued like this and how does that work?
a. BASIC EARNINGS :
b. Done as per usual-nothing special (remember to deduct Pref.Dividends) ????Pref. Dividends is probabley calculated in the same way
as done below for ordinary shares if the Pref.Dividends were also “Issued at less than fair value”???
9. what does ” Fair Value “ mean ? what the management judge to be what the shares are worth at the time, not the Current Book Value of the
shares or also not the current plain market value- just the Fair Value in managements estimation at the time.-(not quite sure- must ask)
10. -(2)If there are any multiple issues in the Current financial year before the “rights at less than fair value issue” then each period in between each
issue is simply treated alone using the same formula and above and then just weighted and added together with the others to get the final
answer.i think??? NOT SURE???
11. For a rights issue at less than fair value : for WEIGHTED AVERAGE NUMBER OF SHARES:
a. (a)Here you must backdate any rights issues as if it happened at the beginning of the year.So you must treat it as if it happened at
beginning of year. If the rights issue was in the middle of the year and there were other issues before that that had to be weighted by
month, then you just work down the list in order of dates (???–I don’t think you weight a normal issue before the rights issue as out of
say 3/6 months if the rights issue after it was half way through the year and it happened in the 3rd month- I think you just weight it as
normal- add it up to the previous ones and work from there!???_)
12. For dividends : do you disclose the adjusted or unadjusted for current year and for Comparative years. In unisa book pg 268 they disclose both,
or adjusted on page 3-4 pages before in previous section or unadjusted in exercises – what is supposed to be done? So for the current year I
believe you only EVER disclose the actual dividends( see unisa book 268 the write up on dividedns says this) and for the last year only ever
disclose the weighted - in the case of – no consideration for a share equity change- thing .What are the hard and fast rules all over here?

1)INVENTORIES:
1.1.1. (See yellow below in 1.1.1.3 that’s all for this section)DEFERRED SETTLEMENT TERMS :
1.1.1.1. This is where the seller offers the buyer that he only pays in eg 12 months time, but the interest he must pay on the credit is
already included in the price that the seller quotes to him in this way. What does buyer do?- write off interest included in the price
as a period cost or include it in inventories cost?
1.1.1.2. ISA 2.18 read with circular 9/2006 par 30 : The purchaser should recognize the inventory at the present value of the amount
payable at the end of the settlement term , assuming the time value of money is material. The interest percentage to be used is
calculated as per the ‘effective interest method (IAS 39) Circular 9/2006 requires that the normal credit term should be included in
period over which the amount is discounted- as it forms part of the financing provided to the buyer.
1.1.1.3. Be careful if it says the buyer normally extends 30 days free credit. You just ignore this and use the whole period if the question
says an interest rate of 10% is similar tpo the market rate on similar credit arrangements.(how does this work? See the example on
page 58 of textbook IFRS (301) example 4.3)

1. By – products :How does pg 68 work where by products (top page ) are subtracted from cost of inventories of othwer products being made
with them. They are valued at NRV, but what do you do at year end with leftover stock of by-products: subtract it from the other products cost
or make it part of inventories at NRV until it is sold- then only take the selling price off the cost of other products sold(what if none of the other
products are left in the year it is finally sold????)
2. Write –down to NRV and Reversal of write off : where does each go in the SCI and SOF ie: under what headings in SCI and SOFP does each
go??????
41 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
3. How does the following scan work: 1- when do you use the normal banks rate of interest and when do you use the suppliers rate of interest? 2-
what about the 1 month free credit allowed by the supplier see below, they should use 11 month , not 12 months!

1. Note :When working out discount for paying in less than eg 30 days(settlement discount) if the comoany has the intention of paying within 30 days
then this is taken off the cost price AND not recorded as OTHER Income in the SCI. ! note this weird new type of thing!(how does this work , what
is the IAS /IFRS number?)
2. SEE QUESTION PAGE 37 OF lecturer notes handout on inventories , q1 – why is discount received not taken off sales revenue???
3. As above q 4 pg39 – why 1-why is the inventory write down OF THE CLOSING INVENTORY added to the cost of sales for the month ,
but that of the actual sales is not written down it is still at the alod inventory price(35 were written down)?? Answer :?? Is it because the
cost of sales just got more because you had to write down the inventory sold in retrospect so the opening inventory is basicly more
expensive ! 2- is selling price not written off as a period cost 2-ANSWER : it is valued at net realizable valuye so selling costs must get
deducted eg liquidation expense , advertising, commission etc!!!
4. If you work out the weighted average for a periodic system , if the price crops so you must use NRV then when do you malke this
adjsuetment in your calculations????? See eg question 7 pg 41 inventory(as above) but just say they had to drop the price in the middle
somewhere!
5. Losses must be recorded as an expense, directly in the “cost of sales” figure, NOT separately like before but must form part of the actual “COST OF
SALES” ,BUT do NOT have to be disclosed separately anywhere else???? Is this true.
6. 38 The amount of inventories recognised as an expense during the period, which is
often referred to as cost of sales, consists of those costs previously included in the
measurement of inventory that has now been sold and unallocated production
overheads and abnormal amounts of production costs of inventories???is this ONLY standard costing “.over/under allocation of overheads’”
The circumstances of the entity may also warrant the inclusion of other amounts,
such as distribution costs??when – only for NRV or also for normal inventory purposes – so under which circumstances..

next: question:
Recent important changes (REDO THIS A BIT AFTER FINDING OUT)
Write downs to NRV & reversals of NRV and losses due to theft etc, any discount granted and discount received must all be included in COST OF
SALES from now on.??? Is thi exactly true – ie all discount received&granted incl. early payment discount , like within 30days etc, or not all

next: question:
OTHER COSTS: see yellow below
1.1.1.1. Included in the cost of inventories are also all other costs incurred in bringing the inventories to current location & condition.:
1.1.1.2. Interest: where where an entity purchases inventories on deferred settlement terms , and the arrangement effectively contains a
financing element, the element is recognized as interest expense over the period of financing, so IS NOT INCLUDED IN TH
COST OF INVENTORIES.(AC108.18)
1.1.1.3. costs of designing products for a particular customer can be included.
1.1.1.4. Necessary storage costs in the production process are also included (eg cheese making)( but not storage costs which are NOT
necessary for the production production process) do you include the storage costs of necessary inventory of raw materials waiting
to be used to make eg shoes., if say the stock level is optimal,not overloaded???
2. next: question:
NOTE : If the SCI is presented in the Functional form instead of the Nature form as shown below , then (1) as per IAS 2 somehow the costs of the
functional expenses have to also be disclosed elsewhere in the Fin Stats, and (2) also somehow there is something weird with the cost of sales disclosure
not being comparable with other entities because they may have a different method of arraying these costs ?????how does this work?

3. next: question:
4. see yellow : AC108.6 :Inventories include all items Intangible or Tangible :
4.1. Held for sale in the ordinary course of business
4.2. In the process of production for such sale
4.3. Consumed during the production of saleable goods & services (eg shampoo in a hair salon)
4.4. To include the cost of labour and other expenses such as supervision or attributable service provider costs not yet invoiced eg interim audit
costs???? does end of year audit also go to inventory???
5.
DISCLOSURE

36 The financial statements shall disclose:


42 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(1) the accounting policies adopted in measuring inventories, including the cost formula used;
(2) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity; Common classifications of inventories
are merchandise, production supplies, materials, work in progress and finished goods. The inventories of a service provider may be described as work
in progress.
(c) the carrying amount of inventories carried at fair value less costs to sell( this is eg in the case of commodity brokers where selling costs are
included as a trade usage over the years, and accepted by IFRS as such)
(d) the amount of inventories recognised as an expense during the period (just the cost of sales figure?or also discount separately etc)
(e) the amount of any write-down of inventories recognised as an expense in the period in accordance with paragraph 34;(typically done in ‘Profit
before tax” note.)
(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognised as expense in the period
in accordance with paragraph 34;(where does this go?)
(g) the circumstances or events that led to the reversal of a write-down of inventories in accordance with paragraph 34; and(where exactly?)
(h) the carrying amount of inventories pledged as security for liabilities.(where)

6. next: question:
1. Note :Raw Materials to be used in production of finished goods : you DO NOT write down raw materials which have a NRV lower than cost, if
they are to be used to produce a finished product which will have a selling price above cost. The following are all treated differently:
1.1. STATIONARY & CONSUMABLES : they are NOT WRITTEN DOWN even if NRV is below cost, , as it is taken that they are used in
operations, which of course leads to some sort of finished goods/services. ( as long as your ‘finished goods’ are sold at above cost-
otherwise ????)
1.2. WIP – Work in progress : NOT written down if NRV is below cost , as long as finished goods are sold at above cost.
1.3. PACKAGING MATERIAL : this is treated as selling expenses, so it is not seen as contributing toward cost of finished product, so IT IS
WRITTEN DOWN if NRV is below cost.(what about a tub for margarine, or a heat sealed pack for sweets, or the very fancy packaging and
pictures for toys?)

2. next: question:
LOSSES, DUE TO THEFT ETC . :(Difference in Inventory Stockcount Vs Inventory Records)
1. Losses must be recorded as an expense, directly in the “cost of sales” figure, NOT separately like before but must form part of the actual “COST OF
SALES” ,BUT do NOT have to be disclosed separately anywhere else???? Is this true.
2. next: question:
pg 72- comprehensive question : why do they take off overhead costs? off cost of sales? It is already off isn’t it??
1. For rendering sevices inventory costings pg 59 :See example scanned in below:9not – in example , how can you match costs to revenue if the costs
have not been incurred yet- say now the costs were less than the costs that are estimated to match the revenue earned so far? Pg59
1.

BORROWING COSTS:
1. Ask in IFRS book see ques pg 703, why not use bank overdraft separate interest rate? For 2nd expense only??? What rule does one refer
to to decide if you must slit up a group loan or put the loan in a group/
RELATED PARTIES
1. How do you show all the categories Para 18 – ias 24. Wghta do you do -? NEVER show a person individually, ONLY in groups, ie or
under each category show ALL the related parties in it?see .22 aggregation?
2. Check IAS1 77-80A, what is this how does it fit in with IAS24 In same place or in different places in the notes.
EARNINGS PER SHARE:
1. RIGHTS ISSUE: WHERE DO YOU MWHERE MORE THAN FAIR VALUE IS PAID, DO YOU INCR. THE AMOUNT OF
SHARES OR NOT ( IE YOU DECREASE FOR LESS THAN FAIR VALUE, WHY NOT INCREASE FOR MORE.?because they put
more money in so they expect so much more E”PerShare” out.
2. RIGHTS ISSUE: WHAT IS THE DIFFERENCE BETWEEN BOOK VALUE & FAIR VALUE WHEN DOING THE
CALCULATIONS FOR A RIGHTS ISSUE.where do you use what and ignore what?
3. ISSUE AFTER REPORTING DATE : IF THERE IS A ISSUE AFTER REPORTING DATE pg 726 Textbook, - DO YOU ADJUST,
FOR A 2009 REPORTING DATE, DO YOU ADJUST 2009 & 2010, OR 2008 & 2009? And – do you show 2010 in comparatives?or
Not?
4.
GROUP STATEMENTS:
GROUP COMPANIES:
1. Find out about which part of voting rights/ shares / etc etc gets to control a company see below.
Definition :Parent : must possess the majority of voting rights OR of the “voting equity shares-ie:Ordinary Shares (Note-NOT
PREF.SHARES ,see below)-”. So if any share (incl. ordinary shares) does not have all its voting rights, then only the voting rights counts
toward if it is a parent or not, the voting potion of shares is what counts , not just the percentage held of all ordinary shares- Has the right to
control composition of the board of directors, holds o
2. 1-must a subsidiary present GAFS to the AGM?or only the parent(repair your notes at ‘bookmark 1’)
2-how does the below work: see ii,results misleading( a-what does misleading and prejudicial mean, is it your competitors find out your stuff or
whatand … b-do you just never prepare any? Or later or only for registrar etc? what ?)+ iii operations different( ask same questions as for ii) –
and for i-must they be prepared later anyway if no time left etc.
When are group statements not required/drafted?
a. Group statements need not deal with a subsidiary if the directors are of the opinion that:
43 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
i. Impractical or no real use to members( eg insignificant sums) or if the cost or delay would be out of proportion to the
usefulness to members.
ii. Results would be misleading or prejudicial to the affairs of the parent or other subsidiary. Permission of the Registrar is
required in cases 2+3
iii.Operations of the parent and subsidiaries are so different that they could not be treated as a single enterprise. Permission of
the Registrar is required in cases 2+3
b. Group AFS are not required when the Parent is itself a wholly owned subsidiary of another company.
3. Do not understand any of the below provisions properly.
GENERAL PROVISIONS
1. GAFS should be a fair reflection of the state of affairs of the parent and its subsidiaries at the accounting date.
2. Profits losses that have arisen as a result of transactions within the group, where such profits/losses have not been realized in respect
of persons outside the group,should be eliminated.
3. The provisions of the Companies Act 1973 must be complied with.
4. All intercompany balances must be eliminated by determining the total assets and liabilities of the group.
5. Dividends declared by a subsidiary out of pre-aquisition profits do not form part of the parents profits that are available for
distribution.
6. Elimination of the carrying amount of the parents investment in the subsidiary.
1. In which companies books does the goodwill get written off –or is it added?- subsidiary or parents? Does one reverse these journal
entries in the new year ? or how can you do the same entry every year- it will add up.ALSO : no 2 : ask about retained earnings below
see yellow.
2. When does the goodwill in the parents books get originally entered in N_C assets?On purchase of the original shares or when? Does it
get written into the books and out of again every year-because you do the same journal entry each year!? Is it not when the purchase
takes place ? how does this work?
STEP (2) JOURNAL ENTRY
DR CR
Share capital of B.Ltd (Ordinary shares of R1 ea) 50,000
Retained Earnings (B.Ltd) 40,000
Goodwill ?????????????????????? 10,000
Investment in B Ltd 100,000
Elimination of shareholders equity of B.Ltd at acquisition
NOTE:
1-Retained Earnings: you only eliminate the retained earnings from before acquisition, not from after acquisition.(I think –
make sure?????) the before part is in the assets + goodwill you paid for (asset swap for cash)so it is written out, but the after
part ???????- re –do update these notes after you ask about this : pg 124!!!!!)
2- GOODWILL: this is written ??into or out of ?? (subsidiary or parent ) in order to what??? Update this in own notes after
asked: pg124

3. For journal entries- are they done in both enitites books, so as if 1 journal entry is made in both books to join the two companies into 1-
so it is like 1 journal entry.
4. Ask about yellow below- to work out % shareholding- you leave out pref.shares, and include ordinary shares, but only the voting part
of each one or what?
STEP (1) Determine the percentage interest in each subsidiary:

Investment in Subsidiary(Ltd) = eg 100 000 shares X 100


Total Ordinary Shares of Subsidiary div. by :eg 100 000 shares 1
=100% : therefore wholly owned
NOTE:
1) interest in subsidiary is determined by the amount of shares held NOT in Rands Value- You must use 100000 shares and NOT EVER R145000 to
determine this percentage.
2) the shares you use to work this out are ONLY ordinary shares(with a vote or per part of a vote-is it 0.5 % of a vote = 1 share or o.5 share even if same
value??ask-, or something like that – not sure), never preference shares.
5. Journal Entry (for non controlling interest in a group statement) is: all Subsidiaries Share Capital & Retained Earnings get written out- and then
just the non- controlling interest gets written in as a CR to balance this all out in a separate line.(is this non-controlling interest a ledger
heading? How does it go in the ledger.? Pg 125 own notes update
6. Can you put 3 dr journal entries above 3 cr journal entries , so 6, + only 1 narration, for eliminate inter-company balances ie: a
loan,debenture+dividend???
7. By when must a company declare its dividend-year end, and then in retained earnings c/d from the appropriation account –we usually have to
write 1 Jan or 1 Mar for the date, but if dividends are only declared 1 week later what do we write then?- still 1 jan for 31 dec? and what about
if we only finish 3 weeks into the new year with the end of year calc. in this ledger account- what date do we put for this thing then.? What
about interim dividends: how many times and by when must the decision be taken and how do you do the ledger entry?(cd / b/d etc)
8. SEE PAGE 78 OF UNISA GUIDE FOR GREEN HIGHLIGHTER ETC.Where do all the other journal entries go? What account does
each one pertain to and in whose books –of parent or subsidiary-is each one- so also what type of account is each one? An expense or
income/asset /liability etc?How EXACTLY does each one work?AS FIOLLOWS PER ITEM IN JOURNALS:
i. Eliminate shareholders equity at acquisition:
44 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1. Retained Earnings: you only eliminate the retained earnings from before acquisition, not from after acquisition.(I
think –make sure?????) the before part is in the assets + goodwill you paid for (asset swap for cash)so it is written
out, but the after part must come from somewhere and so balance out with equity+liabilities section in group
statement by being shown as +retained earnings???????- re –do update these notes after you ask about this!!!!!)
2. Goodwill: update from questions after ask- this is written ??into or out of ?? (subsidiary or parent ) in order to
what??? Update this in own notes after asked: pg124 When does the goodwill in the parents books get
originally entered in N_C assets?On purchase of the original shares or when? Does it get written into the
books and out of again every year-because you do the same journal entry each year!? Is it not when the
purchase takes place ? how does this work?
3. Non-Controlling interest: is written out of where? Into where?
4. Out where /into where do all the rest go?
ii. Recording non-contr. Interest in profit after tax: does the dr (SCI) write it out of the profit for the year(parents–group)
and the cr(SFP) write it out of ret.earnings?
iii.Eliminate intercompany dividend and record non-control interest in dividend.
1. Are you moving the total dividend out from subsidiary across to parent(-cause now it must look like all dividends
come from the parent, not subsidiary who is now a part of the parent,) and writing out div. rec. by parent( so it
becomes just a part of the total bank balance-as if it was just transferred to the bank of parent, not ‘paid’) and
writing ..??to where does the Non-Cntr. Get this dividend as a dr???
9. LOANS/DEBENTURES: where do you eliminate any interest paid out already on loans or debentures intercompany.
10. What STCHEQ reserves or CRRF or revaluation reserves or share premium columns from subsidiary ever appear in the parents side at ‘at’
date in stcheq.And does share premium, or crrf, of reval.reserves from ‘since’ ever go on parents side in their own columns?which ones would
never ?
11. If parent owns any pref shares in subsidiary: does this ever go in own column in stcheq on parents side for ‘at’ OR for ‘since’
12. Revaluations: see pg 91 unisa202r for first type-where assets revalued merely for determining purchase price-without a journal entry being
made in subsidiaries books- then how do you do ConsSFP the PPE- add reval or not?and analysis of equity?- first add entry at ‘at’ date, then
subtract/revalue it at ‘since’ date? Or just mention nothing at all-?? How
1) Ask about yellow below:
a) Journal entry 6:Eliminate profit/loss in closing inventory.: you take out the profit left over in closing inventory of buyer(inventory is a dr so
you cr it) and take out profit from the sales of the seller by (Take Note!:) ADDING it to ‘Cost of Sales of seller’ (cost of sales is a dr so you dr
it) instead of subtracting it from sales of seller because otherwise you could not do a ‘contra type journal entry’ to balance because you are
trying to do 1 journal entry for the books of 2 companies and this is the only way it will work properly(I think-check up on this)
b) Journal entry7:Eliminate profit/loss in opening inventory.: you take out the profit in OPENING INVENTORY so that when one basicly goes
into this current year from previous year, you get rid of any profit left over in stock from last year which is a loose end , since sales&cost of
sales from last year never show up anywhere in this years statements, only retained earnings from last year still includes this profit left in
inventory because you use the books of subsidiary-where it is still in- to compile this years cons.fin.stats,not the cons.fin.stats. of last year-
where it[inventory profit] was taken out-)So you take it out of last years retained earnings of SELLER (this years opening ret.earnings) by dr it
,to take it out there (because retained earnings is a cr so you dr it to take it out) and you take it out of the inventory of ‘BUYER’ by (Take
note!) writing it out of the ‘SELLERS’ Cost of Sales (for some weird reason-don’t know-must ask!)
2) Ask yellow below:
i) StChEq: (re-do-not done properly no time!)
(1) Parents Beginning of year ret. Earnings:
(2) Parents Tot. Comp.Income for Year:
(3) Non-Controlling interest begin year balance:
(a) Parent to Subsidiary Sales: you do it normal, as if there was no issue with stock/sales etc.
(b) Subsidiary to Parent sales: for some weird reason, you MUST subtract the profit left in the parents [closing-opening] inventory
from the minority’s retained earnings at As well as doing the same for the parent of course.
(4) Non-Controlling interest Tot.Comp. Income for Year.
(a) In the same way as for retained earnings above, for some weird reason, you also MUST subtract the profit left in the parents
[closing-opening] inventory from the minority’s share of the profit for the year, as well as doing the same for the parent of
course.
3) Ask yellow below :
a) ANALYSIS OF EQUITY:
i) For parent to subsidiary sales: NO profit/loss/stock.etc. deductions/calculations are done on the Analysis of Shareholders Equity, all are
ONLY EVER all done separately in other calculations/workings. NO changes ever show here, everything is done as if no intergroup
profit/loss/stock changes need to be made at all. This is so the minority’s share of profit loss is properly calc. without any deductions etc.
ii) For Subsidiary to Parent sales: because the subsidiary sold the items, the adjustments need to be shown on the analysis of equity.so:
(1) Retained earnings: you subtract answer of profit left (eg *25/125) in :(closing-opening) inventory of PARENT(not subsidiary) from
everybody’s TOTAL RETAINED EARNINGS,not just the parents, so also minority share as well as parents share get reduced(why I
cannot understand!- surely the dividends of minority NEVER get affected by whats left in parents inventory! Surely they must get
their full profit!And then, if the inventory is left in subsidiaries stock for a visa versa transaction, why is the same not done then?
because it was an asset swap by subsidiary or what?why does minority suffer for parents not having sold stock(they could take up the
production of the subsidiary and hoard it, or sell it at a loss, then minority sits without dividends for a few years! Or what)
(2) Profit for current year: you reduce the TOTAL by subtracting answer of profit (eg *25/125) left in :(closing-opening) inventory of
PARENT (not subsidiary) from everybody’s TOTAL, not just parents BUT also subsidiaries, so also minority share as well as parents
share get reduced(why I cannot understand!-see question in (i) above.)
4) What does “ consider the carrying amounts of the assets of A and B to be equal to their fair value at acquisition” – esp. when the same
question says the land was considered undervalued by 50000 ?see exam questions!
5) See yellow below
Journal entry 9: Elimination of depreciation associated with sale of asset.
45 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
A sells to B: ‘Accumulated Depreciation’ (of Buyer B) 1000
‘Depreciation’ (of ?sellerA? ) Isn’t it of buyer? 500 Booksays seller
(only if sold in previous fin.years.) Retained Earnings’ (of ?sellerA?) Isn’t it of buyer 500 Book says seller
Elimination of depreciation associated with the sale of the asset. Pg 111 unisa book Pg 111 unisa book.

1. Why does the revaluation reserve of subsidiary for any part from after acquisition till current, not show in the parents SFI under its
own heading , or at all, but for the minority interest it does show? See page 123 in unisa book.ANSWER: Wrong- it does show!!!!you
must show it!!!
2. For a PPE profit transaction : what happens if one company still owes the other company for this intergroup sale- do you have to
reduce ‘Trade& Other receivables” in order to eliminate this ‘debt’ ?? whay was it not done in Lucia & Marius exercise?(put answer
in notes: as a special remember)
3. 1-if you want to revalue property,which ledger account do you put this revaluation in: like accumulated depression or ‘accumulated (upward)
revaluations’ etc or what

1. FOR THE StChEq : see yellow NON-CONTROLLING INTEREST: this must be shown – NCI gets its own separate column in
StChEq , and forms part of Total column too. –You get the begin of year figure for this column from the total of the “At to begin
current Yr” part of the ANALYSIS OF EQUITY. If the cons fin stats are done ‘at acquisition” just the total of the NCI as from
ANALYIS OF EQUITY under line item name: “Subsidiary” appears in its own line to record NCI share at aquisition .
a. NCI share of profit for the year: The NCI share of this profit must be shown in a separate column for NCI. Both figures
come straight from the ConsSCI, NOWHERE ELSE, if you try to work it out from single SFP’s & SCI’s you will get a wrong
answer .ONLY use the Cons.SCI to get these two figures because many changes have been made to them as you went along to
get to the Cons.SCI figure.
b. DIVIDENDS: this is a funny one. In the same line as dividends paid by parent NCI dividends paid must also be recorded.
Parents portion is ONLY what the parent itself paid out- nothing AT ALL to do with the subsidiary. BUT the NCI portion is
ONLY the NCI portion per %ratio of the dividends paid out by subsidiary. This you can get from the Journal Entry to
Eliminate dividends paid by subsidiary. WHY on earth they show for the NCI this I DON’T KNOW. The NCI then pays AND
receives this same dividend. ??? just do it and ask later??
2. How do you do negative goodwill for a NCI from a SHARE VALUE method of doing the valuation of NCI , (instead of
proportionate method) – so is it a ‘gain from a bargain purchase’ or what? And does it get a current assets ‘ negative goodwill’ account
to balance itself out in retained earnings (because it does not go to ret.eaRN. LIKE A “GAIN” by the parent from a bargain purchase –
so where does it balance out here??? Does it get a SFP account or a SCI entry – which??
a. AND what happens if a ‘goodwill’ positive balance of the parent , is cancelled out (set-off) by a negative goodwill of NCI – do
you now leave out the ‘goodwill’ heading in SFP , or make it 0 , or leave goodwill as an asset and do something else with NCI
negative goodwill.???
3. See page 129 – why do they do gain twice here? Is it a printing error in top one? How can they add it twice? Is it supposed to
mean you can split the entry up in 2 parts and the top one is a primting error or what?
NON CONTROLLING INTEREST:
1. IAS27.27 N-c interest shall be presented in SFP within equity,separate from equity of owners.
2. IAS27.28 : OTHER COMPREHENSIVE INCOME section: for each component of Other Comprehensive Income the n-c interest shall
be presented separately. ALSO it says this shall be presented separately even if it results in a deficit balance for the N-C interest.
3. JOURNAL ENTRIES : all the amounts th show in the NCI column in “analysis of equity of subsidiary” worksheet from AFTER the
“AT” date ,MUST get a separate journal entry for each one : just go down the row and do a journal for each amount in this column so
you don’t leave any out : ie 1- Retained Earning for “At till begin current year” 2-profit 3-dividends , 4-any other items in this column.
(???5- must gain from bargain purchase/goodwill of NCI when using share valuation method get any extra entries here in year 2 or
later , AND where must you add this in in StCHEq “begin year retained earnings” for NCI or ret.earn.in SFP ??? etc)
1.

LEASES
1. A non-cancellable lease is a lease that is cancellable only:
(a) upon the occurrence of some remote contingency; (y/n ???‘OR’ I think)
(b) with the permission of the lessor; (y/n??? ‘OR’ I think)
(c) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
(d) upon payment by the lessee of such an additional amount that, at inception of the lease, continuation of the lease is reasonably
certain.

CASH FLOW IAS 7


Cash payments to SUPPLIERS & EMPLOYEES:(Cost of Sales)
1) This amount is calculated by comparing the figures for inventory and trade and other payables as given in the
SFP & StChEq. If inventory increased from one year to the next, the effect on cash flow would be negative
because your net profit would record this as an increase in profits but it IS NOT CASH because it is all locked up in
inventory, cash had to go OUT to pay for it . If the number of trade and other payables increased from one year
to the next, this means that less cash flowed out and the figure would then be positive in respect of cash flow
(sort of like -any stuff you got from the ‘creditor’ increases your profit as an asset without you paying for it , so
46 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
these increase in assets must be subtracted, where you got services its something else. All purchases of
inventory and expenses which were paid for in cash are also included in the calculation.- [??how does this work ,
if you get credit (payables) for services [production machine overhaul repairs] where does the actual cash come
in – theres no cash flow here ?]

1) Factored debtors OR discounted bills : (???How in direct method in ”cash from customers” calc ??? If a bill has been discounted- or a
debtor factored , but the debtor must still pay you and you pay the bank – then what do you do with it? then it is not in receivables anymore –
it should be in “discounted bills” or something??- but anything discounted is certainly ‘cash in’ and must be treated as a loan with security or
removed from debtors, one of the 2,- depending o
2) n the discounting deal type- )
3) Major questions :
a) Where does VAT go? 1- direct & 2-Indirect
b) Bad Debts : what do you do with this? 1- direct & 2-Indirect : where does it get added back or whatever ie , if it has already
been taken off the amount you get for ‘receivables’ in the SFP - and you still go add it back in ‘adjustments’ because it is a
non-cash item in the SCI profit that year, then yoyu should add it back to ‘receivables’ again so it does not show as a cash flow
‘in’ by double adding – !!
c) Provision bad debts : what happens with all the contra account stuff like above? And where does it come off in the direct
method? And Where doe sit go in 1- direct & 2-Indirect
d) Leases: where does the thing get added to ‘investments’ ever – if it is a ‘finance section’ thing only?
e) Recovered bad debts : where does it go in 1- direct & 2-Indirect
f) Income received in advance : 1- direct & 2-Indirect

(C)TERMS:
1) REDEEM : -1-to redeem or pay creditors / or -2- redeem a bond which is collect the payment.
2) DISTRIBUTE : TO DISTRIBUTE profit /loss between the partners in a business etc.
3) PECUNIARY (INTEREST) : asset/monetary/patrimonial/ type of interest in a matter: owes him money , or it is his car ,etc.
4) REMUNERATION ?: salary / wages for work(?salary or payment to contractor or if you buy something?
5) CONSIDERATION ?: like a payment ????
6) RE-IMBURSEMENT: pay you back, eg: for returned goods.
7) AMORTISE :???
8) SoFP – Statement of Financial position
9) SoCI- Statement of Comprehensive Income
10)
11) ‘Allocated’ : you allocate to an account, not put, eg ‘allocate’ excess of the par value of shares to the share premium account.
12) “Nominal amount” : if shares are issued at a premium, then the premium is called the share premium and the other part is called the nominal part –
ie the actual share face value.
13) “That will be in order” , Regards xyz , instead of ‘cool bra, cheers’
14) The 3 “Business Areas” of an enterprise: (this is the common term for the 3 cash flow statement headings )
a) Operating activities
b) Investment activities
c) Finance Activities.
15) Subsidiary Ledger: the creditors&debtors ledgers etc. or other ledgers which are ‘subsidiary’ to the Main General Ledger.
16) SHARES ARE CONSIDERED OUTSTANDING’ : WHAT DOES this phrase mean.
17) RANK :The date from which shares “RANK” : means the date from which they are included in the calculations for dividends or pref.dividedns
etc ie ‘effective date’ from which shares ‘count’.

(D) TRICKS:
PARTNERSHIPS:
1. If new members contribution toward goodwill is indicated , allways work out the total goodwill befor new member from this amount , even if
goodwill is stated in the balance sheet( it could be a trick quetion where ther should be a revaluation before new admittal , but you only see it from
this new member indication. METHOD: Then total goodwill must be 15/15 of 3/15 (if 3/15 is new members ratio) etc etc and this 15/15 MUST be
in the books and already distributed before the new member is admitted.
2. Bal sheet changes : only on date of new members or fin year end .
3. Write out Goodwill + General reserve Current accounts of partners before new/old members ALLWAYS.
47 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
4. Profit sharing allways changes partners capital account ratios.
5. If liquidation expenses are dated april ,do not take of this month already when you do the liquidation schedule , only do next month as dated!!!!
6. For Gradual liquidation: you apportion final Deficit in Liquidation account, NOT in Distribution Account!
COMPANIES.
1. IF shares are issued at a discount ,A separate “DISCOUNT ON ISSUE OF SHARES” expense ACCOUNT is used for all discount,but shares are
issued at old/ par value into Share Account, so normally, as if no discount.(plus court allow,+1 year since first issue,+special resolution specify
discount rate etc)

(E) EXAM TIPS:


general
NOTE:IF INVENTORIES CURRENT on stock take do not match the amount in the "inventory account"(calculated amount) it is called a "deficit on
inventory account" and is put as expense in the income statement –ie goods stolen/lost etc.!

partnerships
1. Check for boxing/splitting of Property, Plant ,Equip into Property separate+ Plant separate+ Equip
2. Check which category loans to/or from PARTNERS are in balance sheet to deduce if to or from, AND ask lecturer which it is in case he did mean
differently even if it is in the correct category of Bal Sheet for what you thought it was(to or from)
3. Check for accumulated depreciation before you do revaluations on the n-c assets.!
4.
Statement of changes in equity and share transactions:
Note:Rem: in exam watch out for the pref. shares given at date of current balance sheet, but the other shares at date of last balance sheet.So all this years
share transactions on Pref. shares are to be subtracted from value given on balance sheet to get opening balance for this year on your Statement of
changes in Equity.
48 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

1…..FRAMEWORK
THE SOUTH AFRICAN INSTITUTE OF CHARTERED ACCOUNTANTS INCLUDES THE FOLLOWING STUDY
OBJECTIVES, FOR EXTERNAL FINANCIAL REPORTING, THAT STUDENTS MUST LEARN IN THEIR
CURRICULUM:
1. Identify the objectives of financial statements, the specific information needs of equity investors, the general information needs of other users
and know of, understand and explain the meaning of fair presentation.
2. Explain the need for and the application of a conceptual framework and standards for financial reporting.
3. Select, measure, understand, record and classify accounting data as well as understand, select and record non-financial information.
4. Identify and apply the reporting requirements as they relate to the statutory reporting requirements and the reporting requirements of Generally
Accepted Accounting Practice.
5. Explain and apply the underlying assumptions according to which financial statements are prepared.
6. Define and apply the qualitative characteristics of financial statements and apply them to fair presentation and measurement issues to enhance
the decision-usefulness of financial reporting.
7. Identify the appropriate elements of financial statements and apply them to the presentation of financial statements.
8. Identify recognition criteria and apply them to the incorporation of items in primary financial statements.
9. Identify measurement criteria and models and apply them to the incorporation of items in primary financial statements.
10. Understand the concepts of capital maintenance and the determination of profit.
11. Describe the processes involved in drafting and setting standards of Generally Accepted Accounting Practice.
12. Analyse financial statements to assess the financial position and performance.
KEY QUESTIONS TO BE ABLE TO ANSWER : AS PER SAICA, AND UNISA “KEY QUESTIONS” FOR THIS
CHAPTER:
1. Identify the 1-purpose and 2-status of the framework.
2. Specify the users and their need for information , the specific information needs of equity investors, the general information needs of other
users.
3. Define the objective of financial statements.
4. Define the underlying assumptions of financial statements.
5. Define and discuss the qualitative characteristics of financial statements, apply them to fair presentation and measurement issues to enhance
the decision-usefulness of financial reporting.
6. Discuss + definition : of the characteristics of the elements of financial statements.
7. Identify items as elements of financial statements and explain why the element complys with the characteristics.
8. Describe the recognition criteria of an element,
9. Determine whether an item could be recognised in the financial statements - according to these recognition criteria.
10. Specify the four different measurement bases to measure the elements.
11. Determine in accordance with the measurement bases the value at which an element should
be included in the financial statements.
12. Describe the capital maintenance concepts and determination of profit concepts.
13. Compliance with International Financial Reporting Standards (IFRS).
14. Legal backing for compliance.
15. know of, understand and explain the meaning of fair presentation.
16.Explain the (a)need for and the (b)application of a 1-conceptual framework and 2-standards for
financial reporting.
17.Describe the processes involved in drafting and setting standards of Generally Accepted Accounting Practice.
49 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

THE IASB FRAMEWORK GENERAL POINTS, ARRRANGED ACCORDING TO QUESTIONS THAT ARE
REQUIRED TO BE ABLE TO BE ANSWERED , GIVEN NEARLY VERTABIM BY SAICA AND UNISA, FOR
STUDENTS TO BE ABLE TO ANSWER(syllabus key points):

1-BACKGROUND : Explain the (a) need for and the (b) application of a 1-conceptual framework and 2-standards
for financial reporting.
WHAT IS A FRAMEWORK / conceptual framework:
• A GENERAL FRAME OF REFERENCE FOR A SPECIFIC AREA OF ENQUIRY.
• SET OF acc. Principles which serve as basis for evaluate current practices & develop new acc. practices.
• Part of ‘normative ‘ theory of accounting- ie: based on what info people need , Not want.
• Accounting is a means of communication.
• The old IASB called the IASC only issued the FPPFS –The framework for the preparation and presentation of financial statements, in 1989.
• It does not have the same authority as IFRS (& ISA’s I think) , if there is conflict IFRs prevails.
Trend is toward developing ‘Principles’ based frameworks , not rules based- it is more difficult to bypass a principle than a rule.(for every
circumstance)
APPLICATION of framework :
Just say : what ‘is’ a framework , and the purpose of it : ie to provide a basis / frame of reference on which the IAS ‘s are built , defining
qualitative + assumptions + definitions of elements etc so people can use it to understand what is in the IAS’s and other statements and users
understand fin stats.
1-The Scope of the framework:
1. IAS 1.1(AC.101.1)
2. APPLICABLE TO GENERAL PURPOSE FINANCIAL STATEMENTS OF ALL COMMERCIAL, STATE, reporting entities in order to
satisfy the needs of users who have to rely PRIMARILY on them for info., and not for directors/management etc who have other sources of
info available. Also not for tax or prospectuses.
3. Particularly the provision of assistence to :auditors, preparers of Fin Stats, standard setters of IFRS , and to users in
understanding&interpretation of fin stats.

IDENTIFY THE PURPOSE AND STATUS OF THE FRAMEWORK


A) PURPOSE OF THE FRAMEWORK
50 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

The purpose of the Framework is to:

(a) assist the Board of IASC in the development of future International Accounting Standards and in its review of existing
International Accounting Standards;
(b) assist the Board of IASC in promoting harmonisation of regulations, accounting standards and procedures relating to the presentation
of financial statements by providing a basis for reducing the number of alternative accounting treatments permitted by International
Accounting Standards;
(c) assist national standard-setting bodies in developing national standards;
(d) assist preparers of financial statements in applying International Accounting Standards and in dealing with topics that have yet to form
the subject of an International Accounting Standard;
(e) assist auditors in forming an opinion as to whether financial statements conform with International Accounting Standards;
(f) assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with
International Accounting Standards; and
(g) provide those who are interested in the work of IASC with information about its approach to the formulation of International
Accounting Standards.

B) STATUS OF THE FRAMEWORK

1. The Status of the framework is that :


a. It is not as IAS and thus does not give any standards for any measurement or disclosure issue.
b. If there is a dispute between the framework and an IAS, then the IAS is the one that must be followed.

2. USERS OF FINANCIAL STATEMENTS : THE SPECIFIC INFORMATION NEEDS OF EQUITY


INVESTORS, THE GENERAL INFORMATION NEEDS OF OTHER USERS , specify the users and their need for
information .

Most important users = 1-Providers of finance eg banks 2- Equity investors, namely shareholders.

(a) EQUITY INVESTORS. : Ability of the entity to pay 1-Dividends & 2-Buy, Hold or Sell : The providers of risk capital and their advisers are
concerned with the risk inherent in, and return provided by, their investments. They need information to help them determine whether they should buy,
hold or sell. Shareholders are also interested in information which enables them to assess the ability of the entity to pay dividends.

(b) GENERAL INFO NEEDS OF OTHER USERS


The framework mentions that if the fin stats provide sufficiently for needs of equity investors, that it should be good enough for all other users as
well.
(a) Employees. Stability and profitability remuneration, retirement benefits and employment opportunities.
(b) Lenders. Paid when due.
(c) Suppliers and other trade creditors.: Paid when due
(d) Customers. continuance of an entity , some are quite dependent on entity.
(e) Governments and their agencies. regulate the activities of entities, determine taxation statistics allocation of resources.
(f) Public. Local economy , people they employ , and their patronage of local suppliers
3. DEFINE THE OBJECTIVE OF FINANCIAL STATEMENTS
1. The Objective of the Fin Stats is: (vertabim from framework itself)
1.1. The objective of financial statements is to provide information about the
1.2. financial position, performance and changes in financial position of an entity
1.3. that is useful to a wide range of users in making economic decisions.

1. And furthermore ,it should contain info that is 1- understandable to those with a reasonable understanding of business and a willingness to study
the info. with the necessary diligence 2- on how management performed its stewardship function 3-useful to directors & mngmnt in making
decisions that affect the owners of the company.
1. Although IFRS states users should not rely only on Fin stats for making economic decision because it is past info- not present or future info- the
trend today is toward IFRS stating that more future & non- financial info is disclosed in Fin Stats.
2. The Components of Fin stats:
3. SOFP:
3.1. Info. on Financial Position.
3.2. Info. on resources, equity and claims aginst these resources.
3.3. Useful for estimation of liquidity & solvency , and prediction of ability & likelihood of entity having success in raising finance in the future.
4. SOCI
4.1. Info on Financial Performance.
4.2. Different componete of Income
4.3. See all Fin. Ratios that can be got from SOCI – (that is basicly your answer for any )
5. CASH FLOW STAT.
5.1. Changes in Fin Position
5.2. Ability to generate cash & cash equivalents, needs to utilize cash flows, how it aquires & distributes cash flows
5.3. Info on the entitys investing, financing and operating activities.
6. STAT. OF CH. IN EQUITY.
6.1. Changes in structure of entitys equity, incl. dividends & capital transactions
7. NOTES & SUPPLEMENTARY SCHEDULES.
51 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
8. INTERRELATION OF COMPONENTS.
8.1. Each component reflects different aspects of the same transaction& events, no single statement will provide all the necessary info to users.

4. DEFINE THE “UNDERLYING ASSUMPTIONS” OF FINANCIAL STATEMENTS.


9. There are only 2 underlying assumptions of Fin Stats::
9.1. ACCRUAL BASIS: Definition : Transactions are recorded when they occour, not only when cash actually changes hands., in the fin stats.
of the accounting Period to which they apply.
9.2. GOING CONCERN BASIS: Intentions + Need : Definition : It is assumed that the entity has neither the Intention nor the Need to
liquidate or curtail its operations materially. Should this assumption not be valid then values should be recorded at their liquidation values
and provision made for liquidation costs.

5. THE QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS: Define and discuss, and apply
them to fair presentation and measurement issues to enhance the decision-usefulness of financial reporting.
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
1. The principle 4 characteristics are :
1.1. UNDERSTANDABILITY
1.1.1. Definition : Understandable to the average user who has a reasonable knowledge of business and a willingness to study the info. with
the necessary diligence, but this does not mean any info. should be excluded because it may be too complex for certain readers to
understand.

1.2. RELIABILITY
1.2.1. Definition : Info is reliable when it does not contain “material errors” and is “free from bias”.
1.2.2. Refers less to -absolute accuracy and more to : info. a user can trust.
1.2.3. There are 5 components of reliability:
1.2.3.1. Faithful Representation :
*Para. 34 of Framework states : most fin. Info. is subject to the risk of not being entirely faithfully representative in that it
does not portray what it purports to portray, eg : Goodwill difficult to measure – this should be stated in the notes.
*Likened to a roadmap with symbols in the Framework : cannot leave out roads&symbols or add some extra ones.
1.2.3.2. Substance rather than Legal Form of events.
*Eg where the formalities of a sale have been completed at reporting date – it will be shown in the books even if legal title
has not yet passed to buyer. OR conversely legalities have taken place but seller still substantially enjoys benefits of
ownership- sale is not recognized.
1.2.3.3. Neutral : will not present info. in a manner that will achieve a pre-determined result.
1.2.3.4. Prudent (in instances of uncertainty) :
*where uncertainty exists, the outcome selected will result in the least favourable outcome being reflected eg: 1-if recovery
of a debt is doubtful it should be recorded as a bad debt. (can be changed later) , also 2- assets should not be overstated nor
liabilities understated.
*prudence is a function of uncertainty and in any other circumstances its use is unwarranted and contrary to reliability
concept.
1.2.3.5. Complete
*Complete within the bounds of materiality and cost.
*Material omissions can render info. false and misleading- tantamount to providing misleading info.

1.3. RELEVANCE
1.3.1. Definition : Affect Decisions : Relevant info. is useful and can therefore affect the economic decision making of users.
1.3.2. Materiality : is the one characteristic of relevance.
1.3.2.1. Definition : following 3 points are to be considered in assessing the materiality of an item.
1.3.2.1.1. Omission or Misstatement affect Decisions : Material is considered to be material if it’s omission or misstatement could
affect users decisions made regarding the Financial Statements.
1.3.2.1.2. Increase usefulness : The disclosure of material items increases the usefulness of the Financial Statements.
1.3.2.1.3. In terms of whole Fin Stats : The materiality of an item is to be assessed in terms of the Financial Statements as a whole.
1.3.2.2. Materiality refers to individual items, not groups of items.
1.3.2.3. Two or more similar and material items may not be offset against each other , with the net result that they become a non-material
item.
1.4. Constraints on relevant and reliable information
1.4.1. Timeliness
1.4.2. Balance between benefit and cost
1.4.3. Balance between qualitative characteristics

1.5. COMPARABILITY
1.5.1. Definition :The accounting treatment should be the same for :
1.5.1.1. The same items over time
1.5.1.2. Same items in the same period and
1.5.1.3. Similar items of different but similar companies over time and in the same period.
1.5.2. Main reason is to assist users to compare Fin stats. of different companies, and also compare different periods in one entity.
1.5.3. It is not however desirable to pursue comparability at all costs, where a new Acc. Standard is introduced or when the application of a
more appropriate accounting policy becomes necessary,the current accounting policy should be changed.
2. Constraints on relevant and reliable information
2.1. Timeliness
52 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
2.2. Balance between benefit and cost : Cost vs Benefits : where the cost exceeds the benefits, the info will not (could not) be reported even
though it may meet all the characteristics of usefull information.
2.3. Balance between qualitative characteristics
2.3.1. Interaction between the qualitative characteristics :
2.3.1.1. para. 32 of Framework states : information may be relevant but so unreliable in nature or representation that its recognition may
be potentially misleading.(eg –not showing a disputed claim in balance sheet as a provision,only in the the notes)
2.3.1.2. There is also the tradeoff problem between relevance and reliability concering historical VS fair value amounts to be shown in
Fin Stats. Historical is seen as more reliable while fair value is seen as more relevant.
2.3.1.3. It is sometimes also necessary to report on a transaction before all aspects of it are known : reliability vs fair presentation as a
whole. You should report it, or at least achieve a balancing act.

6- The 5 ELEMENTS OF FINANCIAL STATEMENTS


1. There are 5 elements. The decision as to which element something falls under depends on the rule : Substance Over Form .eg: THE Framework
cites example of finance leases ; although they are legally construed as leases, their substance is such that they are capitalized and treated as assets
acquired from borrowing proceeds.
2. The definition of the 5 elements are:
2.1. ASSETS:
2.1.1. Definition : An Asset of an Entity is :
2.1.1.1. A resource
2.1.1.2. that is under the control of the entity
2.1.1.3. that will result in future economic benefits flowing to the entity
2.1.1.4. that originated as a result of past events.
2.1.2. They may be (vertabim as per framework):
Used singly or in combination with other assets in the production of goods or services to be sold by the entity.
Exchanged for other assets
Used to settle a liability
Distributed to owners of the entity
2.1.3. Control means – like legal ownership or eg. a secret (even unpatented) formula or process.-even if control benefits associated with a
leased asset = control.
2.1.3.1. Ability to obtain future economic benefits from it
2.1.3.2. Ability to restrict access to it by others
2.1.3.2.1. Restrict access part normally comes from legal righ : eg legal duty employees maintain confidentiality, restraint of
trade contract, copyrights.
2.1.3.3. Legal enforcability of a right is not a necessary condition for control
2.1.4. Future economic benefits : Probability of assessed by REASONABLE +SUPPORATBLE assumptions by mngmnt based on best
estimate of economic conditions to exist over useful lifetime of asset, based on evidence at initial recognition, giving greater
weight to external evidence.

2.2. LIABILITIES:
2.2.1. Definition : A liability of an entity is:
2.2.1.1. A present obligation
2.2.1.2. Arising from past events
2.2.1.3. The settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
2.2.2. The sacrifice of resources with economic benefits can take place in a number of ways, for instance through ( per eg in framework)
2.2.2.1. The payment of cash
2.2.2.2. Transfer of other assets
2.2.2.3. Provision of services
2.2.2.4. Replacement of one obligation with another
2.2.2.5. Conversion of an obligation into equity.
2.2.3. Framework says :normally an obligation only arises when an asset is delivered or an irrevocable agreement has been entered into : a
distinction should be mad ebetween present obligation and ‘future commitment’ a decision/commitment to purchase is not a liability.
Also , an estimate of a provision could qualify as a liability( maintenance contract etc)

2.3. EQUITY;
2.3.1. Definition: The residual interest in the assets of the entity after deducting all its liabilities.
2.3.2. It is not the market value of its shares – ever at all.

2.4. INCOME:
2.4.1. Definition :Income is described as
2.4.1.1. Increases in economic benefits during the accounting period
2.4.1.2. In the form of inflows or enhancements of assets or decreases of liabilities
2.4.1.3. That result in increases in equity other than those relating to contribution from equity participants.
2.4.2. Note: unrealized gains eg from revaluation of marketable securities(shares) or fixed property like buildings, is also income but the
approach to their inclusion depends on the approach adpted towards “capital maintenance” by the entity.Gains are usually disclosed
separately to facilitate making of economic decisions.

2.5. EXPENSES:
2.5.1. Definition : expenses are defined as
53 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
2.5.1.1. Decreases in economic benefits during the accounting period,
2.5.1.2. In the form of outflows or depletion of assets or incurrance of liabilities
2.5.1.3. That result in decreases in equity other than those relating to distributions to equity participants.
2.5.2. Note: some expenses which could also be ‘unrealised’ like unrealized losses due to foreign exchange rate changes – where you hold
foreign currency.Also, losses eg: due to fire or theft, are usually disclosed separately in the income stat in order to facilitate the making
of economic decisions.They are often reported net of related income.( related income&expenses offset in one figure)

CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES


1. There are 2 Methods of Presenting Current & Non- Current :
a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings.
b. Method 2: “Liquidity Approach” : Assets&liabilities are presented broadly in order of liquidity. However there is a rule that if
any 1 amount/item covers less < 1 year and > more than 1 year at the same time, then anything over 1 year must be specially
disclosed separately as well for that one amount/item.
c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like
financial institutions. Note : IT IS ALSO ALLOWED TO PUT SOME ITEMS USING METHOD 1 AND OTHER ITEMS USING
METHOD 2 IF THAT IS MORE RELEVANT.ie mixed mixture of the 2 methods

2. Method 1: Current and Non – Current assets / liabilities headings:


a. A CURRENT ASSET IS :
i. Is expected to be realized in, or is held for sale or consumption in the normal course of the entities operating cycle eg
inventories.
ii.Is held primarily for trading purposes ( eg some financial assets held for trading)
iii.Is expected to be realized within 12 mnths (eg non-current assets held for sale.)
iv.Is cash or a cash equivalent that is not restricted from being exchanged or used to settle a liability for the whole of at
least 12 mnths from reporting date.,( eg call account
b. A NON-CURRENT ASSET IS : all other assets are classified as non-current.
c. Definition: operating cycle is the time of acquisition of raw materials and their realization as cash . Thus if the operating cycle
is longer than 12 mnths the “current assets” may include items that are not expected to be realized within 12 mnths. If
operating cycle is not clearly identifiable it should be assumed to be 12 mnths.

d. A CURRENT LIABILITY IS:


i. Is expected to be settled in the normal course of the entities operating cycle.( eg trade payables)
ii.Is held primarily for trading purposes(eg some financial liabilities held for trading)
iii.Is due to be settled in 12 mnths from reporting date (eg dividends payable, income tax payable)
iv.The entity does NOT have the unconditional right to defer payment to after 12 mnths from reporting date.( eg bank
overdraft) (if terms say ‘convertible to share settlement’ at option of counterparty, the share settlement should not affect the classification as
current or non-c. here classification should be based on expected transfer of cash OR other assets,)
e. NON CURRENT LIABILITY: all other liabilities are Non-Current.
i. Note: if non-adjusting event after reporting period says agreement to refinance a current’ , it stays current in old
period , do not change.
ii.Any refinancing/periods of grace etc all get classified into the period they fall into.

7-RECOGNITION CRITERIA OF ALL ALL ALL ALL ALL ELEMENTS OF FINANCIAL STATEMENTS
1. In order to be recognised as an element of the balance sheet or income stat, an item must:
2. FIRST meet the definition of one of the “elements of financial statements” : either assets/liabilities/equities/expenses/ or income.
3. SECONDLY satisfy the following 2 criteria for recognition :
3.1. PROBABILITY OF FUTURE ECONOMIC BENEFIT: it should be probable that future benefits associated with the item will flow to or
from the entity.
3.1.1. Para. 85 of the framework – to be based on evidence available at date of fin stats. eg debtor= “probable asset” but not completely
probable so there must be a “probable” liability” = bad debt provision
3.2. RELIABILITY OF MEASUREMENT: the item must have a cost or value that can be measured reliably.
3.2.1. Reasonable estimation : is allowed .But if an item cannot be reasonable estimated it should not be disclosed in the SCI but in the notes
instead eg: if one cannot possibly manage to estimate the amount of a legal claim which will probably be won.( the eg is from
framework)
3.2.2. Recognition of elements of fin stats : (some notes)
3.2.2.1. Recognition of Assets : eg if it is not probable that economic benefits will flow in following economic periods then item should
not be recorded as an asset.
3.2.2.2. Liabilities : see IAS 37
3.2.2.3. Income : see IAS 18
3.2.2.4. Expenses : basicly when a liability is created without recognition of any asset (in return) eg warranty liability arises.
SPECIFY THE FOUR DIFFERENT MEASUREMENT BASES TO MEASURE THE ELEMENTS.
1.1.1. The following measurement bases are identified in Para.100 of Framework.:( ‘cash’ always means ‘cash or cash equivalents’)
1.1.1.1. HISTORICAL COST: assets: at amount paid/value exchanged for it / liabilities : valued at the amount of proceeds received in
exchange for the obligation(????? What about if you overpaid & owe this now ??) or in some circumstances eg income taxes at
amounts of cash /cash equivalents expected to be paid to satisfy the liability in the normal course of business.
1.1.1.2. CURRENT COST : assets: cash that would have to be paid if same or equivalent asset were acquired currently. Liabilities :
Undiscounted cash that would be required to settle it currently.
54 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1.1.1.3. REALISABLE VALUE (SETTLEMENT VALUE) ; liabilities :undiscounted cash payable in normal course of business.
Assets : at an orderly disposal. Basicly the amount for which an asset can be exchanged between willing parties in an arms length
transaction (not NRV but RV)
1.1.1.1. PRESENT VALUE : assets carried at present discounted values of net cash inflows that item is expected to generate in normal
course of business Liabilities are carried at the present discounted value of future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business. (framework para 100)
1.1.2. Measurement criteria : present value is often used for bonds, where all future cash flows from the bond (interest) is used to discount it
to present value.Or if you use historical cost but get something for free (donation), then it should be included at ‘current cost’, not
historical value.
1.1.3. Fair Value : Definition : by the IFRS as: “the amount for which an asset can be exchanged between willing parties in an arms length
transaction” this is the same definition as for ‘realisable value’ above.
1.1.4. There are some common questions : often asked which framework currently fails to address : what level of aggregation or
disaggregation should be applied during measurement process, also how to choose between different bases, also addressing subsequent
measurement regarding revaluations&impairment&depreciation.also could recognition & derecognition criteria differ in certain
circumstances.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE


1. Two different concepts of capital are identified in the framework:

1.1. FINANCIAL CONCEPT:


1.1.1. CAPITAL IS EQUAL TO THE NET ASSETS OF A COMPANY: in money amount value of.
1.1.2. In terms of this, capital is maintained if net assets at the beginning of the period is equal to net assets at end of period, after excluding
any distributions to or contributions from owners of the equity
1.1.3. . So profit = an increase in money amount of assets , excl. owners contributions/withdrawal.
1.1.4. .Measurement: There are 2 methods of measuring the value:
1.1.4.1. Incl. inflation :Nominal Monetary Units : ie: inflation
1.1.4.2. Excl. inflation :Units of constant Purchasing Power : any inflation is deducted as capital maintenance adjustments that form part
of equity,not profits

1.2. PHYSICAL CONCEPT:


1.2.1. CAPITAL IS EQUAL TO THE PRODUCTION CAPACITY OF A COMPANY eg: number of units produced per day.
1.2.2. This means profit is only made if physical production capacity at end of period is more than at the beginning of period, excl. any
owners equity transactions to do with this
1.2.3. Current cost basis measurement : Measurement takes place on a current cost basis. Any changes in the price of assets or liabilities are
not included in the calculation and are accounted for as capital maintenance adjustments against equity, ie any inflation effects are
“eliminated”.

2. The choice between the 2 is based on needs of users, framework gives scant further guidance on this. In SA most users choose Financial., but if
main consideration of users is maintaining production capacity, Physical is used.

3. These concepts are a point of departure for measuring profits and related to the capital an entity strives to maintain.

4. Framework : 81 : The revaluation or restatement of assets and liabilities gives rise to increases or decreases in equity. While these
increases or decreases meet the definition of income and expenses, they are not included in the income statement under certain
concepts of capital maintenance. Instead these items are included in equity as capital maintenance adjustments or revaluation
reserves. These concepts of capital maintenance are discussed in paragraphs 102 to 110 of this Framework.

LEGAL BACKING FOR COMPLIANCE.


Companies act 2007 says all fin stats should comply with IFRS /GAAP
KNOW OF, UNDERSTAND AND EXPLAIN THE MEANING OF FAIR PRESENTATION.
By: 1- Application of the principal “qualitative” characteristics
2- And of “appropriate accounting standards”

Framework : 46 (vertabim) Financial statements are frequently described as showing a true and fair view of, or as presenting fairly, the
financial position, performance and changes in financial position of an entity. Although this Framework does not deal directly with such
concepts, the application of the principal qualitative characteristics and of appropriate accounting standards normally results in financial
statements that convey what is generally understood as a true and fair view of, or as presenting fairly such information.
DESCRIBE THE PROCESSES INVOLVED IN DRAFTING AND SETTING STANDARDS OF GENERALLY
ACCEPTED ACCOUNTING PRACTICE.

IASB formulates new policies according in consultation with relevant parties, releases exposure draft (ED) for pubic opinion, then if approved releases
new IAS or updates. In SA then SAICA has APB , now changing FRSC financial reporting standards council ,which releases these to the accounting
profession and participates in the evalution and gives opinions on ED’s. .

MATCHING CONCEPT
55 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
MATCHING CONCEPT.
1.1. The asset & liability view : where expenses are not matched in the same period with related revenue ,then income/expense is seen as the
general increase in assets over liabilities in the period. eg depreciation is simply systematicly allocated in the period it occours.
1.2. Revenue&expense view: where expenses and income from similar business activities are matched – eg separate a normal from a once –off
operation.

DEFINITION OF ACCOUNTING&BOOKKEEPING:
DEFINITION OF ACCOUNTING:
ACCOUNTANCY can be defined as :
The Orderly and Systematic
IDENTIFICATION AND RECORDING of the
MONETARY VALUES of
FINANCIAL TRANSACTIONS of an (or economic transactions)
INDIVIDUAL OR INSTITUTION and the
REPORTING on the
RESULTS of these TRANSACTIONS and the
PROVISION of the INFORMATION in FINANCIAL STATEMENTS
which INFORMATION is used in DECISION MAKING .
DEFINITION OF BOOKKEEPING:
BOOKKEEPING can be defined as :
The Orderly and Systematic
IDENTIFICATION AND RECORDING of the ( or here just “ECONOMIC EVENTS”. Finished)
MONETARY VALUES of
FINANCIAL TRANSACTIONS of an (or economic transactions)
INDIVIDUAL OR INSTITUTION.
Identity is important also orderly and systematic AND recording implies Chronological diary of measured events Also Classified and Summarized

THE APPLICATION OF STATEMENTS OF GAAP


Spirit not Letter if problems.
AC100.10 :The application of statements of gaap:APB says
1. Spirit not letter of Fin. Statements if problems with application
2. To remember fair presentation
Substance-form/&Materiality.
AC100.11 :Two considerations affect Application
1. Substance over form –facts over GAAP form
2. Materiality-all matters in financial transactions which can affect the understanding and decisions of users must be recorded.
AC100.07 Fair Presentation
1. Most important part of Companies Act is FAIR PRESENTATION.
2. Compliance with Gaap does not auto. guarantee fair Presentation in Fin.Stat.
3. Standards achieve:1-Comparability 2-help fair presentation
4. Departures must be disclosed in Explanatory Notes.
5. AC100.08 –Compliance with Gaap may be misleading
6. AC100.09 –not necessarily cater for Specialized Activities (more a general standard)
Ac100.09 –1-Specialized +2_unusual transactions add in Notes to Clarify if any deviation in standards.
Implies only in exceptional cases are deviations permitted

UNIVERSAL ACCOUNTING DENOMINATOR THE COMMON UNIT OF MEASUREMENT IN ACC. IS MONEY.


1. In RSA is the Rand and Cents.
2. All transactions are converted to monetary values before being processed.
3. LIMITATIONS:
3.1. Not all events can be converted to monetary terms.
3.2. Value of money unstable-influenced by many economic factors:eg-inflation.
56 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
57 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

2..…PRESENTATION : IAS1
1) BACKGROUND SCOPE AND OBJECTIVES OF FIN. STATS.
1. IAS1 , AC101 SETS OUT THE REQUIREMENTS OF STRUCTURE , CONTENT, AND OVERALL REQUIREMENTS FOR PRESENTATION
OF FINANCIAL STATEMENTS, specifically for ‘general purpose fin.stats’. which is ie not special types like management accounts but meant for
general users , eg shareholders. It does not apply to interim fin.stats, but to all others.
2. It must be applied for ALL GENERAL PUROSE FINANCIAL STATEMENTS ie: all fin stats AT ALL that wish to say they conform to
GAAP/IFRS.
3. Special institutions eg banks must fulfil IAS1 as well as secondary requirements laid down for them elsewhere.’
4. EXCEPTIONS: only certain not-profit entities may have to adapt certain line items, as well as certain entities without share capital, like some co-
ops and mutual funds.
5. OBJECTIVE OF FIN.STATS : Definition: is 1- to provide info about the fin. Perf. Fin pos. and cash flows of an entity , 2- that is useful to a wide
range of users , 3- in making economic decisions
2)GENERAL FEATURES FOR THE PRESENTATION OF FIN STATS.
1. The following general features are identified in IAS 1 (AC 101).15 to .46
1.1. FAIR PRESENTATION AND COMPLIANCE WITH IFRS’s :
1.1.1. FAIR PRESENTATION:
1.1.1.1. If the following are correctly applied it is accepted as resulting in fair presentation.
1.1.1.1.1. Correct application of statements of GAAP / IFRS
1.1.1.1.2. Qualitative characterustcs correctly applied
1.1.1.1.3. element definitions
1.1.1.1.4. recognition criteria(measurement & A flow of economic benefit)
1.1.1.2. In a exam question your answer must :ask&answer 1-which elements involved criteria+ 2-are recognition criteria of these
elements met = Full Answer
1.1.1.3. Fin stats should contain an explicit & unreserved statement in them that say they comply with IFRS.
1.1.2. DEPARTURE FROM IFRS’s :
1.1.2.1. If Framework Does Not Prohibit Such A Departure In That Instance :
1.1.2.1.1. One may depart from it if framework requires or does not prohibit such a departure , very rare if compliance with IFRS
will result in NOT fair presentation.- only in rare cases if needed
1.1.2.1.2. 2 criteria are 1-why must departure happen 2-what about comparability with other similar entities that do not depart
1.1.2.1.3. Any such departure must be disclosed and 7 additional points to be disclosed as well see IAS 1.20:
1.1.2.1.4. IAS 1.20 When an entity departs from a requirement of an IFRS in accordance with paragraph 19, it shall disclose:
(a) that management has concluded that the financial statements present fairly the entity’s financial position,
financial performance and cash flows;
(b) that it has complied with applicable IFRSs, except that it has departed from a particular requirement to
achieve a fair presentation;
(c) the title of the IFRS from which the entity has departed, the nature of the departure, including the
treatment that the IFRS would require, the reason why that treatment would be so misleading in the
circumstances that it would conflict with the objective of financial statements set out in the Framework, and
the treatment adopted; and
(d) for each period presented, the financial effect of the departure on each item in the financial statements
that would have been reported in complying with the requirement.
21 When an entity has departed from a requirement of an IFRS in a prior period, and that departure affects
the amounts recognised in the financial statements for the current period, it shall make the disclosures set out
in paragraph 20(c) and (d).
1.1.2.2.IF FRAMEWORK PROHIBITS SUCH DEPARTURE:
1.1.2.2.1. IAS 23 In the extremely rare circumstances in which management concludes that compliance with a requirement in
an IFRS would be so misleading that it would conflict with the objective of financial statements set out in the
Framework, but the relevant regulatory framework prohibits departure from the requirement, the entity shall, to the
maximum extent possible, reduce the perceived misleading aspects of compliance by disclosing:
(a) the title of the IFRS in question, the nature of the requirement, and the reason why management has
concluded that complying with that requirement is so misleading in the circumstances that it conflicts with
the objective of financial statements set out in the Framework; and
(b) for each period presented, the adjustments to each item in the financial statements that management has
concluded would be necessary to achieve a fair presentation.

1.1. GOING CONCERN : for 12 mnths from fin. Stat. date : or


1.1.1. IF There Is Just Of Material Uncertainties That May Cast Significant Doubt 1-disclose this in notes
1.1.2. IF IT IS Really NOT A Going Concern : Disclose That It Is Not Prepared On A Going Concern Basis, And Then On What Basis
It Is Prepared.(what other types of basis’s do you get?)+2-provision for liquidation costs+possible LIQUIDATION VALUATION
METHOD
1.2. ACCRUAL BASIS: 2 parts = 1 transcations accounted for when they occour,not when cash is received 2- expenses only recognized in profit
calc. in period they incurred,not if incurred in another period. (except cash flow stat is of course NOT prepared on a accrual basis)
1.3. MATERIALITY AND AGGREGATION : Material to a user means if its non –disclosure may influence economic decision.
1.3.1. per IAS 1.29 each material class of separate items should be presented separately in fin stats.
1.3.2. items of dissimilar nature/function to be presented separately when material, but may be aggregated with other material items where
immaterial. ( eg a single event leads to 85% inventory writeoff to be shown separate to the other routine inventory write-offs –
Vertabim- ) certain line items may not be material enough for SCi but still are material enough for Notes.
58 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1.4. OFFSETTING : IAS 1.32 says neither assets&liabilities nor income&expenses may be offset against each other unless specifically required
or permitted by a standard or interpretation .- it is basicly not permitted because it detracts from ability of users of fin stats to understatnd fin
pos & future cash flows & transactions.
1.4.1. Offsetting like this can happen with non ‘revenue’ Equipment sales or foreign currency exchange differences where only net loss/profit
is shown in SCI. , unless certain of these transactions happen to be material and need to be disclosed separately –in the notes or
otherwise.
1.4.2. Offsetting could be disclosed in Notes (study IFRS for circumstance).
1.4.3. Allowances eg bad debts/obsolescence , are not seen as being offsetting .Also assets VS acc. deprec. account are not called offsetting .
1.4.4. But Provisions/warranty/suppier/reimbursement and gain/loss on NC assets are allowable offsetting.
1.5. FREQUENCY OF REPORTING : yearly but if longer/shorter due to change in entity reporting date must disclose 1-reason why not 1 year
2- The fact that comparatives between years are not comparable due to longer/shorter period (see IFRS)
1.6. COMPARATIVE INFORMATION: AC101.38 ; allnumerical info. in fin stats. should be accompanied by comparative info for previous
period unless a standard or interpretation permits otherwise.Even narrative& descriptive info should be accompanied by comparative info. if
necessary for understanding of current periods fin. Stats. …..Vital importance is Fin Stats users discern trends-thus comparatives must be
structured in such a way. Also , if Accounting policy is changed the comparatives must be recalculated & shown again as well + disclose 1-
nature of reclassification 2-amount of each item or class of item reclassified 3-reason for reclassification. See ‘changes in accounting estimates
and errors” chapter. , or IAS 1 .38.
Note: IAS 1.42 introduces notion of IMPRACTICALITY : where it is impractical to calc. comparatives eg if no proper measurements were
made- then need not do it.But there are certain rules- see IFRS.+ then must disclose 1- reasons why not disclosed+ 2- nature of changes had
comparatives been done.
1.7. CONSISTENCY OF PRESENTATION: IAS 1.43 consistency within same period and between periods. It has 2 aspects = 1-consistency
between similar items & 2 consistency over time. This consistency may only be broken if :
1.7.1.1. Required by GAAP
1.7.1.2. Results in more fair presentation
1.7.1.3. Change in entities operations.
1.7.2. If acc.policy changes comparatives must be recalculated and special disclosures made- see relevant chapter & IAS1.42.
5)JSE LISTING REQUIREMENTS:
1. In addition to Companies act & IFRS , the JSE has extra rules to be met for Fin Stats of any listed company as follows.
1.1. AFS must be drawn up in accordance with the national law of the country applicable to the listed company.
1.2. In accordance with with SA GAAP or IFRS , or with foreign national auditing standards acceptable to the JSE or to International Standards
on Auditing.
1.3. Be in consolidated form if it has subsidiaries, (unless JSE otherwise agrees) ,PLUS the listed companies own separate Fin Stats must aso be
published in non-consolidated form if they contain significant additional information.
1.4. Fairly present the Fin Pos , results of operations (Pin Perf), Cash Flows , Ch in Equity of the company.
1.5. Comply Companies Act
1.6. Comply requirements “King report on Corporate Governance “
1.7. The JSE requires that the Annual Reports (not the AFS) should disclose at LEAST the following.
1.7.1. Narrative Statement of how King Report was applied – providing explanations othat enable its shareholders to evaluate how the
principles have been applied.
1.7.2. Statement of EXTENT of compliance and EXTENT of Non- Compliance with King Report, and for what part of year there was non –
compliance & for what part there was compliance.
1.8. The JSE requires that the AFS of listed companies should disclose at least the following:
1.8.1. 1Any Increase in Borrowings
1.8.1.1. Nature of any Increase in Borrowings
1.8.1.2. + Purpose of it
1.8.1.3. + Amount of borrowings authorized by Memorandum of Incorporation/ Articles of Assosiation of it or the relevant subsidiary.
1.8.2. Headline Earnings Per share :
1.8.2.1. For current period & comparatives for the immediately preceeding year.
1.8.2.2. + Itemised Recon between Headline EPS and the earnings used in the calc. of EPS.
1.8.2.3. Headline EPS to be calc. per method in SAICA Circular 7/2002.
1.8.3. Aggregate of Direct & Indirect Interests of the directors in + each directors holding (their companies) in the share capital of the
company
1.8.3.1. distinguishing between beneficial & non-beneficial interests.
1.8.3.2. + any Change or any No-Change in same interests between Fin stats. date & a Date not more than 1 mnth prior to date of AGM
should be disclosed.
1.8.4. No.of public shareholders for each class of listed securities.
1.8.4.1. Also the % of each class of listed securities held by public OR non-public shareholders should be disclosed
1.8.4.2. In the case of non-public shareholders it should be analysed inaccordance with following categories. (listing requirements para
4.25)
1.8.4.2.1. Directors or directors any of its subsidiaries
1.8.4.2.2. Associates of directors or directors any of its subsidiaries
1.8.4.2.3. + Another 4 types – see JSE listing requirements( no time to write it here)
1.8.5. Any shareholders interest over 5% of capital or negative statement if there are no such shareholders.
1.8.6. Details of Share Incentive schemes.( see JSE listing requirements for exact details to be shown here)
1.8.7. Explanation of any difference of >10% from any published forecast/estimate.
1.8.8. No. & status of any unlisted securities.
1.8.9. Details of special resolutions passed by companies subsidiaries ( see JSE listing requirements for exact details to be shown here)
1.8.10.Details of issues of securies for cash during period -( see JSE listing requirements for exact details to be shown here)
1.8.11.Directors emoluments – certain details ( see JSE listing requirements for exact details to be shown here)
59 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

ACTUAL financial statements : Structure And Content Of Financial


Statements

GENERAL ACCOUNTING POLICY IN THE NOTES:


Generally accepted accounting practice
1.1 Generally accepted accounting practice
The annual financial statements are prepared according to the statements of generally accepted accounting . .. . .... practice.
Accounting Policy

The accounting policy of the company is consistent with that of the previous years, and is as follows:
2.1 Measurement basis
The annual financial statements are based on historic cost unless stated otherwise.
2.2 Property, plant and equipment
Depreciation is not written off on land. Depreciation on a plant, buildings, machinery and vehicles . is written off .. at rates deemed
appropriate to reduce the carrying amount of the assets over their . expected useful lives to their .. estimated residual values. The rates and
methods are as follows:
Buildings 2% per year on the straight-line method
Plant 10% per year on the straight-line method
Machinery 15% per year on the straight-line method
Vehicles 20% per year on the straight-line method.

1. The accounting policy on each class of assets must be disclosed.,


a. The basis of depreciation must be disclosed.
b. 2- cost of asset basis or by revaluation must also be disclosed .
c. Also , if held on a revalued basis, whether it is calculated using the Net method or the Gross method.. (look for examples of
some wording here for the cmplex stuff- what do you call net&gross basis).
d. When If you specially decide to roll back a revaluation by using depreciation(subtract new depreciation for year from
revaluation at end of year), to the beginning of year, for a revaluation which was done at end of tear ,so amounts can be
depreciated & used from that beginning of year date, it must be disclosed in the notes under accounting policy for revaluatuons
for that asset class/etc , that this is your method.
e. If the realization of surplus revaluation account amounts is done at time of sale basis or at ime of depreciation basis(wording)
2.3 Other financial assets
Other financial assets are valued at fair value. Listed shares ae .‘aiued at market value. Unlisted .. investments .. .. are revalued every
year at net realisable value to establish the directors’ valuation.
2.4 Inventories
Inventories are valued at the lower of cost, on a first-in-first-out basis, and net realisable value. . .. An appropriate ....part of the fixed and
variable fac:ory overheads are included in determining the . .. cost of work in progress and ....finished goods.
2.5 Revenue recognition
Sales are recognised upon delivery of products or performance of services.
(must show measurement bases used and each specific policy used in fin stats.needed to understand)

PROFIT BEFORE TAX NOTE :


1. COMPENSATION/insurance payout FOR IMPAIRMENT:
a. If you get compensation for impairment or a insurance payout, it must be :
i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed).
ii.Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in
profit/loss for the year. (I don’t know if it goes to asset realsiation account or if it goes separately by itself ?)
iii.Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats :
1. Notes to fin stats :
a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in
Disposals, or in own separate heading called “PPE destroyed in hail storm” any new ssset
bough to replace it goes as per normal in “Additions”
b. Profit Before Tax note: in the normal note called ‘profit before tax” : disclose
i. 1: Amount of loss to item in hailstorm or whatever it was in own line
ii. 2: Amount of compensation received from insurance or wherever in own line
2. IMPAIRMENT recognized in P&L (after portion of reval.surpl. used up)
3. REVERSAL OF IMPAIRMENT.
4.
60 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1) IDENTIFICATION OF FINANCIAL STATEMENTS:
1. IAS 1.51 Fin Stats. to be clearly distinguished & identified as being APART from other info eg value added reports, or sustainability reports etc ,in
annual reports. This is because IFRS DOES NOT apply to these other reports at all.
2. The following info to be indicated prominently, preferably on every page of the reports.: , but allowed to be only once on top of eg electric format
fin stats, where there is effectively only 1 page. The following requirements are met by incl. in HEADINGS only, in columns , notes etc.

2.1. 1-Nameof Entity 2-if any change in Name of Entity from last reporting date then disclose that(??on every page in heading , or hidden in
notes?).
2.2. Whether they cover a Group Consolidated or Single entity
2.3. Date/period
2.4. Type eg SCI or SFP
2.5. Currency
2.6. Level of precision rounded off to eg 000 or 000 000 etc.

) COMPONENTS OF FIN STATS.


1. COMPONENTS OF FIN.STATS.:
1.1. SOFP
1.2. SOCI
1.3. Statement of changes in equity
1.4. STATEMENT of Cash Flows
1.5. Notes to the fin stats. incl. summary of significant accounting policies
1.6. A SoFP as at begin of earlies comparative period when an entity applies an accounting policy retrospectively or makes a retrospective
restatement of items in its fin.stats. or when items in its fin stats were reclassified.
2. FURTHER NOTES ON THE COMPONENTS OF THE FIN.STATS.
2.1. The ”other comprehensive income” may be presented separately in a separate“income stat” or as part of the SCI. If done as a separate
“income stat”. then it should be displayed immediately before the SCL.

2.2. IAS 1 encourages preparers to provide additional info. eg environmental report, statement of added value. A financial overview of the entity
can also be added to include the following info.:
2.2.1. Main factors influenced performance in current period and will continue to do so in future periods
2.2.2. Policy in respect of maintenance & enhancement of performance
2.2.3. Policy in respect of dividends
2.2.4. Sources of funding & policy on gearing & risk management
2.2.5. Strengths & resources of entity not reflected in the stat. of fin pos.
2.2.6. Changes in environment within which entity functions , how it reacts to the changes and the effect thereof on performance.
2.2.7. The content & format of these reports however fall outside the scope of this standard.

SCI
Remember the other comprehensive income is always disclosed with tax already taken out of it ie net of tax. So whether tax expense includes the
tax of other comprehensive income or not, I do not know? Ask . (or is the tax for other comprehensive income not disclosed – maybe only in the
notes? – if ‘tax expense” does include it -it would be a bit wrong so profit before other comprehensive income would have a problem with the
“matching principle”???
SCI : check the questions and answers ‘handout“ from acca 301 from lecturer for all the weird things where the stuff goes into the sci – eg what
goes in distribution costs / admin expenses goodwill written off/ capital gains etc etc- it is very good esp question. 1
1. Rem : distribution costs : include marketing directors salary or depreciation on the delivery vehicle.
2. Admin costs incl: lease costs, loss on sale of asset costs (exept capital gains) depreciation, all salaries incl. auditor , directors etc, bad debts+
(I think , not sure – water & lights, telephone, etc)
3. Other expenses?
SFP
GENERAL RULES
1. NOTE : PER : IAS 1.57 ; the descriptions used and the ordering of items or aggregation of similar items, below are very broad and
may be changed to meet the needs of specific entities eg financial institution. Additional line items, headings and subtotals must be
added when it is needed to understand the SFP- based on liquidity,nature,function of assets & amounts,nature,timing of
liabilities. Quote IAS1 : “the descriptions used and the ordering of items or aggregation of similar items may be amended
according to the nature of the entity and its transactions, to provide information that is relevant to an understanding of the
entity’s financial position.

2. If different measurement bases are used for the same category of assets or liabilities, then DIFFERENT line items should be shown for
each , eg PPE valued at revalued amounts and PPE at historic cost.
3. DEFERRED TAX must not be classified as current or non- current assets/liabilites.
CURRENT OR NON-CURRENT DISTINCTION ,ASSETS & LIABILITES
1. There are 2 Methods of Presenting Current & Non- Current ( see framework chapter before for details of rules for methods below)
a. Method 1 : using Current Assets/Liabilities And Non-Current Assets/Liabilities as headings.
b. Method 2: “Liquidity Approach” : Assets&liabilities are presented broadly in order of liquidity on face of SFP instead of
‘current&non-current headings’.(??example??) However there is a rule that if any 1 amount/item covers less < 1 year and >
61 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
more than 1 year at the same time, then anything over 1 year must be specially disclosed separately as well for that one
amount/item.
c. Method 1 is for entities with a clearly defined operating cycle and Method 2 is where the operating cycle is not that clear, like
financial institutions. ,Note : IT IS ALSO ALLOWED TO PUT SOME ITEMS USING METHOD 1 AND OTHER ITEMS
USING METHOD 2 IF THAT IS MORE RELEVANT.ie mixed mixture of the 2 methods.
IAS 1.54 AT A MINIMUM TO BE SHOWN ON FACE OF SFP
1. Property, Plant And Equipment;
2. Investment Property;
3. Intangible Assets;
4. Financial Assets (Excluding Amounts Shown Under (E), (H) And (I));
5. Investments Accounted For Using The Equity Method;
6. Biological Assets;
7. Inventories;
8. Trade And Other Receivables;
9. Cash And Cash Equivalents;
10. The Total Of Assets Classified As Held For Sale And Assets Included In Disposal Groups Classified As Held For Sale In
Accordance With Ifrs 5 Non-Current Assets Held For Sale And Discontinued Operations;

11. Issued Capital And Reserves Attributable To Owners Of The Parent.


12. Non-Controlling Interests, Presented Within Equity;

13. Trade And Other Payables;


14. Provisions;
15. Financial Liabilities (Excluding Amounts Shown Under (K) And (L));
16. Liabilities And Assets For Current Tax, As Defined In Ias 12 Income Taxes;
17. Deferred Tax Liabilities And Deferred Tax Assets, As Defined In Ias 12;
18. Liabilities Included In Disposal Groups Classified As Held For Sale In Accordance With Ifrs 5;

SFP COMPREHENSIVE SAMPLE :

FRAMEWORK LIMITED
STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER 20.8
Notes Rand
‘000
ASSETS
Non-Current Assets
1-Property, plant and equipment Table
IAS:
+Notes
2-Investment property (This is :Property for leasing out (not financial leases though),property held for long term capital appreciation, etc it is NOT Owner occupied, used for production admin /
IAS:
expressly held for sale/under construction,NOT
3-Intangible Assets ( eg goodwill or could be separate if ‘good reason’) Components
IAS:
-Other intangible assets (if above was separate) of
4-Financial Assets ( eg finance lease receivables or Available-for-sale financial assets /investments , loan - also each could be separate if ‘good reason’.) ?
-Other Financial Assets (eg if above one is separate) (An asset that derives value because of a contractual claim. Stocks, bonds, bank deposits,mutual funds ,& cash but not tangible assets
such as real estate or gold)
5-Investments Accounted for Using the Equity Method (eg: Investment in Associates ) ?
6-Deferred tax assets ?
7- Non-Current Assets classified as held for sale , and assets included in disposal groups classified as held for sale per IFRIC 5 (could also go in ?
‘current assets ?not sure)
8- Any other deemed necessary per conditions IAS [1.58] ?
.
Current Assets
1- Inventories components IAS 2
2- Trade and other Receivables Specified IAS IAS
1 1.78b
3- Cash and Cash Equivalents ?
4- Other Current Assets ?
5- Any heading from “non current assets” above that is within 12 months. ( eg Financial Assets (eg finance lease receivables ) ?
5- Current tax assets ?
6- Biological Assets (maybe also non-current – not sure!) ?
Total Assets
.
EQUITY AND LIABILITIES
1- Issued Capital & Reserves attributable to Owners of the parent Specified IAS1.79
62 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
Share capital IAS1
Retained earnings
Other components of equity
2- Non-controlling interest
Total Equity
.
Non-Current Liabilities (??? I think in increasing order of liquidity remember : payable last first) see page 291 t :chapter 14 : "current liabilities???"
2- Provisions (eg Retirement benefit obligation Long-term provisions) Specified IAS1.78
IAS1 b
3- Financial liabilities (eg Long-term borrowings, could be separate if ‘good reason” )(excl. provisions + trade & other payables) ?
?
Other Financial liabilities ( if above eg ‘loans’ was done separate )
4 -Deferred tax liabilities ? ?
5 -Liabilities included in Disposal Groups classified as held for sale per IFRIC 5 (not sure if current or non current or both?) ? ?
.
Current Liabilities (??? I think in increasing order of liquidity remember : payable last first) see page 291 t :chapter 14 : "current liabilities???"
1- Trade and other payables ?
2- Financial liabilities (eg Short-term borrowings, AND Current portion of long-term borrowings – but could be separate if ‘good reason” )(not provisions + trade &
other payables) ?
Other Financial liabilities ( if above eg ‘Short term Borrowings AND Current portion of long-term borrowings was done separate )
3- Current tax liabilites payable ?
4- Short-term provisions ?
Total Liabilities
.
Total Equity and Liabilities
Example of a different method , not sure if allowed or not, ???+ how does it balance with current Liabilities put in Assets side???

SFP NOTES TO THE FINANCIAL STATEMENTS : further sub-classification of SFP info. required in the
notes or on face of SFP.
1. The detail provided in sub-classifications depends on the requirements of the IAS’s that apply to each Line Item
Presented and on the size, nature and function of the amounts involved namely using the general factors set out in IAS
1.58 to decide what to show:
a. the nature and liquidity of assets
b. the function of assets within the entity; and
c. the amounts, nature and timing of liabilities
1. Basically EVERY line item on SFP must have all their sub-classifications shown in Notes , :
EXCEPT :(not sure yet – see SFP full table above in ‘Notes’ column.)
a. Per IAS 1.78 : The disclosures vary for each item, depends on the requirements of the IAS’s that apply to each
Line Item presented and on the size, nature and function: for example per IAs 1.78
b. PROPERTY, PLANT AND EQUIPMENT are disaggregated into classes in accordance with IAS 16 eg :
i. Land & Buildings
ii. Plant & Machinery
iii.Etc.
c. RECEIVABLES are ( EXACTLY) disaggregated into (vertabim IAS1)
i. Amounts receivable from trade customers,
ii. Receivables from related parties,
iii.Prepayments
iv.And Other Amount
d. INVENTORIES are disaggregated, in accordance with IAS 2 Inventories, into classifications such as eg:
i. Merchandise
ii. Production supplies,
iii.Materials,
iv.Work in progress
v.Finished goods;
e. PROVISIONS are disaggregated into :
i. Provisions for employee benefits and
ii. other items;
63 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
f. EQUITY CAPITAL AND RESERVES Are Disaggregated Into : PER IAS 1.79 Either In The SOF Or The Statement
Of Changes In Equity, Or In The Notes:
i. For Each Class Of Share Capital:
1. The number of shares authorised;
2. The number of shares issued and fully paid, and issued but not fully paid;
3. Par value per share, or that the shares have no par value;
4. A reconciliation of the number of shares outstanding at the beginning and at the end of the
period;
5. The rights, preferences and restrictions attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;
6. Shares in the entity held by the entity or by its subsidiaries or associates
7. Shares reserved for issue under options and contracts for the sale of shares, including terms and
amounts;
ii. Reserves : and a description of the nature and purpose of each reserve within equity.

g. An entity without share capital, such as a partnership or trust, shall disclose information equivalent to that
required by paragraph 79(a), showing changes during the period in each category of equity interest, and the
rights, preferences and restrictions attaching to each category of equity interest.

h. If an entity has reclassified a puttable financial instrument classified as an equity instrument, or (b) an
instrument that imposes on the entity an obligation to deliver to another party a pro rata share of the net assets
of the entity only on liquidation and is classified as an equity instrument between financial liabilities and equity,
it shall disclose the amount reclassified into and out of each category (financial liabilities or equity), and the
timing and reason for that reclassification.

NOTES TO SFP : 100% COMPREHENSIVE EXAMPLE

1. PROPERTY PLANT & EQUIPMENT :


1) The PPE Note Consists of ONLY :
i) A PPE table and sentence at bottom describing special CHARACTERISTICS NAMELY: land address etc.
ii) At bottom of PPE Table : following EXTRA information must be written in sentences for PPE:
(1) address of land
(2) If it is security for any loans etc
(3) name of any valuers and the date amount of any revaluations they did.
(4) any additions to / disposals of this land and date thereof.
2) Note: method of working out cost from carrying amount:
a) For straight line method: EG 20% over 5 years – then after 2 years : 1- acc depr= 20+20% ,2-carrying amount = 100-
(20+20)= 60%. 3- cost = 100/60 X carrying amount.
b) For Reducing balance Method : same as above exept : for 20% on reducing balance method = 1-year 1= 20% 2- year 2 =
20% + (20% X 80%)= 36% 3-year 3 = 36% + (20%x 64 %) =36+12.8=48.8% 4-year 4 = 48% + (20% x 52%) =
48+10.4=58.4% and so on etc. etc.
3) METHODS: use either of:
a) Use straight line ( scrap value+ years of use + same amount off each year to scrap value) or
b) Reducing Balance Method : (20% off each year)
c) Production units method( per no units produced/lifetime units produceable)
4) Selling an asset: Transfer & write out 1-asset 2-acc deprec. both to a ‘Realization Of Assets’ account.Then put price received in
same account –Contra-bank. Then only calc. profit or loss and transfer it ( write-out-in) to a “Profit/Loss On Sale Of Asset”
account.
5) Note: all depreciation or Acc. Depreciation must be in Brackets
6) Note: Don’t for get to subtract depreciation for the current year as well as all previous yrs depreciation from the “disposals at
carrying amount “
7) NOTE: For the movement during year :
a) Disposals of Assets: Put it at carrying amount(not sales amount) – less [pro-rata depreciation to that month+other years
depreciation]
b) Depreciation: include all : incl -rata depreciation to that month for any disposals/sold assets + other unsold assets.
8) Note: for end of year balances:
a) LEAVE out any depreciation from disposals -out of Acc. Depr. , and also leave out costs of disposals out of ‘Cost’.
9) Put : 1) address of land
2) If it is security for any loans etc
3) name of any valuers and the date amount of any revaluations they did.
4) any additions to / disposals of this land and date thereof.
64 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

1. INTANGIBLE ASSETS :
Intangible assets Brand names Licences TOTAL

Carrying amount: Beginning of the year: ( cost – acc.depreciation) xxx xxxx xx


Cost
Accumulated amortisation ------------------- (Brackets) (Brackets)

Additions (include all costs of : installation etc as COST price!)


Disposals (Cost price – Accumulated depreciation ONLY ) --------------- (Brackets) -----------
Amortisation (One Year's including Pro rata for Disposals +Additions) --------------- (Brackets) (Brackets)

Cost ---------------
Accumulated Amortisation(remember to add all up extra mnths to date sold ------------------- (Brackets) (Brackets)
Carrying Amount: End of year: ( cost – acc.depreciation)

2. INVESTMENT PROPERTY:
a. This is :Property for leasing out (not financial leases though),property held for long term capital appreciation, etc
it is NOT Owner occupied, used for production admin / expressly held for sale/under construction,NOT

1. INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD:


a. All details
2. FINANCIAL ASSETS:
1) 3 types :1-Loans&receivables, 2-held to maturity 3-at fair value through profit & loss,
2) All financial assets which are not N-Current: eg, 1-Loans, 2-held to maturity 3-at fair value through profit & loss (buying costs not
capitalized), 4- shares for short term trading
a) The following information must be disclosed in respect of convertible instruments and debentures (non current and
current ):
i) the amount and classes issued

Property Plant & Equipment: Land&BuildingsVehicles Machinary TOTAL

Carrying amount: Beginning of the year: ( cost – acc.depreciation) xxx xxxx xxx xx

Cost
Accumulated depreciation ------------------- (Brackets) (Brackets) (Brackets)

Additions (include all costs of : installation etc as COST price!)


Disposals (Cost price – Accumulated depreciation ONLY ) --------------- (Brackets) ------------ -----------

Revaluations. (Brackets) (Brackets) (Brackets) (Brackets)

Depreciation (One Year's including Pro rata for Disposals +Additions) --------------- (Brackets) (Brackets) (Brackets)

Cost ---------------

Accumulated Depreciation(remember to add/minus all up extra mnths to date sold------------------- (Brackets) (Brackets) (Brackets)
and minus any disposals)
Carrying Amount: End of year: ( cost – acc.depreciation)
65 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
ii) the conditions of conversion and the dates of redemption
iii) particulars of convertible instruments and debentures which may be issued by the company again
iv) that portion which is payable within 12 months of balance sheet date (to be classified as a current liability)

b) The following must be disclosed in respect of loans: (non current and current )
i) the amount of the obligation
ii) the interest rate applicable
iii) the repayment conditions
iv) that portion which is payable within 12 months of balance sheet date (to be classified as a current liability)
v) Whether it is a secured or unsecured loan and by what it is secured exactly , incl. address / erf no. etc.

3) ?Can you just have 1 heading for ALL Financial Assets , or just 1 for ALL loans or 1 for ALL debentures and then in that heading put
the current AND non current in one heading,? Or does half have to go in ‘financial assets ‘ current and the other half in financial
assets n-c (Or ½ in loans current and ½ in loans n-c or all just under 1 heading and separated for n-c and cc in that heading???

4) Financial Assets :
a. Non-Current Financial assets
1. Available- for- Sale Financial Asset /Investment ( does this go to INVESTMENTS” or does it stay here ?,
UNLISTED INVESTMENTS
1000 ordinary shares (cost price 2500) 5000{market value} (you can put ‘at R20 each – but this must be the cost , not
the market value ?? confused so leave out)
LISTED INVESTMENTS
xxxxxxx
a. Current Financial Assets
1. Financial Asset at Fair Value through Profit & Loss
UNLISTED INVESTMENTS
xxxxx
LISTED INVESTMENTS
10000 Ordinary Shares in BCD(ltd) cost 20000 40000 (you seem to only put name .
for listed companies?)
2. Trade & other receivables( 43000+2000) 45000 (does this go here?)
3. Loans and Receivables:
Loan to a director(loan interest free and repayable Following year) 50
Staff Loans ( loans interest free repayable following year) 100

1) INVENTORIES:
Inventories:
a. Finished goods 10000
b. WIP 100

1) PRELIMINARY COSTS AND SHARE ISSUE COSTS UNDER WHAT DOES THIS GO? EQUITY SECTION OR
WHICH HEADING IN ASSET SECTION? “FINANCIAL ASSETS” OR WHAT???

2) EQUITY:
66 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
i) FOR EACH CLASS OF SHARE CAPITAL:
(1) The number of shares authorised;
(2) The number of shares issued and fully paid, and issued but not fully paid;
(3) Par value per share, or that the shares have no par value;
(4) A reconciliation of the number of shares outstanding at the beginning and at the end of the
period;
(5) The rights, preferences and restrictions attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;
(6) Shares in the entity held by the entity or by its subsidiaries or associates
(7) Shares reserved for issue under options and contracts for the sale of shares, including terms and
amounts;
ii) RESERVES : and a description of the nature and purpose of each reserve within equity.

b) IF AN ENTITY HAS RECLASSIFIED : a puttable financial instrument classified as an equity instrument,


or (b) an instrument that imposes on the entity an obligation to deliver to another party a pro rata share
of the net assets of the entity only on liquidation and is classified as an equity instrument between
financial liabilities and equity, it shall disclose the amount reclassified into and out of each category
(financial liabilities or equity), and the timing and reason for that reclassification.

RESERVES
Reserves should be classified under two main headings, namely:
1) non-distributable reserves
2) distributable reserves
3) The movement on each reserve during the current year must be disclosed in the statement of changes in equity. The
nature and purpose of reserves need to be disclosed.

6-Other Reserves:
Non-Distributable reserves
CRRF 10000
Distributable Reserves
Reserve on revaluation of property 15000

SCI
1) PER IAS1.81 the SCI may be presented as one unit or 2 separate statements, one for ‘Other comprehensive income” and
the other for the rest of the SCI. Profit attributable to Parent – N-C interest and ‘Other comprehensive income” attributable
to Parent – Minority interest gets shown on each page separately – one on one page , the other on the other page.
2) 85 An entity shall present additional line items, headings and subtotals in the statement of comprehensive income and
the separate income statement (if presented), when such presentation is relevant to an understanding of the entity’s
67 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
financial performance. (the ordering and descriptions of line items may also be changed - if relevant to – understanding -
financial performance) The factors to consider are , amoungst others, esp.
a) materiality
b) nature
c) Function
3) IAS 87 An entity shall not present any items of income or expense as EXTRAORDINARY ITEMS, in the statement of
comprehensive income or the separate income statement (if presented), or in the notes.
4) RECLASSIFIACTION ADJUSTMENTS: these can be shown either on the ‘face’ or in the notes. If shown on the face
they are displayed in the ‘Other Comprehensive Income” section just below the line item they come from in the current or
past year – just shown as “Less …..so and so…eg Less :Reclassification adjustments for gains incl. in P/L” below the
‘adjustments for gains ‘ line item, and if shown in notes then the exact FULL ‘other comprehensive income statement’
that would be shown on the face is shown in the notes, -EXCEPT it must start with ‘Profit after tax’ for the year though –
AND on the ‘face’ just the second “less….” Line is left out each time – see full example below in ‘examples’ section.
5) An entity shall disclose reclassification adjustments relating to components of
a) other comprehensive income.
b) 93 Other IFRSs specify whether and when amounts previously recognised in other
c) comprehensive income are reclassified to profit or loss. Such reclassifications are
d) referred to in this Standard as reclassification adjustments. A reclassification
e) adjustment is included with the related component of other comprehensive
f) income in the period that the adjustment is reclassified to profit or loss.
g) For example, gains realised on the disposal of available-for-sale financial assets
h) are included in profit or loss of the current period. These amounts may have been
i) recognised in other comprehensive income as unrealised gains in the current or
j) previous periods. Those unrealised gains must be deducted from other
k) comprehensive income in the period in which the realised gains are reclassified
l) to profit or loss to avoid including them in total comprehensive income twice.
m) 94 An entity may present reclassification adjustments in the statement of
n) comprehensive income or in the notes. An entity presenting reclassification
o) adjustments in the notes presents the components of other comprehensive
p) income after any related reclassification adjustments.
q) 95 Reclassification adjustments arise, for example, on disposal of a foreign operation
r) (see IAS 21), on derecognition of available-for-sale financial assets (see IAS 39) and
s) when a hedged forecast transaction affects profit or loss (see paragraph 100 of
t) IAS 39 in relation to cash flow hedges).
u) 96 Reclassification adjustments do not arise on changes in revaluation surplus
v) recognised in accordance with IAS 16 or IAS 38 or on actuarial gains and losses on
w) defined benefit plans recognised in accordance with paragraph 93A of IAS 19.
x) These components are recognised in other comprehensive income and are not
y) reclassified to profit or loss in subsequent periods. Changes in revaluation
z) surplus may be transferred to retained earnings in subsequent periods as the asset
aa) is used or when it is derecognised (see IAS 16 and IAS 38). Actuarial gains and
bb) losses are reported in retained earnings in the period that they are recognised as
cc) other comprehensive income (see IAS 19).

SCI: AT A MINIMUM ITEMS TO BE PRESENTED ON FACE OF SCI.

1) An Analysis of EXPENSES note , note not income, Classified based on either their NATURE or their
FUNCTION , whichever info. is more “reliable and more relevant” , must be presented , and is encouraged
by IFRS to be shown on the face of SCI , but it seems this could also be in the notes somehow.
2) As a minimum, either in the NATURE or FUNCTION of expenses format , the statement of comprehensive
income shall include line items that present the following amounts for the period, so in the ‘functions‘
format the items that would be included in below headings for ‘nature ‘ format would just have to be
presented separately in the function format.
i) REVENUE
ii) FINANCE COSTS
iii) ASSOCIATES & JOINT VENTURES : share of the profit or loss of associates and joint ventures
accounted focusing the equity method;
iv) TAX EXPENSE
v) DISCONTINUED OPERATIONS : a single amount comprising the total of :
(1) the post-tax profit or loss of discontinued operations
(2) and the post-tax gain or loss recognised on the measurement to fair value less costs to sell or
on the disposal of the assets or disposal group(s) constituting the discontinued operation ;
vi) PROFIT OR LOSS ;
vii) ASSOCIATES & JOINT VENTURES : share of the other comprehensive income of associates and joint
ventures accounted for using the equity method; and
viii) TOTAL COMPREHENSIVE INCOME :
(1) each component of other comprehensive income classified by nature (excluding amounts in (h));
(2) An entity may present components of other comprehensive income either:
(a) net of related tax effects, or
68 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(a) before related tax effects with one amount shown for the aggregate amount of income tax
relating to those components.
ix) TOTALS : income as allocations for the period: ( (a) &( b) below may be shown on separate
statements if separate statements are used for both)
(a) profit or loss for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.
(b) total comprehensive income for the period attributable to:
(i) non-controlling interests, and
(ii) owners of the parent.

SCI COMPREHENSIVE SAMPLE in NATURE and FUNCTIONS formats : in both 1 and 2 statement format.
1) One Example is ‘Nature ‘ in one statement format , the next is ‘Nature’ in 2 statement format . THEN follows ‘function’ in 1 statement
format ,

ONE STATEMENT FORMAT : SCI in “NATURE” of “EXPENSES” (note not ‘income’) FORMAT :
STATEMENT OF COMPREHENSIVE INCOME for The YEAR ended 28 Feb 2007 (over a specific period)
69 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
NOTES R
REVENUE COMPLEX IAS 18
Cost of Sales :Rem: for WIP work in progress accounting type, REM to (xxxxxx)
1- Depreciation on FACTORY PLANT (not buildings or delivery vehicles) is included in cost of sales, leave
out of anywhere else in the SCI , not in admin expenses with all the other depreciation costs like cars etc!!!
2-Salaries of Factory Workers is Included here (not admin staff , or marketing staff). eg not in “administration
expenses” with other salaries! Does this happen in NON- WIP type account as well.-no matter what type of
entity, you always do this or not?? For both of these?
Gross Profit TOTAL
Other Income xxxxx
Bad Debts Recovered Xxxxx
Discount received Xxxxx
Rent or(next line)Commission/etc. income Xxxxx
Distribution Expenses. ( sales staff salaries , depreciation on delivery vehicles, Advertising costs!!!delivery (BRACKETS)
costs etc.)
1- REM : salaries of all sales staff are ALLWAYS included here .( in the notes they go in normal place ie
“profit before tax note” , but here they go in here, and not with other salaries in “administration expenses”!)
2-depreciation on delivery vehicles goes in here, but other depreciation goes in other headings, not here.
3-Advertising costs go in here!!!!
Discount Allowed (where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxx
Depreciation(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’)
Carriage on "Sales" (not purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other Xxxxxx
Packaging (also not in purchases ! ) (where – here or in another heading below ie ‘Admin’ or ‘Other Xxxxxx
Advertisements(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxx
Wages and salaries(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxxx
Water and lights(where – here or in another heading below ie ‘Admin’ or ‘Other Expenses’) Xxxxxxx
Administrative All other depreciation that does not go elsewhere . Expenses what goes in here?
Other Expenses
Share of P/L of Associates & Joint Ventures accounted focusing the equity method
Share of P/L of Associates & Joint Ventures: (a separate line for other comprehensive income must also be
shown , ???don’t know where? somewhere)
Discontinued Operations : post tax gain /OR loss , incl. assets sold or value of to be sold.(where does this go: ie
it is supposed to be post tax!)
Finance Costs (BRACKETS)
Interest on Long term Loan: MUST apart Xxxxxxx
Interest on Bank Overdraft: Must apart Xxxxxxx
Interest on Debentures Xxxxxxx
Profit before Tax TOTAL
INCOME TAX EXPENSE TOTAL
Profit (for the year) TOTAL
OTHER COMPREHENSIVE INCOME( the tax for this can be shown as a total like here ,or not shown and TOTAL
just pre-deducted from each item shown below )
Reclassification adjustments (see IAS 1.93-97 for more)

Gains on Property Valuation (Changes in revaluation surplus relating to PPE)

Actuarial gains/losses on defined benefit plans (recognized outside P/L)

Exchange differences on translating foreign operations

Available for sale financial Assets (Gains/Losses on remeasuring available for sale financial instruments. )

Cash Flow Hedges : (Effective portion of gains/losses on cash flows )

Share of other Comprehensive Income of Associates

INCOME TAX EXPENSE relating components of other Comprehensive Income.(or items can also be shown net of tax and leave this
heading out)

TOTAL COMPREHENSIVE INCOME FOR THE YEAR


70 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

SCI : NOTES TO THE FINANCIAL STATEMENTS


1) CRITERIA WHEN TO DISCLOSE : IAS 1.97 When items of income or expense are material, an entity
shall disclose their nature and amount separately – either in the notes or on face –
a) IAS 1.98 Circumstances that would give rise to the separate disclosure of items of income and
expense include:
i) Write-downs of inventories to net realisable value or of property, plant and equipment to
recoverable amount, as well as reversals of such write-downs;
ii) Restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
iii) Disposals of items of property, plant and equipment
iv) Disposals of investments;
v) Discontinued operations;
vi) Litigation settlements; and
vii) Other reversals of provisions.
2)
71 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

1. PROFIT BEFORE TAX :


Profit before tax is disclosed after taking the following items into account , amoungst others:
i. Any weird stuff: like depreciation or advertising costs or staff salaries of “Distribution costs”, or when using WIP
accounting plant depreciation & factory workers salaries that go in “Costs of sales ”, DO NOT GET TREATED
SPECIAL HERE, they just go in the notes as per usual with all the other depreciation or salaries or whatever!!!
ii. IAS 1.104 says certain things get incl. in this note for ‘function’ method , but not for “nature “ method . See ias 1!!!!!??
Can you add them in the “nature” not withu tloosing marks, or NOT??? Ie : staff costs &depreciation?
iii. Depreciation
iv. Dividends received
v. Staff costs /salaries
2. INCOME TAX EXPENSE :
i. Current tax
ii. Deferred tax
72 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1. Tax Rate Recncilliation.:
a. Accounying profit
b. Tax at X 28%
c. Less / add all differences
d. =ACTUAL FIGURE IN SCI
e. .
73 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

3…..REVENUE : IAS 18 (AC111) ; SIC31(AC431);


ED204; CIRCULAR09/06; IFRIC12(AC445);
IFRIC13(ac446); IFRIC 15 (AC448)
EXAM QUESTIONS GUIDE:
1. Bad debts : mention uncollectable amounts already recognized as revenue NOT deducted but seen as an EXPENSE – for 1 Mark ( !
even if no bad debts happened in question! )
2. Measurement at FAIR VALUE : for all questions mention this 1 mark.
3. Discount:
a. Split into Possible discount / Revenue and only a portion is recognised as Revenue immediately ,
b. Discount only recognized permanently if Payment before final date to claim, ELSE
c. Possible Discount is reversed back into Sales recognized as Revenue because..
d.
4. Credit Terms:
a. “Installments” or / and “Later Payment” means : Split into a financing transaction , (incl. a “lower” rate than market.)
b. Discount rate determined by
i. Market Rate
ii.OR Rate Implicit in transaction
c. Interest is Recognised AS IT IS EARNED & on a TIME-PRPORTION BASIS.
5. SALES : 3 X Probability of flow + 2 X Measurement = 5 Points. 2 MARKS per point : - 1-give the rule first ,2- then how rule works in
question.
a. REM : indication benefits will flow … contractual ‘installments to be paid” term(legal weight) = 1 MARK, and Deposit
already paid = 1 EXTRA MARK since incentive to not loose deposit.
6. SERVICE : 1 X Probability of flow + 3 X Measurement = 4 Points, 2MARKS per point : 1-give the rule first ,2- then how rule works in
question
7. ROYALTIES/DIVIDENDS/INTEREST : just mention : Probability of Flow + Measurement at fair value , then:
a. Interest = effective interest method.
b. Royalties = per contract
c. Dividends = approval by AGM after BOD .

BACKGROUND:
1. IAS18 deals with 1-WHEN and at 2-WHAT VALUE revenue must be recognized.
SCOPE
2. IAS 18 DOES NOT INCLUDE ‘OTHER INCOME’ . “REVENUE” IS NOT “OTHER INCOME” : see definition of revenue below :
it says for ‘normal operations’ and thus DOES NOT INCLUDE any income that is not from ‘normal operations’ of entity. “Other income”
like capital “gains” or interest from money lent out if it is not a part of the core business of the entity etc is not covered by IAS18. Book says
‘income’ and ‘revenue are 2 VERY different terms here.
3. What TYPES of REVENUE DOES & DOES NOT - IAS 18 deal with ? (any income that has actually been classified as revenue, even
certain types of this revenue are covered by other IAS’s , and not IAS18 ; as follows)
3.1. It deals with the treatment of revenue arising from the following events :
3.1.1. Sale of goods
3.1.2. Rendering of services (except construction contracts eg surveyors, dealt with under IAS11.)
3.1.3. Use by others of assets of the entity,yielding interest,royalties,dividends
3.2. IAS 18 DOES NOT DEAL WITH REVENUE from :
3.2.1. Lease agreements
3.2.2. Dividends from investments that are equity accounted
3.2.3. Insurance contracts of insurance companies
3.2.4. Changes in the fair value of financial assets and liabilities, or the disposal thereof
3.2.5. Initial recognition and changes in the fair value of biological assets and agricultural produce related to agricultural activities
3.2.6. The extraction of mineral ores
3.2.7. Changes in the value of other current assets
3.2.8. initial recognititon of agricultural produce
RECENT IMPORTANT CHANGES
1. The treatment of discounts rebates & extended settlement terms was treated differently in SA to the rest of the world. Thus circular 09/06
was re-issued in 2006 to further explain these matters.
2. CIRCULAR 09/06 STATES THAT : cash & settlement discounts must reduce revenue/purchase costs of inventory ,as is the case with
trade discounts..It must NOT be shown under other income/expenses as an expense item or an income item discount granted NOR as
discount received.Further more rebates need not necessarily be offset against revenue/purchase cost of inventory –the treatment would
depend on the applicable terms when these are granted.Deferred settlement terms would lead to the separate recognition of finance income
74 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
or expenses (in addition to the revenue or purchase cost of of inventory recognized) where the settlement term is extended beyond the
normal credit term for the specific operation or business.
DEFINITION:
Defiition :Revenue :
is the gross inflow of economic benefits during the period
arising in the course of the ordinary activities of an entity (note – so ‘other income’ is not covered)
when those inflows result in increases in equity, other than increases relating to contributions from equity participants.

Definition :Fair value


is the amount for which
an asset could be exchanged
or a liability settled
between knowledgeable, willing parties in an arm’s length transaction.

1. NOTE: amounts received in an agency relationship or taxes eg vat received, are both not revenue but held for other parties.
MEASUREMENT AND RECOGNITION REQUIREMENTS OF REVENUE: PER IAS18
1. MEASUREMENT:
At Fair Value of Consideration received or receivable.(see definition of fair value)
2. RECOGNITION:
2.1. Probability of Future Economic Benefit (flowing to the entity- there must be probability of)
2.2. Requirement of Reliable Measurement (must be able to be measured)

1- MEASUREMENT OF REVENUE:
1. Note: for barter transactions , IAS 18 revenue says to use 1st Fair value of item received , But PPE IAS 16 says
to use Fair Value of item given up!

2. MEASUREMENT OF REVENUE :as per IAS 18 , revenue must be measured at ONLY the fair value of the consideration received or
receivable : ie Definition :Fair value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable, willing parties in an arm’s length transaction.
3. SUBSTANCE OVER FORM OF TRANSACTIONS OCCOURING SIMULTANEOUSLY
3.1. One must use ‘substance over form’ to decide where all the following transaction get split or not.
3.2. Sales Commission : does it get offset against revenue – NO , it is an expense
3.3. Sale & Leaseback : funny enough this is viewed as a single transaction – not 2 separate. See ‘Leases’
3.4. Maintenance Plan included in Price of a Car : the single transaction must be split into 2 separate transactions.
Then the maintenance part goes to an “Accrued Maintenance Plan Income” account and each year the
maintenance value done that year is transferred to “Maintenance Income” from the accrued account and
only then gets recognized as income/revenue for the year. Before that it is still unearned ! (Is the unearned
part left in the account a liability or what – under what heading does it go in the Fin Stats? is it ‘owed to
buyer of car” so a long term liability with a short term portion (the next 12 months portion coming) or how
exactly does it get treated?
3.5. Collections made on behalf of third party : eg VAT : This must be split as it is NOT part of revenue at all!!also any other collections
made on behalf of a 3rd party gets treated the same way.
4. SWAPPING SIMILAR GOODS When goods or services are exchanged or swapped for goods or services which are of a similar nature
and value, the exchange is not regarded as a transaction which generates revenue. Eg suppliers swap milk / oil in different regions to supply
demand timeously. But if the goods are dissimilar it IS recognized.(how will you record this is in your books?- Sale invoice = sold = 1 truck
of milk , price charged =1 truck of milk. , or do you issue no invoice- what will your General Journal entry be?)

5. DISCOUNT : Trade disc./Cash disc. /Rebates/& SETTLEMENT DISCOUNT : as per world standards SA had to start using new
method of treating discount(+/_ 2005) IAS18.10 & Circular 09/06
5.1. HISTORY:
5.1.1. Because of this, circular 09/06 was reissued in 2006 , which stated , amounst other things, that : cash & settlement discounts must
reduce revenue/purchase costs of inventory ,as is the case with trade discounts. It must NOT be shown under other
income/expenses as an expense item or an income item discount granted NOR as discount received.
5.1.2. The discount/interest must be accounted for in the normal profit/loss section of the Fin.Stats. as normal “Finance Interest” over
the effective life/period of the transaction.(like a loan)(also as per IAS 39)
5.1.3. NOTE: There are 2 big types of discount specially dealt with by accounting standards, and there is a big difference between
them: 1-Settlement discount granted and 2-Finance charges . It might seem as if they both deal with finance charges, and that any
income from interest here should be recorded as finance charges, BUT NOTE: IT IS NOT done this way : Settlement discount is
treated as part of (written back to) SALES(REVENUE) in SCI if the debtor does not pay in time,??? BUT “Finance charges” for
the credit granted in a sale (??or is it a purchase??) are treated as “Finance Charges” (is it OTHER INCOME finance charges?
in the SCI.???
5.1.4. :The required accounting that it indicated typically gives rise to an adjustment to the amount of revenue recognised on a sale, or
the cost of purchase of an item of inventory.(vertabim circular 09/06)
75 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
5.2. CASH DISCOUNT TRADE DISCOUNT & VOLUME REBATES : : previously cash discount was recognized in SA as a separate
expense, But as per IFRS it should be ignored completely, and thus treated as a plain reduction in the price same likea trade discount-
and not shown in the books at all. Also ,incorrect treatment of this in any previous years, if material , must also be corrected
retrospectively in terms of IAS 8. Trade discounts & volume rebates are to reduce the amount of revenue (PRICE) directly ,and are not
recognized as an expense , so they just reduce the price you charge and are NOT recorded separately anywhere in the books.
5.3. REBATES :
5.3.1. There are many different kinds of intricate rebates which companies may give. (like special arrangements) Generally ALL the
rebates need to be estimated at the time of sale and be shown as a reduction in revenue.
5.3.2. Some rebates are only given once purchases for the year have gone over a certain level for that customer, then he is refunded the
rebate of all purchases to date. It seems one must make a ‘ Possible rebate’ separate account and split revenue , same as with a
possible settlement disclount method here. ??not sure??( per circular 09/06.21 reimbursments of selling expenses are not included
in cost of sales/inventory per circular 09/06.21 ?)– so if you give a rebate like this to someone – not sure if you must deduct from
revenue or not-ANS: own idea is probably :reimburse agent’s selling expense then this is a selling expense on your part.
5.4. SETTLEMENT DISCOUNT RECEIVED :
5.4.1. This is not really part of revenue, but part of purchases ie cost of sales. But ….

5.5. SETTLEMENT DISCOUNT GIVEN :


5.5.1. Q – is the ‘Allowance acc.for discount’ a debtor contra account for the SFP fin stats- just to be written off directly against debtors
and only debtors nothing else at all (no end of year adjustments etc) when transferring from Trial Balance to SFP.?
5.5.2. For method 1 & 2 separately , how does it work with “5% for 30 days or 10 % for 10 days “ discount terms offered on the
sale depending when you pay , and writing back if they take the 30 days after you made (prudence) provision for 10%.
5.5.3. BIG QUESTION : pg 336& 337 descr. Acc book : For method 1 & 2 separately, how does VAT get accounted for
together with the other entries, esp. for the write back of both if the discount is not taken? REM you charge 100% VAT
(without deducting the discount)on INVOICE and must pay sars this BEFORE the customer even decides whether is is
going to take the discount or not ---???
5.5.4.
See circled point in blue pen pg 337 descr. Acc book, how are sales shown at the “net” amount? – ONLY in fin stats by
just subtracting settlement disc. Granted, or is settlement disc granted a separate item in SCI (UNDER WHAT
HEADING IN SCI DOES IT GO?) – OR IS sales reduced in the general ledger by a journal entry to follow the IAS 18
revenue rule?how can it be left at pre- discount level for this rule?
How does pastel accounting deal with this – auto or manual – how does one do manual for 100000 transactions?what
about other accounting packages?
5.5.5. Settlement Discount must be deducted from revenue at initial recognition.(per circular 09/06) it must be estimated on the selling
date and be presented as a reduction in revenue. There are several different ways to address the problem and how to jounalise it : 2
main methods are shown here , NET method is the one chosen by UNISA. net treatment is probably more correct (initial sale but
can lead to VAT problems , but gross method more effective, from an accounting perspective.
5.5.6. HISTORY : SA never used to do this but per circ 09/06 now must. In order to comply with International Accounting
Standards, South Africa must take the necessary corrective action when accounting for settlement discount. At
very least, it should be ensured that instead of disclosing an expense discount allowed, or an income discount
received, these amounts should be offset against revenue or the cost of the purchase respectively. At the
reporting date the appropriate adjustment for settlement discount not yet claimed should be made. The way South
African entities have interpreted these situations therefore represents an incorrect application of previous GAAP in the past and
should be treated as a prior period error, if material. In terms of IAS 8 - Accounting policies, Errors and Changes in
Accounting Policies, the error should be corrected retrospectively and prior period figures restated – ie not a change in
accounting policy but an error.. Where amounts are material, separate disclosure is required to highlight to the users of the
financial statements the change in the measurement bases applied to revenue and the amounts of consequent adjustments to each
financial statement line item affected.
1.1.1. VAT : note that vat is charged by you on the settlement discount in the original sale, and is charged on the possible ‘discount’ at
the normal rate14% and paid to SARS. But if the discount is then eventually taken and not forfeited, then the VAT is claimed
back as a VAT input adjustment. The GROSS method below is probably better for Vat treatment , the NET may lead to problems
with vat charged on sales.
1.1.2. 2 METHODS OF JOURNALISING :
1.1.2.1. NET METHOD : The “allowance account for settlement discount’ method .(Preferred by UNISA).
1.1.2.1.1. See example below. For method
1.1.2.1.2. VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
1.1.2.1.3. Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or
not?)
1.1.2.1.4. WRITEING BACK : If Discount is Not taken: simple :you write ‘allowance account’ back into ‘sales’ONLY. No
VAT adj. because Vat is Originally accounted at full 100% per SARS rules - and even paid already probably.
1.1.2.2. GROSS METHOD :
1.1.2.2.1. See Example below for method
1.1.2.2.2. VAT: how does this get done here – and write –back ? REM 100% Vat charged on invoice.!
1.1.2.2.3. Allowance Account for Discount : this is a (SFP) liability account, goes with Current/Long term liabilites(true or
not?)
1.1.2.2.4. “Settlement Discount Granted Account “: this is either 1- a revenue contra account like ‘acc depr’ is to assets and
never shows in SCI , only in the books , or it is a 2- account that show in the SCI under ‘admin expenses’ and 3- is it
76 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
cleared each year end to ‘trading account’ to get profit so it is zero at begin new year (BUT what happens to
transactions where it has not been decided yet if customer takes discount or not at year end?)
1.1.2.2.5. WRITEING BACK : If Discount is Not taken: simple :you write ‘Allowance for Settlement Discount account’ off
against CONTRA ‘Settlement Discount Granted ’ account ONLY. No VAT adj. because Vat is Originally accounted
at full 100% per SARS rules - and even paid already probably.
1.1.2.2.6. As per tutotial letter, this is another way of doing the gross method:(how does this work exactly, which is the
right one and what does one do here??)

1.1.3. Matching Principle : The allowance is just written back against sales if the debtor does not pay in time- so it could cause an
increase in sales in a future year if the period allowed extended into a future period. So if the write –back to sales occours in a
future period this is half logical because you now earned “interest” of sorts in a follow up period for the guy not paying in time so
you cancelled his discount ,but half not logical because this discount cancelled which is more similar to “interest” now has to get
written up into “sales” ???but it is not shown as interest but as sales so the matching principle seems to go a bit wrong here????.

1.1.4. See the 2 Methods : 1- GROSS and 2- NET method of journalizing in example below:
77 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

2. CREDIT TERMS GRANTED / TIME VALUE OF MONEY / DEFERRED PAYMENT:


2.1. IAS 39.43 as well as Circular 09/06 confirm that the time value of money must be taken into account when the fair value of money
and an associated debtor is measured. Circular 09/06 also specifically refers to interest free credit terms eg 6 mnths interest free : here it
refers us to : IAS 39(AC 133) – Financial Instruments: Recognition and Measurement : it applies to the receivable in such
circumstances, and the effect of the time value of money should be taken into account in these instances as well. Even if normal credit
terms allow just 7 or even 30 days interest free credit, these 7 – 30 days must be taken into account as a finance charge and thus also a
reduction in revenue The way South African entities have interpreted these situations therefore represents an incorrect application of
previous GAAP in the past and should be treated as a prior period error, if material. In terms of IAS 8 - Accounting policies, Errors
and Changes in Accounting Policies, the error should be corrected retrospectively and prior period figures restated – ie not a
change in accounting policy but an error.. Where amounts are material, separate disclosure is required to highlight to the users of the
financial statements the change in the measurement bases applied to revenue and the amounts of consequent adjustments to each
financial statement line item affected. ( (if it is a low interest rate is used then must you go and find out what the current standard rate
for those transactions is and use only the difference(not all because you are going to charge him the low interest at the end of each
month anyway??? Yes or no) as your (?extra?) financeing allowance “accued finance income” (?and &?) revenue? (????And the
same for purchases you make – do you also do this y or n????)
DISCOUNT RATE USED is EITHER :
2.1.1. Current Interest Rate applicable to similar circumstances with a similar risk OR
2.1.2. OR Interest Rate Implicit in the transaction , in other words , the rate that discounts the transaction amount to the current cash
price. (it seems if the implicit interest rate is 0 or lower than ‘ruling interest rate’ then use the “ruling similar type interest rate” –
is this true?)
2.1.3. OR If neither the implicit NOR the current interest rate is known, then the selling price is recorded as the normal cash price
and the difference between the ACTUAL price charged and the normal cash price is treated as interest.
78 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
Edgars for example : sells for both cash or 6 mnths interest free credit at the same price. Here the implicit interest rate OR the ruling
interest rate for similar transactions must be used to determine the fair value of revenue & the debtor, taking into account the time value
of money.(WHAT DO THEY END UP USING- IMPLICIT=0 or RULING = 29% etc???-Ans : it seems it is a rule to use the ruling
one)

NB : CALCULATING THE INTEREST PORTION using time value of money formula !NB!
1. Watch out , it is a Very tricky way to do this on calc. even though it looks easy!!! There are 3 different ways a question could be
asked :
a. ‘IRR’ …For Many Unequal INSTALLMENTS : rather use this easy method for everything, it will always work! but
you can also use the other 2 mad methods below sometimes
i. For this method you use the IRR and NPV method on calculator(not AMRT) ??? how to do it yet.

b. ‘PV’ …For One INSTALLMENT : The full amount is paid on last minute of last day :
i. Easy : USE the calculator with sale price as FV , then PV = REVENUE (without any interest) and FV-PV=
interest portion. – there is only 1 PMT so treat it as a PV calc.
c. ‘PMT’ …For Many equal INSTALLMENTS : If the amount is paid off in installments each period : so you MUST
USE the PMT function on calculator ( annuity formula NOT PV or FV formula) to calculate the total interest paid off.
THIS IS BECAUSE EACH INSTALLMENT REDUCES THE PRINCIPLE SO THE INTEREST RATE ONLY WORKS
ON THAT LEFT, NOT THAT PAID OFF ALREADY!!!!!!!. Watch out , it is a Very tricky way to do this on calc. even
though it looks easy
i. For compounded MONTHLY =!!! WATCH OUT HERE---- :Only PMT & N & i = “Calc” PV works here,
do not include the principle as PV or FV , it is even impossible to get the FV ie ‘actual price charged’ from this
PMT method ,because that is like saving up , you can only get PV. THIS IS A VERY UNIQUE calculation here
that only works this one tricky way!!!! Watch out! ( REM for i it is eg: 12% / 12mnths= 1% per N if using
months)
ii.For compounded YEARLY = if you are working in years as period there is no problem , just use the method
above , but if you are working in months : same as above in (i) EXCEPT you must first work out your APR
interest rate from your EFF annual one they give you.(since it is compounded yearly then the yearly quoted rate is
a eff not a apr , but it would be seen as a apr if compounding was mnthly ie: just visa versa.) So just enter 12(x,y)
& 2ndFuncAPR. (I think, not sure!) Then above method after.Then you can divide this apr by 12 to get the
monthly interest rate to use in (i) above method as usual from there on.
2. Note : if the question says the normal interest free credit term of the company is 30 days, but 6 months was given in this case, just
ignore the 3o days thing – it is a red herring, use the normal standard method over full 6 months still.

3. For interest sakes only: To get the TOTAL Interest in ‘%’ OVER 2 YEARS IF ONLY GIVEN p/a interest , Calculating for 1 year
is easy, but if it says 10% per year over 2 years, you must use FV formula or calculator to work it out. Just ALLWAYS use “100”
(ie %) as the PV amount for FV formula : = PV x ( 1 + i) t = 100 .(for 10%pa over 2 yrs = 100x 1.01 2=121) Then your answer
LESS 100 will be the interest charged in %. So the total interest was 121-100=21% .BUT to get the interest you say 21 % / 121% x
SalePrice = interest portion to go to “Accrued Interest”(not 21/100! ). REM for FV formula use 10% as “0.1” decimal !
JOURNALISATION method
1.1.1. NB : EVERY END OF MONTH MUST ?? the months finance charges are transferred from “ACCRUED INTEREST
INCOME” to “INTERESTS INCOME” , not just all at end of term or when debtor pays , or only at end of term/or payment
date??when/how? AND at end of Fin YEAR do you have to do any adjustments to account for interest actually earned to date or
not? – if it is not done monthly but at end of term? How does this work?
1.1.2. The amount you work out as being the “finance charges” per circular 09/06 must deducted from REVENUE/ SALES and be
separately transferred to an allowance account called “Accrued Finance Income” UNTIL the debtor pays, and not sure? Either at
end of term OR each month end OR at Fin Yr end + Term End - that months portion of interest now definitely incurred then gets
transferred again to “Finance Income(interest)” account??: The reason you use an allowance account is because you are not sure if
the debtor will pay earlier than his 6 months, because if he DOES PAY EARLIER than the credit term granted , for the months he
DID get credit, that % part of the “allowance account” must go to “INTEREST INCOME”, and for the months he did not take
credit due to paying early, that part must go BACK to SALES/REVENUE from “Accrued Finance Income”.( it is just a
temporary holding account)This only happens till end of term granted, thereafter it would be a separate penalty interest that would
be raised only !(WHERE DOES ‘ACCRUED FINANCE INCOME” LEFT AT FIN YEAR END , ACTUALLY GO TO????-
TRANSFERRED AS A ‘adjustment to FINANCE INCOME or to SALES through the General Journal or just added to finance
income WITHOUT JOURNALISING AN year end adjustment like some other stuff is done.?)
1.1.3. GOODS RETURNS: if goods are returned for a credit both revenue + interest + accrued interest must be written back!
1.1.4. Explained : IF THE DEBTOR PAYS EARLY :for the months he DID get credit, that % part of the “allowance account” must go
to “interest income”, and for the months he did not take credit due to paying early, that part must go BACK to
SALES/REVENUE?tru or not?.So if he pays early then the amount you deducted from SALES to treat as an interest charge in
order to ‘pretend’ it is interest to'satisfy circular09/06, would be wrong. So you send the ‘wrong’ part back to “SALES” .Note:
this does NEVER apply where you actually charge a customer interest as part of his credit terms. That would be treated as a
normal ‘loan’ and no ‘accrued finance income’ would be raised you would just book the ‘interest charges’ every month- this
“accrued finance income” is only for “no finance charges are actually openly charged” and you have to “pretend” that they are for
the sake of circular 09/06 and IAS 18
1.1.4.1. see example below for JOURNALISATION.
79 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

USE financial calculator above one and below one.

2- RECOGNITION OF REVENUE
80 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

yi
(1)REQUIREMENTS FOR RECOGNITION
REM definition of revenue :the ‘probable’ future economic benefit part leads to below points(+ by incr. in asset or decr. In liability , etc etc.)
The 2 requirements for the recognition of revenue as per IAS 18 are:
1. Recognition Criteria (for elements of fin stats, in order to be part on SCI or SFP)
1.1. Probability of Future Economic Benefit
1.2. Reliability of Measurement

(2) SALE OF GOODS: 6 POINTS FOR BOTH


1. To decide for SALES specifically if the 2 Requirements for Recognition (1-Future Economic Benefit & 2-Reliably Measureable) are
properly met, there are a number of items for each one that must be checked (these items are vertabim per IAS18)
2. There seem to be 6 points exactly for ‘probability & measurement ‘ combined for SALE OF GOODS .
1. ‘PROBABILITY OF FUTURE ECONOMIC BENEFIT TO ENTITY’ REQUIREMENT.

(1) For there to be a Probability of Future Economic Benefit there are 3 main rules in IAS 18 , only:
(a) WHEN SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP HAS PASSED :The entity has transferred to the
buyer the SIGNIFICANT RISKS AND REWARDS OF OWNERSHIP of the goods .
(i) Insignificant Ownership can be Retained If entity retains only insignificant portion of ownership solely to protect
collectability, eg legal title retained in ‘installment sale’ , it is still regarded as a sale – substance over form applies.
(ii) Legal rule on Time of Transfer of Ownership: Legally it is when either:
1. Receipt of goods & services by the buyer (but not if Rewards & Risks have not passed)
2. OR Transfer of Significant Risks & rewards of ownership to Buyer.
3. OR contractually it could be before the above 2 , but this is rare –ignore.
(b) Neither CONTINUING MANAGERIAL INVOLVEMENT nor NOR EFFECTIVE CONTROL OVER THE
GOODS retained The entity retains neither of the 2 to the degree usually associated with ownership.
(c) ECONOMIC BENEFITS WILL FLOW : if a foreign country does not allow foreign exchange payments then there can
be no revenue recognized – it is legally certain they will never get paid.
(i) Note: IRRECOVERABLE AMOUNTS = BAD DEBTS not reduction in revenue: Should it be confirmed later.
(d) SUBSTANCE OVER FORM For example, an entity may sell goods and,at the same time, enter into a separate agreement
to repurchase the goods at a later date, thus negating the substantive effect of the transaction; in such a case, the two
transactions are dealt with together –WHERE can this happen so there is NO revenue recorded- how do you journalise this
sort of transaction?
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(2) EXAMPLES IN IAS 18 ITSELF of NO SALE RECORDED of situations in which the entity may retain the significant risks
and rewards of ownership and thus there NO SALE is recorded.
(a) When the ENTITY RETAINS AN OBLIGATION FOR UNSATISFACTORY PERFORMANCE NOT COVERED BY NORMAL WARRANTY PROVISIONS;
(b) When the receipt of the REVENUE FROM A PARTICULAR SALE IS CONTINGENT on the derivation of revenue by the buyer from its
sale of the goods(if it is stated that unless the customer sells the goods or gets a big contract to do something, he will return
it)
(c) When the goods are SHIPPED SUBJECT TO INSTALLATION and the installation is a significant part of the contract which has not
yet been completed by the entity;
(d) When the buyer has the RIGHT TO RESCIND THE PURCHASE FOR A REASON SPECIFIED in the sales contract and the entity is
uncertain about the probability of return.( if you can reliably estimate the possible returns and make a provision for it
then it is possible to recognize the sale – less the provision of course)

2. REQUIREMENT OF RELIABLE MEASUREMENT :


1) THE REVENUE MUST BE CAPABLE OF BEING MEASURED RELIABLY
2) THE COSTS / EXPENSES INCURRED MUST BE MEASURABLE RELIABLY: Revenue and expenses that relate to the
same transaction or other event are recognised simultaneously; this process is commonly referred to as the matching of revenues
and expenses. Expenses, including warranties and other costs to be incurred after the shipment of the goods can normally be
measured reliably when the other conditions for the recognition of revenue have been satisfied. However, revenue cannot be
recognised when the expenses cannot be measured reliably; in such circumstances, any consideration already received for the
sale of the goods is recognised as a liability ie: as ”Income Received in Advance”.????????what is this as an example- if some
stupid expense eg factory telephone bill, cannot be estimated, then how can you not recognize the sale????????

1.
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(3) RENDERING OF SERVICES:ias 18.20-28


The rendering of services requires the performance by the entity of a contractually agreed upon task within an agreed upon task within an agreed
period. And for any services ,you only ever at all , per ias18 : “When the outcome of a transaction involving the rendering of services can be estimated reliably, revenue
associated with the transaction shall be recognised by reference to the stage of completion of the transaction at the end of the reporting period. The outcome of a
transaction can be estimated reliably when all the following conditions are satisfied”

REQUIREMENTS FOR RECOGNITION:


1) THE PROBABILITY REQUIREMENT
a)PROBABLE WILL FLOW : It is probable that the economic benefits associated with the transaction
will flow to the entity
2) REQUIREMENT OF RELIABLE MEASUREMENT:
(b) REVENUE AMOUNT MEASUREABLEthe amount of revenue can be measured reliably;
(c) EXPENSES TO DATE & TOTAL MEASUREABLE: the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably.(if expenses cannot be reliably measured, then what?say you cannot estimate hat the total costs will be ? – how do you journalise any
money received for work done so far?)
(d) STAGE OF COMPLETION : the stage of completion of the transaction at the end of the reporting period can be measured reliably, and

1.1. Percentage of completion method: IAS 18 .24-28


1.1.1. Revenue is recognized evenly over the accounting periods in which the services are rendered.
1.1.2. The stage of completion is estimated by various methods eg
1.1.2.1. 1-surveys of work performed
1.1.2.2. 2- % of total services performed to date
1.1.2.3. 3- % of costs incurred to estimated total costs. (it seems EXAMS mostly go for this one!)
1.1.2.4. 4-% time used to % total time required if possible unless other method is better (it is thus needed that the entity have an
effective internal budgeting process to estimate, revisions of budget are allowed by the way)(progress payments by
customer often do not reflect work performed vertabim)
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1.1.2.4.1. For method -4- above, If a specific act is more important than other acts, recognition of revenue in this way is
postponed until this act is performed.
1.1.1. When the outcome of the transaction involving the rendering of services cannot be estimated reliably, revenue shall be
recognised only to the extent of the expenses recognised that are recoverable, no profit shall be recognized yet.vertabim (means
if you cannot measure the stage of completion enough,or if unsure that it will be completed, eg contact is in very very early
stages, then only the expenses incurred so far are recognized as revenue- as long as they are recoverable)
1.1.2. If per above 1.1.1 expenses could not be recoverable, but later this changes to ‘are recoverable’ , then see IAS18.28 for special
rule here.

1.2. Reliable measurement can usually take place once the following is established:
1.2.1. The enforceable rights of the parties to transaction
1.2.2. The price
1.2.3. The means of payment

EXAMPLES:

INTEREST ,ROYALTIES & DIVIDENDS


Definitions per IAS 18:
INTEREST—charges for the use of cash or cash equivalents or amounts due to the entity;
Preference Dividends : These can be seen as “interest’ , but ONLY if they ARE classified as financial liabilities as per IAS 32 at the time. Eg cumulative
redeemeable preference dividends which of course accrue on a time-proportion basis per textbook.
ROYALTIES—charges for the use of long-term assets of the entity, for example,patents, trademarks, copyrights and computer software; and
DIVIDENDS—distributions of profits to holders of equity investments in proportion to their holdings of a particular class of capital.
Preference Dividends : These are also seen as dividends as long as they are NOT classified as financial liabilities as per IAS 32.

REQUIREMENTS FOR RECOGNITION:


Revenue arising from the use by others of entity assets yielding interest, royalties and dividends shall be recognised on the bases set out in paragraph 30 when the following
2 requirements are met

1) THE PROBABILITY REQUIREMENT


(a) it is probable that the economic benefits associated with the transaction will flow to the entity; and

2) REQUIREMENT OF RELIABLE MEASUREMENT


(b) the amount of the revenue can be measured reliably.

When these requirements are met then the following then applies :
30 Revenue shall be recognised on the following bases:
(a) INTEREST : (MEASUREMENT) : measured using the effective
interest method ONLY as set out in IAS 39, paragraphs 9 and AG5–AG8;
1. THE EFFECTIVE INTEREST RATE METHOD WORKS LIKE THIS:

NOTE there is a TRAP HERE – read this method well!!!!!


84 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
i) Remember on calculator to always put a MINUS sign on the PV side when comp. for i else it gives a ERROR. (NOT ON FV
SIDE, THIS GIVES A WRONG ANSWER FOR SOME REASON!!!! NOTE)
ii) An effective rate ALLWAYS includes PER YEARLY compounded interest – as if it was compounded each year, even if there was only 1 interest payment
at the end of 10 years!
iii) !!!!!! NOTE : Even if the R100 loan /etc is over 10 years with only one extra ‘premium’ payment of R20 at the end over and above the R100
principle to be repaid, you must get the ‘effective interest rate ‘ and from there work out the interest you can book as REVENUE at the end of each year.
This effective interest rate would be : as if the final premium was charged + compounded YEARLY. SO it will not be R20 / 10years = R2 interest per
year, but some fraction due to compounding.!!!!!!!!!!
iv) Method: Calculator : Enter : FV(incl.principle+premium) 120 ---- PV 100 --- PMT 0 ------ N 10 --- Comp i = 1.839%
SO : YEAR 1 :1,839%interest * 100principle = R1,83 cents first year NOT R20 / 10 = R2 .
YEAR 2 : R100 + R1.83c = R101.83 * 1.839% = R1.87cents NOT SAME AS YEAR 1 !!!!!!
YEAR3 etc: each year all previous years payouts get added to principle to get the amount to * by effective interest rate .
v) AMORTISATION function can be used on calculator for this!!!!!!!!!! Much easier !!!

b) ROYALTIES : (probability requirement) shall be recognised on an accrual basis in accordance with the substance of the relevant agreement; unless, having
regard to the substance of the agreement, it is more appropriate to recognise revenue on some other systematic and rational basis. (eg :on a straight line basis over time of
contract)
(c) DIVIDENDS (probability requirement) shall be recognised when the shareholder’s right to receive payment is established.( WHEN AGM APPROVES THE
DIVIDENDS APPROVED BY THE BOD)

32 When unpaid interest has accrued before the acquisition of an interest-bearing investment, the subsequent receipt of interest is allocated between pre-acquisition and
post-acquisition periods; only the post-acquisition portion is recognised as revenue, the pre-acquisition interest is part of the purchase price.( eg consolidated group
statements, where you incorporate a newly acquired subsidiary into your statements )(how do you journalise and FIN STAT this pre-acquisition interest IF NOT GROUP
STATEMENTS , EG FOR DIVIDENDS OR A BOND?)

1. General Notes :
2. Remember income already recognized is treated as an expense if it later becomes uncollectable.
3. EFFECTIVE INTEREST RATE: calculation method of :SEE IAS 39.9 VERY FUNNY METHOD _YOU MUST CHECK UP ON IT!!!
4. Dividends are recognized as soon as the last date to register has passed (per IAS18 when shareholders right to receive payment is established.

Examples:
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1 - Transaction for SALE OF GOODS AND RENDERING OF SERVICES AT SAME TIME


1. The Way to decide which method to use is if the transaction is predominantly a sale and less a service transaction then it should be treated as
a sale , and visa versa. BUT where it is impossible to come to a conclusion about the substance of a transaction then it must be apportioned
in its 2 components and the relevant revenue recognition principles applied.
2. Eg for a contract for a sale of a motor vehicle which includes a 5 years maintenance contact, the transaction must be divided in 2 and the
revenue from the sale must be recognized at the point of sale and the revenue from the maintenance contract deferred and recognized over a
period of 5 years.

2 - CUSTOMER LOYALTY PROGRAMS (IFRIC 13)


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1. IFRIC 13 addresses loyalty award credits.These are incentives to buy their products. It applies whether entity runs its own loyalty program
or participates in one run by another entity as outsourced service.
2. RULE: one must apply IAS 18.13 and account for any and all award credits as a separately identifiable component of the transaction in
which those credits are earned. The value received from initial sale shall be allocated between award credits and other components of the
sale.
3. MEASUREMENT :
3.1. The value of the credits can be measured in 2 ways :
3.1.1. Fair Value of the Credits ( means the amount for which the award credits can be sold separately.) To be “calc.” or
“estimated”(how does this work? Why not use the cost to you of these credits, ie cost price, why usecost plus a markup here?)
3.1.2. Or On a Pro-Rata Basis : Based on the fair value of the credits relative to the fair value of the goods and services (you add the
estimated value of the loyalty credits to the sale price amount of money actually received from customer, then loyalty/total * sale
price = amount you attribute to deferred loyalty income AND sale price/total * sale price = amount you attribute to
revenue(sales) in your books [you don’t use/attribute the actual value of the loyalty credits, but the pro-rata proportion] )
3.2. A If customers can choose from a range of different awards, the fair value of the award credits will reflect the fair values of the range of available awards, weighted
in proportion to the frequency with which each award is expected to be selected.
3.3. An entity may estimate the fair value of award credits by reference to the fair value of the awards for which they could be redeemed. The fair value of these awards
would be reduced to take into account:
3.3.1.1. The fair value of awards that would be offered to customers who have not earned award credits from an initial sale; and
3.3.1.2. The proportion of award credits that are not expected to be redeemed by customers.
4. ONEROUS CONTRACTS : If at any time the unavoidable costs of meeting the obligations to supply the awards are expected to exceed the consideration received
and receivable for them (ie the consideration allocated to the award credits at the time of the initial sale that has not yet been recognised as revenue plus any further
consideration receivable when the customer redeems the award credits), the entity has onerous contracts. A liability shall be recognised for the excess in accordance
with IAS 37. The need to recognise such a liability could arise if the expected costs of supplying awards increase, for example if the entity revises its expectations
about the number of award credits that will be redeemed.
5. RECOGNISING REVENUE
5.1. ENTITY SUPPLIES AWARDS ITSELF : If the entity supplies the awards itself, it shall recognise the consideration allocated to award credits as revenue when
award credits are redeemed and it fulfils its obligations to supply awards. The amount of revenue recognised shall be based on the number of award credits that have
been redeemed in exchange for awards, relative to the total number expected to be redeemed – so when the customer eventually redeems his credits in return for
goods or whatever, that is the day you recognize those redeemed credits as REVENUE , not before- so the loyalty credits are a liability(like payment received in
advance) and are taken as revenue/ ”payment received” when the company supplies the actual ‘award goods’ to the client when he redeems his credits.
5.2. AGENTS :If a third party supplies the awards, the entity shall assess whether it is collecting the consideration allocated to the award credits on its own account (ie as
the principal in the transaction) or on behalf of the third party (ie as an agent for the third party).
5.2.1. If the entity is collecting the consideration on behalf of the third party, it shall:
5.2.1.1. measure its revenue as the net amount retained on its own account, ie the difference between the ??consideration?? allocated to the award credits
and the amount payable to the third party for supplying the awards;(meaning any commission reciveived from the agent by entity for awarding
credits is treated as a separate transaction completely and not included in any revenue relating to the original sale transaction : see example 13.14
below for how to work this out( VERY TRICKY)
5.2.1.2. recognise this net amount as revenue when the third party becomes obliged to supply the awards and entitled to receive consideration fordoing
so. These events may occur as soon as the award credits are granted. Alternatively, if the customer can choose to claim awards from either the
entity or a third party, these events may occur only when the customer chooses to claim awards from the third party.??no idea how this works???
I think it’s the same as 5.1
5.2.1.3. If the entity is collecting the consideration on its own account, it shall measure its revenue (not costs?) as the gross consideration allocated to the
award credits and recognise the revenue (not costs?) when it fulfils its obligations in respect of the awards.
6. OTHER ESTIMATION TECHNIQUES : In some circumstances, other estimation techniques may be available. For example, if a third party will supply the
awards and the entity pays the third party for each award credit it grants, it could estimate the fair value of the award credits by reference to the amount it pays the
third party, adding a reasonable profit margin. Judgement is required to select and apply the estimation technique that satisfies the requirements of paragraph 6 of the
consensus (IFRIC 13) and is most appropriate in the circumstances.

Examples::
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88 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

3 - SERVICE CONCESSION ARRANGEMENTS (IFRIC 12 AC445)


1. This applies where a government(only) has given an operator the right to charge for a service(eg a toll road) in return for maintaining &
operating the service.
2. This Interpretation applies to public-to-private service concession arrangements if:
2.1. the grantor controls or regulates what services the operator must provide with the infrastructure, to whom it must provide them, and at what price and
2.2. the grantor controls—through ownership, beneficial entitlement or otherwise—any significant residual interest in the infrastructure at the end of the term of
the arrangement.
3. Infrastructure used in a public-to-private service concession arrangement for its entire useful life (whole of life assets) is within the scope of this Interpretation if the
conditions in paragraph -2.1- above are met. Paragraphs AG1–AG8 provide guidance on determining whether, and to what extent, public-to-private service
concession arrangements are within the scope of this Interpretation.
4. This Interpretation applies to both: (a) infrastructure that the operator constructs or acquires from a third party for the purpose of the service arrangement and (b)
existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.
5. This Interpretation does not specify the accounting for infrastructure that was held and recognised as property, plant and equipment by the operator before entering
the service arrangement. The derecognition requirements of IFRSs (set out in IAS 16) apply to such infrastructure.
6. METHOD:
6.1. The operator may receive 1-financial asset[use IASs 32 and 39 and IFRS 7] (guarantee of full payment or shortfall payment by Gov.) or
2- intangible asset [45–47 of IAS 38 ](right to charge eg toll fees) in return for his services. The fair value of these must be recognized
as revenue, as per IAS11 (construction) and IAS 18. Costs are also accounted for per IAS18.
6.2. If there are more than 1 job done by operator eg construction & operating, , consideration received or receivable shall be allocated by reference
to the relative fair values of the services delivered,
6.3. I think this means you must ‘value’ the asset at fair value by using formula in mngmnt acc. For calc. value of an investment ie: per
returns expected to come in over no. of years formula
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6.4. IAS 37 must be used to account for any terms of contract requiring the facilities to be restored at end of contrct period ie: at the best estimate of the
expenditure that would be required to settle the present obligation at the end of the reporting period.
6.5. Borrowing costs : In accordance with IAS 23, borrowing costs attributable to the arrangement shall be recognised as an expense in the period in which they
are incurred unless the operator has a contractual right to receive an intangible asset (a right to charge users of the public service). In this case borrowing costs
attributable to the arrangement shall be capitalised during the construction phase of the arrangement in accordance with that Standard.
6.6. Assets & Liabilies ; if operator gets assets from the gov. as part of deal, they may not be seen as a gov. grant, but must be accounted for
at fair value at initial recognition., also any obligation to fulfil any contractual obligations must be accounted for as liabilities as far as
they must be paid for one day.
4 - AGREEMENTS FOR THE CONSTRUCTION OF REAL ESTATE: IFRIC 15
1. Refer to IFRIC 15 for all the details
2. This applies to developers of real eastate where the customer buys off plan or pays a deposit to reserve a unit off-plan.
3. There are 2 possibilities, Either it falls withing IAS11 contruction contracts OR it gets treated as IAS18 revenue , depending on type of contract & circumstances:
3.1. IAS 11 CONSTRUCTION CONTRACTS :
3.1.1. Applies when it meets the definition of a construction contract : being
3.1.1.1. The buyer is able to specify(need not exercise the ability) the major elements of the design of the real estate before construction commences.(not
choose from a no. of specified designs , or just minor variations to a specified design)
3.1.1.2. The buyer may specify major structural changes once construction is in progress (not minor).
3.1.2. Method : entity recognizes revenue by reference to stage of completion.
3.2. IAS 18 REVENUE
3.2.1. Applies when : when the agreement for the construction of real estate provides only limited ability to influence the design of the real estate.
Limited ability implies selecting a design from a range of specified options or specifying minor variations to the basic design.
3.2.2. Method:
3.2.2.1. Entity must first determine if it is 1-for the sale of goods or 2- for the rendering of services
3.2.2.1.1. SALE OF GOODS : If entity is required to supply construction materials + also the services t (ie: BOTH ) to deliver the real estate to the
buyer, then it is a sale of goods per IAS18.14
3.2.2.1.1.1. Revenue recognition : If the entity transfers control and significant risks and rewards of ownership of the work in progress to the
buyer as construction progresses , the entity recognizes revenue by reference to the stage of completion , using the percentage of
completion method . If however , the entity transfers control and significant risks and rewards of ownership real estate at a single
time such as at completion , on delivery or after delivery, the entity recognizes revenue only once all of the3 criteria of IAS 18.14
are satisfied.
3.2.2.1.2. RENDER OF SERVICES : This applies when the entity is not required to aquire and supply construction materials,
3.2.2.1.2.1. It is then usually an agreement per IAS18.18 for the rendering of services.
3.2.2.1.2.2. Revenue recognition : is by reference to the stage of completion of transaction using the ‘percentage of completion’ method.l
3.2.3. Further work on estate already delivered : buyer , a liability per IAS 37 and an expense per IAS 18.19 is recognized. This is a separate
component of sale.(IFRIC 15.8&19). eg maintenance part of contract or some other matter maybe repairs to shoddy workmanship.
5 - EXCHANGE TRANSACTIONS :
1. As per IAS 18.12 , the following applies to any exchange transactions – incl. services for services or services for goods etc etc.:
IAS18.12 : When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a
transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to
fulfil demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is
regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash
or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the
goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.
2. Another example of similar goods exchanged is different colour cars exchanged by dealers.
3. METHOD TO BOOK SIMILAR GOODS exchanged transactions : ?????? how????
4. METHOD TO BOOK DIFFERENT GOODS : exchange transactions :
4.1. REVENUE IS BOOKED AT COST OF ITEM(+any cash) RECEIVED UNLESS THAT IS NOT DETERMINABLE, THEN COST OF ITEM
GIVEN UP IS USED. NOTE IAS16 PPE states that it must be done exactly the other way around for any assets swapped ie: at value of item given up.
Per article in accounting SA one must choose your method as disclose carefully in the notes which one you choose, and be consistent in usage.
4.2. just book assets received same as you would book cash received to bank, except in the asset concerned’s account. Remember if the goods you give are worth
less than the (fair value) of goods you receive, then you just book the revenue you get as higher than the value of the goods you gave – so if your tyre was
worth R100 BUT the door you exchanged it for was worth R200, your revenue you book is R200, not R100(ie a profit)
5. lSee 2 examples below of how to account for these transactions:
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5.1 – EXCHANGE TRANSACTIONS involving ADVERTISING SERVICES (SIC 31/AC431)


1. The need for this refinement of the IAS18 came about from entities placing Adverts in each others websites, where problems arose on
measurement of these exchanges causing overinflated revenues,thus SIC 31 was developed.
2. This SIC 31 applies only to:
2.1. Dissimilar ad services being exchanged ( if they were “similar” they are auto. Revenue is not recognized as per IAS18)
2.2. The amount of revenue can be measured reliably
3. This rule applies to all ads, incl radio etc
4. Revenue from a barter transaction involving advertising cannot be measured reliably at the fair value of advertising services received. However, a Seller can reliably
measure revenue at the fair value of the advertising services it provides in a barter transaction, by reference only to non-barter transactions that:
(a) similar : involve advertising similar to the advertising in the barter transaction;
(b) frequent: occur frequently;
(c) predominant number compared : represent a predominant number of transactions and amount when compared to all transactions to provide advertising that is
similar to the advertising in the barter transaction;
(d) For any asset with reliably measurable fair value; involve cash and/or another form of consideration (eg marketable securities, non-monetary assets, and other
services) that has a reliably measurable fair value; and
(e) Not same counterparty : do not involve the same counterparty as in the barter transaction.
5. Per textbook : =/- vertabim :”Experience has shown that revenue from exchange transactions involving ad services, cannot be measured
reliably using the fair value of advertising services received.IAS 18.12 Due to this fact the rule from … IAS 18 .12 – ie that if the fair value
of services received cannot be measured reliably then it must be measured at the fair value of services provided/forfeited … must always be
applied in the case of exchange of advertising services. (where does it state this in the IAS or IFRIC or SIC – whose rule is this now?)
91 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

7-DISCLOSURES
PER IAS 18 VERTABIM:
IAS18. 35 An entity shall disclose:
(a) the accounting policies adopted for the recognition of revenue, including
the methods adopted to determine the stage of completion of transactions
involving the rendering of services;
(b) the amount of each significant category of revenue recognised during the
period, including revenue arising from:
(i) the sale of goods;
(ii) the rendering of services;
(iii) interest; ( see -IFRS 7. IG13- only if it is an investment company , otherwise it forms part of ‘finance costs’ per book ??not other
income???)
(iv) royalties;
(v) dividends; and
(c) the amount of revenue arising from exchanges of goods or services
included in each significant category of revenue.
IAS18.36 An entity discloses any contingent liabilities and contingent assets in accordancewith IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Contingent liabilities and contingent assets may arise from items such as warranty costs,claims, penalties or possible losses. BUT
[According to ED 204, this requirement is replaced(?already?) by requiring information about key estimation uncertanties related to revenue,
being:
— a description of the uncertainty related to revenue, and
— an indication of the possible financial effects on the amounts recognised for revenue and the timing of those effects.
For example, this requirement would apply where an entity only recognises revenue to the extent of costs incurred to date, since the outcome of the
transaction cannot be estimated reliably.
NOTES ON EXACT DISCLOSURES FOR REVENUE:
1) ACCOUNTING POLICIES FOR REVENUE
1. REVENUE :
i) Net of Vat.
ii) Intra-Group Revenue is eliminated in Group Statements
2. SALES : once all risks & rewards of ownership have passed.
3. SERVICES :
i) Percentage of completion basis –that its done on this basis (standard – always says the same)
ii) Method of determining stage of completion -eg % completion of total services OR % expenses of total expected expenses.
4. INTEREST INCOME :
i) effective interest method
ii) time-proportion basis – ie: amount earned so far
5. ROYALTIES : per contractual conditions

2) REVENUE NOTE (ie: note number next to revenue on SCI, BUT CAN ALSO BE CALLED ‘Profit Before Tax’ , and can have the
number next to both Revenue and Profit before Tax on SCI ie both items use same note!)
1. EACH SIGNIFICANT CATEGORY : Just the amount of each significant category included in revenue, at minimum the following
if present:

7.”REVENUE” or “PROFIT BEFORE TAX”


2005 Company 2005GroupConsFinStats
R ‘000 R’000
SALES Xxx
SERVICES Etc
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INTEREST etc
ROYALTIES
DIVIDENDS
total
3) ANY EXCHANGE OF GOODS : in a sentence just amount of revenue incl. PER EACH OF ABOVE CATEGORIES , of goods
bartered received instead of cash for revenue.
4) CONTINGENT LIABILITIES&ASSETS per IAS37 changing to KEY ESTIMATION UNCERTAINTIES: changing from former
to latter per ED204 – this is eg: “services revenue was only recognized value of expenses to date, since outcome of transaction cannot be
estimated reliably. “

CONSTRUCTION CONTRACTS :
1.1. When an entity recognises revenue using the percentage of completion method for agreements that meet all the criteria in paragraph 14 of IAS 18 continuously
as construction progresses (see paragraph 17 of the Interpretation), it shall disclose:
1.1.1. how it determines which agreements meet all the criteria in paragraph 14 of IAS 18 continuously as construction progresses;
1.1.2. the amount of revenue arising from such agreements in the period; and
1.1.3. the methods used to determine the stage of completion of agreements in progress.
1.2. For the agreements described in paragraph 20 that are in progress at the reporting date, the entity shall also disclose:
1.2.1. the aggregate amount of costs incurred and recognised profits (lessrecognised losses) to date; and
1.2.2. the amount of advances received.
93 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

INCOME TAXES IAS 12 , SIC 21, SIC 25 , AC501 ,


AC502 & circular 1/2006
Special OWN Notes
1. IAS 1 requires Deferred Tax to be in CURRENT assets/liabilities , not Non-Current.
2. Note: recovery of economic benefits means eg when you use the asset to produce goods for profit ,then you recovered economic benefits
from the carrying amount of the asset, and you can deduct depreciation as an expense incurred in this production.( or asset is sold and profit
(after acc.depr.) from recovery is taxed.
3. Note: this standard IAS12 says the tax must be shown separately in the section of the Fin Stats in which it happened(...in the same ‘way’ ie
section , the event was accounted for) : so
3.1. Profit shows its own tax, and
3.2. “Other Comprehensive Income” shows its own tax in own section of the SoCI, and
3.3. Pure Equity Transactions show their own Tax in their own section of the Fin Stats.
4. NOTES: If it says : The related expense will be deducted for tax purposes on a cash basis, it means
it will be deducted when it is paid in cash ie: when money actually changes hands
4.1. 1- Deferred Tax Liability = per lecturer :ACCOUNTANTS BELIEF THAT TAX HAS BEEN INCURRED BUT WHICH HAS NOT
YET BEEN CHARGED BY THE TAX AUTHORITY. IT THEREFORE SHOWS THE AMOUNT THAT WILL BE CHARGED BY
THE TAX AUTHORITY IN THE FUTURE ie PAYABLE EXPENSE.
4.2. 2- Deferred Tax Asset = per lecturer : ACCOUNTANTS BELIEF THAT TAX HAS BEEN CHARGED BUT WHICH HAS NOT
YET BEEN INCURRED.THIS PREMATURE TAX CHARGE MUST BE DEFERRED (POSTPONED) (ie PREPAID EXPENSE)
5. UNUSED TAX CREDITS & TAX LOSSES : redo a bit here- very basic copy paste
5.1.There a re only 2 types of this stuff:
5.1.1.1. Unused tax losses: where you had a loss this year it can become a tax credit next year,
so ONLY this year it appears as Deferred Tax (not next year cause it should get used up
next year) .( !so you effectively a “loss” is you only loose 71%, the other 29% you can
claim from tax next year !)
5.1.1.2. Tax Credits: if SARS gives you a tax credit for some or other odd reason.
5.2. Both never appear in Carrying Amount Column : only in the Tax Base column, because they
are not accounting positives (you don’t show last years loss as an account in your books-it
disappears mos in the trading acc/profit loss acc/closing of expense/income acc’s. Same with tax
credits!There is no tax credit account in your books – only in SARS books It only shows as
deferred tax! )
5.3. UNUSED TAX LOSSES and CREDITS are ONLY EVER DEFERRED TAX ASSETS, they are never
deferred tax liabilities. They only refer to types ‘credits’ from the taxman, nothing else at all.

1. REDO: see PPE chapter, redo income tax section in PPE chapter and maybe include it here- not done yet!!

2. Add still : how does the deferred tax iability cause profit to drop, and where do you calc. Profit before
tax ? is it after putting in deferred tax liability or before? If before then how can your calc. work for profit
before tax and tax – if you don’t even know the deferred tax yet???
3. So add: how does deferred tax liability account to finstats work exactly –what is the process
4. Over/under provision ledger&journal entries
5. Provisional tax “ledger& journal”- see if you did nit pay last year (underprovide) then the extra you pay to
sars this year (you only pay sars final pay ment in the next year so you don’t know last year ) is the
underprovision from last year! Note
6. You never put deferred tax in ‘sars liability account” you put it in deferred taxCONTRA tax expense acc.,
so it will never show as a liability to sars itself, it only shows as a liability to /in ‘deferred tax’- BUT in SCI
you do add deferred tax to the ‘INCOME TAX EXPENSE” after profit before tax, and deduct it to get
‘profit after tax’ But this is just a theoretical calc. , it is not real life. The real life is that ‘sars liability
account’ will have a DIFFERENT ENTRY + AMOUNT to SCI ‘tax expense ‘amount’ , they are 2
completely different things, because of the ‘deferred tax’ PROVISION that is made.( it is a PROVISION
LIABILITY, not a TRUE LIABILITY)
7. Do A FULL max possible NOTES – WITH REFERENCE FROM THE IAS 12 evry point in ‘dsiclosure’ so
you can see where each point in the disclosure goes.
8. What is recoupment ? /sect 12c of act/ how does recoupment allowance? work.
94 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
9. What is scrapping allowance? Tax act etc ??
10. ASK LECTURER:
a. Legal costs for debt collection is NOT DEDUCTABLE quest 1 handout why
b. Ques 1 handount why is new machine tax only 20 % not 40 % per notes sec12c thing
11. Note: deferred tax will always balance itself out in the recon of tax rates- till it seems like it is not there. So
that’s why you do not put it in this recon of tax rates. You see this SCI tax total has the deferred tax taken
out then added in again already, so it is invisible there- it (deferred tax)is the same as if it never happened
in the SCI total. You see you take it out with temporary differences, calc the current tax payable to sars
after that, then add deferred back to this figure afterwards – so the tax in sci is always completely void of
any deferred tax anyway- unless you made amistake and added a permanent diff as a temp diff.

Background
1. IAS 12 Income taxes is applicable to :
1.1.SA taxes levied on profits
1.2.Foreign taxes levied on foreign profits
1.3.Tax on distributions to reporting entity with held by subsidiaries , associates & joint ventures.
2. Secondary tax on companies is discussed in AC501 , a SA interpretation bases on IAS 12
3. In SA. CGT is also included in normal tax .
4. There are 3 +/- methods of working out tax in accounting – see IAS 12 for details – but only the one
has been chosen as the method to use for IFRS. That is this complicated ‘Tax Base’ method thing.The
other methods seem much more understandable.
4.1. IAS12 says: IN2 : The original IAS 12 required an entity to account for deferred tax using either the deferral method
or a liability method which is sometimes known as the income statement liability method. IAS 12 (revised) prohibits the
deferral method and requires another liability method which is sometimes known as the balance sheet liability method.
The income statement liability method focuses on timing differences, whereas the balance sheet liability method
focuses on temporary differences. Timing differences are differences between taxable profit and accounting profit that
originate in one period and reverse in one or more subsequent periods. Temporary differences are differences between
the tax base of an asset or liability and its carrying amount in the statement of financial position. The tax base of an
asset or liability is the amount attributed to that asset or liability for tax purposes.
4.2. Also : Now this :All timing differences are temporary differences. Temporary differences also arise in the following
circumstances, which do not give rise to timing differences, although the original IAS 12 treated them in the same way as
transactions that do give rise to timing differences:
4.2.1. (a) subsidiaries, associates or joint ventures have not distributed their entire profits to the parent or investor;
4.2.2. (b) assets are revalued and no equivalent adjustment is made for tax purposes;and
4.2.3. (c) the identifiable assets acquired and liabilities assumed in a business combination are generally recognised at their
fair values in accordancewith IFRS 3 Business

CURRENT AND DEFERRED TAX:


1. For each income tax that an entity is subject to, it has to consider the effect of BOTH current and DEFERRED tax
.IAS 12 prescribes the accounting treatment of both these.
2. The Tax Shown As “Tax For The Year” In The Income Statement -SCI Is The Aggregate Of Current
And Deferred Tax , Added Together.

CURRENT TAX
1. SA has a dual tax system. 1- CGT is raised on Capital gains and current tax on taxable income AND 2-
Secondary Tax STC is raised on Distributed Income, but STC will soon be phased out.
DISCLOSURE OF CURRENT TAX IN FINANCIAL STATEMENTS
2. The Tax Shown As “Tax For The Year” In The Income Statement -Sci Is The Aggregate Of Current
And Deferred Tax , Simply Added Together.
3. Current tax is recognized as an expense and included in Profit or Loss EXCEPT to the extent that it arises
from an event outsideP&L EITHER in Other Comprehensive Income or Directly in Equity.
4. SO CURRENT TAX IS INCLUDED IN EITHER OF ONE of the following in the Fin stats, depending where it
arises (NOT mixed up)
a. PROFIT OR LOSS
b. OTHER COMPREHENISIVE INCOME
c. DIRECTLY IN EQUITY.
Penalties & Interest
95 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1. Any penalties & interest should not be included in “Tax for the Year” in Fin Stats as they do not meet
definition of income tax in IAS2, but should be accounted for separately. ALSO the best estimate of interest
&penalties payable for past periods should be disclosed as a PROVISION in accordance with IAS37
“Provisons etc”

IF SARS GRANTS EXTENDED PAYMENT TERMS SPECIALLY TO A SPECIFIC COMPANY.


1. If entity has an agreement with tax authority to pay its taxes over a period of time, then it should be
discounted when the effects of discounting are material.This ecxtended credit should then be treated as a
“government grant” in accordance with IAS20 “Government Grants“ in this respect.
CURRENT INCOME TAX ON COMPANIES:
1. Tax on profit.
2. The amount of current tax(incl. deferred tax) remains an accounting estimate, which may change once the
tax return is finally received.
3. The correction of the accounting estimate takes place in the period in which the Tax Return is received, and
is shown as an Over or Under Provision of Current Tax in the Tax Expense of the Current Year. The
correction of a preceding year must be dosclosed separately as per IAS 12.80.b.
4. Deferred as well as normal tax is treated&displayed in the same manner as the underlying transaction it
relates to.( ie in SoCI or StChEq or in OtherComprehensiveIncome of SoCI.)
CAPITAL GAINS ON COMPANIES
1. Forms part of current tax
2. After 1 oct 2001 it applies & started in SA.
3. The item may be partly taxable and partly exempt if acquired prior to 1 oct 2001.
4. Any portion that is a loss after 1 oct2001 may be offset agaist other capital gains in that current relevant
year.
5. 50% of capital gains must be included in income and is taxed at 28% : this results in an EFFECTIVE TAX
RATE OF 14%.
6. If the capital gains for that year is a loss, it must be carried forward to the following year of assessment
(unused tax loss)- just for 1 yr ??only for capital gains or against all tax next year?? Carried forward As tax
or capital gains??
SECONDARY TAX ON COMPANIES:
1. STC is 10 % of dividends payable less any dividends received by company.(so you don’t pay twice)
2. EXEMPT: any scrip dividends
3. If dividends received exceeds dividends paid then an unutilized STC credit arises which may be carried
forward to subsequent tax years.
4. No TEMPORARY DIFFERENCES: since a dividend MUST first accrue before a liability arises for STC, no
temporary differences can happen.
5. STC is treated as part of normal income tax in the SCI so it must also form part of the reconciliation of TAX
in the TAX RATE RECONCILLIATION in the NOTES.
6. DIVIDENDS declared or proposed after the reporting date do not meet the definition of a liability and
are therefore not recognized in the SFP.(IAS 10.12)
7. If the TAXMAN of the country has different tax rates for when all the profit/ret earnings are paid out and
when it isn’t, then you use the normal tax rate for undistributed profit to work out deferred tax.(make as if it
will not be distributed for deferred tax purposes)
8. Withholding Tax: company may have to pay a portion of dividends owed to foreign shareholders, to
taxman as withholding tax(in case they duck with it). Similar treatment to transactions, but saica says
different ,see below.
9. AC501 :SAICA expressed view on treatment of STC:
a. Seen as A ‘company tax’
b. To be included in normal tax line item in SCI
c. Recognized dividends may vary causing tax to be unproportional to “tax before profit”
d. It may cause a upward trend in profit to be reported as a downward trend in earnings
e. Ac501.09 only recognized as an expense in year dividend is declared & liability recognized
f. Ac 501.13 Acc. Treatment applicable to both interim & final fin stats.
g. For Pref.Shares treated as a special type of LIABILITY (not equity)per ias39, the STC of the dividends
must also be treated as a liability.
h. STC related to equity transactions and related transaction costs go to SCI and NOT AS A DEDUCTION
AGAINST EQUITY , even though the IAS12 intones it should!
i. Anomaly: Cumulative Pref Shares dividends which are still owed from years past- their dividends is
not subject to STC because it has not yet been declared- HOWEVER ac501.12 requires that the STC
be brought ino the Calc. of EPS : these dividends are treated and deducted from profit in the
calculation of EPS even though they ONLY get treated as a liability once they get declared( once
96 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
company says they have the money to pay , they now declare the dividends , only then does a
liability arise. Before that NOT. But EPS calc. requires arrears Cum Pref.dividend+STC deduction
anyway.
j. AC501.14 says : STC credit for more dividends received than declared must be treated as a ‘deferred
tax assets’ NOT as a contingent liability like in the past .
k. Only the portion that is expected to be realized (ie: if dividends are actually expected to be going to
be declared next year) may be recognized as a deferred tax assets, the other potion not recognized
must be disclosed in the NOTES as an ‘unrecognised tax credit’ per IAS12.81e
l. One must disclose all the % and amounts of STC deferred tax and STC credits in the note to SFP
because it is a very confusing load of amounts.
m. Disclosure requirements for STC have been expanded by AC501.
10. PROPOSED CHANGES TO DIVIDENDS TAX:
a. PHASED IN FROM 21 FEB 2007
b. STC being replaced by Dividend withholding tax.
c. Intention is liability of tax moves to shareholder level but company remains responsible to pay SARS.
d. Tax base broadened to include ANY distributiuon of profit, not just dividends, as in SA law what
constsitutes ‘distributions ‘ is a complex issue.
e. Tax rate of 10% from Oct 2007
f. Dividends received will not be incl. in the shareholders taxable income

DEFERRED TAX:
I. The amount of tax that is payable by an entity in a specified accounting period is often out of proportion to the
reported profit for the period.It could be more or less-due to SARS working out differences eg depreciation use
by entity and that allowed by SARS. The reason for this difference is that the basis used for establishing the
accounting profit often differs from the rules used to determine the taxable profits.
II. You get 2 types of deferred tax
II.1. 1- for SoFP items: namely ASSETS and LIABILITIES, (only to do with weird expenses allowed by SARS kind
of stuff really, like depreciation etc.) which you work out with the special method of columns shown below ,
II.2. 2-for SCI items like tax on profit , losses & normal expenses , income : you only get either 1- a
Carryforward of unused tax losses or 2- a Carryforward of unused tax credits for something or other. –this
does not go in the column method , it is straightforward.
III. You must be able to do journal entry for deferred tax liability.
IV. IAS 1 requires Deferred Tax to be in CURRENT assets/liabilities in entities which display both, not Non-Current.
V. Deferred tax is recalculated each year, and compared to last years one. The increase/decrease is normally
presented in profit /loss in SCI as part of the income tax expense line item.
VI. Note: recovery of economic benefits means eg when you use the asset to produce goods for profit ,then
you recovered economic benefits from the carrying amount of the asset, and you can deduct depreciation as an
expense incurred in this production.( or asset is sold and profit from recovery (after acc.depr.) is taxed.
VII. Deferred tax can be a liability or asset:
VII.1.Deferred Tax Asset : is the amount of tax recoverable in future periods due to:
VII.1.1.Deductable Temporary Differences
VII.1.2.Carryforward Of Unused Tax Losses
VII.1.3.Carryforward Of Unused Tax Credits
VII.2.Deferred Tax Liability : is the amount of tax that will still be payable in future periods due to:
VII.2.1.Taxable temporary differences (that happened in current or previous years).
VIII.There are 2 types of differences:
VIII.1.Permanent differences :
VIII.1.1.Non-taxable
VIII.1.2.Non-deductable
VIII.2.Temporary differences
IX. These difference arise mainly from the following circumstances :
IX.1. • the carrying amount of assets AND of liabilities in the accounting records that differs from the tax base of
the assets / LIABILITIES, or amounts FOR ASSETS ,NOT LIABILITIES are expensed for accounting purposes in
a particular period and deducted for income tax purposes in a different period;
IX.2. • the carrying amount of assets and accounting expenses AND liabilities that are not deductible for income
tax purposes;
IX.3.• income that is not taxable, or income that is recognised for accounting purposes in a specific accounting
period and taxed for income tax purposes in another;
IX.4.• tax losses that are set off against taxable income in later years, thereby disturbing the relationship
between the accounting profit and the taxable income, and
97 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
IX.5.• adjustments related to the correction of errors and/or changes in accounting policies that are either taken
into account in different periods for income tax and accounting purposes or are excluded because they are
neither taxable nor deductible.
METHOD OF DOING DEFERRED TAX:
1. Move this to here when you get there :IN GROUP STATEMENTS, temporary differences are
determined by comparing the carrying amounts of assets and liabilities in the consolidated financial
statements with the appropriate bases. The tax bases are determined by referring to the tax returns of
the individual companies in the group, with the necessary adjustments being made on consolidation
IAS12 (AC 102). 11). Because the calculation is based on the consolidated financial statements, the tax
bases of intergroup transactions are omitted automatically
2. There are 5 steps to do to work out deferred tax
a. Calc. Temp. Difference.
b. Consider Exemptions for recognition of deferred tax for certain Temp.Diffs.
c. Consider limitations for recognition of a deferred tax asset for :
i. Deductable temp . diffs.
ii.Unused tax losses OR credits.
d. Consider tax rate to use
e. Recognition of deferred tax income or expense.
3. The 5 steps are done in the following 5 sections:
STEP 1 : CALCULATE TEMPORARY DIFFERENCES
Tax Base
1. (lAS 12 (AC 102)05).The Tax Base of an asset or a liability is the amount attributed to that asset or liability for
tax purposes .[here attributed does not mean ‘it is what sars says the thing is worth’ , it mean something very
different , some complicated system –see definitions of Tax base of Asset & Liability.]

1. Definition : TAX BASE OF ASSET: The tax base of an asset is the amount that will be deductible [ you can
deduct it from your future taxable income eg you can deduct : future wear & tear from future income for
tax purposes] for tax purposes against any taxable economic benefits that will flow to an entity when it
recovers the carrying amount of the asset ..[ in future periods] . If those economic benefits will not be
taxable, the tax base of the asset is equal to its carrying amount.
2. Definition : TAX BASE OF LIABILITY: The tax base of a liability is its carrying amount, less any amount
that will be deductible[ future tax deduction : you can deduct it from your future taxable income eg for
a future warranty costs liability , you can deduct any actually paid future warranty costs from future
taxable income ] for tax purposes in respect of that liability in future periods ..[when that liability is
settled] . In the case of revenue which is received in advance, the tax base of the resulting liability is its
carrying amount, less any amount of the revenue that will not be taxable in future periods.
3. Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in
advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue
that will not be taxable in future periods.
TAX BASE OF AN ASSET
1. Definition : TAX BASE OF ASSET: The tax base of an asset is the amount that will be deductible [ you can
deduct it from your future taxable income eg you can deduct : future wear & tear from future income for
tax purposes] for tax purposes against any taxable economic benefits that will flow to an entity when it
recovers the carrying amount of the asset ..[ in future periods] . If those economic benefits will not be
taxable, the tax base of the asset is equal to its carrying amount.

a. Per IAS 12: the reason for the ‘rule 2’ at bottom of definition (equal to carrying amount)is in
substance the entire carrying amount of the asset will be deductable against the future economic
benefits ,for tax purposes, “therefore the tax base is seen as = carrying amount”
2. ON INITIAL RECOGNITION AFFECTS NEITHER ACCOUNTING PROFIT NOR TAXABLE PROFIT : EG : Land
& other Assets that SARS does not grant an Allowance For: : This can happen if you buy any
98 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
asset , (asset exchange – money for asset –no profit) AND SARS does not grant any deductions for
this type of asset in ALL future periods (so taxable profit is never to be affected-no deductions allowed
from taxable profit) . (I THINK LAND IS ZERO FOR SARS IF ITS use IS TO BE USED , NOT SSOLD- YOU MUST
MOS CHOOSE N RECOGNITION. BUT IF IT IS TO BER SOLD, THEN THERE IS PROBABLY CGT TO BE “RAISED
AS A DEFERRED TAX “ IE THERE IS A TAX BASE THEN AND A TEMP DIFF ETC.- ASK LECTURER –PUT THIS IN
QUESTIONS WHEN YOU GET HERE- HVE NOT YET PUT IT IN THERE!)
a. THE RULE HERE IS : you must ignore this entire thing for temp. diff. purposes . No deferred tax
may be raised. Also for any future depreciation of asset or revaluation /impairment , the change
resulting from any of these may also NOT be recognizes for Defreed tax purposes (write in the tax
base but put a line in Temp.Diff space , with the words ‘exempt ‘ or something. ( even though the
future “economic benefits” eg rent , OF THE ASSET will be taxable, this rule still applies
3. REVALUATIONS : any revalauation changes the carrying amount of asset , so the tax base must change as
well!
4. SPECIAL CASE : certain amounts that for accounting purposes go to income statement, are ‘DEEMED’ by
sars to be ASSETS or LIABILITES for the purpose of TAX. When you do these amounts , the tax base will be
calc. as normal , but REM that the ‘carrying amount’ of the item MUST BE TAKEN EXACTLY AS IT STANDS
IN THE BOOKS. Do not just deem it to be an asset – if it was written off as an expense/income then it is
gone – the CARRYING AMOUNT in your calc. must be 0 ….so Temp.Diff will be (negative) whereas one
would imagine it to be Positive.!!!
a. EG RESEARCH COSTS WRITTEN OFF AS PERIOD COST IN FIRST YEAR, WHERE SARS
ALLOWS A 50/30/20 DEDUCTION.
Tax Base = 10000 – 50% aleady written off, leaves 5000 deductable in future.
Carrying Zero (it was written off as period costs)
Amount
Less : Tax Base R5000
=Temp.Diff (5000) negative - 5000, where if you had said ‘carrying amount was 10000 and
not 0, you would have had positive +5000 .

5. WHERE TAX RATE DEPENDS FUTURE USE OF ASSET : An asset tax base must be determined , per ias
12, depending on what mngmnt indends the use of asset to be : ie either on a will be sold basis
(14% CGT rates used) or on a will be used basis rented out or own use -(28% normal tax rates
will apply) (see ias on ‘held for sale basis)or on a “held for sale basis” (no depreciation) or to
use (depreciation counts).
6. NOTES:
a. What is Income & expenses for tax base : liability or asset? Like : depreciation
for deferred tax quick calc., or income from dividends, etc. on page 39 tut 1,
see c4 calc, if deferred tax had been calculated on the building , would you still
put depreciation in this calc. again? And if an asset is not recognsed on initial
recognition because eit does not affect acc or tax profit , next year for
depreciation on that asset , how do you d the Temp.Diff and tax base for it??
Where does that depreciation go fpr tax?
b. Land always has a tax rate of 14% , so as if it were CGT, never 28%. Special
rule.It is also not ‘taxable’ in use.check some more about this.
c. If it says : The related expense will be deducted for tax purposes on a cash basis, it
means it will be deducted when it is paid in cash ie: when money actually changes
hands
d. FOR ASSETS & EXPENSES: Brackets stay normal at “temporary difference column ” &
“Movement of deferred tax column” to SCI but turn around at ‘Deferred tax to SFP’ : UNDER ALL
CONDITIONS THIS HAPPENS
e. Assets:
-The tax base of an asset is dependent on whether the future economic benefits arising from the
recovery of the carrying -amount of the asset are taxable.
-If the future economic benefits are taxable, the tax base is the amount that will be deductible for
tax purposes.
-Where the economic benefits are not taxable, the tax base of the asset is equal to its carrying
amount, such as trade receivables where the sales have already been taxed (lAS 12 (AC 102)07).

1. SPECIAL CASE : certain amounts that for accounting purposes go to income statement, are ‘DEEMED’ by sars
to be ASSETS or LIABILITES for the purpose of TAX. When you do these amounts , the tax base will be calc. as
normal , but REM that the ‘carrying amount’ of the item MUST BE TAKEN EXACTLY AS IT STANDS IN THE BOOKS.
Do not just deem it to be an asset – if it was written off as an expense/income then it is gone – the CARRYING
99 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
AMOUNT in your calc. must be 0 ….so Temp.Diff will be (negative) whereas one would imagine it to be
Positive.!!!
a. EG RESEARCH COSTS WRITTEN OFF AS PERIOD COST IN FIRST YEAR, WHERE SARS ALLOWS A
50/30/20 DEDUCTION.
Tax Base = 10000 – 50% aleady written off, leaves 5000 deductable in future.
Carrying Zero (it was written off as period costs)
Amount
Less : Tax Base R5000
=Temp.Diff (5000) negative - 5000, where if you had said ‘carrying amount was 10000 and
not 0, you would have had positive +5000 .

1. TAX BASE of PPE :


1.1. Tax Base of just Depreciation itself: I think – not sure :[Minus less Minus = Plus !] NOTE:
depreciation is a NEGATIVE amount opposed to PPE. So if the exam asks for the tax base of
depreciation itself alone : you imagine it in brackets , then do as usual workings as above, EXCEPT rem
negative minus negative = “ + “ so “-300” - “-100” = -300+100 = -200 NOT -500. But rather don’t
put brackets or minus sign in the exam but imagine it to be there to work out the answer. If howver the
‘Temporary Difference’ is negative it must go in brackets though, just the other 2 columns don’t put
brackets in case the examiner gets funny about it. Allowance for bad debts works the same.

2. TAX BASE of Dividends Receivable: = NOT TAXABLE so =Acc. CARRYING AMOUNT


2.1. Dividends receivable is not taxable, so the TAX BASE = the “Accounting” Carrying Amount per IAS12
definition.

3. TAX BASE of Trade Receiveables: = NOT TAXABLE so =Acc. CARRYING AMOUNT


3.1. Trade Receivables is not taxable(it was already taxed when recognized), s
3.2. Allowance for bad debts: rem that this is a liability so it does not come under Assets section, it gets
treated as a liability same as other liabilities(see definition of liability Tax Base). However if you want to
deduct it from trade receivables first like you do with depreciation, you probably can, then that will be
your new starting point: Carrying Amount of trade receivables.

4. TAX BASE of Capitalised Development Costs:


Exactly the same thing as depreciation method
100 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

5. TAX BASE of Research Costs:


Sometimes the carrying amount can already be ZERO , and the tax more.

6. TAX BASE of Land or Buildings etc .where no deductions are allowed in the future but future
economic benefits to be derived from the asset will definitely be Taxable.
6.1. IAS 12.15 : states a deferred tax liability is NOT RECOGNISED in certain exceptions. Ie:
6.2. IAS 12.15: A deferred tax liability shall be recognised for all taxable temporary
differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax
loss).
However, for taxable temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint ventures, a deferred tax liability shall be
recognised in accordance with paragraph 39.
1.1. Here the income is still taxable, but no deductions are allowed, which makes the Temporary Difference
ALLWAYS = Carrying Amount of asset. This is a lot of deferred tax that will slowly get chewed away by
the assets own depreciation schedule. IAS 12 says these instances are EXEMPT.- You still fill in the TAX
BASE as 0 and the Temporary difference as what it works out to(it will be = to the acc. carrying amount
of course) but just write ‘EXEMPT’ for the “Deferred tax” column . This means exempt per IAS 12 itself.
1.2.Land & Administration Building in example below.
101 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

TAX BASE OF LIABILITIES & REVENUE RECEIVED IN ADVANCE.

1) FOR LIABILITIES & REVENUE RECEIVED IN ADVANCE: Brackets TURN AROUND (because the
carrying amount liability is actually in brackets itself at the time you see ,& tax base amount too – so
answer must be in brackets too!. But the first 2 are just not shown in brackets in exam- as a type of way
they write it down-although they should be!) at “temporary difference column ” & “Movement of
deferred tax column” to SCI but go/become opposite to “Movement –SCI Column” ie: TURN AROUND
when they go to the ‘Deferred tax to SFP’ column. UNDER ALL CONDITIONS THIS HAPPENS

2) Definition : TAX BASE OF LIABILITY: The tax base of a liability is its carrying amount, less any amount
that will be deductible[ future tax deduction : you can deduct it from your future taxable income eg for
a future warranty costs liability , you can deduct any actually paid future warranty costs from future
taxable income ] for tax purposes in respect of that liability in future periods ..[when that liability is
settled] . In the case of revenue which is received in advance, the tax base of the resulting liability is its
carrying amount, less any amount of the revenue that will not be taxable in future periods.
3) Definition : TAX BASE OF REVENUE RECEIVED IN ADVANCE : In the case of revenue which is received in
advance, the tax base of the resulting liability is its carrying amount, less any amount of the revenue
that will not be taxable in future periods.

4) “Deductable for tax purposes in the future” means if say ‘leave pay accrual’ is only deductable as an
expense when it is paid out in cash: so any ‘leave pay accrual’ will not be deductable this year but only
in a ‘future period’ : that amount is then : “deductable for tax purposes in the future” and must be
subtracted from ‘carrying amount’ to get the ‘tax base’
5) Taxable Temporary Difference(you owe) hardly ever arises in ‘liabilities’ or ‘revenue rec. in
advance’ exept in exceptional circumstances eg construction contracts.
6) Note: if given a loan and interest in one question, always separate the 2 and do them 1 by 1 .REM that if
they say ‘at end of reporting period no interest has been paid’ it probably means that interest was
ALREADY deducted for tax purposes that year(interest is deductable as it is incurred), not that that item
is still going to be deducted because you are doing the fin stats for that year.
7) Provision for bad debts Liability : if SARS allows 3000 that year, and you do your own depr. Of
12000, then WHAT WILL be left that can be deducted in the future is –ie future deductions possible from
carrying amount – is only 9000 (say there are bad debts or something. ) THAT is the logic behind
depreciation, so do it that way, if you tryu figure it out your own way you will make an error.
8)
a) To do the depreciation & debtors together : study example below from ‘descriptive’ book , and ask
lecturer to explain when you visit him.
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1. TAX BASE of Long Term Loan and Interest Accrued:

2. TAX BASE of Liabilities:

3. TAX BASE of Revenue Received in Advance:


Note : funny method here.( SARS taxes money as it comes in, but you only recognize it as revenue next year
when you send out the magazine.)

4. TAX BASE of Provision for Bad Debts:


103 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
Note : here SARS only allows you to deduct 25% of YOUR estimate of doubtful debts. So there will ALLWAYS be
a Temporary Difference here.
METHOD : funny thing : here you seem to use the “Provision for bad debts” as a liability , and work it out
separate to the “Trade & Receivables” line item. So you treat the provision as a liability,and just say any part of
the liability in your books(your provision for bad debts) not allowed by sars this year, can(could) be deducted in
a future period as a deduction. So your carrying amount less the future possible deduction = tax base of the
liability. So your answer will be POSITIVE – not a negative like if you had used the full ‘Trade & Other
receivables’ amount as it appears in the SFP.
THEN : you show it in one with the ‘trade&other receivables “ item, not separate- you use the
Provision/liabilities answer as the “temporary difference’ answer but show the carrying amount & tax base after
depreciation is minused from each – see example below carefully-Note –funny thing: this one has a special way
of doing it- different from the others!!!!.
And below, they say a balance of 74000 after a deduction of 12000 for Doubtful Debts = 74 + 12 = 86000
original amount. (how does sthis work??? : also I think the 9000 shuld be in brackets and comment 1 should
read at end : tax base equals GROSS carrying amount, not NET carrying amount. – not sure???)

STEP 2 : GET THE TEMPORARY DIFFERENCE


TEMPORARY AND PERMANENT DIFFERENCES

1. There are 2 major differences between Taxable income and Profit before Tax : Permanent and Temporary
differences.
2. Permanent differences are for differences for items that are found EITHER in the tax calculation or
the accounting calculation, BUT not in both.ie : it does not relate to a deferred tax at all, it only applies to
current year (you just leave it out or include it , one of the 2, then its gone for ever. Example ?????put
some here.
3. Temporary Differences are differences for items that are found BOTH in the tax calculation AND the
accounting calculation but in different periods, they are differences that arise between the tax base and
the carrying amount of assets and liabilities on reporting date.
3.1.TEMPORARY DIFFERENCE MEANS “YOU OWE THIS TO SARS.” IF IT IS IS POSITIVE IT MEANS
YOU OWE THAT TO SARS(one day in the futureyou will pay) AND IF IT IS NEGATIVE IT
MEANS YOU OWE NEGATIVE :ie SARS OWES YOU.
3.2. Temporary differences are divided into two categories, namely
3.2.1. 1-Taxable Temporary Differences= Deferred Tax Liability = Acc Profit>Taxable Income
, SARS tax acc. Debited(???Y/N), Deferred Tax acc. credited. (TAXABLE in the future - you pay
104 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
less/leave out some this year, so you ‘owe’ them) = ACCOUNTANTS BELIEF THAT TAX HAS BEEN
INCURRED BUT WHICH HAS NOT YET BEEN CHARGED BY THE TAX AUTHORITY. IT THEREFORE
SHOWS THE AMOUNT THAT WILL BE CHARGED BY THE TAX AUTHORITY IN THE FUTURE ie
PAYABLE EXPENSE.
3.2.2. 2-Deductable Temporary Differences = Deferred Tax Asset= Acc Profit<Taxable
Income ,SARS Tax acc. Credited, Deferred Tax acc. Debited. (DEDUCTABLE in the future - you
paid more /over this year so they ‘owe’ you) = ACCOUNTANTS BELIEF THAT TAX HAS BEEN
CHARGED BUT WHICH HAS NOT YET BEEN INCURRED.THIS PREMATURE TAX CHARGE MUST BE
DEFERRED (POSTPONED) (ie PREPAID EXPENSE)
TEMPORARY DIFFERENCES:
1. It is ALLWAYS carrying amount LESS tax base= TEMPORARY DIFFERENCE.

Per Accountant Per SARS Read YOU If temp diff = (-) ONLY EVER
OWE ( ‘minus‘ then this is DR [this years
= they owe (owe you)@ answer –
you) less-last
years]
Carrying Tax Base Temporary *29% = Deferred Movement
Amount Difference Tax in P/L for
Year
Property & 1000 700 300 (87) cr (87) cr income
Plant

Provision (100) (25) [neg- (75) xx dr owed you ??


doubt debts neg=
neg+pos]

2. PER IAS12 WHY YOU GET TEMP .DIFFS.: This is the VERY WELL PUT : reason Per IAS12 why
you get temp .diffs. and how they work (to understand, for logical thinking)
2.1. :IAS 12.16 : It is inherent in the recognition of an asset that its carrying amount will be recovered
in the form of economic benefits that flow to the entity in future periods. When the carrying
amount of the asset exceeds its tax base, the amount of taxable economic benefits will exceed
the amount that will be allowed as a deduction for tax purposes. This difference is a taxable
temporary difference and the obligation to pay the resulting income taxes in future periods is a
deferred tax liability.
3. FOR ASSETS & EXPENSES :: (The tax base and carrying amount are both always positive ,
so [+A] - [+B] = :+/-) Where the carrying amount of the asset exceeds the tax base, the difference
is a Taxable Temporary Difference, and visa versa is a Deductable temporary difference. (TAX
LIABILITY) [because you will be able to deduct less tax in the future from tax base than from carrying
amount, so you are in the red here, so you raise a liability cause you know this will happen , so your
books will owe SARS.]
4. FOR LIABILITIES & REVENUE REC. IN ADVANCE: (The tax base and carrying amount are
both always negative(they are liabilities) , so minus less a minus = a minus + a
positive). :+/-) Where the carrying amount of the asset exceeds the tax base, the difference is a
Deductable Temporary Difference( not like assets where it is the other way around ) and visa versa is
a Taxable Temporary Difference. Means SARS taxed you for more for it this year or in the past than
they should have per your method, so the tax base is higher than carrying amount and thus in future
years you can deduct more from it (eg deprecuiation)– than what your carrying amount is So you are
winning here and per your books you now have an asset .You loose this time because you had to pay
now, but gain next time , because you can deduct it in the next years
4.1. Only In exceptional circumstances, taxable temporary differences arise in 1-Liabilities, and 2-
Revenue received in advance , where the tax base is larger than the carrying amount. An
example is found in construction contracts.
5. NOTE it says: a taxable liability must be recognized AT ALL TIMES FOR ALL ITEMS except those
above. So if it seems there is not going to be enough profit next year or there is no balancing
‘deductable temporary difference’, any taxable liability STILL has to be shown, unlike the rules for a
105 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
‘deductable temporary difference’ where if it seems there wont be enough profit next year you may
not show it in the books.
6.
STEP 3 : CHECK FOR EXEMPTIONS FROM RECOGNITION OF DEFERRED TAX FOR CERTAIN TEMP
.DIFFERENCES
1. DEFERRED TAX ASSET rules:
1.1. A deferred tax asset shall be recognised for all deductible temporary differences to the extent
that it is probable that taxable profit will be available against which the deductible temporary
difference can be utilised, unless the deferred tax asset arises from the initial recognition of
an asset or liability in a transaction that:
1.1.1. (a) is NOT a business combination; and
1.1.2. (b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax
loss).
1.2.However, for deductible temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint ventures, a deferred tax asset shall be recognised
in accordance with paragraph 44.
2. DEFERRED TAX LIABILITY : rules
2.1. IAS 12.15: A deferred tax liability shall be recognised for all taxable temporary differences,
except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or (nor any subsequent impairments or devaluations of
goodwill etc.)
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit (tax
loss).
However, for taxable temporary differences associated with investments in subsidiaries,
branches and associates, and interests in joint ventures, a deferred tax liability shall be
recognised in accordance with paragraph 39.

3. ASSETS BOUGHT : (initial recognition)


3.1.If you buy an asset , eg
3.1.1. Whatever the use you put it to any asset that on INITIAL recognition does NOT affect
accounting OR tax profit , is ignored for Deferred tax purposes. Some scenarios to see a bit :
3.1.1.1. YOU INTEND TO SELL IT: its tax base value is what you paid for it (cause of
CapitalGainsTax cost of purchase is allowed as deduction against selling price for CGT )
so TempDiff= 0 , but still deferred tax is ignored (initial)
3.1.1.2. YOU WANT TO USE IT:, eg land : so economic benefits will flow, amount deductable for
future tax purposes is nil (ie no depreciation for land) : Tax base = 0 , so Temp.Diff =
price paid : BUT since it’s initial recognition does not affect accounting NOR tax profit,
per IAS rule the Temp Diff is ignored – no deferred tax on it.
3.1.1.3. REVALUATIONS : because it no longer relates to a ” initial recognition” : any Temp.diff
must have deferred tax taken into account. (see PPE chapter for how?? Not sure whatthe
tax base is here!)

4. REVALUATIONS : because it no longer relates to a ” initial recognition” : any Temp.diff must have
deferred tax taken into account. (see PPE chapter for how?? Not sure whatthe tax base is here!)
(EXCEPT for goodwill (I think) impairments can not , but can revaluations create a tempo. Diff? when
EVER is goodwill allowed to get a temp.diff????)

5. GOODWILL : Per IAS 12.15 goodwill may not berecognised for temp.diff or deferred tax . in SA
goodwill may not be claimed as a deducton for tax purposes either . Thus : for goodwill the tax base
will be 0 (no deductions allowable in SA) and TempDiff=full goodwill as a “deferred tax
liability”(carrying-0=full carrying)…. But IAS 12.15 disallows the recognition of goodwill and also of
any future impairment of this goodwill, as it would reduce the net asset value (through the deferred
tax liability) of the entity- leading to a circle of this increasing the “carrying amount” of goodwill (to
balance), round & round etc etc So you just ignore it completely when calc. deferred tax.
5.1.Any future impairment of this goodwill is also not allowed to be recognized for deferred tax at all -
106 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
6. EXAMPLE OF A “Initial Recognition of an asset /liability”: where accounting profit is not
affected. We are not talking here about depreciation affecting the tax base with PPE, but that the
Temp.Diff should be 0 from just buying an asset, but here it would be -20000 because of the IAS rules
for accounting for a gov. grant. So the rule says you may not recognize this- just ignore.

STEP 3 :CONSIDER LIMITATIONS FOR DEFERRED TAX ASSET FOR DEUCTABLE TEMPORARY
DIFFERENCES AND UNUSED TAX LOSSES OR CREDITS
1. A deferred tax asset is only recognizable to the extent that it is PROBABLE that taxable income will be available against which it , OR
unused tax losses or credits , can be utilized.
2. IAS 12.27-29 says: (superfluous pieces have been erased to make it summarized here) basicly:
27 : An entity recognises deferred tax assets only when it is probable that taxable profits will be available against which the
deductible temporary differences can be utilized : (this can happen is 2 cases , either 1 of the following:)

SUFFICIENT TAXABLE TEMPORARY DIFFERENCES


28: It is probable that taxable profit will be available against which a deductible temporary difference can be utilised when there
are SUFFICIENT TAXABLE TEMPORARY DIFFERENCES relating to the same taxation authority and the same taxable
entity which are expected to reverse:
i. (a) in the [same period] as the expected reversal of the deductible temporary difference; or
ii.(b) [in other periods] into which a tax loss arising from the deferred tax asset can be carried back or forward.
SUFFICIENT TAXABLE PROFIT
29 : When there are insufficient taxable temporary the deferred tax asset is recognised to the extent that:
(a) it is probable that the entity will have SUFFICIENT TAXABLE PROFIT relating to the same taxation authority and the
same taxable entity in the same period as the reversal of the deductible temporary difference (or in the periods into which a tax
loss arising from the deferred tax asset can be carried back or forward . or
(b) tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.
3. the first step is to check if TAXABLE temp. diff. which creates an income OR TAXABLE INCOME itself
will be available in the next year/s against which the unused tax losses/credits can be set off.
4. the second step is : to check the timing: if the tax loss/credit cannot be used in the same years in
the future as the future Taxable temp. diff. or Taxable Income then it can not be recognized of
course

RE- ASSEMENT each year : at each reporting date, the following musty be re-assesed
a. Previously Unrecognized deferred tax assets : to see if maybe there is going to be enough profit etc. in the future , so that they may
again be recognized perhaps.
b. Previously Recognised deferred tax assets : to see if there will still be enough profit etc. in future to support them.

5. CHANGE IN ACCOUNTING ESTIMATE: the re- measurement and adjustment of the deferred tax
asset is not an adjustment of the previous years results, but rather a Change in Accounting Estimate.
.
6.
STEP 4 : APPROPRIATE TAX RATES & LAWS
1 of 2 :Enacted or Substantively Enacted Tax Laws and Tax Rates
1. There are 2 standards which apply to this :
1.1. IAS 12. 47-48 : says any deferred tax must be measured at the rates that are expected to apply at the
time the deferred tax is going to be realized- so if the deferred tax can only apply in 2 years time, any pre-
announced rate by SARS for that year in the future must be used this year already to value the specific
“deferred tax” in the books this year the only condition is , the rate must be enacted already or
‘substantively enacted’ which means it can be regarded as enacted, not just on rumours or talk of a
possible change in tax rates.
107 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1.1.1. AC502: SUBSTANTIVELY ENACTED TAX RATES AND TAX LAWS: saica ISSUED THIS ‘Ac’ TO
CLARIFY WHEN a tax law is substantively enacted or not yet.
1.1.1.1. TAX RATES must be regarded as substantively enacted from when they are announced by the
Minister Of Finance’s budget statement. UNLESS these rates happen to be inextrucatbly lik=nked
to the Law that goes with them eg Captial gains Tax introduced in 2001- then the “RATE + the
LAW “ must both only be recognized as substantively enacted once the Law is signed by President
& passed, NOT when they are announced as above but rather same as for TAX LAWS below.
1.1.1.2.It distinguishes between 3 types of changes :
1.1.1.2.1. Change in tax rate not linked to changes in law ---by announcement in minister of finance
budget speech
1.1.1.2.2. Change in rate linked to change in laws ---only when approved by parliament
&signed by president
1.1.1.2.3. Other changes in laws --- only when approved by parliament
&signed by president
2.
3. Non-Adjusting Events: IAS 10 :Any tax rates substantively enacted after the reporting date are considered as
NON-ADJUSTING events by IAS10, even when they are to be applied retrospectively. Disclosure of the non-
adjusting event must be provided (namely the change in tax rates)
4. Interim Fin Stats : Exactly same principles as above to be applied.
5. Disclosure: IAS 12.80c7d require disclosure of amount applicable to changes in tax rate or tax law
5.1. For a tax rate change there is a special way of disclosing it.This is just 2 lines in the notes to give
the user a clear indication of the figures involved in the changeover. There are only 2 lines:
5.1.1. Line 1 :Transfer Line: the amount applies ONLY to the temp.diff that only the new tax rate ever
applied to, never yet to old tax rate ie: any deferred tax just caused in the current year for the first
time.
5.1.2. Line 2: Tax Rate Change Line: this amount is the amount to which ONLY THE DIFFERENCE in tax
rates applies ie: new rate minus old rate(leave out negative signs though) .
5.1.2.1.THERE ARE 2 METHODS TO WORK IT OUT:
5.1.2.1.1.OPTION 1 :Adjust opening balance -which Year?:
5.1.2.1.1.1. Transfer Line: show in brackets these workings :(any newly created deferred tax from
current year[show plus or minus sign] X New Rate next Year) = positive or negative
answer .
5.1.2.1.1.2. Tax Rate Line: show in brackets these workings: (all deferred tax from last year X
difference in tax rates ?????????????????????
5.1.2.1.2.OPTION 2: Adjust closing balance -which? Year:
5.1.2.1.2.1. Transfer Line: ????????????
5.1.2.1.2.2. Tax Rate Line:???????????????
108 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

2 of 2 : EXPECTED MANNER OF RECOVERY:


1. MANNER OF SETTLEMENT OF LIABILITIES OR RECOVERY OF ASSETS AFFECTS THE
MEASUREMENT: for instance if the asset is sold SARS says they tax you 14% (capital gains tax) but if
depreciated then 28%. ANSWER: the entity must decide what they EXPECT to do with the asset eg sell it or
use it- and according to this decision use the appropriate rate.
a. IAS16: says the carrying amount of an asset can be recovered through use or sale, and says land is
the only investment property that is non-depreciable.
b. IFRS 5 : Note: per IFRS 5 the carrying amount of an asset, [could only be ??deemed as being??] will
be recovered through sale once it has been classified as a non-current asset held for sale.
c. IFRS 5: an assets will be recovered from use if it has no residual value and is not classified as held
for sale
d. IFRS 5: an assets will be recovered from a combination of use and sale if it has a residual value AND
is not classified as ‘held for sale’.
e. SIC21: Says LAND :the future economic benefits of a non-depreciable asset can only be realised
through sale, not through use.(eg land)
i. Thus when land is revalued , the deferred tax to be raised on it may only be calc. using CGT
(28% of 50%of the value= 14%), not normal tax. , EVEN if the land is used for renting
purposes (use) . ALSO if land and buildings are on the same property, they must be dealt with
separately.
f. Framework says : There must be an expectation that ‘future economic benefits” will flow from
asset., before eg deferred tax can be applied to it. (not zero)
g.
2. DISCOUNTING: IAS 12.53 prohibits the discounting of deferred tax assets & liabilities.

STEP 5: RECOGNITION OF THE DEFERRED TAX INCOME OR EXPENDITURE


TRANSACTION RECOGNISED OUTSIDE PROFIT & LOSS
BUSINESS COMBINATION

SPECIFIC ISSUES
CHANGES IN THE TAX STATUS OF AN ENTERPRISE or SHAREHOLDERS
109 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
CHANGES IN CARRYING AMOUNTS OF INVESTMENTS IN ASSOSIATES &SUBSIDIARIES &BRANCHES
&JOINT VENTURES
DEFERRED TAX ON FINANCE LEASES
WITHFOLDING TAX ON DIVIDENDS

FINANCIAL STATEMENT PREPARATION:


Rules 1: IAS 1 REQUIREMENTS
Rules 2: IAS 12 REQUIREMENTS : OFFSETTING
1 Of 3 : Disclosure : IAS 12 REQUIREMENTS : PRESENTATION & DISCLOSURE
2 Of 3 : Discosure : IAS 12 REQUIREMENTS : THE TAX RECONCILLIATION OR TAX RATE
RECONCILLIATION
3 Of 3 : Disclosure : CIRCULAR 1 / 2006 : DISCLOSURE OF CHANGE IN MANNER OF RECOVERY ( EG:
USE TO SALE)
TAXABLE TEMPORARY DIFFERENCES
1. IAS 12.15: A deferred tax liability shall be recognised for all taxable temporary
differences, except to the extent that the deferred tax liability arises from:
(a) the initial recognition of goodwill; or
(b) the initial recognition of an asset or liability in a transaction which:
(i) is not a business combination; and
(ii) at the time of the transaction, affects neither accounting profit nor taxable profit
(tax loss).
However, for taxable temporary differences associated with investments in
subsidiaries, branches and associates, and interests in joint ventures, a deferred tax
liability shall be recognised in accordance with paragraph 39.

1.1. NOTE it says: a taxable liability must be recognized AT ALL TIMES FOR ALL ITEMS except those above.
So if it seems there is not going to be enough profit next year or there is no balancing ‘deductable
temporary difference’, any taxable liability STILL has to be shown, unlike the rules for a ‘deductable
temporary difference’ where if it seems there wont be enough profit next year you may not show it in the
books.
2. As Per (lAS 12 (AC 102)05) : Taxable temporary differences are :those temporary differences that will
result in taxable amounts in the determination of the taxable profit or tax loss for future periods when the
carrying amount of the asset or liability is recovered or settled .
3. This means that you will be taxed for it in future by SARS, but not this year – this year you got away with it, now
you sort of owe SARS?.
1. A Deferred Tax Liability is recognized in respect of all taxable temporary differences. There are
a few exceptions to this rule however(see IAS12.15) or in number 4 below own notes.
2. FOR ASSETS & EXPENSES: Brackets stay normal at “temporary difference column ” & “Movement
of deferred tax column” to SCI but turn around at ‘Deferred tax to SFP’ : UNDER ALL CONDITIONS
THIS HAPPENS
3. FOR LIABILITIES & REVENUE RECEIVED IN ADVANCE: Brackets TURN AROUND (because the
carrying amount liability is actually in brackets itself at the time you see ,& tax base amount too – so
answer must be in brackets too!. But the first 2 are just not shown in brackets in exam- as a type of
way they write it down-although they should be!) at “temporary difference column ” & “Movement of
deferred tax column” to SCI but go/become opposite to “Movement –SCI Column” ie: TURN AROUND
when they go to the ‘Deferred tax to SFP’ column. UNDER ALL CONDITIONS THIS HAPPENS
4. For Assets : Where the carrying amount of the asset exceeds the tax base, the difference is a
Taxable Temporary Difference.
5. For Liabilities : In exceptional circumstances, taxable temporary differences arise in 1-Liabilities,
and 2-Revenue received in advance , where the tax base is larger than the carrying amount. An
example is found in construction contracts.
5.1. Exceptions : lAS 12 (AC 102)15. identifies circumstances in which a deferred tax liability is not
recognized. These exceptions include liabilities that arise from: (Note below different method for
these items in calculation)
5.1.1. The Initial Recognition Of Goodwill, Or
5.1.2.The Initial Recognition Of An Asset Or A Liability In A Transactions Which
5.1.2.1.Is not a business combination, and
5.1.2.2.At the time of the transaction, affects neither accounting profit nor taxable profit (tax
loss).
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6. Method For Calculating the Exceptions : to calc. exceptions you do not do it like a normal calc. Here
you call the Tax Base ‘ZERO’ and you put for the Temporary difference the same amount as the
Carrying amount.- then under the ‘deferred tax balance ‘ you write ‘exempt’. This is due to ‘initial
recognition’ whatever that means , so just do it that way till you understand it.

7. Taxable temporary differences may also arise from (subsidiaries stories I think) differences in
investments in subsidiaries, branches and associates, interest in joint ventures and in business
combinations. These temporary differences are addressed in the relevant chapters.
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DEDUCTABLE TEMPORARY DIFFERENCES:


1. A DeMeans SARS taxed you for it this year, but in future years you can deduct it – it will already have been
taxed then.You loose this time because you had to pay now, but gain next time , you can deduct it in the next
years.
2. A deferred tax asset is recognised for all deductible temporary differences to the extent that it probable that
future taxable profits will be available against which the asset or the liability be recovered or settled ((AS 12 (AC
102)24).
3. Deferred tax assets (Deductable temp. differences) can also arise from :
3.1. Carryforward of unused tax losses and unused tax credits.
3.2. Liabilities from revenue received in advance. (where carrying amount is larger than tax base).

4. Deductible temporary differences are those temporary differences that will result in amounts that are
deductible in the determination of the taxable profit (or tax loss) in future periods when the carrying amount of
the asset or liability is recovered or settled ((AS 12 (AC 102).05).
4.1. lAS 12 (AC 102)28 indicates that it is probable that future taxable profits will be available for
utilisation against a deductible temporary difference when:
4.1.1.sufficient taxable temporary differences relating to the same tax authority and the same taxable entity
are expected to reverse in the same period as the deductible temporary differences, or
4.1.2.sufficient taxable temporary differences relating to the same tax authority and the same taxable entity
reverse in the periods in which a tax loss arising from the deferred tax asset can be carried forward.
4.2. Where there are insufficient taxable temporary differences, the deferred tax asset is only
recognised to the extent that:
4.2.1.• it is probable that the entity will have sufficient taxable profits in the same periods in which the
reversal of the deductible temporary differences occurs, or
4.2.2.• there are tax planning opportunities available to the entity that will create taxable profit in the
appropriate periods (lAS 12 (AC 102)29).
5. These 2 types of indication of when oit will be probable that future taxable profits will be available mean there
must either be enough profit to have to pay tax on in a future period, so you can deduct these amounts then, or
there must be corresponding tax liabilities then so you can write the two off against each other.
6. For Assets & Expenses : Where the tax base of the asset exceeds the carrying amount, the difference is a
Deductable Temporary Difference.
7. For Liabilities & Revenue Rec. in Advance: Deductable temporary differences arise in 1-Liabilities, and 2-
Revenue received in advance , where the carrying amount is larger than the tax base. An example is found in
construction contracts.
7.1. FOR ASSETS & EXPENSES: Brackets stay normal at “temporary difference column ” & “Movement of
deferred tax column” to SCI but turn around at ‘Deferred tax to SFP’ : UNDER ALL CONDITIONS THIS
HAPPENS
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7.2. FOR LIABILITIES & REVENUE RECEIVED IN ADVANCE: Brackets TURN AROUND (because the carrying
amount liability is actually in brackets itself at the time you see ,& tax base amount too – so answer must
be in brackets too!. But the first 2 are just not shown in brackets in exam- as a type of way they write it
down-although they should be!) at “temporary difference column ” & “Movement of deferred tax column”
to SCI but go/become opposite to “Movement –SCI Column” ie: TURN AROUND when they go to the
‘Deferred tax to SFP’ column. UNDER ALL CONDITIONS THIS HAPPENS
8.

9. EXCEPTIONS to the RULE:


9.1. In lAS 12 (AC 102)24, circumstances are identified in which a deferred tax asset is not recognised. These
exemptions include tax assets which arise from:
9.1.1. the temporary difference on the initial recognition of an asset or liability in a transaction which
9.1.2.— is not a business combination, and
9.1.3.— at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).
EXAMPLE OF EXCEPTIONS TO THE RULE :

METHOD For Deductable And Taxable Temporary Differences Of Tax Base Of Assets & Liabilities :

1.1. Remember that in the column method below, for the last column = Movement in Profit/loss , you get
this figure by subtracting last years deferred tax account figure from this years deferred tax account
figure(don’t use the SCI movement to P/L figure AT ALL for this minusing-not for any one of the 2). It
is only this difference that goes in this column. So if they want to know the ?????

1.2. Remember : If your deductions the next year are more than what you worked out as your “Deferred
Tax” the year before, it means nothing, there are no special adjustments in review to be made-this
can happen because many things might change or new things might happen. Just carry on as usual
the next year, deduct what you can, and work out the new Deferred Tax in the usual manner- it is
just a estimate that you did/are doing anyway.-And it is the liability per “current situation as it
stands” , worked out at the end each fin year.
1.3. ALLWAYS USE THE TOTAL “deferred tax” of last year and of this year to find the “movement in
deferred tax P/L for the year.” , never use each individual one , item by item , because then if you do
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that you ALSO have to go back to last year and get all the items which do not show up this year and
put them on this years list as well as a movement – YOU CANNOT LEAVE ANY ITEMS DONE LAST
YEAR OUT AT ALL- they must all be moved across to this year- if they don’t show this year then this
years figure will be ZERO – so zero minus last years figure will be the movement!!! [rem: 0- -100 =
0+100=+100, BUT 0-100=-100]lo
1. OFFSETTING : IAS 12.71
An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
(a) has a legally enforceable right to set off the recognised amounts; and
(b) and intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
a. Local/Foreign :The taxpayer usually has the right of offset if the taxes are levied by the same
Authority and that authority permits entity to make /receive a single net payment. Thus entity
may not OFFSET current local tax against current foreign tax in the SoFP.
b. Consolidated Statements: only allowed to offset 2 different entities if the above 2: Ias12.71
conditions are met.
c. Deferred Tax assets/liabilities Offsetting : IAS12.74
An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets against current tax
liabilities and
(b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied by
the same taxation authority on either:
(i) the same taxable entity; or
(ii) different taxable entities which intend either to settle current tax liabilities and assets
on a net basis, or to realise the assets and settle the liabilities simultaneously, in each
future period in which significant amounts of deferred tax liabilities or assets are
expected to be settled or recovered.
a. THUS an entity may not offset a deferred tax asset of STC against normal
deferred tax liability because SARS asseses these taxes differently (legally
enforceable right)

a. These OFFSETTING rules allow offsetting without having a detailed schedule of reversals for all
deferred assets.
b. Any OFFSETTING balance which is a deferred asset still falls under the rules of there must be
enough future profits forecasted before you can recognize an asset here.

1.1. 1-Taxable Temporary Differences =“BALANCE IN SFP Deferred Tax Column” in BRACKETS
in SFP it is a CR in Non-Current Liabilities
1.2. 2-Deductible Temporary Differences= “BALANCE IN SFP Deferred Tax Column” is
POSITIVE in SFP it is a DR in Non-Current Assets
1.3. FOR ASSETS & EXPENSES: Brackets stay normal at “temporary difference column ” & “Movement
of deferred tax column” to SCI but turn around at ‘Deferred tax to SFP’ : UNDER ALL CONDITIONS
THIS HAPPENS
1.4. FOR LIABILITIES & REVENUE RECEIVED IN ADVANCE: Brackets TURN AROUND (because the
carrying amount liability is actually in brackets itself at the time you see ,& tax base amount too – so
answer must be in brackets too!. But the first 2 are just not shown in brackets in exam- as a type of
way they write it down-although they should be!) at “temporary difference column ” & “Movement
of deferred tax column” to SCI but go/become opposite to “Movement –SCI Column” ie: TURN
AROUND when they go to the ‘Deferred tax to SFP’ column. UNDER ALL CONDITIONS THIS
HAPPENS
1.5.TO GET THE MOVEMENT FOR THE YEAR :
1.5.1. You say this year’s(?-not last years? ie visa versa?) “TOTAL Deferred tax Balance” in SFP MINUS
last years “TOTAL Deferred tax Balance” in SFP = the “Movement for the year” in SCI : BUT
YOU ALLWAYS CHANGE THE SIGN AROUND WHEN YOU MOVE IT TO THE “MOVEMENT
P/L SCI” COLUMN FROM “DEFERRED TAX SFP” COLUMN. This is because of the way you
do the journal entries from here- to get it to work. REMEMBER : TAX Asset/Deductable Temp.
Difference is always in BRACKETS in “Deferred tax SFP” column as a CR and visa versa. So
brackets mean a minus, and you must include the ”negative sign ’ in you calc. to get the whole
thing above to work properly –or you will get the wrong signs out.
1.5.2.
1.5.3.NOW IF the “TOTAL Deferred tax Balance” in SFP gets more negative then the movement in the
SCI will show it as positive. But if the SFP Deferred Tax balance gets more positive, (or less
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negative) then the Movement in SCI will show as negative. ???why is on page 167 bottom no
brackets at the SFP column, whiule on page 165 there is(both circled in black)
1.5.4.JOURNAL ENTRIES :
1.5.4.1.You make 1 journal entry with 2 legs for this deferred tax stuff : 1- income tax expense
(the ‘movement’ part to P/L SCI) and 2- deferred tax SFP
1.5.4.2.BOTH ENTRIES USE THE SAME AMOUNT : only the “movement for the year amount” –
nothing else at all – ever!!! gets used as a journal entry.
1.5.4.3. –INCOME TAX EXPENSE-_ : “MOVEMENT FOR THE YEAR”IN SCI P/L PART : as it comes
out of the above calculation to the P/L as heading: –INCOME TAX EXPENSE-_ in the same
sign as it comes out : so if + then DR and if in brackets then CR.
1.5.4.4. - DEFERRED TAX - :DEFERRED TAX SFP : this part forms the other leg in the opposite
sign as the other entry- in heading : - DEFERRED TAX - that’s it, FINISHED! You see you just
raise or lower the BALANCE LEFT FROM LAST YEAR to this years level in the Ledger. This is
because t is not a continually updating balance – you only update it once a year, last years
balance is still there in the ledger.
1.6.TO DO THE SFP and SCI
1.6.1.If the “Deferred tax balance in SFP “ column on the tax workout sheet ,is negative in brackets,
it actually means it gets subtracted from the normal INCOME TAX EXPENSE for the year you
work out from your profit , to make it less.(see journal entries above)(and visa versa). In the SFP
it therefore must go in as a NON_CURRENT LIABILITY as line item called “Deferred Tax Liability”
(because it reduced your tax owed this year- because of temp. differences – but in later years
you will have to pay it to SARS when the things balance out) If the column is POSITIVE it goes in
the SFP as a NON-CURRENT ASSET : as “Deferred Tax Asset” (same reasoning as above):
1.6.2.SCI : you just put the accounting tax – without any deferred tax included- in here as normal ,
then the note 3 on deferred tax shows what it is made up of.
1.6.3.NOTES :
1.6.3.1.Policy note : deferred tax is calc.using the : COMPREHENSIVE ALLOCATION BASIS : temp
diff, carry amnt tax base unused tax loss/credits
1.6.3.2.INCOME TAX EXPENSE NOTE :You make a heading called income tax expense and show in
a calc. how the normal tax you work out from normal profit (goes in the total line at
bottom) is made up : from deferred tax plus the answer you got after you added/subtracted
deferred tax from your tax you calculated from your accounting profits.

1.6.3.3.
1.6.3.4.DEFERRED TAX NOTE : just list all the different things that made up this years deferred
tax calculation and their amounts : eg depreciation, research costs etc.

1.6.3.4.1.
1.6.3.5.Reconcilliation :
1.6.3.5.1.*Tax Effect at Standard rate of tax *Reduction in tax expense for yr (1- exempt 2-
reduction in tax rate 3-non-taxable perotion of capital gains etc) *Increase in tax
expense for yr.(1-non –deductable) *end total

2. In terms of lAS 12 (AC 102), the recognition of deferred tax, either as a deferred tax liability or as a
deferred tax asset, is based on temporary differences. Temporary differences are differences between
the tax base of an asset or liability and its carrying amount in the statement of financial position (lAS 12
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(AC 102).05). At the end of each financial period, these differences are used to determine the deferred
tax liability or asset in the statement of financial position.

3. The fundamental principle ???? that underlies the determination of all temporary differences is that
an entity must recognise a deferred tax liability (asset) whenever recovery or settlement of the carrying
amount of an asset or liability would make future tax payments larger (smaller) than they would be if
such recovery or settlement were to have no tax consequences.

GENERAL COMPREHENSIVE EXAMPLE :

Unused Tax Losses and Credits .


1. There a re only 2 types of this stuff:
i. Unused tax losses: IT ALLWAYS SHOWS in the TAX BASE FIRST IN THE YEAR IT HAPPENS IN -
(you don’t show last years loss as an account in your books-it disappears mos in the trading
acc/profit loss acc/closing of expense/income acc’s. ) Where you had a loss this year it can
become a tax credit next year, so ONLY this year it appears as Deferred Tax IN THE YEAR IT
HAPPENED FIRST, then in any following year SARS allows it to be Carried Over(if at all).(not next
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year cause it should get used up next year) .( !so you effectively a “loss” is you only loose 71%,
the other 29% you can claim from tax next year !)
ii. Tax Credits: if SARS gives you a tax credit for some or other odd reason.
2. Both never appear in Carrying Amount Column : only in the Tax Base column, because they
are not accounting positives (you don’t show last years loss as an account in your books-it
disappears mos in the trading acc/profit loss acc/closing of expense/income acc’s. Same with tax
credits!There is no tax credit account in your books – only in SARS books It only shows as deferred
tax! )
3. UNUSED TAX LOSSES and CREDITS are ONLY EVER DEFERRED TAX ASSETS, they are never
deferred tax liabilities. They only refer to types ‘credits’ from the taxman, nothing else at all.
4. The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses
and tax credits are the same as the criteria for recognizing deferred tax assets arising from
deductible temporary differences. :

5. IAS 12.34 :A deferred tax asset shall be recognised for the carryforward of unused tax losses
and unused tax credits to the extent that it is probable that future taxable profit will be available
against which the unused tax losses and unused tax credits can be utilised.
6. IAS 12.36 An entity considers the following criteria in assessing the probability that taxable profit
will be available against which the unused tax losses or unused tax credits can be utilised:
(a) whether the entity has sufficient taxable temporary differences relating to the same taxation
authority and the same taxable entity, which will result in taxable amounts against which the
unused tax losses or unused tax credits can be utilised before they expire;
(b) whether it is probable that the entity will have taxable profits before the unused tax losses or
unused tax credits expire;
(c) whether the unused tax losses result from identifiable causes which are unlikely to recur;
(check if a loss last year will not maybe be repeated this year) and
(d) whether tax planning opportunities (see paragraph 30) are available to the entity that will
create taxable profit in the period in which the unused tax losses or unused tax credits can be
utilised.
To the extent that it is not probable that taxable profit will be available against which the
unused tax losses and unused tax credits can be utilised, the deferred tax asset is not
recognised.
a. The TAX PLANNING opportunities referred to in (d) above means the following types : explained
in IAS 12.30 next:
b. IAS 12.30: TAX PLANNING OPPORTUNITIES ARE : actions that the entity would take in
order to create or increase taxable income in a particular period before the expiry of a tax loss
or tax credit carryforward. For example, in some jurisdictions, taxable profit may be created or
increased by:
(a) electing to have interest income taxed on either a received or receivable basis;
(b) deferring the claim for certain deductions from taxable profit;
(c) selling, and perhaps leasing back, assets that have appreciated but for which the
tax base has not been adjusted to reflect such appreciation; and
(d) selling an asset that generates non-taxable income (such as, in some jurisdictions,
a government bond) in order to purchase another investment that generates taxable
income.
Where tax planning opportunities advance taxable profit from a later period to an earlier
period, the utilisation of a tax loss or tax credit carryforward still depends on the existence
of future taxable profit from sources other than future originating temporary differences.
7. Note: examples of circumstances to take into account for the above IAS12.36 are:
a. change in mngmnt causes better expectations,
b. mngmnts own expectations of the future
c. previous years losses
d. industry outlook
e. economic climate
8. IAS 12. 82 :An entity SHALL DISCLOSE (in the Fin Stats) the amount of a deferred tax asset and
the nature of the evidence supporting its recognition, when:
(a) the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable temporary differences; and
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(b) the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to
which the deferred tax asset relates.
REASSESSMENT OF UNRECOGNISED DEFERRED TAX ASSETS
1. IAS 12.37 At the end of each reporting period, an entity reassesses unrecognised deferred tax
assets. The entity recognises a previously unrecognised deferred tax asset to the extent that it
has become probable that future taxable profit will allow the deferred tax asset to be recovered.
For example, an improvement in trading conditions may make it more probable that the entity will
be able to generate sufficient taxable profit in the future for the deferred tax asset to meet the
recognition criteria set out in paragraph 24 or 34. Another example is when an entity reassesses
deferred tax assets at the date of a business combination or subsequently (see paragraphs 67 and
68).

2. CHANGE IN ACCOUNTING ESTIMATE: the re- measurement and adjustment of the deferred
tax asset is not an adjustment of the previous years results, but rather a Change in Accounting
Estimate.
3. The criteria for recognising deferred tax assets arising from the carryforward of unused tax losses
and tax credits are the same as the criteria for recognizing deferred tax assets arising from
deductible temporary differences. :
a. One may not set- off ANY old type of Temp Diff or Taxable Income against a unused tax
loss/credit. There are certain rules as to what may be set-off against what – this has 3 benefits:*
it allows set-offs so extensive scheduling of reversals is prevented, and it * allows set off of
most taxable liabilities against deductable assets. *And it prevents set off of incompatable
things against each other.
b. the first step is to check if TAXABLE temp. diff. which creates an income OR TAXABLE INCOME
itself will be available in the next year/s against which the unused tax losses/credits can be set
off.
c. the second step is : to check the timing: if the tax loss/credit cannot be used in the same
years in the future as the future Taxable temp. diff. or Taxable Income then it can not be
recognized of course.
1. Partial recognition is allowed :then next year the stuff left out can be re-recognised if
circumstances change.
2. IAS12. 56 : The carrying amount of a deferred tax asset shall be reviewed at the end of each
reporting period. An entity shall reduce the carrying amount of a deferred tax asset to
the extent that it is no longer probable that sufficient taxable profit will be available to allow
the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be
reversed to the extent that it becomes probable that sufficient taxable profit will be available.(you
first just work out what the deferred tax asset would be, then decide how much of that can
actually be used next year/s depending on forecasted profit and forecasted tax that one can use it
aginst. Then you do NOT make any journal entries for the POSSIBLE TAX ASSET, you only disclose
in the notes how much was left out. You only make a journal entry for what the forecasted Tax
allows you to ussume will be deductable next year/s.)
3. If deferred tax assets are not recognized it should be disclosed in a note to the SoFP (IAS12.81e)

Method:

Per Accountant Per SARS Read YOU If temp diff = (-) ONLY EVER
OWE ( ‘minus‘ then this is DR [this years
= they owe (owe you)@ answer –
you) less-last
years]
Carrying Tax Base Temporary *29% = Deferred Movement
Amount Difference Tax in P/L for
Year
Property & 1000 700 300 (87) cr (87) cr income
Plant
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Unused Tax 0(you don’t say 5000 (5000) 1450 dr (they owe 1450 dr
Loss tax loss in your you) expense
books next year
– its gone)

1. There a re only 2 types of this stuff:


i. Unused tax losses: where you had a loss this year it can become a tax credit next
year, so ONLY this year it appears as Deferred Tax (not next year cause it should get
used up next year) .( !so you effectively only loose 71%, the other 29% you can claim
from tax next year !)
ii. Tax Credits: if SARS gives you a tax credit for some or other odd reason.
2. Both never appear in Carrying Amount Column : only in the Tax Base column, because they
are not accounting positives (you don’t show last years loss as an account in your books-it
disappears mos. Same with tax credits! It only shows as deferred tax! )
3. Note that : “Profit of Company For the Year” = [Net Profit Before Tax] –less/add- [Deferred Tax + Normal
tax] = Net Profit SO DEFERRED TAX FORMS PART OF THE YEARS PROFIT , IT MUST ALLWAYS BE
ADDED TO THE YEARS PROFIT!
a. If A DEFERRED TAX ADDED TO PROFIT CAUSES A PROFIT WHERE THERE WAS A LOSS OR A
LOSS WHERE THERE WAS A PROFIT THIS IS OK/RIGHT/FINE. You just treat the profit as a
profit or the loss as a loss, and you will also have to pay tax on this worked out profit as
per usual.
4. C:\Documents and Settings\All Users\Application Data\Microsoft
5. IF “DEFERRED TAX ASSET” from depreciation causes an “INCOME” and causes you to pay more
tax :IF THERE WILL BE NO PROFIT NEXT YEAR/S : You may not show any ‘Deferred Tax Asset“ as an
asset because there will be no profit to claim it back from , BUT you MUST still show the extra tax you must
pay in SoCI on the “DEFERRED TAX ASSET” - so the DEFERRED TAX ASSET may not appear in the books as
a debtor but you must still pay the tax on the TEMPORARY DIFFERENCE which caused the DEFERRED TAX
ASSET – even if you made a loss and the only profit you made comes from the DEFERRED TAX ASSET extra
tax payable on the ‘deferred tax asset’ , you must still pay it and show it.! – this means just because you
have a different depreciation rate than SARS, you can end up paying 14000 rand tax on the DEFERRED TAX
ASSET (you would be able to subtract it from TAX next year) created by the difference – even when you
actually make a loss one year , now you make a loss and even more of a loss by paying this tax on an
‘IDEA”! that’s what it means to use depreciation rates different to SARS depreciation rates!!!!
6. If you have a tax loss in year 1 (above) , then in year 2 it just disappears exactly and ONLY here(nowhere
else): in the ‘MOVEMENT in P/L for Year column’: so when you minus last years “Deferred Tax Account”
from this years, then the unused tax loss disappears there because it does not appear in this years calc.
(there is nothing left , it is being used up by this years tax payment.
7. you first just work out what the deferred tax asset would be, then decide how much of that can
actually be used next year/s depending on forecasted profit and forecasted tax that one can use it
aginst. Then you do NOT make any journal entries for the POSSIBLE TAX ASSET, you only make a
journal entry for what the forecasted Tax allows you to assume will be deductable next year/s.)
You must disclose in the notes IAS12.83e, the extent to which deferred tax assets are not
recognosed in the Fin Stats (how much was left out ).
8. IF: the profit next year is more than you thought so you can deduct more of the possible
‘Deferred tax ‘ than you thought : it means nothing – you just deduct the extra amount possible as
usual from your tax – THE AMOUNT YOU WORK OUT LAST YEAR AS YOUR DEFERRED TAX is just an
‘ESTIMATE’ to be used to estimate this years ‘debtor SARS’ , if your ESTIMATE is wrong it means nothing,
you can still deduct whatever the next year anyway it dos’nt stop you.
9. The next year you don’t do anything with what you left out last year – you just leave it - you have
to work the whole deferred tax thing out from scratch again and decide again how much you will
be able to recognize and how much you must ignore because there wont be enough profit next
year.
10.Remember any loss from last year gets carried forward as an “Unused tax loss” – like a “Tax
Credit” to the next year- it gets added to the “Deductable Temporary difference. “ and to any
“Deductable permanent differences” and multiplied by the tax rate% to get the possible
“Deferred Tax Asset” you must decide on.
11. REMEMBER : YOUR DEFERRED TAX YOU WORK OUT FOR THIS YEAR IS NEVER YOUR FINAL
ANSWER. The final Journal Entry (final answer) for the “Deferred Tax Asset” (or liability) is ONLY
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EVER the difference between last years Journal Entry and this years Final “Deferred Tax”. – SO
THE DIFFERENCE BETWEEN LAST YEARS DEFERRED TAX disclosed in the SoCI, AND THIS
YEARS DEFERRED TAX you work out. You see, when you add this ‘difference’ to the “Deferred
tax” account in the ledger, last years amount is still in there, so it will bring it to this years amount
after you add the difference. Thats why the journal entry for “Deferred Tax” as well as the entry
for “Tax Expense” (Movement to Profit/Loss) are both the same figure- the 2nd shows the
movement from last years asset balance- so what happened this year- and the 1st shows the new
actual asset balance.

VERY COMPREHENSIVE EXAMPLE: KNOW THIS ONE :


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2) RECOGNITION:
1. General Guideline: IAS 12.58&61A , Tax is to be recognized in the same manner in which the relating
transaction is recognized,whether it was in the same or another period. Eg: revaluations,long term
investments stated at fair value,exchange procedures
2. Vertabim: Deferred tax must be recognized as an INCOME or EXPENSE in profit & loss for the year , except if
the tax arises from :
a. Transactions recognized in OTHER COMPREHENSIVE INCOME
b. A BUSINESS COMBINATION (IAS 12.58)
3. Eg If the tax status of company changes through restructuring of equity or owner moving to new tax
district/country, then IT MUST BE SHOWN IN profit&loss. The EXCEPTION is if (per SIC 25)the transaction
related to equity was treated as a direct charge to Equity or Other Comprehensive Income, in these cases
the TAX is also charged direct to EQUITY or Other Comprehensive Income- whichever is applicable.
PRESENTATION AND DISCLOSURE:
OFFSETTING:
1. OFFSETTING : IAS 12.71
An entity shall offset current tax assets and current tax liabilities if, and only if, the entity:
(a) has a legally enforceable right to set off the recognised amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
a. Local/Foreign :The taxpayer usually has the right of offset if the taxes are levied by the
same Authority and that authority permits entity to make /receive a single net payment.
Thus entity may not OFFSET current local tax against current foreign tax in the SoFP.
b. Consolidated Statements: only allowed to offset 2 different entities if the above 2:
Ias12.71 conditions are met.: IT IS NOT ALLOWED IN SA because : in SA separate legal
entities are liable for income taxes, not groups of companies, ‘groups’ are not allowed to
settle their tax on a net basis.
c. Deferred Tax assets/liabilities Offsetting : IAS12.74
An entity shall offset deferred tax assets and deferred tax liabilities if, and only if:
(a) the entity has a legally enforceable right to set off current tax assets against current
tax liabilities and
(b) the deferred tax assets and the deferred tax liabilities relate to income taxes levied
by the same taxation authority on either:
(i) the same taxable entity; or
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(ii) different taxable entities which intend either to settle current tax liabilities and
assets on a net basis, or to realise the assets and settle the liabilities simultaneously,
in each future period in which significant amounts of deferred tax liabilities or assets
are expected to be settled or recovered.
a. THUS an entity may not offset a deferred tax asset of STC against normal
deferred tax liability because SARS asseses these taxes differently (legally
enforceable right)

a. These rules allow offsetting without having a detailed schedule of reversals for all deferred
assets.
b. Any balance which is a deferred asset still falls under the rules of there must be enough
future profits forecasted before you can recognize an asset here.
SoCI AND NOTES Presentation & Disclosure :
1. ON THE FACE or IN THE NOTES (I think)
IAS 12. 77 The tax expense (income) related to profit or loss from ordinary activities shall be presented in
the statement of comprehensive income. (means on the face of it-)
79 The major components of tax expense (income) shall be disclosed separately.
80 Components of tax expense (income) may include:
a. (a) current tax expense (income);
b. (b) any adjustments recognised in the period for current tax of prior periods;
c. (c) the amount of deferred tax expense (income) relating to the originationand reversal of
temporary differences;
d. (d) the amount of deferred tax expense (income) relating to changes in tax rates or the
imposition of new taxes;
e. (e) the amount of the benefit arising from a previously unrecognised tax loss tax credit or
temporary difference of a prior period that is used to reduce current tax expense;
f. (f) the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary
difference of a prior period that is used to reduce deferred tax expense;
g. (g) deferred tax expense arising from the write-down, or reversal of a previous write-down, of a
deferred tax asset in accordance with paragraph 56; and (change in probability that profits will
be available….)
h. (h) the amount of tax expense (income) relating to those changes in accounting policies and
errors that are included in profit or loss in accordance with IAS 8, because they cannot be
accounted for retrospectively.
2. ONLY IN THE NOTES TO THE SCI:
A RECONCILLIATION : of the relationship between tax expense (income) and accounting profit in
either or both of the following forms:
(i) a numerical reconciliation between tax expense (income) and the product of accounting
profit multiplied by the applicable tax rate(s),disclosing also the basis on which the applicable
tax rate(s) is (are)computed; or
(ii) a numerical reconciliation between the average effective tax rate and the applicable tax
rate, disclosing also the basis on which the applicable tax rate is computed;
(d) an explanation of changes in the applicable tax rate(s) compared to the previous accounting
period;
(g) in respect of each type of temporary difference, and in respect of each type of unused tax
losses and unused tax credits:
(ii) the amount of the deferred tax income or expense recognised in profit or loss, if this is not
apparent from the changes in the amounts recognised in the statement of financial position;
(ab) the amount of income tax relating to each component of Other Comprehensive income (see
paragraph 62 and IAS 1 (as revised in 2007));
(h) in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued operation for the period,
together with the corresponding amounts for each prior period presented;
3. SA only : AC501.22 : ABOUT STC in the NOTES:
a. The amount provided for STC
b. An explanation that assists in understanding the factors affecting the STC
charge(what can be the factors at all), escpecially where STC is a significant
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component of the total tax charge , or the effective STC rate varies
substantially from the standard rate. ( you only get 1 stc rate ie 10%, so what
other rates are there?)
c. The STC on dividends declared after year end but brfore the fin stats were
authorised for issue.
d. The nature of potential income tax consequences that would result from a
dividend payout to shareholders.where practicabley dtererminable the
amounts should also be disclosed- where not practicably determinable an
explanation is required. (also see IAS 12.82a)??what doe sthis mean? The
exact same as pont b above orwhat??)
e. The amount of deferred STC credits that arise to the extent that it is not
raised as a deferred tax asset. ( does this means ANY STC credits at all
because STC is never allowed to be a deferred tax asset)
f.

SFP and NOTES Presentation & Disclosure :


a) the aggregate current and deferred tax relating to items that are charged or credited directly to
equity (see paragraph 62A);
(e) the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and
unused tax credits for which no deferred tax asset is recognised in the statement of financial position;
(INCL. unutilized STC credits)
(f) the aggregate amount of temporary differences associated with investments in subsidiaries, branches
and associates and interests in joint ventures, for which deferred tax liabilities have not been recognized
(see paragraph 39);
(g) in respect of each type of temporary difference, and in respect of each type of unused tax losses and
unused tax credits:
(1) the amount of the deferred tax assets and liabilities recognised in the statement of financial
position for each period presented;
(i) the amount of income tax consequences of dividends to shareholders of the entity that were proposed
or declared before the financial statements were authorised for issue, but are not recognised as a
liability in the financial statements;
82 (Deferred tax assets) An entity shall disclose the amount of a deferred tax asset and the nature of the
evidence supporting its recognition, when:
(a) the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable temporary differences; AND
(b) the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to
which the deferred tax asset relates.

DISCLOSURE per IAS 12.79-end vertabim


Disclosure (GREY is in textbook and SHOWS ABOVE , NOT GREY DOES NOT SHOW ABOVE IE:
not in our TEXTBOOK)
79 The major components of tax expense (income) shall be disclosed separately.
80 Components of tax expense (income) may include:
(a) current tax expense (income);
(b) any adjustments recognised in the period for current tax of prior periods;
(c) the amount of deferred tax expense (income) relating to the originationand reversal of temporary
differences;
(d) the amount of deferred tax expense (income) relating to changes in tax rates or the imposition of new
taxes;
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(e) the amount of the benefit arising from a previously unrecognised tax loss tax credit or temporary
difference of a prior period that is used to reduce current tax expense;
(f) the amount of the benefit from a previously unrecognised tax loss, tax credit or temporary difference of
a prior period that is used to reduce deferred tax expense;
(g) deferred tax expense arising from the write-down, or reversal of a previous write-down, of a deferred
tax asset in accordance with paragraph 56; and (change in probability that profits will be available….)
(h) the amount of tax expense (income) relating to those changes in accounting policies and errors that are
included in profit or loss in accordance with IAS 8, because they cannot be accounted for retrospectively.

81 The following shall also be disclosed separately:


(a) the aggregate current and deferred tax relating to items that are charged or credited directly to
equity (see paragraph 62A);
(ab) the amount of income tax relating to each component of Other Comprehensive income (see
paragraph 62 and IAS 1 (as revised in 2007));
(b) [deleted];
(c) an explanation of the relationship between tax expense (income) and accounting profit in either or
both of the following forms:
(i) a numerical reconciliation between tax expense (income) and the product of accounting profit
multiplied by the applicable tax rate(s),disclosing also the basis on which the applicable tax rate(s)
is (are)computed; or
(ii) a numerical reconciliation between the average effective tax rate and the applicable tax rate,
disclosing also the basis on which the applicable tax rate is computed;
(d) an explanation of changes in the applicable tax rate(s) compared to the previous accounting
period;
(e) the amount (and expiry date, if any) of deductible temporary differences, unused tax losses, and
unused tax credits for which no deferred tax asset is recognised in the statement of financial position;
(f) the aggregate amount of temporary differences associated with investments in subsidiaries,
branches and associates and interests in joint ventures, for which deferred tax liabilities have not
been recognized (see paragraph 39);
(g) in respect of each type of temporary difference, and in respect of each type of unused tax losses
and unused tax credits:
(i) the amount of the deferred tax assets and liabilities recognised in the statement of financial
position for each period presented;
(ii) the amount of the deferred tax income or expense recognised in profit or loss, if this is not
apparent from the changes in the amounts recognised in the statement of financial position;
(h) in respect of discontinued operations, the tax expense relating to:
(i) the gain or loss on discontinuance; and
(ii) the profit or loss from the ordinary activities of the discontinued operation for the period,
together with the corresponding amounts for each prior period presented;
(j) if a business combination in which the entity is the acquirer causes a change in the amount
recognised for its pre-acquisition deferred tax asset (see paragraph 67), the amount of that change;
and
(k) if the deferred tax benefits acquired in a business combination are not recognised at the
acquisition date but are recognised after the acquisition date (see paragraph 68), a description of the
event or change in circumstances that caused the deferred tax benefits to be recognised.

82 (Deferred tax assets) An entity shall disclose the amount of a deferred tax asset and the nature of the
evidence supporting its recognition, when:
(a) the utilisation of the deferred tax asset is dependent on future taxable profits in excess of the
profits arising from the reversal of existing taxable temporary differences; AND
(b) the entity has suffered a loss in either the current or preceding period in the tax jurisdiction to
which the deferred tax asset relates.
82A In the circumstances described in paragraph 52A, (ie 52 is where in some countries tax rates are
different if you pay out all profit as dividends or if you don’t pay out)an entity shall disclose the
nature of the potential income tax consequences that would result from the payment of dividends to
its shareholders. In addition, the entity shall disclose the amounts of the potential income tax
consequences practicably determinable and whether there are any potential income tax consequences
not practicably determinable.
83 [Deleted]
84 The disclosures required by paragraph 81(c) enable users of financial statements
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to understand whether the relationship between tax expense (income) and
accounting profit is unusual and to understand the significant factors that could
affect that relationship in the future. The relationship between tax expense
(income) and accounting profit may be affected by such factors as revenue that is
exempt from taxation, expenses that are not deductible in determining taxable
profit (tax loss), the effect of tax losses and the effect of foreign tax rates.
85 In explaining the relationship between tax expense (income) and accounting
profit, an entity uses an applicable tax rate that provides the most meaningful
information to the users of its financial statements. Often, the most meaningful
rate is the domestic rate of tax in the country in which the entity is domiciled,
aggregating the tax rate applied for national taxes with the rates applied for any
local taxes which are computed on a substantially similar level of taxable profit
(tax loss). However, for an entity operating in several jurisdictions, it may be
more meaningful to aggregate separate reconciliations prepared using the
domestic rate in each individual jurisdiction. The following example illustrates
how the selection of the applicable tax rate affects the presentation of the
numerical reconciliation.
86 The average effective tax rate is the tax expense (income) divided by the
accounting profit.
87 It would often be impracticable to compute the amount of unrecognised deferred
tax liabilities arising from investments in subsidiaries, branches and associates
and interests in joint ventures (see paragraph 39). Therefore, this Standard
requires an entity to disclose the aggregate amount of the underlying temporary
differences but does not require disclosure of the deferred tax liabilities.
Nevertheless, where practicable, entities are encouraged to disclose the amounts
of the unrecognised deferred tax liabilities because financial statement users may
find such information useful.
87A Paragraph 82A requires an entity to disclose the nature of the potential income
tax consequences that would result from the payment of dividends to its
shareholders. An entity discloses the important features of the income tax
systems and the factors that will affect the amount of the potential income tax
consequences of dividends.
87B It would sometimes not be practicable to compute the total amount of the
potential income tax consequences that would result from the payment of
dividends to shareholders. This may be the case, for example, where an entity has
a large number of foreign subsidiaries. However, even in such circumstances,
some portions of the total amount may be easily determinable. For example, in a
consolidated group, a parent and some of its subsidiaries may have paid income
taxes at a higher rate on undistributed profits and be aware of the amount that
would be refunded on the payment of future dividends to shareholders from
consolidated retained earnings. In this case, that refundable amount is disclosed.
If applicable, the entity also discloses that there are additional potential income
tax consequences not practicably determinable. In the parent’s separate financial
statements, if any, the disclosure of the potential income tax consequences
relates to the parent’s retained earnings.
87C An entity required to provide the disclosures in paragraph 82A may also be
required to provide disclosures related to temporary differences associated with
investments in subsidiaries, branches and associates or interests in joint ventures.
In such cases, an entity considers this in determining the information to be
disclosed under paragraph 82A. For example, an entity may be required to
disclose the aggregate amount of temporary differences associated with
investments in subsidiaries for which no deferred tax liabilities have been
recognised (see paragraph 81(f)). If it is impracticable to compute the amounts of
unrecognised deferred tax liabilities (see paragraph 87) there may be amounts of
potential income tax consequences of dividends not practicably determinable
related to these subsidiaries.
88 An entity discloses any tax-related contingent liabilities and contingent assets in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets.
Contingent liabilities and contingent assets may arise, for example, from
unresolved disputes with the taxation authorities. Similarly, where changes in
tax rates or tax laws are enacted or announced after the reporting period, an
entity discloses any significant effect of those changes on its current and deferred
tax assets and liabilities (see IAS 10 Events after the Reporting Period).
EXAMPLE FROM IAS12:
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Circular 1/2006 Special DISCLOSURES IN RELATION TO DEFERRED TAX:


1. It says entities need to consider whether the carrying amount is recovered through use , sale, or liabilities
settled, because each cound cause different material differences in the deferred tax balance.
2. Circular 1/2006 requires additional disclosures only:
a. If the manner of recovery of a component of deferred tax can CHANGE (eg from sale to use etc)
b. If expected recovery manner changes, in which event will the deferred tax for that component be
materially different AND
c. when the user of the fin stats is not capable of determining the rate at which deferred tax has been
raised on that component from the info provided in the fin stats
3. THE FOLLOWING EXACT DISCLOSURES SHOULD BE PROVIDED OR BE CAPABLE where If expected recovery
manner changes the deferred tax for that component could become be materially different:
a. The expected manner of recovery and the tax rate used to calc. the deferred tax balance( the one
you went and used so far)
b. Where more than 1 tax rate is used for each category of temp diff(if more than 1 tax rate in 1 categ.
Or if each categ has a different tax rate?), the components of the deferred tax at the various rates
incl. those components on which no tax is expected to be paid.(is a component a category or what?
And what does ‘no tax expected to be paid mean?- all exempt things to to be listed or what?)
EXTRA PARTS ADDED FROM EACH CHAPTER WHERE THERE IS A SECTION ON DEFERRED TAX FOR
THAT PARTICULAR ‘IAS’

TAX IMPLICATIONS of CAPITALISTAION OF BORROWINGS:


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INCOME STATEMENT METHOD (FOR INTEREST SAKES)


1. This is the old method, it is not allowed by IAS 12, onlt he balance sheet approach is allowed. But this
method is good for comparison, and it used to be allowed until recent changes to IAS12
2. See scan below:
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130 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

IAS Property Plant & Equipment


Scan it in : Note: see the 1 page summary at back of GAAP book, pg184 - it is very good and perfect for this

IAS 16 Property Plant & Equipment

1-REDO: see PPE chapter, redo income tax section in PPE chapter - not done yet!!
2-DO THE TABLE OF PPE IN NOTES AND AN FULL EXAMPLE COMPLETE NOTES: not done yet in
DISCLOSURE
3- quickly shot through ias 16 to see if you missed any points in there that are not maybe in
textbook or something.

How to Journalise Sale of PPE , Realisation Account etc.


a.
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Special Notes
1. When you transfer any depreciation attributable(difference) to revaluation from REVALUATION SURPLUS ACCOUNT to
RETAINED EARNINGS ACCOUNT at each years depreciation , you do not have to . the company can have a policy of only
transferring this on sale/disposal .,
2. When you transfer the extra portion of depreciation of difference between cost and revalued amounts each year, from reval surplus to
retained earnings, YOU MUST STILL WRITE UP THE FULL AMOUNT AS AN EXPENSE IN THE PROFIT/LOSS SECTION. So
this does not mean you leave that part out of the yearly depreciation written out through profit / loss- . This transfer is a second entry
completely unrelated entry(just equity movement thing –like a transfer between equity accounts!)–so there are 4 legs.
a. You still write the full amount – both amounts here- off to depreciation account and accumualed depreciation/. This transfer is
a second entry completely unrelated entry(just equity movement thing out one and into the other for sort of ‘cosmetic reasons
like’!)–
b. Question: how can you move it to ret earn. from reval. Surpluss, if it is GONE now- I mean it has been depreciaqted, it is
gone,out the door , no more. So how come it gets moved to retained earnings ? ANS: when the depreciation you did in P&L
SCI moves through to retained earnings for the year, it will AUTO reduce the amount you transferred there from reval.
Acc. another QUES: what if they spend all profit before they move it and don’t move it to ret.earn. first to balance out the thing
, now you have some ‘deprecciation’ in ret. Earn. which must be taken out ? it is used up – gone? My own ANS ask if correct ::
I think they moved it there magically since depreciation reduced profit (deprec. is just imaginary anyway) so that part of profit
was not able to be ‘spent’ before it got to ret.earn , and thus what could have gone to ret.earn. if you had forced it (profit) did
not go, so ret. Earn. is auto. Poorer by that amount, no matter what you do with the profit after tax! Is this correct??or not?

3. SHORTENED NOTES : PPE:


a. IFRIC 1 : IF DISMANTLING or DECOMMISIONING OR SIMILAR COSTS ARE RE-ASSESED: different for each
cost model type:
i. UNDER COST MODEL :per IFRIC 1 you just re-work out the Present Value of the changed dismantling costs, and
if the amount in you books is different you change it by capitalizing the difference : so “Building asset account”
CONTRA “Provsion for dismantling etc account” add/subtract the change in costs to the asset. Do NOT book this
change as interstest expense , that is completely sepatarate- just keep the 2 apart and treat this change as capital, and
the interest has nothing to do with it , it is a separate charge each year calculated from the balance of the “Provision”
liability account. These changes are disclosed as changes in estimate ALSO see IFRIC 1 for there should be testing of
impairment when cost estimates go down due to higher discount rate or declining costs..(if it goes up do you do
anything special with ‘IAS change in accounting estimate’ ? and if it goes down do you de-recognise it or just change
it and finished?)
ii.UNDER REVALUATION MODEL: increases in provision set off against revaluation surpluss by debiting other
comprehensive income./decreases by crediting it. If it increases, you first Dr Reval.Acc, then when assets balance in
reval.acc. is used up, only then do you take the REST to SCI profit&loss. See example 11.17 scanned in long notes.
b. GROSS AND NET METHOD OF DOING A REVALUATION:
i. GROSS METHOD: you adjust acc.depr. so that the CARRYING amount of the asset is equal to the new revaluated
amount.
1. The Acc.Depr. must be adjusted by bring it to the level of : by recalculating depreciation from scratch for
the asset, as if it was bought at the new revaluated amount when it was bought many years ago, and using the
EXACT same depreciation rate as used from then till now(old rate) up to now. (as if it was always
depreciated at that level.) (If you wish to change depreciation rate you must do it from now onwards , not in
the past. )This method is normally used where you do not want to do a revaluation for some reason, so you
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take the current replacement value of the asset, and make that your ‘cost’(bring the asset book cost to that
level) .then you also adjust depreciation so your carrying amount is the new depreciated revalued rate
a. Depreciation & Acc Depr & Reval. : this method never affects the ‘depreciation ‘ line item in the
SCI. Funny thing: for Acc Dep. You just add/less from acc dep account, and the CONTRA is the
PPE asset account that will always be on the opposite side. It is a natural contra – just make these 2
opposing entries in 1 journal entry. Then the reval. Account ONLY gets the balance of what the 2
entries (reval + acc dep) on one side need to balance out the PPE entry on other side: it is just some
weird method they work out somehow – notice acc dep is a CR and reval .acc. is also Cr. (can you
say [acc dep. Contra depreciation in P/L for year] why must [acc dep & reval surp. CONTRA
asset], why cant [reval.surp. CONTRA PPE asset account] alone. How does this funny method
work?not sure.)
2. The “PPE /asset account” historical cost price in the books must be adjusted up/To get the new PPE level
for asset account : if useful life = 10yr , used so far = 4 yr , then say 10/4 x (new revalued amount wanted) =
what your Cost in asset account must be . So the asset account must be brought to this level by dr/cr
CONTRA [ acc dep +balance use reval.acc), So the asset account and acc dep together will equal the
revalued amount you want as CARRYING AMOUNT. You do this by [Dr/Cr Asset account CONTRA
needed Acc Dep+ balance Revaluation Surpluss account ] , Reval.Surpluss.Acc. is a “Other Comprehensive
Income Account” that is part of equity. (Revaluation Surplus) and shows as its VERY own column in the
StChEq.
a. Unisa does the PPE account by 1-writing out old ppe asset named ”Asset at Cost” AFTER the old
Acc.Dep. is reversed INTO it. Then 2- they write out the balance after .acc. dep. Reversal left in old
asset account and write it into a new asset account called “Asset at Revaluated Amount” They
ALSO do all the journal entries in ONE GO for this – so add all the entries to PPE account into 1
line item, and do the same for other items in entry. (first do them singly on scrap paper, then
combine them into a single entry afterwards- it should save some time too , only 1 narration!) This
method is NOT used for the Gross method, because there the old asset account is just adjusted to the
new level, not closed off like here.I don’t think it is compulsory, you probly can keep old asset
account in both cases, but this is UNISAS chosen way.

ii.NET METHOD:
1. Acc Depr. :here you just write out the Acc. depreciation account into the PPE/asset account to get rid of it,
back to 0, So Acc.Depr. starts again from scratch at zero with this method.
2. Adjust the PPE/ Asset account after writing Acc.Dep. into the Assets Account , bring the book value of the
asset to the level of new revalued amount by : [Dr/Cr Asset account CONTRA Revaluation Surpluss account
] , which is a “Other Comprehensive Income Account” that is part of equity. (Revaluation Surplus) and
shows as its VERY own column in the StChEq.
a. Unisa does the PPE account by 1-writing out old ppe asset named ”Asset at Cost” AFTER the old
Acc.Dep. is reversed INTO it. Then 2- they write out the balance after .acc. dep. Reversal left in old
asset account and write it into a new asset account called “Asset at Revaluated Amount” They
ALSO do all the journal entries in ONE GO for this – so add all the entries to PPE account into 1
line item, and do the same for other items in entry. (first do them singly on scrap paper, then
combine them into a single entry afterwards- it should save some time too , only 1 narration!) This
method is NOT used for the Gross method, because there the old asset account is just adjusted to the
new level, not closed off like here.I don’t think it is compulsory, you probly can keep old asset
account in both cases, but this is UNISAS chosen way.
iii.TIMING OF REVALUATIONS :(used for Net & Gross method both)
a. If you revalue something at end of year, then depreciation for that year is calculated using the old
value before revaluation of the asset.Only in the next year would depreciation be calc. using the new
revalued value. Simple
b. If you revalue at end of year, but wish to account fior revaluation as if done at begimning of year,
then you must ADD afull years DEPRECIATION to the REVALUED amount at REVALUED
amount s rate, not old rate of depreciation or anything. Eg 1200 = revalued amount , useful life = 10
yrs, revalued at end yr 4, residual value =200. So to bring it back to begin yr 4, add back one yrs
depreciation ( don’t forget to minus the residual first]: [1200 -200] /10 = 100 = 1 yrs
depreciation.So at begin yr 4 revalued amount is 1200+100=1300 . Now you can carry on with rest
of revaluation calculations.
c. If you specially decide to roll back a revaluation by using depreciation to begin of year for a
revaluation done at end of ,so amounts can be depreciated & used from that date, it must be
disclosed in the notes under accounting policy for revaluatuons for that asset class/etc.

1. COMPENSATION/insurance payout FOR IMPAIRMENT:


a. If you get compensation for impairment or a insurance payout, it must be :
i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed).
ii.Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in profit/loss
for the year. (I don’t know if it goes to asset realsiation account or if it goes separately by itself ?)
iii.Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats :
1. Notes to fin stats :
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a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in Disposals, or
in own separate heading called “PPE destroyed in hail storm” any new ssset bough to replace it goes
as per normal in “Additions”
b. Profit Before Tax note: in the normal note called ‘profit before tax” : disclose
i. 1: Amount of loss to item in hailstorm or whatever it was in own line
i. 2: Amount of compensation received from insurance or wherever in own line

Scope:
3 This Standard does not apply to:
(a) property, plant and equipment classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations;
(b) biological assets related to agricultural activity (see IAS 41 Agriculture);
(c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for
and Evaluation of Mineral Resources); or
(d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
However, this Standard applies to property, plant and equipment used to develop or
maintain the assets described in (b)–(d).

Definitions:
1. AN IMPAIRMENT LOSS is the amount by which the carrying amount of an asset exceeds its
recoverable amount.
2. RECOVERABLE AMOUNT is the higher of an asset’s fair value less costs to sell and its value
in use.
3. ENTITY-SPECIFIC VALUE is the present value of the cash flows an entity expects to arise from
the continuing use of an asset and from its disposal at the end of its useful life or expects to incur
when settling a liability.(does this incl repairs& maintenance ie ‘ cash outflows as well’ and can
you set-off liabilities vs positive- what does it mean ‘expects to incur when settling a liability?)
4. FAIR VALUE is the amount for which an asset could be exchanged between knowledgeable,
willing parties in an arm’s length transaction.
5. RESIDUAL VALUE : amount entity would CURRENTLY (today, not in future! Note funny method here) obtain from disposal of the
asset, after deducting estimated costs of disposal, if asset were today already at the age & condition expected at end of it’s useful life.
(Ie: at todays prices not future prices)
1. ASSET: Definition : An Asset of an Entity is :
i. A resource
ii. that is under the control of the entity (control=restrict access to asset&power to
obtain future economic benefits from it)
iii.that will result in future economic benefits flowing to the entity
iv.that originated as a result of past events

1. Carrying amount: is the amount at which an asset is recognised after deducting any
accumulated depreciation and accumulated impairment losses.
2. Useful life is:
3. (a) the period over which an asset is expected to be available for use by an entity; or
4. (b) the number of production or similar units expected to be obtained from the asset by an entity.
5. Depreciation is the systematic allocation of the depreciable amount of an asset over its useful
life.
6. Depreciable amount is the cost of an asset, or other amount substituted for cost, less its
residual value. (what is a residual value – fair value or what its worthy at end of useful life)
7. Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration
given to acquire an asset at the time of its acquisition orconstruction or, where applicable, the
amount attributed to that asset when initially recognised in accordance with the specific
requirements of other IFRSs, eg IFRS 2 Share-based Payment.
8. PROPERTY, PLANT AND EQUIPMENT are tangible items that:
(a) are held for use in the 1- production or 2- supply of goods or services, for3- rental to
others, or for 4-administrative purposes; and
(b) are expected to be used during more than one period.
(the intention is clearly to generate revenue from these assets rather than to sell them.)
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Nature of PPE
1. PROPERTY, PLANT AND EQUIPMENT are tangible items that:
(a) are held for use in the 1- production or 2- supply of goods or services, for3- rental to
others, or for 4-administrative purposes; and
(b) are expected to be used during more than one period.
(the intention is clearly to generate revenue from these assets rather than to sell them.)
2. ASSETS: Definition : An Asset of an Entity is :
i. A resource
ii. that is under the control of the entity (control=restrict access to asset&power to obtain future economic benefits from it)
iii.that will result in future economic benefits flowing to the entity
iv.that originated as a result of past events.
3. PROPERTY: normally land & buildings, although normally purchased as a unit, they are required to be recorded separately because of the
difference in their nature.
a. LAND: normally does not have a limited life and thus it is normally not depreciated.
b. BUILDINGS: by contrast have a limited life and thus are depreciated.
4. PLANT: machinery & production line etc .
5. EQUIPMENT: generic term for all other categories of this nature which do not fall into plant or property.

RECOGNITION:

1. THIS is the ONLY MAIN RECOGNITION CRITERIA :PPE IS


RECOGNISED AS AN ASSET IF :
IAS 12. 7 The cost of an item of property, plant and equipment shall
be recognised as an asset if, and only if:
(a) it is probable that future economic benefits associated with
the item will flow to the entity; and ( it is not unsaleable and
useless as well)
(b) the cost of the item can be measured reliably.

2. INITIAL & SUBSEQUENT COSTS: : 10 An entity evaluates under this recognition principle all
its property, plant and equipment costs at the time they are incurred. These costs include costs
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incurred initially to acquire or construct an item of property, plant and equipment and costs
incurred subsequently to add to, replace part of, or service it.
a. After initial recognition: an asset is reflected at cost less:
i. Acc. Depreciation and
ii.Acc. Impairment losses.
b. The same recognition rules below are applied in determining the costs at INITIAL
recognition as well as SUBSEQUENT capitalization
3. RECOGNITION RULES
a. COMPONENTS : ‘THE IDENTIFICATION OF’ : forms the basis for the RECOGNITION and
DERECOGNITION of the PPE. One should identify the different components of any
asset( must identify significant parts of an asset ) upon recognition and depreciate each
part separately if this is necessary.( eg helicopter engine/ rest of body ) Any components
which depreciate at different rates can be treated as separate parts(assets) but one
weighs up the economic benefit cost/vs/time of overdoing it with some minor parts – it may
just be a waste of time to overdo it too much per textbook..
b. When you separate a item of PPE into its components, the [item + component ] still
appears under the machines name in PPE table, ie there is not a separate column for
separate components. I think, per lecturer, in the books it is also not shown separate, it is
all under the main assets name.

c. UNIT OF MEASURE : you can group things(all tools & dies) or take them individually one
by one – whichever you want.- IAS 12 SPECIALLY SAYS IT DOES NOT specify this thus it is a
matter of judgement.
d. ADDITIONS / REPLACEMENTS OF PARTS / SPECIAL MAINTENANCE (???how big/how
much etc ) TO AN ASSET : these costs can be capitalized
e. DAY- TO DAY MAINTENANCE: general maintenance (even a service etc) is is not
capitalized but written off as an expense in the Profit/Loss. This includes any small parts
that replaced etc : This cost consists mainly of labour, consumables & small spare parts.
f. REPLACEMENT OF COMPONENTS AT REGULAR INTERVALS: eg relining a
furnace,seats&galley of aircraft&interior walls of a building eg office block.
i. Depreciate major components separately : You depreciate each major
component like these separately from the rest
ii. Capitalize the replacement cost : When you replace a component, you can
capitalize the replacement cost.(as long as the recognition criteria of it are met) and
depreciate it separately from there on. The remaining carrying amount of the old
component that was replaced shall be derecognized at this stage.(old one )..
note : (derecognition is the same process as a sale of an asset :treat it as a sale
where you got paid 0 :ie transfer asset + acc.depr. to ‘Asset Realisation’ account,
then get profit/loss and transfer to profit/loss on sales of asset account)
iii.If not initially recognized : If it is not possible to estimate the cost of the replaced
component to derecognize it, (eg where the component has not been depreciated
separately) then the cost of the new component (less pro-rata depreciation)
may be used as an indication of what the cost of the replaced component would
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have been.(IAS 16.70) YOU MUST take off deemed depreciation to date from that new
‘replacement cost’ before you derecognise that amount. The depreciation you take
off the deemed cost must be at the rate you depreciated THE REST OF THE ASSET SO
FAR AT – not at the new rate you are going to start depreciating the new replacement
part at . (if seats life = 5 yrs,and bus life = 20 yrs, but you did not depreciate
separately, now you relace seats, you first deduct depreciation at old rate (rate you
used so far on rest of bus) over 20 yrs, but if the seats were replace 5 yrs after
buying bus then only for 5 yrs of course but at 20yr rate ie cost/20 * 5 yrs=
depreciation, from deemed cost of old seats to get their derecognition value) see
example below .Also note, from now on the new asset gets depreciated at it’s OWN
rate, don’t use the bus’s old rate for it anymore. Rem-??does it y/n - de-recognition
gets its own line in the PPE table in ‘notes’ or can you include it with normal
‘disposals’, and capitalization? Must it also get its own line or can you include it with
‘additions’. ???

g. MAJOR INSPECTIONS: certain assets need inspections for faults so the asset operation
can continue efficiently. Eg aircraft every 5000hrs.
i. Capitalized: once the inspection occours the cost is capitalized to the assets and
depreciated separately to the next inspection.
ii. De-recognised: the cost of last inspection is derecognized once the new inspection
happens. (derecognition is the same process as a sale of an asset :treat it as a sale
where you got paid 0 :ie transfer asset + acc.depr. to ‘Asset Realisation’ account,
then get profit/loss and transfer to profit/loss on sales of asset account)
iii.Initial recognition estimate cost : the cost of an inspection is estimated at initial
recognition of the asset and capitalised to the asset(long before it even happens-
when still newly bought).this is depreciated over to the next inspection date, then
derecognized) NOTE : you do not ADD this estimated cost of inspection that
will only be happening in 5 years to the price you paid for the asset , rather you
imagine you have a inspection thing as a part of the asset ( like a engine is part of a
helicopter) and that inspection was brand new when asset was purchased , or only 2
yrs old since last inspection by previous owner etc. (so it does not need to be done
right then) but will be depreciated over x years till the new inspection must be done.
iv.???How do you do this in the books?raise a new asset from scratch at current date
and acc .depr and depr. For year , all in one go , and then “sell” it ie derecognize it?
Or what . Also, must this depreciation show in P&L SCI ? or does it not show???
v. If last inspection not depreciated / or initially not estimated : use same
method as for major component separate depreciations: If not initially recognized
: If it is not possible to estimate the cost of the replaced ‘inspection’ to derecognize
it, (eg where the ‘inspection’ has not been depreciated separately or it was not
initially at purchase recognized as a separate ‘component’ ) then the cost of the
new ‘inspection’ (less pro-rata depreciation) may be used as an indication of
what the cost of the replaced ‘inspection’ would have been.(IAS 16.70) YOU MUST
take off deemed depreciation to date from the inspection cost before you
derecognise that amount. The depreciation you take off the deemed cost must be at
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the rate you depreciated THE REST OF THE ASSET SO FAR AT – not at a special new
faster rate . (if inspection life = 5 yrs,and plane life = 20 yrs, but you did not
depreciate separately, now you do inspection after first 5 yrs of life, you deduct
depreciation at old rate (rate you used so far on rest of plane) so Inspection/20 * 5=
depreciation, from deemed cost of old inspection to get it’s derecognition value) This
answer amount must now be derecognised before the new inspection is capitalized
(derecognition can get its own line in the PPE table in notes in fin stats it seems )
vi.If inspection done at 18 mnths instead of original estimate of 2 yrs, and at
a higher/lesser cost:
1. Wrong inspection cost estimate: :you just DE-Recognise any remaining
portion of the initial ‘wrong estimate of inspection costs’ not yet depreciatiated
yet by date of new inspection. (for whichever reason any part is not yet
depreciated at date of new inspection eg wrong initial estimate) -this gets rid
of whats left of the old estimate.YOU DO NOT TRY AND CORRECT THIS OLD
WRONG ESTIMATE/DEPRECIATION IN RESTROSPECTION – just forget it. Then
of course capitalize the new (different) inspection costs at new inspection date
AND DON’T FORGET to start depreciating them from the date of new
inspection.
2. Wrong estimate of time between inspections: if this is found out at
date of new inspection(maybe a bit early etc) you do not change your method
or time frame or useful life of old inspection estimate at all – JUST CONTINUE
DEPRECIATING it at the old usual rate you were using , then you just DE-
RECOGNISE any part of the old undepreciated value of last inspection left at
date of new inspection. If it is found out long eg 1 year before next inspection –
just use ‘change in accounting estimate (IAS something) method. If it is all
depreciated gone before next inspection already- just forget it and leave it
alone preferably, then of course capitalize the cost of the new inspection(like a
fully depreciated asset)or use your Prof.judgement to decide.
vii.Method Of Showing Capitalised Costs In The PPE Table In The Notes :
1. Just add it in its own separate line under
depreciation/derecognition/capitalization/revaluation etc Section of table (in
the middle part of table)
2.

h. SMALL SPARE PARTS AND SERVICING EQUIPMENT:


IAS 12. 8 Spare parts and servicing equipment are usually carried as inventory and
recognised in profit or loss as consumed. However, major spare parts and stand-by equipment qualify
as property, plant and equipment when an entity expects to use them during more than one period.
Similarly, if the spare parts and servicing equipment can be used only in connection with an item of
property, plant and equipment, they are accounted for as property, plant and equipment.[so if only
used for 1 certain PPE thing , then you create a whole new asset class called ‘specific spares’ and
treat it as an asset.
i. SAFETY & ENVIRONMENTAL COSTS :
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i. If entity is OBLIGED to buy them (MUST) : SUCH ASSETS bought for safety &
environmental purposes are not used to produce income, but entity is obliged to
invest in them so entity can get economic benefit from other assets. –BECAUSE OF
THIS they do qualify as capitalisable as part of the PPE asset they get added to. (like
a catalytic converter added to a chimney etc)
ii. IF bought VOLUNTARILY : cost should be expensed unless either one of the
following:
1. Increases the economic life of related asset that does bring in economic
benefit OR
2. OR a constructive obligation due to eg industry practices (ie : NOT A LAW , BUT
VERY CLOSE)
3. OR it increases the safety & environmental standards of a related qualifying
PPE asset.
iii.Impairment : the original asset + this extra related environmental asset
(presumabley in total and thus a cash generating unit) must in terms of IAS 36 be
evaluated for impairment (higher carrying amount but still generates same cash flow)
iv.Capitalise costs to another asset : it seems you add the cost of these to the
economically productive asset they go with if at all possible, unless somehow they
cannot really be capitalized to another asset then they probably have to go alone

MEASUREMENT:
1. THE GENERAL MEASUREMENT RULE :
2. IAS 16. 15 An item of property, plant and equipment that qualifies for recognition as an asset shall be measured at its cost.
INITIAL MEASUREMENT:
(1)COST OF PPE :
Cost of PPE is cash /cash equivalent paid, or fair value of other consideration given at time of acquisition or completion of construction.
(Capitalisation of costs CEASES as soon as asset is in condition and location to be capable of operating as mngmnt intends.)

a. ITEMS TO BE INCLUDED IN COST:


i. Purchase price incl. import duties +non-refundable purchase taxes AFTER deduction of trade discounts and rebates. If
input vat cannot be claimed back ( if unregistered) it DOES form part of the cost.
ii.Directly attributable costs for bring asset to location & condition to operate as intended eg:
1. Employee benefits (ANY and ALL) arising directly from construction or acquisition of item of PPE – this
INCLUDES any current employees who worked on the asset in this state at all- even for normal time they
would have worked anyway (not just overtime etc, but all employee costs are included)
2. Depreciation ; if any depreciation/amortization/impairment somehow qualifies to be capitalised, if is
minused from the depreciation in the SCI, and also minused from depreciation in the “Profit before tax” note ,
but it still shows in the depreciation line item in the PPE table, it is not minused there.
3. Site preparation
4. Initial delivery & handling costs
5. Installation & assembly
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6. Testing costs :ONLY IF TEST COSTS CAN BE SEPARATED FROM OPERATING COSTS , otherwise
NO! But you MAY capitalize costs To see if functioning correctly AFTER DEDUCTING net proceeds (net
means eg revenue less expenses like sales commission etc) of sale of samples from testing phase. They are
eg : ‘testing costs eg electricity , or raw material costs for products used to do testing etc; LESS revenue from
sale of any samples made –if at all.(INITIAL OPERATING LOSSES MAY NOT BE CAPITALISED-) If
the testing phase is not quite JUST a test : ie if it is that the machine is to sink an operational shaft over 2
years and in this time we will see if it works properly- this is NOT incl. as capitalized costs-UNLESS one can
say the test costs are separable eg 10% of operating costs over these 2 years ,then you could add it (per
‘Descriptive ‘book vertabim pg 212) If the first production run costs much more than normal for technical
reasons– this is also NOT capitalized.( Initial Operating Losses May Not Be Capitalised-though) [very
tricky and mixed up in all references – need a lot seeing how accounting industry does it generally as well](
7. Import duties
8. Non-refundable taxes
9. Professional fees
10. Initial estimate of dismantling , removing, restoring site on which asset is located- IAS16.16 (c) the
initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs either when the item is acquired OR as a
consequence of having used the item during a particular period for purposes other than to produce
inventories during that period. (??a related obligation would arise when item is acquired or as a result
of use of item for purposes other than the mnftring of inventory during that period . ??whats this to the
left?- means if inventory was produced in same period as dismantle/restore/remove asset then capitalize costs
to inventory and NOT to PPE as per IAS2.- so how do you know? - all machines produce inventories ! when
you buy machine and its going to be used for making inventories later on, do you still capitalize these costs or
not.(what if it only very distantly will be used for inventories ie: acts in a very remote supporting role)

b. ITEMS TO BE EXCLUDED FROM COST


1. INITIAL OPERATING LOSSES MAY NOT BE CAPITALISED- eg losses incurred while demand is
growing is NOT capitalised.
2. Costs of opening a new facility (new factory for machine? Or what)
3. Costs of introducing a new product : eg advertising & promotional costs
4. Costs of conducting business in a new location or new class of customer : eg staff training
5. Admin & general overhead costs ( ?/electricity used in testing phase?yes or no)
6. Costs incurred after capable of being brought into operation as intended by mngmnt: eg has yet to be
brought into use or is used at less than full capacity. (say it cannot go at full capacity because it is not working
properly, so they run at half capacity for both testing&profit ie trying to get it to go properly– and it is
loss/profit –what about electricity because it is being tested and fixed still etc??)
7. Costs of re-organising /relocating part or all of entities operations.
8. If the testing phase not quite JUST a test : ie if it is that the machine is to sink an operational shaft over 2
years and in this time we will see if it works properly- this is NOT incl. as capitalized costs.But where it is a
bit confusing , like in this example ,book says if it is possible to apportion the testing costsand say 10% of
costs sre testing, then one can capitalize that part only, that is allowed.

c. INCIDENTAL OPERATIONS
i. 1-Income + 2-Expenditure from Operations relating to 1-construction or 2-development of PPE item, but that are not
needed for bringing item to condition&location needed for (eventual/final/main) operation as intended by mngmnt, are
not capitalized. Eg if land is rented out as a parking lot while waiting for construction, 1-the rent income & 2- related
costs are not capitalized but sent to SCI as profit/loss.
d. SELF CONSTRUCTED ASSETS
i. Principles of IAS2 relating to capitalization of mnftring costs should be followed
ii.Internal profits are eliminated in arriving at costs-even if you normally make & sell these assets you still cannot put
own normal markup profit extra on top of original cost and capitalize it.
iii.Abnormal wastage of labour/materials/etc are not capitalized
iv.See IAS23 borrowing costs for how interest may be added or not.
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(2)ASSET DISMANTLING, REMOVAL & RESTORATION COSTS
a. If INVENTORY WAS PRODUCED IN SAME PERIOD BY THE ASSET AS period of restore/dismantle/removal : then it
is added to costs of inventory, not to costs of PPE per IAS2 (but what about if it was capitalized at the begin when you bought
it , what do you do to that then later? )
b. ELSE per IAS16.16 Entity must have a legal or constructive obligation (‘at acquisition’ ,like years before, when initially
bought) (see IAS37) , to restore/dismantle/removal , then it can be added to PPE- IAS16.16 (c) the initial estimate of the costs
of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity
incurs either when the item is acquired or as a consequence of having used the item during a particular period for
purposes other than to produce inventories during that period.. [So it must be ONLY 1 of 2 things : either on DATE of
buying , or if not on DATE of buying, but sometime after that , then only if not used to produce inventory in that period (IAS2) ]
c. DISCOUNTING THE COSTS TO PV: The interest does not get capitalized, it is charged as an expense each year to
profit/loss. :(Q-?are you not allowed to capitalize interest generally speaking?) you must estimate the future dismantling
etc costs and then disclount them to Present Value at a suitable discount rate (probably the general INFLATION RATE) ,
before you put it in the books today.So you do not use the estimated value, you use the Present Value of this estimated future
value of ‘dismantling’.(IAS 37)THEN AT THE END OF YEAR 1 you must CHARGE and expense to own company the
interest on this Present Value of the future ‘dismantling’ liability. So on purchase the structure you bought costs the company a
discounted lump sum extra , on top of the purchase price, booked as a liability, for ‘future dismantling costs’ – and then every
year after that it costs the company X rands of interest on this PV discounted value to keep the structure for another year( today
the dismantling costs should be = the PV value you calculated, next year that amount will cost more to do the job (inflation) so it
goes up by the discount interest rate(INFLATION RATE),and every year after that. So every year you make a journal entry to
charge interest to the company for that year,CONTRA “Provision for dismantling” liability account.see journal entries below.
The interest does not get capitalized, it is charged as an expense each year to profit/loss.
i. IF THEY GIVE YOU DISCOUNT RATE AFTER TAX:this yearly interest payment is an expense, so they mean the
rate after tax has been deducted due to this expense. BUT when you journalise the entry you have not got to the tax
part yet, so you must journalise it at a rate BEFORE TAX. So if the tax rate is say 30% , take the “rate after tax”
multiply by 100/70 = ‘rate before tax’ that you must use. (?Ie original rate is 20%after tax, so100/70 X 20/100= +/-
28% rate of interest before tax?)
IF THEY GIVE YOU DISCOUNT RATE BEFORE TAX: this is the rate you use (not ‘rate after tax’) to work out the
interest on the PV value that you must add to the PV value each year.
a. JOURNALISING THE COSTS: you must create a LIABILITY in the books for future “dismantling etc”‘ costs. By creating a
liability the directors can see in the fin. stats. over the years where they must put money aside/spend. This liability is called
“PROVISION FOR DISMANTLING etc COSTS” . This Provision is CAPITALISED so DR “building asset account”
CONTRA CR “provision for dismantling account” . You must estimate the future dismantling etc costs and then disclount them
to Present Value at a suitable discount rate (probably the general INFLATION RATE) , before you put it in the books today.So
you do not use the estimated value, you use the Present Value of this estimated future value of ‘dismantling’.(IAS 37)THEN AT
THE END OF YEAR 1 you must CHARGE and expense to own company the interest on this Present Value of the future
‘dismantling’ liability. So on purchase the structure you bought costs the company a discounted lump sum extra , on top of the
purchase price, booked as a liability, for ‘future dismantling costs’ – and then every year after that it costs the company X rands
of interest on this PV discounted value to keep the structure for another year( today the dismantling costs should be = the PV
value you calculated, next year that amount will cost more to do the job (inflation) so it goes up by the discount interest
rate(INFLATION RATE),and every year after that. So every year you make a journal entry to charge interest to the company
for that year,CONTRA “Provision for dismantling” liability account.see journal entries below. ONLY the original Present Value
of the Future ‘dismantling costs’ get CAPITALISED on purchase of structure ;the interest(inflation) charge each year does not
get capitalized, it is charged as an expense each year to profit/loss only- so it is a tax deduction there, not as depreciation once
capitalised. See example sanned in below.
b. Obigations for costs are measured as per see IAS37(all the discounting etc)
141 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

c. IF DISMANTLING COSTS ARE RE-ASSESED: different for each cost model type:
i. UNDER COST MODEL :per IFRIC 1 you just re-work out the Present Value of the changed dismantling costs, and
if the amount in you books is different you change it by capitalizing the difference : so “Building asset account”
CONTRA “Provsion for dismantling etc account” add/subtract the change in costs to the asset. Do NOT book this
change as interstest expense , that is completely sepatarate- just keep the 2 apart and treat this change as capital, and
the interest has nothing to do with it , it is a separate charge each year calculated from the balance of the “Provision”
liability account. These changes are disclosed as changes in estimate ALSO see IFRIC 1 for there should be testing of
impairment when cost estimates go down due to higher discount rate or declining costs..(if it goes up do you do
anything special with ‘IAS change in accounting estimate’ ? and if it goes down do you de-recognise it or just change
it and finished?)
ii.UNDER REVALUATION MODEL: increases in provision set off against revaluation surpluss by debiting other
comprehensive income./decreases by crediting it. Remaining balances after debiting are written off to profit /loss of
OtherComInc, (what doe sthis mean ? no clue! ?example 11.17 in descriptive book Very complex- see book again no
clue.ANS : see the example below, it is very clear – you just write off anything ober whats left in revaluation account
to to P/L

iii.er

(3)DEFERRED SETTLEMENT
1. IAS 16. 23 :The cost of an item of property, plant and equipment is the cash price equivalent at the recognition date. If payment is
deferred beyond normal credit terms, the difference between the cash price equivalent and the total payment is recognized as interest
over the period of credit unless such interest is capitalised in accordance with IAS 23.
2. Means :So you can choose to either capitalize the interest costs as per IAS 23 , or you can treat it as a separate finance charge over the
period of credit( there are certain conditions before you may capitalize interest per IAS 23 borrowing costs though eg: it may not be
capitalized AFTER the asset has been brought into use +many more conditions, not easy to just choose this option).
3. To calculate the interest part of the payment: you DO NOT SAY PRICE X interest rate = interest part NO, because what you want
to get is a part of the purchase price which if X by interest rate = other part of purchase price, not if PRICE*interest rate but CAPITAL
part*interest rate : 2 different things. So you say PRICE = CAPITAL + INTEREST RATE , so PRICE= 100% + interest rate(say 10%)
so price = 110% and you want the interest part which is 10% , so you say 10/110 * PRICE = interest portion NOT 10/100*Price BUT
10/110 * price !!! not funny method here ( old story this method)
4. This means assets works the same as inventory purchased on credit terms. The credit interest charge component must be taken out of
the Purchase price paid by you for the building , unless it already has been taken out and is treated separately anyway in the sale
agreement. So if they give you 1 year to pay, it means YOU MUST TREAT IT as if they charged you interest at the current standard
rate, and separate this interest from the price of the asset.
5. This is necessary since : the creditor must initially be accounted for at its fair value. Fair value is calculated by discounting all future
cash flows at a market related interest rate, back to transaction date. Then interest charges are booked each month/year separately.
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6. See example below for method(:In this example 11.8 in descriptive book, may one capitalize the interest payments?yes or no) this is
where the price of a building has to be paid in 6 mnths, and deemed interest is exctracted etc from price.

(4)BARTER / EXCHANGE OF ASSETS (PPE ITEMS )


1) It seems from the discussion below in IAS 16 , that the fair value (not carrying amount)of asset given up is used to measure “what you paid “
in monetary terms for the asset received. But if fair value is not known or if the fair value of the asset recived is more evident , then use that
value instead. If no fair values are known, then use carrying amount of asset given up. If you have a problem with this because you say you
made more of a profit/loss here than what comes out from this process, then you can have the new asset revalued in your books, AFTER you
have booked it /initial recognition in the manner prescribed .
2) Per IAS 16 :

Note: IT IS VERY COMPLEX!


VERTABIM AS PER IAS 16.24-28:
24 (what does whole last part here mean? Very mixed up)One or more items of property, plant and equipment may be acquired in
exchange for a non-monetary asset or assets, or a combination of monetary and non-monetary assets. The following discussion refers
simply to an exchange of one non-monetary asset for another, but it also applies to all exchanges described in the preceding sentence.
The cost of such an item of property, plant and equipment is measured at fair value unless (which one , both or asset given or asset
received? And when? After the asset is booked at cost being value of item given up then you revalue it at fair value or what? See yellow
below in ias 16.26 ie the RULE as per textbook pg 215 yellow ) –ANS:I think the one given up-
(a) the exchange transaction lacks commercial substance or
(b) the fair value of neither the asset received nor the asset given up is reliably measurable. The acquired item is measured in this
way even if an entity cannot immediately derecognise the asset given up. If the acquired item is not measured at fair value, its cost
is measured at the carrying amount of the asset given up.

25 An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash
flows are expected to change as a result of the transaction. An exchange transaction has commercial substance if:
(a) the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash
flows of the asset
transferred; or
(b) the entity-specific value of the portion of the entity’s operations affected by the transaction changes as a result of the exchange;
and(ask why is transaction 4 in example pg 216 textbook not commercial- value is significant 50-20=30000 difference, and fair
value is higher so entty-specific is higher –you can sell it for more if you want! )
(c) the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
For the purpose of determining whether an exchange transaction has commercial substance, the entity-specific value of the portion of the
entity’s operations affected by the transaction shall reflect post-tax cash flows. The result of these analyses may be clear without an
entity having to perform detailed calculations.

26 The fair value of an asset for which comparable market transactions do not exist is reliably measurable if
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(a) the variability in the range of reasonable fair value estimates is not significant for that asset or
(b) the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.
If an entity is able to determine reliably the fair value of either the asset received or the asset given up, then the fair value of the
asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident.
( textbook yellow pg 215, and what happens with the fair value of asset received- if you reliably know fair value of asset given up?
Do you just ignore it completely and utterly, and if you want to book a profit on the barter then you must basicly do a full
‘revaluation’ AFTER you have booked the new asset as per the “rule” in -textbook pg 215 yellow- so is that the ONLY place at all
any fair value of asset recived will be used at all? So if your carrying amount of asset given is 100 but its fair vaue is 10, then you
record a loss even if asset received is worth 1000? – and to get the profit you must after this do a full ‘revaluation’ of your new
asset, or what? )

27 The cost of an item of property, plant and equipment held by a lessee under a finance lease is determined in accordance with IAS 17.

28 The carrying amount of an item of property, plant and equipment may be reduced by government grants in accordance with IAS 20
Accounting for Government Grants and Disclosure of Government Assistance.

1. This is what all the IAS 16 stuff for asset exchanges(barter) means:
a. THE RULE FOR BOOKING NEW COST PRICE OF ASSET BOUGHT : If both items fair value can
be reliably determined, the fair value of asset given up is used as the NEW COST PRICE OF ASSET
BOUGHT IN ASSETS & PPE TABLE (in notes), unless the fair value of asset received is more evident.
THIS IS THE RULE ! So it does not matter what the value of asset received is worth, you book the cost
price you paid ( asset given up) as the new book value of new asset recived in own asset register. You can do
a REVALUATION of asset received later if you are not happy with this cost price- but first follow the rule.
NOTE : if receiving asset is more clearly/readily measurable than given asset, but given asset is still ’reliably
measurable ‘ per IAS16.26 – YOU STILL ONLY USE THE MORE CLEARLY EVIDENT ONE ie the one
received’s value is now used as cost price.( MORE CLEARLY goes before/above “STILL RELIABLY
MEASURABLE per IAS16.26”see scanned exampleno.3 below.
b. ( textbook yellow pg 215, and what happens with the fair value of asset received- if you reliably know fair
value of asset given up? Do you just ignore it completely and utterly, and if you want to book a profit on the
barter then you must basicly do a full ‘revaluation’ AFTER you have booked the new asset as per the “rule”
in -textbook pg 215 yellow- so is that the ONLY place at all any fair value of asset recived will be used at
all? So if your carrying amount of asset given is 100 but its fair vaue is 10, then you record a loss even if
asset received is worth 1000? – and to get the profit you must after this do a full ‘revaluation’ of your new
asset, or what? )
i. If CASH IS PART PAYMENT: if any cash exchanges hands as well in transaction , you just
increase or decrease the relevant assets value by this amount as you go along ( so you journalise
“cash to bank & asset given in 2 lines s” against CONTRA “cash from bank & asset received in
another 2 lines“
c. A GAIN OR LOSS (capital gains) is recognized as difference between fair value (of which asset – you
must use asset received’s fair value here or what? See textbook pg 215 yellow highlighter ) and carrying
amount of asset given up, where applicable.
d. EXCEPTIONS TO THE RULE :There are only 2 exceptions( below), in both cases the asset that is
acquired is measured at the carrying amount of the asset given up, and no gain or loss is recognized.
i. Exception 1: exchange transaction lacks commercial value-very tricky!( see IAS 16.25 for
definition of )
ii.Exception 2:if fair values of both asset given-up & asset received cannot be measured reliably.
e. NOTE : if receiving asset is more clearly/readily measurable than given asset, but given asset is still ’reliably
measurable ‘ per IAS16.26 – YOU STILL ONLY USE THE MORE CLEARLY EVIDENT ONE ie the one
received’s value is now used as cost price.( MORE CLEARLY goes before/above “STILL RELIABLY
MEASURABLE”

SUBSEQUENT MEASUREMENT:
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1. There Are 2 Different Types Of Alternative Accounting treatments allowed by IFRS 16 for PPE,without indicating preference- you
may use either of the 2 types. BUT each “specific class” of PPE must only be treated using one of the methods.
a. 5 : An entity using the cost model for investment property in accordance with IAS 40 Investment
Property shall use the cost model in this Standard.
2. COST or REVALUATION model : After initial recognition entity must choose to carry PPE assets at either of COST or
REVALUATION model of determining the normal ‘carrying values’ of assets in books.
3. CHANGE IN ACC POLICY :AS PER IAS 8 if you change from cost to reval method it is a IAS8 change in acc. Policy , BUT as per
IAS 16 it need only be treated as a common revaluation. SO THE FIGHT between the 2 ends by saying one must follow IAS16- just
treat it as a “revaluation” as per IAS16, not as a change in acc policy. As per IAS8.(???? Do you NOT treat it as a change in acc. Policy
or do you?i think it could be disclosed but ends up just becomng a revaluation)
a. COST MODEL: this is just the normal way as usual – Cost less [Accumulated Depr. and Accumulated Impairment]- no
weird ways of showing it in the books- just as usual the machine stays at cost value in its own account and the Acc.Depr.
account & Acc Impairment account acts as ASSET CONTRA accounts to it- as per normal way of doing it – nothing special.
You just never do a revaluation for this method though- the cost can only go down or reverse up to original level – it can never
go up above “cost”.
b. REVALUATION MODEL: this method works exactly the same as the one above except for the COST price in the ASSET
account eg ‘machine account’ is not at the original cost but at a REVALUED AMOUNT- ie it gets revalued.(so if you ever
dare to revalue say a flat, then for ever more all flats in your business must be revalued and again every year? What if no
money for valuers one year- what do you do then?)
i. There are just 2 special rules: if you ever use this method for any asset:
1. All Assets In Same Category Get Same Treatment: all the assets in the same category eg:
machines/boats/buildings etc, must get treated in the same way – ie they must all be revalued.
2. Done Again On Regular Basis: all these assets using this method must be revalued regularly.there are
certain rules as to how soon after each other all assets in one class must get revalued etc – see IAS 16.31-42
for details.
ii.Revaluation Surplus / Other Comprehensive Income.(IMPORTANT)
1. IAS16.39 If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other
comprehensive income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be
recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or
loss. (???whats this mean -same year only or any of last years before derease as well??? Where do you keep this info? where
does it show?)

2. 40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss.
However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the
revaluation surplus in respect of that asset. ( do you first reduce any balance of that asset left in reval acc.and THEN send the rest
to P&L, or do you do both qat the same time? -what if this amount goes below zero- do you go over to the profit/loss then for the
balance?) The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading
of revaluation surplus.

3. 41 : The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly
to retained earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is
retired or disposed of. However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the
amount of the surplus transferred would be the difference between depreciation based on the revalued carrying amount of the
asset and depreciation based on the asset’s original cost. Transfers from revaluation surplus to retained earnings are not made
through profit or loss.
4. If an asset is sold – one can transfer its balance from Reval. Acc. to retained earnings. This has no effect on “Profit/loss on
sale of asset account” or Acc.Depr. account or any other account at all. It is merely a ‘cosmetic’ type change – from one reserve
to another. It does not balance out against any leg of the sale as a contra entry at all. Rem: it is in equity like as if profit got
transferred to retained earnings- then before next profit/loss comes into retained earnings account you move half the ret.earn. to
some other reserve. But that reserve can just be transferred back anytime- it means nothing, it all falls in the class of ‘owners
equity’, you are just moving between reserves in ‘owners equity’ to show where funds came from/keep track of things basicly.

2. IAS 16.31:Cost & Revaluation Model and Subsequent Measurement per IAS16 :
29 An entity shall choose either the cost model in paragraph 30 or the revaluation model in paragraph 31 as its accounting policy and shall
apply that policy to an entire class of property, plant and equipment.
Cost model
30 After recognition as an asset, an item of property, plant and equipment shall be carried at its cost less any accumulated depreciation and
any accumulated impairment losses.
Revaluation model
31 After recognition as an asset, an item of property, plant and equipment whose fair value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ
materially from that which would be determined using fair value at the end of the reporting period.

32 The fair value of land and buildings is usually determined from market-based evidence by appraisal that is normally undertaken by
professionally qualified valuers. The fair value of items of plant and equipment is usually their market value determined by appraisal.
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33 If there is no market-based evidence of fair value because of the specialised nature of the item of property, plant and equipment and the
item is rarely sold, except as part of a continuing business, an entity may need to estimate fair value using an income or a depreciated
replacement cost approach.

34 The frequency of revaluations depends upon the changes in fair values of the items of property, plant and equipment being revalued.
When the fair value of a revalued asset differs materially from its carrying amount, a further revaluation is required. Some items of property,
plant and equipment experience significant and volatile changes in fair value, thus necessitating annual revaluation. Such frequent
revaluations are unnecessary for items of property, plant and equipment with only insignificant changes in fair value. Instead, it may be
necessary to revalue the item only every three or five years.

35 When an item of property, plant and equipment is revalued, any accumulated depreciation at the date of the revaluation is treated in one
of the following ways:
(a) [GROSS REVALUATION METHOD] restated proportionately with the change in the gross carrying amount of the asset so that the
carrying amount of the asset after revaluation equals its revalued amount. This method is often used when an asset is revalued by means of
applying an index to determine its depreciated replacement cost.
(b) [NET REVALUATION METHOD] eliminated against the gross carrying amount of the asset and the net amount restated to the
revalued amount of the asset. This method is often used for buildings. The amount of the adjustment arising on the restatement or
elimination of accumulated depreciation forms part of the increase or decrease in carrying amount that is accounted for in accordance with
paragraphs 39 and 40.

36 If an item of property, plant and equipment is revalued, the entire class of property, plant and equipment to which that asset belongs shall
be revalued.

37 A class of property, plant and equipment is a grouping of assets of a similar nature and use in an entity’s operations. The following are
examples of separate classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures; and
(h) office equipment.

38 The items within a class of property, plant and equipment are revalued simultaneously to avoid selective revaluation of assets and the
reporting of amounts in the financial statements that are a mixture of costs and values as at different dates. However, a class of assets may be
revalued on a rolling basis provided revaluation of the class of assets is completed within a short period and provided the revaluations are
kept up to date.

IAS16.39 If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognised in other comprehensive
income and accumulated in equity under the heading of revaluation surplus. However, the increase shall be recognised in profit or loss to the
extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. ???whats this mean -same year only or
any of last years before decrease as well???ANS : last years as well, any former reval. decrease of this asset must first be reversed .

40 If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in profit or loss. However, the
decrease shall be recognised in other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect
of that asset. The decrease recognised in other comprehensive income reduces the amount accumulated in equity under the heading of
revaluation surplus.

41 : The revaluation surplus included in equity in respect of an item of property, plant and equipment may be transferred directly to retained
earnings when the asset is derecognised. This may involve transferring the whole of the surplus when the asset is retired or disposed of.
However, some of the surplus may be transferred as the asset is used by an entity. In such a case, the amount of the surplus transferred
would be the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset’s
original cost. Transfers from revaluation surplus to retained earnings are not made through profit or loss.

42 The effects of taxes on income, if any, resulting from the revaluation of property, plant and equipment are recognised and disclosed in
accordance with IAS 12 Income Taxes.
REVALUATION MODEL:
1) INITIAL MEASUREMENT OF PPE: all initial measurement MUST be done at cost, ONLY THEREAFTER one can choose to either use
the REVALUATION MODEL or COST MODEL
2) SIC 21: (land) the revaluation of non-depreciable assets is covered by SIC 21.
3) Rem: revaluation gets its own line in the PPE table in notes.
4) REVALUATION MODEL MAY ONLY BE USED IF: if the Fair Value of the asset CAN be measured reliably.
5) PERIODIC REVALUATION RECOMMENDED IF: fair value changes a lot , eg assets with very long useful life, some assets can
double in value every 5 years. It is remomended in order to:
a) Ensure equity in Fin STATS is not understated (limiting ability to get loans)
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b) Align amount of depreciation (LESS TAX mix ups ) written off with fair value – less tax more deprec. Expense. Facilitate replace
asset without further debt.
c) Prevent take over of entity – shareholders might think shares are worth less than they really are assets are undervalued.
6) See revaluation reserve heading below ..
7) MARKET VALUE :
a) Property : usually the ‘market value method’ is used : ie what the market will pay today (professional valuers)
b) Plant & Equipment: the ’depreciated replacement value’ is used, which is basicly the GRV method or the NRV method : see the 2
below ..
c) GRV & NRV:
i) There are 2 different methods of showing the revaluation in the books.

THE GRV (or “RESTATEMENT”): and NRV (or ‘ELIMINATION’) METHODS of how to treat accumulated
depreciation and do the journals on revaluation (redo this section – you have made it too complex , it is actually very
simple really!see first 2 scanned in examples below)

GRV method: NRV one:

a) REMEMBER always if something is revalued at year end, you always treat it as from end of year, not like with changes in Acc
depreciation method stuff where it is then taken as from beginning of that year.
b) GRV and NRV:
i) IAS 16.35 :refers to 2 alternative accounting treatments with regard to accumulated depreciation on revaluation: Each of the 2
mthods below just treats the accumulated deprec. a bit differently, but the ‘revaluation reserve’ is treated exactly the same in both

instances.
ii) GRV : GROSS REPLACEMENT VALUE: means “Asset Account” is shown at the price of a similar new asset ,and the
Acc.Depr. account is just increased so the 2 balance out to equal the revalued amount. So the Acc Depr is proportionately restated
to be inline with the gross replacement cost of the revalued asset so the gross carrying amount of the asset after revaluation equals
the revalued amount. : you do this by :
(1) You bring the old 1-carrying amount in the books and 2- the Acc Depr. In the books up to a higher level where when
added together they come out at the new Revalued Amount.You do this by . Just make the ‘asset’ account to = GRV ,
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.Then add enough to Acc.Depr. so it will balance the asset account out to the NRV –ie: revalued amount. Then you Cr the
Revaluation Surplus account with the revalued amount to account for the increase in the “final net carrying amount of asset “
you just did. [You can also do it in a complex way by using a ratio: doing a reverse depreciation calculation backwards using
following ratio: new carrying amount you want {divided by/over} old carrying amount in books. This fraction you get you just
multiply the Acc dep and old Cost of Asset amount by and add the increase difference to each of these account , in both cases
(acc dep acc& asset cost acc) the CONTRA account is the “Revaluation Surplus Account”. The whole thing should all balance
itself out and come out at the right levels you want it at!!!! See example below! ]
(2) Effectively this means you bring the carrying amount in books to a level where it is the Gross Replacement Value at
current fair values, and the acc depr account its contra which brings it to Net Replacement values at Current Fair
Value
(3) The PPE table in ‘Notes’ will be exactly the same for both methods, just the final TOTAL Cost & TOTAL accdepr right at the
bottom of table will be different for each method.-Elimination Method=has lower amounts than for Proportional Restatement
method-
(4) (Note funny: in Prop.Restate. method the ‘REVALUTIONS’ line in PPE TABLE in ‘Notes’. Must be= NewCost –less-
NewAccDep= 1 amount, NOT just the increase in the ‘Cost’ part but the answer of both written off against each other as 1
amount-see example below)

iii) NRV: NET REPLACEMENT VALUE METHOD: means “ Asset Account” is shown at the price of similar asset but at same
age & condition , so it is shown at the ‘revalued amount’ exactly , and Acc. Depr. Is eliminated completely and started agin from
scratch. The revalued amount goes to “Reval.Surpluss acc.” Write Off Against Asset Acc. : Acc.Depr. in the books already can
be eliminated against gross carrying amount of the asset. You first clear out the Acc Dep Acc against the Asset Account (write -off)
DR Acc.Dep. CONTRA Cr Asset . Then you add the extra amount needed to bring the asset account to the level of the revaluation :
ASSET ACCOUNT–contra- REVALUATION SURPLUS ACCOUNT. See example below!The PPE table in ‘Notes’ will be
exactly the same for both methods, just the final TOTAL Cost & TOTAL acc depr right at the bottom of table will be different for
each method.-Elimination Method=has lower amounts than for Proportional Restatement method- but the final total should be the
same.

REVALUATION SURPLUS RESERVE:


c) The revaluation surpluss account is a funny thing- it does not come into equity via profit nor owners contributions,and once it is in
equity cannot get out of equity by a transfer of loss to equity(retained earnings) , but only by issue of capitalization shares or specially
going and writing out the portion of each asset in there due to depreciation or selling the asset. So this account must be handled
specially and separately, and a record kept of all the things which make up a part of it – and a record next to each asset which ever got
revalued as to the portions involved- so you can control it . it is a absolute cow- so note
d) Note : the Reval. Reserve does not need to be transferred on sale NOR for depreciation, it can be kept as is as a Capital replace ment
reseve ,or even transferred to another reserve as asset replacement reserve when sold /depreciated etc.
e) It is viewed as part of equity.,AND It is shown as perhaps a non-distributable reserve in the StCHEQ in its own column.
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f) It is always unrealized and unused and once it gets realised it is gone and becomes something else . It can only either be 1-USED up or
2-REALISED, or it just stays there and does nothing.
i) It may be USED only for:
(1) Capitalisation issues(how do you do this?? And how do youtake it out agin for sale/depreciation? If asset gets depreciated ,
how do you know which assets stuff was used for shaeres/ so which asset may you not write off depreciation throuhh thos
account?)
(2) OR to absorb subsequent revaluation deficits ( if reval. Of some asset goes down)
(i) REVALUATION DEFICIT : THIS IS IF A REVALUATION is downward/less, then YOU MAY ONLY
DECREASE THE REVALUATION ACCOUNT BY THE PORTION OF THAT ASSET THAT IS IN THE
REVALUATION ACCOUNT FROM A PREVIOUS REVALUATION upwards. Any excess over whats left of a
previous revaluation surplus for that one asset , or if “that particular” asset has no positive revaluation balance in this
account at all , then that part goes directly to profit/loss account as a loss for the year- period cost/expense- YOU
CANNOT MAKE A REVALUATION SURPLUSS ACCOUNT NEGATIVE EVER!
(ii) Deficits of one item can not be set off against surplusses of another item, even if such items are from the same
category
(iii) IF AN ASSET IS REVALUED UPWARDS(a impairment reversal works same way), you first have to go check if
that asset ever had a deficit revaluation that resulted in a loss going direct to the profit/loss section of SCI ( NOT
Other Comprehensive Income decrease but a normal loss) due to the reasons in (i) above. Then you must first add a
profit to the exact same value as that previous loss to the normal profit/loss in SCI –so profit /loss account-(even if its
10 years later) , then only the balance may be credited as REVALUATION SURPLUS-this is some funny rule to stop
cockeyed things happening with these matters!

ii) It may be REALISED only by:


(1) Disposal Immediatly (you sell the asset and (where / how do you keep a record of the revalued part of each asset so you can
go back and revese this part of it in the books it once it gets sold?)
(a) JOURNAL ENTRIES: once sold you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings
Acc.. It SEEMS YOU ARE SAYING THE REVALUATION COULD HAVE BEEN A OWNER S CONTRIBUTION,
LIKE HE GAVE AN ASSET EG: CAR, TO THE ENTITY- as if he did a CR owners equity AND DR asset account!.
How that work I don’t know Now you have a extra amount in here that comes from nowhere! (tax/profit/sale at aloss etc
etc) but that’s it- ANSW= see last sentence before this yellow..
(b) For De-Recognition: same, you just transfer the surpluss of that one asset from Surplus..acc to Retained earnings Acc
(c) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line!

(2) Usage Gradually :Depreciation : this is before you sell the asset while its still yours, you say:
(a) ONLY the difference in depreciation between what the old depreciation amount that year would have been and the new
depreciation amount that year is allowed to be deducted from Revaluation Surplass Account from the amount that
particular asset caused to be in there of course- no more. See example below.
(b) Journal Entries: do your normal depreciation entries for the year- and include both amounts in it it is just You still write
the full amount – both amounts here- off to depreciation account and accumulated depreciation/. This funny transfer thing
is a second entry completely unrelated entry(just equity movement thing !)–
(c) : lessen DR Reval Surplus. Acc. And move it into CR Retained Earnings. These 2 accounts are both equity accounts.so
both increase on the CR side. You just move it out SURPLUS.. and into RETAINED.. (so it does not get used as an
expense depreciation?? OR go through tax , I mean depreciation is an expense so it should decrease retained
earnings.THIS NORMALLY HAPPENS BY IT BEING WRITTEN AS AN EXPENSE THEN GOING TO RETAINED
EANINGS THROUGH PROFIT/LOSS ACCOUNT. But What happens here? – ANSWER :no it is all goes through
depreciation account, no tjust half.)
(d) StChEQ; THIS TRANSFER MUST BE SHOWN DIRECTLY IN THE STCHEQ in its own line!
(e) ALSO ;what s this mean?: see textbook page 225 yellow- must still transfer this to notes but cannot understand it.
(f) What do ou do when you have a sale- what happens to the reval.surpluss then??
(g) When you transfer any depreciation attributable(difference) to revaluation from REVALUATION SURPLUS ACCOUNT
to RETAINED EARNINGS ACCOUNT at each years depreciation , you do not have to . the company can have a policy
of only transferring this on sale/disposal ., or of transferring for depreciation as well.
(h) When you transfer the extra portion of depreciation – difference beteen cost and revalued amounts depreciaytion each
year, from reval surplus to retained earnoings, YOU MUST STILL WRITE UP THE FULL AMOUNT AS AN EXPENSE
IN THE RPOFIT/LOSS SECTION. So this does not mean ypou leave that part out of the yearly depreciation written out
through profit / loss- . This transfer is a second entry completely unrelated entry(just equity movement thing !)–so there are
4 legs.
(i)
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2) DEPRECIATION AND PROFIT AND LOSS


a) Depreciation is calc. on the revalued amount less any residual value
b) Gains/losses on disposal are calc. using principles in IFRS5.
c) An asset should not be revalued shortly before disposal in order to manipulate the gain/loss unless the revaluaton forms part of a
systematic revaluation program.
d) An item held for sale will seldom be revalued because of cost of revaluation.& bookkeeping needed eg updating asset register.
e) PPE items must be evaluated as a class/group. To bear in mind requirement that fin stats should not be misleading, if it is not possible
to revalue all items in a group simultaneously for all items in a group, then do some internal valuations which should be supported by
external valuations from time to time.
3) TIMING OF REVALUATION (major bugger up-check it out)
a) It is better to revalue at begin or end of a period (not middle cause then there are 2 depreciation amounts that year , one to halfway the
next from halfway onwards), so the user can compare depreciation to the carrying amount more plainly and clearly.
4) Disclosure
a) A full record in the asset register of all revaluations and transfers in/out to reval.surp.acc. eg depreciation etc and the historical cost
must be kept very well so that one can comply with the disclosure requirements eg you must show carrying amount at cost method +
reval method every time.
b) Reval at end year appears to be the better option by SFP needs for comparability but aggravates the workload at end of year.
c) THER seems to be a huge bugger up about the begin/end of year story. If reval is done at begin of year there is no problem,everything
works out just fine and depreciation for tht year is just calc. from this new amount. But if done at end of year , instead of just doing
things logicly step by step, the book says if REVAL done at end of year you must roll this back to begin year before you do the
depreciation for the year. (I am not sure about if done in middle of year – it does not say what do you do then????roll back or do half
/half. If done at end why cant you also do half/ half?)
i) REVAL DONE BEGIN OF YEAR:
ii) REVAL DONE END OF YEAR: you roll the reval back to begin year, so you try add back any depreciation that that revalued
amount WOULD have had the whole year – so if reval amount at end is 100, you say what depreciation would that 100 have been
subject to the whole year to get to 100- if there is a useful life of 2 years left at end year on straight line basis – you say 100*3/2=
150. So depreciation was R50 that year. NEVER use the old carrying anmount depreciation, ALLWAYS roll back if the revaluation
was dome at year end.And rem: the reval.surpluss you add as a line item in the PPE table must not just be the actual reval surplus,
but it must get increased by the depreciation you work out as being for that year!! It is higher!! So you make it more from the roll-
back!! See example below (WHY I DON’T KNOW?)
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DEPRECIATION:
1. Special Note: note that if it says depreciation was at 5% pa for the asset, then after 2 years it means there are only 18 ie: [100/5=20]-
2=18 years of the useful life left for the buildings, so if they get revaluated after 2 yrs, then the revaluated amount does not get
depreciated at 5 % again per year, rather you recal. This ‘rate’ by saying :[revalued amount] / 18 yrs life left = depreciation per year
from now on- Note: it will not be = 5% again, now it is different!
2. There are many traditional views on depreciation purpose, the most important are:
a. Process of valuation
b. Process of capital maintenance
c. Process of cost allocation
3. View c is the view chosen by IAS16.
4. ALLOCATION OF COST:
a. Depreciation is an amount that replaces cost, less residual value.
b. RESIDUAL VALUE : amount entity would CURRENTLY (today, not in future! Note funny method hereobtain from
disposal of the asset, after deducting estimated costs of disposal, if asset were today already at the age & condition expected at
end of it’s useful life.
c. The AIM is: to allocate depreciation costs to income generated by asset for matching principle each year. MAINLY! The aim.
5. THERE ARE 3 ASPECTS TO WORK OUT DEPRECIATION: 1- useful life 2- residual value 3-method of depreciation.
a. USEFUL LIFE:
i. IAS16.51 REVIEW ANNUALLY: ias16.51 requires every useful life to be reviewed AT LEAST annually at Fin Yr
End , by using one(or another type) of the methods specified in IAS 16.56.
ii.There are 2 types:
1. Useful life: u use to this owner only till he disposes
2. Economic life: use to all owners it will ever have
iii.Factors influencing: wear & tear, capacity , etc , commercial or technical obsolescence , changes in demand for
product, legal factors eg leases maturity dates,
iv.Change in estimate of useful life:
1. this can happen a lot, it is to be treated as a “Change in Accounting Estimate” per IAS8 and if size/natue
warrants it must be disclosed separately in the notes.It forms part of normal operating expense items.
2. You do not adjust retrospectively
3. You do not restate comparatives
4. See example below for funny method of doing this ( if they give you the amount end yr 2 you start the new
change from beginning yr 2- see below!

v. Useful life of land & buildings


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1. Treated as separate units even if on same place.
2. An increase in the value of the land should not cause usefull life of a building to change nor its depreciation.
3. Land is not depreciated except special circumstances eg dumping site.
1. NB : Restoration Costs for LAND : IAS16 . 59 vetrabim :If the cost of land includes the costs of site
dismantlement, removal and restoration, that portion of the land asset is depreciated over the period of
benefits obtained by incurring those costs. In some cases, the land itself may have a limited useful life, in
which case it is depreciated in a manner that reflects the benefits to be derived from it. (SO IT SEEMS FOR
LAND YOU DEPRECIATE A PORION OF THE COST PRICE, BUT FOR ANY OTHER ASSET YOU
ADD THE PV OF THE FUTURE ESTIMATE OF RESTORATION COSTS TO THE COST PRICE &
ADD INTEREST(INFLATION) TO IT EVERY YEAR AS WELL–SEE ias 16.16c now is this the rule for
all non-depreciable assets or only land? And if land is depreciable in a special circumstance which of the 2
methods do you use?)
i. Impairment loss: if you have to write down the value of land due to an adverse location etc.

b. RESIDUAL VALUE:
i. Per IAS16 the residual value (as well as usefull life) must be reviewed each year (at year end).This rule applies to both
cost and revaluation model.
ii.ANY CHANGE IN RESIDUAL VALUE – must be accounted for as a “change in accounting estimate per ias8.”
1. In terms oas IAS8 – for any change in residual value you disclose the nature of change, amount,& effect on
future periods if significant. To do this you make a table with all the assets and rework the whole thing out.
Last Fin Years Ends depreciation you keep and leave it as is. Just take the CARRYING AMOUNT from end
last Fin Yr and minus the old residual value and ADD the new residual value to supplant the old one.Then
rework out your new depreciation for the current year end.
a. Even if you revalue the residual value at year end , you still use that residual value for the whole fin
yr up to that yr end date .(vertabim in book)
b. You must as per IAS8 show the effect on future periods. To do this you must work out from
beginning of next fin year (future!) 1- depreciation to end of life as per old residual value.. and 2-
depreciation to end life per new residual value. Then get the difference between the 2 and Disclose
this . see example below.
iii.The residual value is the value entity would obtain AFTER deducting disposal costs at end of its USEFUL life(not
economic life) ..must be at its CURRENT value- ie at todays prices and rates ,as if sale happened today in condition &
wear you could expect at end of useful life.

c. DEPRECIATION METHODS:
d. IAS 16 . 55 Depreciation of an asset
i. BEGINS when it is available for use, ie when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management. (
not when it is commissioned or brought into use but AVAILABLE and not before!)
Depreciation of an asset
ii. CEASES at the earlier of the date that the asset is classified as held for sale (or
included in a disposal group that is classified as held for sale) in accordance with IFRS
5 and the date that the asset is easurement. Therefore, depreciation does not cease
when the asset becomes idle or is retired from active use unless the asset is fully
depreciated. However, under ‘usage’ methods of depreciation the depreciation
charge can be zero while there is no production.
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iii.REVIEW OF DEPRECIATION METHOD: the depreciation method shall be
reviewed at least once per year (End FinYear). Any changes get accounted for as
“changes in accounting estimate” per ias8.
iv.A variety of methods can be used eg diminishing balance, straight line ,
units of production, sum of the digits . It should reflect the manner the asset is
consumed eg most in first year etc.(can you use your own made up method eg use
SARS allowance exactly as SARS gives it? Or not?)
v.Sum of digits method : Useful life : 5yr Yr1 : 5/[1+2+3+4+5] = 5/15=1/3 =30%
depreciation
a. Yr 2 :4/15=xxx% depreciation and carry on like
that to yr5.
b. So the denominator is sum of digits, and numerator
is start in yr1 with last years number ie 5 , and go
down each year.!

IMPAIRMENT LOSSES AND COMPANSATION FOR LOSS:


1. IAS 36 is about If an item or group of irems is impaired by technological obsolescence or other economis factors, the carrying amount is
written down to the recoverable amount. –
2. Impairment menas a permanent diminuition in value of an asset on a once off basis.
3. IAS 16.65-66 gives guidance on how to account forcompensation received for impairment/loss of items of PPE from 3rd parties who are
responsible, to restore/purchase /replace. Eg insurance, expropriation by Gov. etc.
4. The 3 things that form this matter are separate parts and must get accounted for separately as per iAS16: You deals with these things as
follows:
a. Impairments or losses of PPE : Impair: deal with by using IAS 36 Impairments Loss: recognize in terms of IAS 16 – ie
normal way.
b. Compensation from 3rd parties : must be included in profit/loss when receivable.
c. Subsequent purchase or construction of assets. : account in terms of IAS 16

1. COMPENSATION/ insurance payout FOR IMPAIRMENT or LOSS / DAMAGE etc.:


a. If you get compensation for impairment or a insurance payout, it must be :
i. Recognized when : it becomes payable to you (date creditor could be raised / claim confirmed).
ii.Compensation received/payout JOURNALS /fin stats : The compensation should be accounted for in profit/loss
for the year. (I don’t know if it goes to asset realsiation account or if it goes separately by itself ?)
iii.Compensation received/payout for insurance or other claims/impairment paybacks etc Fin Stats :
1. Notes to fin stats :
a. PPE table : just derecognition of asset destroyed recognized as if sold/disposed of in Disposals, or
in own separate heading called “PPE destroyed in hail storm” any new ssset bough to replace it goes
as per normal in “Additions”
b. Profit Before Tax note: in the normal note called ‘profit before tax” : disclose
i. 1: Amount of loss to item in hailstorm or whatever it was in own line
1. 2: Amount of compensation received from insurance or wherever in own line
2. In terms of IAS 1 the nature and amount of such items must be disclosed separately, in the notes tyhis means. So you can make a note
for: -profit before tax and under it write 1-proceeds from insurance –rands-2- loss of motor vehicle.-rands- together with other things to
be disclosed under this all encompassing note heading.
3. Journals:just do loss as : same realsiation of machinery account but there is no profit but a loss to be transferred to ‘loss on theft of
vehicle’ account. Then later the insurance goes to the same ‘realisation account’ and from there to the same’loss/profit on theft of
vehicle’ account.
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DERECOGNITION:
1. AN ITEM OF PPE IS DERECOGNISED IN THE SFP :
a. On DISPOSAL
b. When no FUTURE ECONOMIC BENEFITS are expected from its use or disposal.
2. This does not mean just withdrawing an asset from use- it means when it can no longer ever be used to produce economic benefits .
3. HOW TO DERECOGNISE : redo – very fast here – no time.:
a. Journals: it works the same as a sale of an asset, except the loss/profit is called “loss on derecognition” – (there can never be a
profit on derecognition)
b. PPE-table in notes: I tyhink – not sure – it gets its own line in the PPE table in notes.!
4. THIS IS RECOGNOSED AS A GAIN in the normal way of selling/writing off an asset in the accounts immediately , except for
IAS17 sale&leaseback where gain is deferred. Gain is not a profit as per ias18 – THERE IS A BIG difference between the 2.
5. TO DETERMINE DATE OF GAIN/SALE/etc you use IAS 18 revenue(ALL OF AT ONCE :risks&rewards,managerial
involvemet,revenue measured reliably,probable economic benefits flow,costs measure reliably)
6. DEPRECIATION CEASES: at the earlier of date asset is classified as held for sale or date asset is derecognized.
7. HELD FOR SALE: per IFRS 5 Non-current items held for sale no longer fall under IAS16 but under IFRS5. After classified as held
for sale it is classified as a CURRENT asset at lower carrying amount and fair value ,less cost to sell and depreciation is
discontinued.the gains and losses recognized in IFRS 5 are similar to IAS16.(read about the same)
a. IFRS 5 REQUIRES SPECIFIC DISCLOSURE : of of N_C assets earmarked for disposal within 12 mnths after taking
decision to dispose of asset.

8.
TAX IMPLICATIONS:
1. NOT DONE-REDO
2.
DISCLOSURE:
1) ACCOUNTING POLICY :
a) All details possible. Depreciation , useful life etc.,manner of cost/revaluation . manner of gross or Net method of revaluation etc.
2) PROFIT BEFORE TAX Note To Fin Stats :(used by many IAS’s) :in SCI :
a) Depreciation
b) loss on Disposal
c) & profit on Disposals
d) Revaluations Downward(less) after first removing Reval.Surpluss. left of that asset.
3) PPE TABLE
a) As normal
b) Devaluations separate

4) UNDER PPE TABLE: in writing


i) Security :Any asset details pledged as security,
ii) Revaluations: :
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(1) Date of the revaluation; whether an independent valuer or not, methods & assumptions,techniques eg active market priceOR
recent similar transactions ,details of each thing / class revalued.
(2) Carrying amount and acc. depr. if it had not been revalued.
iii) DEVALUATIONS separate
iv) Insurance / indemnity payouts of any sort.
v) Contractual commirtments to buy any PPE
vi)
TAX :
5) DEFERRED TAXATION NOTE (used by all deferred tax)
a) Wear & tear for tax purposes (accelerated or reduced) :Just the amount of Deferred tax
b) Revaluations : :Just the Amount of Deferred tax. (Totaled at bottom of list)
c) Under This list , in writing : if any assumptions were made on use eg : benefits come from Sale or Use so 29% tax or 14% CGT, then it
must be noted : (1)-details ,(2) both possible rates of tax , and (3) amount that was included in the line item eg in REVALUATIONS
or wherever.
6) COMPONENTS OF OTHER COMPREHENSIVE INCOME:
a) All items separate excluding tax
b) At end , tax relating to (brackets )
c) Total at bottom
7) TAX EFFECT RELATING TO EACH COMPONENET OF OTHER COMPREHENSIUVE INCOME: (used by all deferred tax
a) Revaluation Gains or Losses : on Property Revaluation (1- Before Tax , 2- Tax , 3-After Tax ) ( same as other kinds of line item for all
deferred tax here) –( just put a separate note here for property alone)
b) and any restrictions on the distribution of the balance of Reval.Surpluss to shareholders
8) INCOME TAX EXPENSE(used by all tax)
a) Deferred & Normal Tax of course.

9) DON’T FORGET ;
a) “IMPAIRMENTS” NOTE : if relevant
b) “CHANGES IN ACCOUNTING ESTIMATE” NOTE if relevant.

1. DO THE TABLE OF PPE IN NOTES AND AN FULL EXAMPLE COMPLETE NOTES: not done
yet in DISCLOSURE

2. This below is as per IAS16 vertabim. Just below that is a scan from textbook which
shows in which part of the FIN STATS each of the items below must go(all jumbled up
in ias16)
Disclosure
73 The financial statements shall disclose, for each class of property, plant and equipment:
(a) the measurement bases used for determining the gross carrying amount;(what is a measurement basis?)
(b) the depreciation methods used;
I the useful lives or the depreciation rates used;
(d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment losses) at the beginning and end
of the period; and
(e) a reconciliation of the carrying amount at the beginning and end of the period showing:
(i) additions;
(ii) assets classified as held for sale or included in a disposal group classified as held for sale in accordance with IFRS 5 and other
disposals;
(iii) acquisitions through business combinations;
(iv) increases or decreases resulting from revaluations under paragraphs 31, 39 and 40 and from impairment losses easuremen or
reversed in other comprehensive income in accordance with IAS 36;
(v) impairment losses easuremen in profit or loss in accordance with IAS 36;
(vi) impairment losses reversed in profit or loss in accordance with IAS 36;
(vii) depreciation;
(viii) the net exchange differences arising on the translation of the financial statements from the functional currency into a different
presentation currency, including the translation of a foreign operation into the presentation currency of the reporting entity; and
(ix) other changes.

74 The financial statements shall also disclose:


(a) the existence and amounts of restrictions on title, and property, plant and equipment pledged as security for liabilities;
(b) the amount of expenditures easuremen in the carrying amount of an item of property, plant and equipment in the course of its
construction;
155 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(c) I the amount of contractual commitments for the acquisition of property, plant and equipment; and
(d) if it is not disclosed separately in the statement of comprehensive income, the amount of compensation from third parties for items of
property, plant and equipment that were impaired, lost or given up that is included in profit or loss.

75 Selection of the depreciation method and estimation of the useful life of assets are matters of judgement. Therefore, disclosure of the methods
adopted and the estimated useful lives or depreciation rates provides users of financial statements with information that allows them to review the
policies selected by management and enables comparisons to be made with other entities. For similar reasons, it is necessary to disclose:
(a) depreciation, whether easuremen in profit or loss or as a part of the cost of other assets, during a period; and
(b) accumulated depreciation at the end of the period.
76 In accordance with IAS 8 an entity discloses the nature and effect of a change in an accounting estimate that has an effect in the current period
or is expected to have an effect in subsequent periods. For property, plant and equipment, such disclosure may arise from changes in estimates
with respect to:
(a) residual values;
(b) the estimated costs of dismantling, removing or restoring items of property, plant and equipment;
I useful lives; and
(d) depreciation methods.

77 If items of property, plant and equipment are stated at revalued amounts, the following shall be disclosed:
(a) the effective
(b) whether an independent valuer was involved;
I the methods and significant assumptions applied in estimating the items’ fair values;
(d) the extent to which the items’ fair values were determined directly by reference to observable prices in an active market or recent market
transactions on arm’s length terms or were estimated using other valuation techniques;
(e) for each revalued class of property, plant and equipment, the carrying amount that would have been easuremen had the assets been carried
under the cost model; and
(f) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the balance to shareholders.

78 In accordance with IAS 36 an entity discloses information on impaired property, plant and equipment in addition to the information required
by paragraph 73(e)(iv)–(vi).
79 Users of financial statements may also find the following information relevant to their needs:
(a) the carrying amount of temporarily idle property, plant and equipment;
(b) the gross carrying amount of any fully depreciated property, plant and equipment that is still in use;
I the carrying amount of property, plant and equipment retired from active use and not classified as held for sale in accordance with IFRS 5;
and
(d) when the cost model is used, the fair value of property, plant and equipment when this is materially different from the carrying amount.
Therefore, entities are encouraged to disclose these amounts.
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157 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

INTANGIBLE ASSETS: IAS38 & SIC 32


1) In order to be classified as an intangible asset, an item must be identifiable, , controlled by the entity and expected to render economic
benefits before it can be easurement as an asset..

INCLUSIONS & EXCLUSIONS


EXCLUSIONS
1) Intangible Assets that are covered by another GAAP statement:
a) Inventory :
i) Intangible assets held as stock to sell , as inventory , in ordinary course of business covered by IAS2 inventory ( not capital)
ii) Construction work : research development costs “on behalf of others“ ARE an intangible asset, but since it is inventory, (sale to
others) it is covered by IAS2 inventory.
b) Deferred tax assets : by IAS 12
c) Leases : by leases IAS (I think if you leased something to someone else / or an operating lease, not sure)
d) Insurers costs : deferred acquisition costs and intangible assets arising from insurers contractual rights under insurance contracts
within the scope of covered by IFRS 4 Insurance Contracts.
e) Held for sale : Non – current intangible assets classified as held for sale
f) Goodwill : arising on a business combination (covered by another ias)
g) Employee benefits : assets arising from this. Covered by another IAS.
INCLUSIONS:
1) Finance lease : an intangible asset held under a finance lease
2) Rights in Terms of a Licencing Agreement ; that relate to films, play, manuscripts , patents & copyrights.
a) (note : licencing agreement meets definition f a lease, but they are specifically excluded from leases IAS and included in this IAS38.
3) Patents
4) Copyrights
5) Customer lists
6) Fishing licences
7) Import quotas
8) Franchises
9) Marketing rights
10) Software: is an intangible asset, even though it may be stored on a disk
11) Windows operating system is intangible asset (software) should form part of the computer hardware because they cannot operate
separately, but should be depreciated as a separate component because it has a different useful life to computer.

DEFINITION OF INTANGIBLE ASSET:


1) DEFINITION : An Intangible asset is an Identifiable, Non-Monetary Asset without physical presence.
a) IDENTIFIABLE:
i) In order for an intangible asset to fall under IAS38 , it must be EITHER or BOTH of
(1) Separable : from the entity (can be sold, licenced, exchanged etc) (inseparable means it cannot be sold without selling the
entity with it)
(2) OR Arises from Contractual or Legal rights (matters not whether they can be separated from entity or other legal rights or not)
ii) Goodwill is not classified as a intangible asset because it is NOT separable from the entity and does not arise from contractual or
other legal rights (so what is goodwill then , and under what ias does it fall for a non-business combination. .AND could it maybe
be an intabngibe asset if some kind of goodwill could be sold separately,or if it comes from a legal right somehow?-or NOT?)
b) NON-MONETARY: not trade debtors , not current account etc.
c) ASSET: must meet definition of an asset : [resource,control, future economic benefits,result past events. ]
i) CONTROL: BUT note CONTROL part is hard to see for intangible assets :
(1) Ability to obtain future economic benefits from it
(2) Ability to restrict access to it by others
(a) Restrict access part normally comes from legal righ : eg legal duty employees maintain confidentiality, restraint of trade
contract, copyrights.
(3) Legal easurementty of a right is not a necessary condition for control
(4) Eg ‘customers’ is not , unless they are contractually bound + it can be ‘sold’ where similar business practice exchange
agreements can show this to be possible.,
d) FUTURE ECONOMIC BENEFITS:
(1) Probability assessed by REASONABLE +SUPPORATBLE assumptions by mngmnt based on best estimate of economic
conditions to exist over useful lifetime of asset, based on evidence at initial recognition, giving greater weight to external
evidence.
(2) Reduction in costs or inflow of money etc.

RECOGNITION
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1. RECOGNITION: IAS38. 18 The recognition of an item as an intangible asset requires an entity to demonstrate that the item meets:
a. (a) the DEFINITION of an intangible asset
i. Definition : An Intangible asset is an Identifiable, Non-Monetary Asset without physical presence.
b. (b) the RECOGNITION criteria ….(which are as follows:)
i. An intangible asset shall be easuremen if, and only if:
1. (a) it is probable that the expected future economic benefits that are attributable to the asset will flow
to the entity; and
2. (b) the cost of the asset can be measured reliably.
ii.22 An entity shall assess the probability of expected future economic benefits using reasonable and supportable
assumptions that represent management’s best estimate of the set of economic conditions that will exist over the useful
life of the asset.
iii.23 An entity uses judgement to assess the degree of certainty attached to the flow of future economic benefits that are
attributable to the use of the asset on the basis of the evidence available at the time of initial recognition, giving
greater weight to external evidence..
2. Useful Lives : If a number of intangible assets make up a brand, then they may be recognized as a single asset only if their useful lives
are similar.
3. Together with another asset :If an intangible assest is only SEPARABLE if it goes together with some other asset, contract or
liability , it only gets recognized together with that item as 1 item.(components of 1 asset)
4. Subsequent expenditure on intangible assets can be capitalized but
a. 1st :Only rarely will subsequent expendure on asset meet this requirement above
b. 2nd: it is often difficult to separate subsequent expnses from the business as a whole,

MEASUREMENT
1) MEASUREMENT: An intangible asset shall be measured initially at cost.
INITIAL MEASSUREMENT
1) MEASUREMENT: An intangible asset shall be measured initially at cost. (at –fair value- if no costs exist somehow)
2) THE CRITERIA OF IAS 38 FOR THE MAIN WAYS AN INTANGIBLE ASSET CAN BE INITIALLY MEASURED ARE:

a) COSTS THAT MUST ALLWAYS BE EXPENSED :


(1) Expenses on start up of a business eg legal & secrestarial. , or to open a new facility, or launch new products or services.
(2) Training
(3) Advertising / promotional
(4) Relocating / reorganizing

b) PREPAYMENTS : they are an asset until you obtain the right to access the related goods or receive the service.( are they Intangibke
assets per definition? Do tyhey fall undere ias38 – and in intangibele items line item in the SFP? Why do they have thois here???

c) SEPARATE ACQUISITION METHOD :


i) Capitalisation ceases when goods are in a condition necessary to operate as mngmnt intended.
ii) If credit is granted : interest portion (deemed) of price should be discounted and charged asseparate finance interest over the
period, it can only be easurement if it meets the requirements of IAS borrowing costs.
iii) Costs that can be easurement :
(1) Normal same as for PPE eg:
(a) Price AFTER trade rebates
(b) Import duties + non-refundable import taxes taxes,
(c) Employee benefits (certain one s same as PPE ones)
(d) Professional fees
(e) Testing(same as PPE)
iv) Costs that cannot be easurement: eg:
(1) Costs of introducing a new service or product
(2) Admin & general overhead costs
(3) Costs from time after If operating as mngmnt intended, but before actually brought into use.
(4) Initial operating losses

d) AS PART OF A BUSINESS COMBINATION


i) If it does not have a value already , then easurement is at FAIR VALUE .
ii) Both the Probability & reliable measurement requirements are always considered to be satidsfied for intangible assets acquired
like this(you do not have to go check again)
iii) Goodwill :Anything that is NOT identifiable as an intangible asset must be seen as Goodwill on acquisition.
iv) RESEARCH COSTS: they are usually expenses and not capitalized wit other development cposts, but when acquired with a
business combination, they may be capitaised (their old research costs) . BUT after acquisition any new research costs must again in
be expensed from then on.(so allowed just once at acquisition, for some weird reason!)
v) Useful Lives : If a number of intangible assets make up a brand, then they may be recognized as a single asset only if their useful
lives are similar.
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vi) Together with another asset :If an intangible assest is only SEPARABLE if it goes together with some other asset, contract or
liability , it only gets recognized together with that item as 1 item.(components of 1 asset)
vii) Allowed examples of funny intangible assets on acquisition:
(1) Customer or order backlog
(2) Existing costracts with customers
(3) Construction permits
(4) Unpatented technology
(5) Trade secrets
(6) Copyright protected or NOT databases.

e) BY WAY OF GOVERNMENT GRANT


(1) If given , or very cheap ,(eg airport landing rights) then you can choose to recognize it at : EITHER
(a) Cost + any capitalisable expenses
(b) OR at fair value (no capitalized expenses allowed then, so its not overvalued)

f) EXCHANGE / BARTER
i) Same rules as for PPE :
(1) It seems from the discussion, that the fair value (not carrying amount)of asset given up is used to measure “what you paid “ in
monetary terms for the asset received. But if fair value is not known or if the fair value of the asset recived is more evident ,
then use that value instead. If no fair values are known, then use carrying amount of asset given up. If you have a problem with
this because you say you made more of a profit/loss here than what comes out from this process, then you can have the new
asset revalued in your books, AFTER you have booked it /initial recognition in the manner prescribed .

g) INTERNALLY GENERATING THE ASSET

i) GOODWILL
(1) Internally generated goodwill is NOT , it is not 1-separable 2 legal rights .
ii) INTERNALLY GENERATED NEWSPAPER MASTHEADS, BRANDS, PUBLUSHING TITLES, CUSTOMER LISTS,
SIMILAR ITEMS ( maybe in additional docs to IFRS book)
(1) These may NOT EVER , as their costs cannot be distinguished from entity development as a whole , it is not SEPARABLE,
nor LEGAL RIGHT. Irrespective of whether they were internally generated or externally acquired. Nor may subsequent
expenditure be capitalized .
iii) OTHER INTERNALLY GENERATED INTANGIBLE ASSETS:
(1) In order to asses if interbally generated … may be recognized, and at what cost, one must separate them into 2 sections : a
research phase and a development phase. If it cannot be separated it must be deemed to be a research phase only –which means
it gets written off.
(2) RESEARCH PHASE :EXPENSE :see definition :basicly “original & planned investigation for new
knowledge/understanding” always done as an EXPENSE only ever.
(3) DEVELOPMENT STAGE
(a) See Definition ; basicly “ application of research to a plan for production prior to start of commercial production” :
(b) Note : it end up only the further development & testing of a FINAL alternative is allowed, if you are still looking for
alternatives it is not allowed.
(c) Eg : construction of pilot plant , or Design & testing of a chosen alternative etc.
(d) Depreciation on Machines MUST be capitalized..
(i) Depreciation:
1. CAPITALISATION : on machines, allocated to CAPITALISATION of research costs, must be deducted from
depreciation, and in ‘profit before tax note’ under the deprec. line item, in separate line , Blocked Off : say less
1200 allocated to capitalization of development costs. don’t forget ,and this goes into PPE capitalize
development costs. So “Depr. is shown in Profit before Tax , and the total is net of these costs , but blocked
undeneath it shows them clearly what was net’ed out of the depreciation. Note: in PPE table this amount is NOT
deducted, it is ignored.( Note sure in SCI , do you put it in deprec. or not, and elsewhere in fin stats the same ?
where is it left out?)
2. UNISA SAYS IT IS GOOD PRACTICE TO DO THIS : ( but not sure if they should be taken oiut of deprec. in
the fin stats. in SCI? yes/no?) ONLY IN PROFITY BEFORE TAX NOTE , not in fin stats, or anywhere else: on
machines etc, , that was allocated to research or development costs as an EXPENSE , must be taken out of
depreciation, and put into research costs or dev.costs SEPARATELY , and in ‘profit before tax note’ under the
deprec. line item, in separate line , Blocked Off : say less 1200 allocated to research costs. don’t forget ,and this
goes into research costs then . – so “Depr. is shown in Profit before Tax , and the total is net of these costs , but
blocked undeneath it shows them clearly what was net’ed out of the depreciation.

(a) Entity must demonstrate ALL of the following before it can be recognized :. IAS 38.57 :
(i) the technical feasibility of completing the intangible asset so that it will be available for use or sale.
(ii) its intention to complete the intangible asset and use or sell it.
(iii) its ability to use or sell the intangible asset.
(iv) how the intangible asset will generate probable future economic benefits.
(v) Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the
intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset.
160 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(vi) the availability of adequate technical, financial and other resources to complete the development and to use or sell the
intangible asset.
(vii) its ability to measure reliably the expenditure attributable to the intangible asset during its development.
(b) EXPENSES initially taken to SCI may not be capitaised later. ALSO , if these were exposed in the INTERIM
STATEMENTS, they may NOT be capitalized either.
(c) You may not include : training staff to operate, inefficiencies in the process (wastage etc).
(d) You may include : admin overheads etc if directly related to project. Selling expenses if down to get it ready for use –eg
marketing expenses to demonstrate existence of a market.

(2) WEB SITE COSTS : SIC32:


(a) If any ISP hosts the website, all expenses from this are regarded as an EXPENSE only.
(b) Websites for : storing customer details(internal use) or selling of products(external) can qualify. But if primarily for
advertisng & promoting your goods, then it is not allowed for some reason- being cannot prove future economic benefits
flowing from it.
(c) The process must be divided into the research or development stage to see what part is capitaisable. SEE SIC32 appendix

SUBSEQUENT MEASUREMENT:
1) COST MODEL:
a) AFTER initial recognition, it is carried at costs less amortization or impairment losses.
2) REVALUATION MODEL:
a) after initial recognition it may be carried at a new revalued cost less amortization or impairment losses.
b) Revaluations MUST be done in an ACTIVE MARKET : (see definition in IAS38) –there are not very many of these around (these
assets are 1-not very homogenous nor 2-publicly available common prices , except maybe fishing licences ,+ manufacturing quotas.
c) Revaluations must be done frequently (to maintain fair value , eg yearly)
161 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
d) All assets in same class must also be revalued simultaneously, if one of them does not have active market , it may be that one alone at
cost .
e) Other Com inc. + Revaluation Surplus : thses assets get treated exactly the same as PPE rules , incl. net & gross method etc. , and
transferring Reval .Revseve to retined earnings etc.
f) Note : the Reval. Reserve does not need to be transferred on sale NOR for depreciation, it can be kept as is as a Capital replace ment
reseve ,or even transferred to another reserve as asset replacement reserve when sold /depreciated etc.

INDEFINITE USEFUL LIFE


1) Eg patent that can be renewed every 20yrs , at little cost. Indefinite means can end but not in foreseeable future. , that is different to infinite.
2) If you must update eg a list of customer names every year it is NOT indefinite .
3) They MUST NOT be amortised only Impairment testing should be done yearly.
4) ,REVIEWED ANNUALY: this must be reviewed annually, and if not indefinite anymore it must be changed by ‘Change in accounting
estimate” procedure.

FINITE USEFUL LIFE


1) Amortisation is charged to inventory if the asset is used to produce inventory, otherwise it is charged to expense in P&L as amortization
expense.
2) It is done the same as depreciation, no different.
USEFUL LIFE
1) Either period deemed available for use, or no. of production units .
2) If legal right s may be renewed, it is only part of useful life if 1-costs insignificant to renew , 2-evidence it should happen see IAS for
details.
3) Useful life reviewed yearly , any change is a Change in accounting estimate.
RESIDUAL VALUE:
1) (see definition) is the estimated amount entity would CURRENTLY obtain from disppsal after deducting disposal costs, if asset were
already at the age and condition expected at end of useful life.
2) IT IS ASSUMED TO BE zero for intangible sssets, UNLESS exceptionally :
a) Commitment by 3rd party to purchase it exists
b) Actve Market .
3) Reviewed yearly change is a Change in Accounting estimate.
4) If increases to above carrying amount, amortization ceases until it drops below.
AMORTISATION METHODS
1) Use straight line if cannot choose , or else reducing balance , unit of prodution etc.
2) Begins when asset is AVAILABLE FOR USE , Ends when classified as held for sale , or derecognosed.

IMPAIRMENTS
1) IAS 36 impairment is used to do this.
2) Following is important:
a) Indefinite useful life : tested annually for impairment, and whenever there is an indication of impairment as well
b) Not yet available for use : annually
c) All other : at reporting date only.

RETIREMENTS AND DISPOSALS


1) To be derecognized – same as PPE – on disposal OR when no future economic benefits are expected from its use or scrap value.
2) Proceeds are a GAIN (CGT) . recognized at cash value of payment , and if credit was granted it must be taken out and treated as a finance
cost.
IF SEPARATE COMPONENTS ARE REPLACED / ETC.
1) If item has components , same as a helicopter engine + body is separate , and these get replaced, it works exactly the same as with PPE .

TAXATION
1) Income tax act : 11B = research & develop. 11g(C) trade marks, copyrights etc.
2) Deferred tax temporary difference etc work exactly the same as for PPE.

FINANCIAL STATEMENT PRESENTATION:


1) ACCOUNTING POLICY :
162 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
a) Put every policy under a small subheading eg : RESEARCH COSTS, DEVELOPMENT COSTS for internally generated intang.assets
, Property,Plant & Equip , Amortisation ,Impairment.
b) If Useful lives are definite or indefinite.
c) Amortisation method used
d) For each clsss of asssets, whether they have a finite or a indefinite life.
e) Any other policy eg Cost /Revaluation methods, Net /Gross methods / whether Reval.Surplus. goes to Ret.Earn at sale or depreciation if
That research costs are expensed when incurred. That development costs are capitalized if all recognition requirenets are met(per
example in textbook – not in IAS) .etc.etc etc. any you can think of .(does this also have to be there, like for PPE,???)
2) PROFIT BEFORE TAX Note to Fin Stats. (used by many IAS’s) (note: STUDY THIS : IAS does not tell you WHERE to put this)
a) Amortisation expense for the year : if this is GIVEN IN QUESTION AS part of any INTERNALLY GENERATED Intang..Assets,then
that part of it gets shown under and added to DEVELOPMENT COSTS, since it is blocked off underneath under the DEVELOPMENT
line item, in separate line , Blocked Off : say less (1200) from development costs. + REM for a block, all the amounts making it up
must be in the block, so any plus and any minus making up the total must go in block, then these other under in brackets to show they
were deducted. If there is no part of amortization that is left after this, then no separate heading for amortistion is needed, the one in the
block is enough. But if some part of amortization is still left, that was not part of CAPITALISED Dev. Costs, then Amortisation costs
must get a separate heading , and be done same as depreciation explained below (see below how that is done)…
b) Amortisation : if any part of it goes is apportioned to other line items, it must be done same as depreciation is explained below.(blocked)
c) All research costs expensed for the year separate , incl blocked below any depreciation impairment,amortisation that is incl. in it.
d) All development costs expensed for the year. , incl blocked below any depreciation, impairment,amortisation that is incl. in it.
e) Impairment loss : do this exactly the same as for depreciation& amortization, when part if it goes to other line items, (see above)
f) Depreciation:
i) on machines etc, , that was allocated to research&development costs as an EXPENSE , must be taken out of depreciation, and put
into research costs or dev.costs , and in ‘profit before tax note’ under the deprec. line item, in separate line , Blocked Off : say less
1200 allocated to research costs. don’t forget ,and this goes into research costs then .+ REM for a block, all the amounts making it
up must be in the block, so original total depreciation must be first line of block, then these other under in brackets to show they
were deducted.
ii) on machines, allocated to CAPITALISATION of research costs, must be deducted from depreciation, and in ‘profit before tax note’
under the deprec. line item, in separate line , Blocked Off : say less 1200 allocated to capitalization of development costs. don’t
forget ,and this goes into PPE capitalize development costs .

3) SCI :
a) (A)The line item in which amortization is included.
b) (B)The amortization charged in arriving at amortization for the period( these 2 (A) +(B) seem to relate to SCI line item and PPE table
line for amortization or to Profit before tax note for the year)

4) PPE TABLE : do a separate one for Intangible Assets (for current & comparative period , on top of each other or next to each other)
a) A separate table, same as for PPE ,must be made. The different classes should be distinguished by
i) Type of asset class+
ii) Internally or Externally generated. ( same class can have 1 heading for each of these)
b) Line item must be there , in middle of table , for (similar to PPE table) : (reconciliation of carrying amount at begin & end Yr. is what
IAS calls it)
i) Amortisation
ii) Capitalized Development Costs
iii) Reva;uations Incr. or Decr. + Impairment losses from Other Comprehensive income
iv) Impairment losses from Profit & Loss
v) Impairment losses REVERSED in P&L
vi) Disposals
vii) Additions : showing separately 1- Internally Generated 2- From Business Combinations 3- Acquired Separately .
viii) Other changes in carrying amount during the period (any and all must show somewhere in Fin Stats.
c) A reconciliation of carrying amount at begin & end Yr. of Exchange difference from translating FinStats AND of foreign operations into
the presentation currency

d) UNDER PPE TABLE :in words :


i) INDEFINITE useful life: assets In a separate line item , or under PPE table : if any INDEFINITE useful life assets : carrying
amount + reason supporting , incl. factors that caused it to have a indefinite life.
ii) Material ones only (very): to entity specific ones : a line with carrying amount, remaining amortization period.
iii) Government grant – if you got them from this : details (see IAS 38)
iv) Any Pledged as security – details (see IAS 38)
v) Contractual commitments for acquisition of any new ones: (see IAS 38)

5) REVALUATED ASSETS : a whole table with various things must be shown if there are any of these …(see IAS 38)

6) SOME OTHER NON-COMPULSORY things …see (see IAS 38)


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GOVERNMENT GRANTS IAS 20 , SIC10


SCOPE:
1. EXCLUSIONS:
a. Gov grants involving benefits in determining taxable profit or tax loss eg:
i. Tax benefits (tax holiday, investment tax credits , accelerated deprec. allowanceetc)
ii.Gov. participation in ownership of entity
iii.If covered by IAS agriculture eg grants related to biological assets.
iv.Special problems of gov.grants to do with changing prices , etc.
v. Grants which cannot reasonably have a value placed on them or thiose which cannot be distinguished from
normal trading transactions of entity

Defintions :
2. See IAS 20 , on difference between eg gov. assistance and gov . grant , or asset related or income related
3. Note : any grant which is NOT asset related, is then seen as INCOME related.
4.

RECOGNITION:
1. RECOGNITION :
a. ONLY WHEN THERE IS REASONABLE ASSUREANCE THAT:
i. Entity will comply with the conditions of the grant
ii.The grant will be received.
(grant should be accounted for as a liability if there is uncertainty as to whether conditions will be complied with by
the entity)
2. MEASUREMENT:
3.

GENERAL ACC. ASPECTS


1. LIABILITY :Grant should be accounted for as a liability if there is uncertainty as to whether conditions will be complied with by the
entity- see “recognition” rule.
2. GOVERNMENT CONDITIONS OF GRANT : because grants are seldom without a condition that the entity must comply with (like
work in a specific area), ALL grants, no matter if with conditions or not, are to be seen as : ( because you ‘earned’ it by complying)
a. Seen as income , on asystematic & rational basis, over the periods necessary to match the grants with related expenses which
they are intended to compensate. ( matching principle must be applied to theis)
b. Should NOT be credited directly to shareholders interests.
3. RECOGNITION IF ALL COSTS ARE ALREADY INCURRED : Thus , due to the abpove,
i. if all the costs / losses have already been incurred that the grant is meant to compensate for ,
ii.OR if it is financial assistance with no future conditions to comply with (so not related expenses will ever occour in
return for the help/to comply with a condition)
b. then the income must be recognized immediately, and no part of it deferred to be recognosed in any future period (matching
principle)

GRANTS RELATED TO ASSETS:


1. ARE :grants whose primary condition is a entity should purchase ,construct or other wise aquire long term assets.
2. REDUCTION OF LIABILITY : grants are accounted for in the same way, whether granted as a reduction in liability you owe gov. or
as money given to you.
3. Aid Packages :For certain aid packages , each part of package may be treated differenty using different methods.
4. MONEY GRANTED TO BUY ASSET : accounted for by:
a. Normally has conditions attached which must be complied with
b. ACCOUNTED FOR BY: either
i. SUBTRACT GRANT DIRECTLY FROM THE COST of the asset in your books: ,
1. this reduces the caaying amount , and reduces depreciation as well .It will create a “more of” deferred tax
asset “than before” (if possible with SARS for that asset class of course) ( but per textbook, keep grant in a
deferred income account until the day the asset is bought)
2. Journals :
a. PPE & Depreciation :: It reduces cost price of asset in books, ALSO in PPE table , and therefore
each year depreciation is a bit less of course than otherwise would be. So Dr Bank Cr Deferred
164 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
Income account , then when asset is paid for , account for it at its cost price , but then transfer from
“Deferred Income” to asset account, to lower its price.
b. It never goes to any income account like ‘grant recived’ at all , because this is a CAPITAL method
only.
ii. DEFERRED INCOME ACCOUNT set up a ‘deferred income account’ , and recognize eiethr;
1. Depreciable Assets :recognize grant as “INCOME” over” USEFUL LIFE “of of asset
2. Non-Depreciable Assets : identify the periods over which the entity will be burdened with the conditions of
the Go.Grant. then divide up and recognize the grant AS “INCOME” over these periods .
3. Journals :
a. Grant Received : this is a ‘income ‘ account in the SCI , and every year a portion is tyransferred to
here , to show as profits for the year, that’s it. (on original recipt of grant it goes to ‘deferred
income’ , not to this one at all’
b. Deferred income : this is a “ Liability“ Cr account , opposite to a bank account side (Dr bank Cr
Deferred income ) . It shows in the SFP and every year a portion is transferred to ‘grant Received”
income account in the SCI . that’s it .
c. PPE & : Deprecdiation :this grant does not affect depreciation in any way. The asset stays at it
original price paid for it, and acc. depr. and depr. carry on as per 100% usual .
4.
5. ASSET GIVEN TO YOU: eg landing rights or broadcasting licence
a. accounted for by: either
i. asses its FAIR VALUE then account for asset AND grant at this value ( both get same accounting treatment below)
ii.OR record asset and grant both at a nominal value. This is say at a nominal value of R10 , and that’s it. Gets the same
accounting treatment below.
1. Journals :
a. Grant Received : this is a ‘income ‘ account in the SCI , and every year a portion is tyransferred to
here , to show as profits for the year, that’s it. (on original recipt of grant it goes to ‘deferred
income’ , not to this one at all’
b. Deferred income : this is a “ Liability“ Cr account , opposite to a bank account side (Dr bank Cr
Deferred income ) . It shows in the SFP and every year a portion is transferred to ‘grant Received”
income account in the SCI . that’s it .
c. PPE & : Deprecdiation :this grant does not affect depreciation in any way. The asset stays at it
original price paid for it, and acc. depr. and depr. OR amortization carry on as per 100% usual . (a
licence would get amortised .)

GRANTS RELATED TO INCOME :


1. These grants may be either :
a. DEDUCT DIRECT FROM EXPENSES which they are meant to help with . OR
b. RECOGNISE AS A INCOME in form of ‘grant received income” in SCI.
2. JOURNALS :
a. DEDUCT FROM EXPENSES METHOD :
i. First Dr BANK CONTRA Cr ‘Deferred Expenses Account”
ii.Each period you transfer the portion for that period from ‘DEFERRED INCOME account” to the expense account to
which it must help. This REDUCES that expense for the year Eg wages was 300 , now it is 100 from a 200 grant.
Finished and klaar.
b. RECOGNISE AN INCOME METHOD
i. First Dr BANK CONTRA Cr ‘Deferred Expenses Account”
ii.Each period you transfer the portion for that period from ‘DEFERRED INCOME account” TO “grant Received
income’ in SCI. Finish and klaar.
3. NOTE : the grant must be apportioned to costs equally per year. So if you only get 100 ,
a. year 1 costs = 200
b. year 2 costs = 500
c. year 3 costs = 400
d. then it is 100 / (200+500+400) X 200 for year 1 , and X 500 for year 2 etc etc.
4. see example of complex salaries on page 328 gaap text. SCAN it in !

REPAYMENTS OF GRANTS:
1. POSSIBLE REPAYMENT: If it is unsure wheter a grant must be repayed or not , it must be trted as aliability , UNTIL you are sure it
needs not get paid back.
2. WAS GRANT THEN LATER BECAME REPAYABLE : grant that was a grant, but then later becomes repayable, should be trated
as a ‘Change in accounting estimate’ per IAS 8.
3. For each type of grant there is a different repayment method:
a. REPAYMENT OF INCOME GRANT: tricky :
i. Change in Accounting Estimate : This whole thing is to be treated as a change in accounting estimate ONLY So
you :
165 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1. First any unamortized ‘deferred income’ must be removed , and the rest goes to P&L as an expense. So if
only 10 is left in ‘deferred income’ after 3 years , and now 50 must be paid back of a original 100 , first the
‘deferred income’ account gets cleared , then the rest to ‘expense. REM Allways first clear the ‘deferred
income’ account, no matter if party of the grant is not repayable and relates to future periods – it is DEEMED
that future periods got less grant , even if the reason was for something assigned last year to ‘grant income’
ANY repayment ALLWAYS first reduces this balance, then to expense if anything is left.
2. Anything left in the “deferred income account”,then gets either ;apportioned equally beteen the following
years, or used up on old basis , or what? Just use it up after recal. What your new periodic payment should
have been originaly - to that level )ASK LECTURERor full amount now ‘left of grant’ as if other years had
not used it up yet , apportioned between all years and somehow grant income from former years reversed etc
as change in acc. estimate ‘ or what?? Like for deferred income asset based thing below.??)
3.
ii. JOURNALs:
1. Dr “deferred income account’ empty AND rest to Dr “ Repayable Grant expense” <CONTRA> CR bank
‘full amount repayable’
b. REPAYMENT OF ASSET GRANT : more simple :
i. Deferred IncomeAccount method ; if this method was used ,
1. Change in Accounting Estimate : This whole thing is to be treated as a change in accounting estimate
ONLY So you :
a. This is the only really funny one out of all 4 types : you calc. what your original periodic
allotyment from ‘deferred income account’ would have been , then anything extra allotted to former
years gets charged to P&L immediatelky as an reversal of former grant income)
b. New allotment per year : now start allotting only this new figure to ‘grant income” each year.
c. Dr bank Cr Deferred income” with penalty , and any excess goes to P&L as an expense , unless
,same as the first expense above(they could even be done in the same one shot amount together.
d. “All change in estimates ‘ stuff must be done now too , whatever they are.
ii. Reduce Asset Carrying amount method :
1. PPE account : increase the asset cost price by this amount , CONTRA expense “repay gov. grant expense
acc.”
2. Depreciation ; you must immediately work out what the deprecition on the asset would have been if the
grant was not ever given , and charge that to depreciation (and Acc .depr. of course) immediately.

SPECIFIC FORMS OF GOVERNMENT GRANTS:


1. LOW INTEREST RATE LOANS:
a. Any benefit received from a loan is calc. at fair value and regarded as a Grant. It is then treated as explained below.
b. DEFERRED INCOME BASIS :
i. Journals :
1. First : calc. the loan at its PV fair value : ie as if there were no grant at all. This will be the PV of all interest
and all the principle repayments . This goes to “Long term loan” account
2. Second : calculate the government grant portion of this loan : ie loan in cash given to you, minus the PV
portion you just calculated. That is the Grant portion .
Dr Bank (what you got in cash)
Cr Long Term loan Acc.
Cr“Deferred income account” Grant portion goes to

3.
Then follows a very complex order of journal entries till , of finance costs each year , etc – see txt book.
4.
NOTE : the ‘deferred income “ transfer to “grant income account SCI P&L” each year is not over the loan
period, but over the useful life of the asset. Eg building useful life = 20 yrs etc. NOT loan repayment period.
5. See example pg 330gaap book :Scan it in
c. CAPITAL METHOD LOANS:
1. First : calc. the loan at its PV fair value : ie as if there were no grant at all. This will be the PV of all interest
and all the principle repayments . This goes to “Long term loan” account
2. Second : calculate the government grant portion of this loan : ie loan in cash given to you, minus the PV
portion you just calculated. That is the Grant portion .
Dr Bank (what you got in cash)
Cr Long Term loan Acc.
Cr PPE (Grant portion goes to REDUCE asset cost in books)

3. Then follows a very complex order of journal entries till , of finance costs each year , etc – see txt book.
4. See example pg 330gaap book :Scan it in
5.

2. FORGIVABLE LOANS : treated If there is reasonable assurance that the terms of the loan will be met by both parties, it is treated
same as above.
3. OTHER FORMS OF GOV.ASSISTENCE:
a. Eg : gov. procurement contract , free technical assistance , guarantee of loans, price preference on Gov tenders of say 10%,
166 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
b. No value should be “attempted” to be placed on these other forms of assistance, just the details must be disclosed in the notes:
ie 1-nature + 2-extent + 3-duration. In “government assistance” notes , under its own sub heading in that note : called
Other Forms Of Gov Assistence.

TAX SPECIAL IMPLICATIONS


1. ALL GOVERNMENT GRANTS , : pay tax 100% immediately , whether accounted for on the CAPITAL or INCOME basis (less
from asset cost OR deferred income account ) MUST be taken 100% in consideration for TAX in the period they are received or
become receivable(if you can raise Gov.as a creditor ). So , even though income might be only recognosed over a period of 10 years
etc, you must actually pay SARS tax on the whole amount immediately when you get it, no matter which method you use.
2. Deferred Tax : if Tax is paid on the Whole amount of grant to SARS immediately , the following deferred tax implications arise:
a. INCOME METHOD : The Deferred income Account is deemded to be “Revenue Received in Advance” for deferred tax base
calc. So if there is any money left in the deferred tax account, it will have a tax base of ZERO (you already pay tax on the
full amount in same period you get the grant-and tax exempt grants will also be zero-see definition of “tax base of income
received in advance) , and it will thus create a tax asset .(negative temp. difference is a asset!)
b. ASSET METHOD : the only deferred tax implication willlbe a different depreciation rate between you and sars. That is all –
no deferred income or anything else at all – finished and klaar.
3.

DISCLOSURE
1. In P&L , if recognised as income over 20 years , it should be separate from depreciation .,under it own name , and not set off.
2. STATEMENT OF CASH FLOWS : deals with ‘gross amounts ‘ so , it does not matter if the grant is deducted from cost of assets, or
recogniosed over 50 years , that year you get it goes in as under : INVESTING ACTICITIES “FULL PRICE PAID FOR ASSET” and
Financing Activities : ‘FULL AMOUNT OF GRANT”
3. SFP :
a. N-C liabilities : Name : “Deferred Income” : : n-c portion of only in here ( over 12 mnths)
b. C-Liabilities : : “Deferred Income” : : current portion only must be taken out and put in here – ie: next yrs transfer! ( Under
12 mnths)
4. ACCOUNTING POLICY:
a. In its own sub-heading : “GOVERNMENT GRANTS”
b. Policy for deferred income VS set off AND CAPITAL vs INCOME metods etc, for each separate class of Gov.Grant
Separately. Also give the rates used for deferred income method for each class , when you transfer to “grant income sci” ie
over 5 yrs, 10000 per yr etc.
5. PPE TABLE
a. As Usual
b. REM : Assets recived as a grant gst their own item Line in Middle by additions, depreciation etc, called : “Government Grant”
6. GOVERNMENT ASSISTENCE NOTE: ( number next to “deferred income” item in SFP, or in SCI if “Grant Income” is shown.
a. Unfulfilled conditions left over to do BY YOU for every gov. grant /assistance recived..
b. All grants under : 1-ASSETS , 2- INCOME , 3-OTHER GOV.ASSISTENCE must be in separate sub-headings.
c. For every Gov.Grant recived, the 1-amount recived this year 2-next years portion<12mnths 3- N-C portion (over 12 mnths)
7. PROFIT BEFORE TAX :
a. For Every “Grant Income” recognosed in the year – ie transferred from “Deferred Income” to “Income” , BUT only if
TRANSFERRED TO SCI from “DEFERRED INCOME ACCOUNT”. If it was an asset based grant that was recogniosed
using the CAPITAL method (ie deduct it from the cost of asset bought) then it does NOT get put in this note – it is a capital
based thing!!!\
8. DEFERRED TAX :
167 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

IAS 36 IMPAIRMENT
SCOPE
1. Specifically Excluded:
a. Inventories
b. Construction contract assets
c. Deferred tax assets
d. Employee benefit assets
e. Financial assets in scope of ias 39
f. Investment properties at fair value
g. Biological assets
h. N-C assets classified as held for sale per IFRS 5
i. Intangible assets in scope of IFRS 4
2. Specifically included:
a. Investment in Associates, subsidiaries ,joint venture
b. goodwill
c. PPE ,goodwill , intangible assets
3. However , if any asset has been revalued, this IAS36 statement DOES apply from then on .(only for some or all of the above, and when
does it cease to apply again?)

WHEN TO TEST FOR IMPAIRMENT:


1. ANNUALLY (MUST) :
a. INTANGIBLE asset indefinite life .(this one must also be tested whenever there is an indication)
b. Goodwill acquired in business combination ( this one must also be tested whenever there is an indication)
c. Intangible asset not yet available for use (this one not)
2. ONLY IF at reporting date IF there is an “indication” that there might be impairment. If no indication , don’t test for nothing.
a. All other assets
3. ASSESING : WHAT TO CONSIDER , AT A MINIMUM , WHEN ASSESING IF IT SHOWS SIGNS:
External sources of information
a. technological, market, economic or legal environment in which the entity operates or in the market to which an asset is
dedicated.
b. (c) market interest rates or other market rates of return on investments have increased during the period, and those increases are
likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount
materially.
c. (d) the carrying amount of the net assets of the entity is more than its market capitalisation.

Internal sources of info :\


a. (e) evidence is available of obsolescence or physical damage of an asset.
b. (f) significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in
the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the
asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset
before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.*
c. (g) evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse
than expected.

For an investment in a subsidiary, jointly controlled entity or associate,


a. The investor recognises a dividend from the investment and evidence is available that:
a. (i) the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the
consolidated financial statements of the investee’s net assets, including associated goodwill; or
b. (ii) the dividend exceeds the total comprehensive income of the subsidiary, jointly controlled entity or associate in the
period the dividend is declared.

RECOGNITION AND MEASUREMENT


1. RECOGNITION:
a. If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be
reduced to its recoverable amount. That reduction is an impairment loss.
2. MEASUREMENT:
a. At higher of fair value less costs to sell or PV of future cashflows.

MEASUREMENT:
168 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
1) An asset is impaired if If, and only if, the recoverable amount of an asset is less than its carrying amount.
2) The recoverable amount is defined as :the higher of assets value in use of fair value.
3) So you do not have to test for impairment if ANY ONE of the 2 above values are above carrying amount value.
4) If it is NOT possible to determine ‘value in Use’ then value in use of the ‘assets cash generating unit” must be measured ..see below.
MEASURING VALUE OF INTANGIBLE ASSET WITH INDEFINITE USEFUL LIFE.
1) LAST YEARS value calc. may be used again , if :
a) If part of cash –gen. unit assets&liabilites of it have not changed much
b) It exceeds carrying amount by far margin
c) Events/ economic conditions do not indicate a problem.
FAIR VALUE LESS COSTS TO SELL:
1) Fair value less costs to sell : is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal. (disposal specifically excl. finance costs & tax &
employee wages/termination benefits) [Either a 1- binding sale agreement , 2-active market price , or 3- between willing ,
knowledgeable….)]
VALUE IN USE:
1) VALUE IN USE IS : PV of all future cash INFLOWS + OUTFLOWS.
FUTURE CASH FLOWS
1) Cash flow projections should be based on REASONABLE and SUPPORTABLE assumptions , of managements best estimate of future
economic conditions ..
2) Greater weight to external evidence.
3) Should be based on budgets/forecasts of no longer than 5 yrs. After 5 yrs extrapolation is done by using a GROWTH RATE of : 1-
steady or 2-declining or 3-increasing growth rate if it can be justified) or 4-zero
4) Current condition : ONLY to be calc. on asset as it is in current condition , any cash outflows that will enhance its performance
should be ignored, and any future inflows from better performance due to this must also be ignored. UNLESS it is no0t yet avvilable
for use, then this rulke does not apply yet.
5) Future restructuring : any differences (cheaper staff costs due to restructuring firm) may only be incl. if entity is ‘commited’ , not just
if it is ‘planned.’ Also any eg transport costs or termination costs of employees , must be expensed to the restructuring and not toi the
outflows here.(it must be a factory wide restructuring, not just this asset)
6) Tax in/out flows & financing costs : do not include these.
7) Any replacement of separately depreciatd components , is considerd as daily servicing in this calc. ALSO in a cash-gen-unit, any
replacement of an asset with a shorter life is also considered as daily servicing in this calc.
8) Exchange rates ; overseas stuff- first do all calc. & discounting in their currency, then translate all at todays spot price.
9) INFLOWS : incl. disposal costs .
10) OUTFLOWS : necessarily incurred , to generate outflows , from continuing use of the asset , incl. to prepare it for use and disposal
costs.
DISCOUNT RATE
1) Must be Pre-tax rate that reflects current fin market rates AND takes into account asset risks that were not considered when calc. the
outflows/inflows.
2) Cash flows & discount rates should reflect consistent assumptions , so if inflation is incl. in cashflows, it must also be considered in discount
rate, and visa versa. ( specific price incr. MAY be used in cashflows without considering discount rate)
INDIVIDUAL ASSET : RECOGNITION AND MEASUREMENT OF AN IMPAIRMENT LOSS
1) To SCI / RevalSurpl.: Any impairment is written off to SCI immediately , unless the asset was ‘revalued’ previously , then any
reval.surplus left must first be used up, before the rest , whats left , goes to SCI .(same as PPE devaluations).So anything of that assets in the
Reval.Surpl. account, gets written out of Revaluation Surplus account first.

2) Journal Entry :
Dr Impairment Loss Account (SCI)
Cr Accumulated Depreciation & Impairment Account . SFP
3) Depreciation is adjusted accordingly , same as for a revaluation or depreciation, on the assets new value from then
on.

DEFERRED TAX :

1) Note ; A “POST TAX REVALUATION SURPLUS “ , with deferred tax at R10 of R50 means a true revaluation
surplus of R60
2) Deferred tax that is left over from the revaluation , and applies to the revaluation in the revaluation Surplus
Account, must get written out of that same OCI (other comprehensive income) .So in a question , rem that when
you do a Deferred Tax entry for the ‘reduction’ in deferred tax (an -increase in tax asset or a decrease in tax
liability of course- for a ‘devalued asset ‘ due to an impairment etc) it will have to be a DR (asset is worth less
169 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
now so you pay less tax now than before). An the CONTRA to this DR will have to be INCOME TAX EXPENSE
account (normal + deferred tax all goes there) , BUT ALSO the OCI REVALUATION SURPLUS account, because
all tax from last year for OCI mos had to go to there seprarately I think :
a) Journal Entry :
i) Dr Deferred Tax (SFP)
(1) Cr Revaluation Surplus (OCI) (not sure why???)
(2)Cr Income Tax Expense account SCI
REVERSAL OF AN IMPAIRMENT LOSS FOR AN INDIVIDUAL ASSET:
1) One should check for if a reversal of previous impairments is possible annually. (times are given in IAS 36 – eg at end yr for some, some in
middle depends)
2) SEE IAS 36 FOR ‘at a minimum’ what should be considered when you re-asses at reporting date if any previously impired assets may be
reversed.
3) It may not be reversed just because thePV of future cash flows increases over time as future cash flows draw nearer. ( the closer they get,
the larger the PV , due to discounting) No, either of the reasons in IAS 36 must exist : eg 1- discount rate changes or 2-better economic
conditions or 3-market value of asset increased a lot .
4) An impairment may not be reversed if the carrying amount , net of depreciation and amortistation , will be higher than what it was if an
impairment had not been done years ago. Any increase above this amount is seen as a revaluation , and may only be done by the revaluation
model. This means , if you had carried on depreciating the asset at the old depr.Rate , before it was impaired , up to today ,the carrying
amount less Acc.Depr. you would have left TODAY, may not be less than the “reversed total carrying amount” , cause that means it WENT
UP , and that is a revaluation! , not a reversal .
5) SCI / OCI : The reversal must be recognized in P&L , since impairment was done in P&L. BUT if asset is carried at a revalued amount,
first reverse any previous P&L decrease/charge/expense from the last impairment , then the rest MUST go to Revaluation Surplus.(it may
only reverse a former P&L expense , if there is none it ONLY goes to OCI Reval. Surpl. Acc.
6) Depreciation is adjusted accordingly , same as for a revaluation or depreciation, on the assets new value from then
on.
7) Journal Entry :
Dr Accumulated depreciation & Impairment Losses. (SFP) R100000
CR Revaluation Surplus (OCI) R30000
CR Impairment Loss Reversal(SCI) R70000
CGU: CASH GENERATING UNITS

CORPORATE ASSETS :

TAXATION
1) Impairments are not recognized for tax purposes so they do not affect the tax base ever. BUT they do affect the ‘carrying amount’ so it will
always have positive tax consequences that must be shown in deferred tax . REM anything that happens in the OCI (other com Inc.) ie
Revaluations surpluss account , has its own tax shown there separately , always. So amount that goes in or out there has its deferred tax
shown in the OCI only!
2) Note ; A “POST TAX REVALUATION SURPLUS “ , with deferred tax at R10 of R50 means a true revaluation
surplus of R60
3) Deferred tax that is left over from the revaluation , and applies to the revaluation in the revaluation Surplus
Account, must get written out of that same OCI (other comprehensive income) .So in a question , rem that when
you do a Deferred Tax entry for the ‘reduction’ in deferred tax (an -increase in tax asset or a decrease in tax
liability of course- for a ‘devalued asset ‘ due to an impairment etc) it will have to be a DR (asset is worth less
now so you pay less tax now than before). An the CONTRA to this DR will have to be INCOME TAX EXPENSE
account (normal + deferred tax all goes there) , BUT ALSO the OCI REVALUATION SURPLUS account, because
all tax from last year for OCI mos had to go to there seprarately I think :
a) Journal Entry :
i) Dr Deferred Tax (SFP)
(1) Cr Revaluation Surplus (OCI) (not sure why???)
(2)Cr Income Tax Expense account SCI
DISCLOSURE: IMPAIRMENTS
1) ACCOUNTING POLICIES:
a) Under own separate sub-heading called Impairments :
i)
2) PROFIT BEFORE TAX
a) Impairment losses :expensed to P&L (excl that that went to OthCompInc)
b) Reversals of impirment losses :written back to P&L
3) OCI : OTHER COMPREHENSIVE INCOME NOTE
170 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
a) Impairment losses :that went to OthCompInc
b) Reversals of impirment losses :written back from OCI
4)
5) PPE TABLE :
a) Accumulated depreciation AND Impairment line goes instead of just Acc.Depr. , in Begin, and End of table.
b) Impairment losses
c) Reversals of Impairments own line
d) UNDER PPE TABLE IN WRITING : for each asset impaired or reversed (or class? Also for reversed?)
i) Assets(or class?) that were impaired ,
ii) Reason why it was impaired
iii) Valuation method employed to get Recoverable Amount : either 1-“fair value less costs to sell” OR 2-PV of future Cash Flows.
iv) Carrying amount of asset

126 An entity shall disclose the following for each class of assets:
(a) the amount of impairment losses recognised in profit or loss during the period and the line item(s) of the statement of comprehensive
income in which those impairment losses are included.
(b) the amount of reversals of impairment losses recognised in profit or loss during the period and the line item(s) of the statement of
comprehensive income in which those impairment losses are reversed.
(c) the amount of impairment losses on revalued assets recognised in other comprehensive income during the period.
(d) the amount of reversals of impairment losses on revalued assets recognized in other comprehensive income during the period.
127 A class of assets is a grouping of assets of similar nature and use in an entity’s operations.
128 The information required in paragraph 126 may be presented with other information disclosed for the class of assets. For example, this
information may be included in a reconciliation of the carrying amount of property, plant and equipment, at the beginning and end of the period,
as required by IAS 16.
129 An entity that reports segment information in accordance with IFRS 8 shall disclose the following for each reportable segment:
(a) the amount of impairment losses recognised in profit or loss and in other
comprehensive income during the period.
(b) the amount of reversals of impairment losses recognised in profit or loss
and in other comprehensive income during the period.
130 An entity shall disclose the following for each material impairment loss
recognised or reversed during the period for an individual asset, including
goodwill, or a cash-generating unit:
(a) the events and circumstances that led to the recognition or reversal of the
impairment loss.
(b) the amount of the impairment loss recognised or reversed.
(c) for an individual asset:
(i) the nature of the asset; and
(ii) if the entity reports segment information in accordance with IFRS 8,
the reportable segment to which the asset belongs.
(d) for a cash-generating unit:
(i) a description of the cash-generating unit (such as whether it is a
product line, a plant, a business operation, a geographical area, or a
reportable segment as defined in IFRS 8);
(ii) the amount of the impairment loss recognised or reversed by class of
assets and, if the entity reports segment information in accordance
with IFRS 8, by reportable segment; and
(iii) if the aggregation of assets for identifying the cash-generating unit
has changed since the previous estimate of the cash-generating unit’s
recoverable amount (if any), a description of the current and former
way of aggregating assets and the reasons for changing the way the
cash-generating unit is identified.
(e) whether the recoverable amount of the asset (cash-generating unit) is its
fair value less costs to sell or its value in use.
(f) if recoverable amount is fair value less costs to sell, the basis used to
determine fair value less costs to sell (such as whether fair value was
determined by reference to an active market).
(g) if recoverable amount is value in use, the discount rate(s) used in the
current estimate and previous estimate (if any) of value in use.
IAS 36
1760 © IASCF
131 An entity shall disclose the following information for the aggregate impairment
losses and the aggregate reversals of impairment losses recognised during the
period for which no information is disclosed in accordance with paragraph 130:
(a) the main classes of assets affected by impairment losses and the main
classes of assets affected by reversals of impairment losses.
171 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(b) the main events and circumstances that led to the recognition of these
impairment losses and reversals of impairment losses.
132 An entity is encouraged to disclose assumptions used to determine the
recoverable amount of assets (cash-generating units) during the period. However,
paragraph 134 requires an entity to disclose information about the estimates used
to measure the recoverable amount of a cash-generating unit when goodwill or
an intangible asset with an indefinite useful life is included in the carrying
amount of that unit.
133 If, in accordance with paragraph 84, any portion of the goodwill acquired in a
business combination during the period has not been allocated to a
cash-generating unit (group of units) at the end of the reporting period, the
amount of the unallocated goodwill shall be disclosed together with the reasons
why that amount remains unallocated.

Estimates used to measure recoverable amounts of


cash-generating units containing goodwill or
intangible assets with indefinite useful lives
134 An entity shall disclose the information required by (a)–(f) for each
cash-generating unit (group of units) for which the carrying amount of goodwill
or intangible assets with indefinite useful lives allocated to that unit (group of
units) is significant in comparison with the entity’s total carrying amount of
goodwill or intangible assets with indefinite useful lives:
(a) the carrying amount of goodwill allocated to the unit (group of units).
(b) the carrying amount of intangible assets with indefinite useful lives
allocated to the unit (group of units).
(c) the basis on which the unit’s (group of units’) recoverable amount has been
determined (ie value in use or fair value less costs to sell).
(d) if the unit’s (group of units’) recoverable amount is based on value in use:
(i) a description of each key assumption on which management has
based its cash flow projections for the period covered by the most
recent budgets/forecasts. Key assumptions are those to which the
unit’s (group of units’) recoverable amount is most sensitive.
(ii) a description of management’s approach to determining the value(s)
assigned to each key assumption, whether those value(s) reflect past
experience or, if appropriate, are consistent with external sources of
information, and, if not, how and why they differ from past
experience or external sources of information.
IAS 36
© IASCF 1761
(iii) the period over which management has projected cash flows based on
financial budgets/forecasts approved by management and, when a
period greater than five years is used for a cash-generating unit
(group of units), an explanation of why that longer period is justified.
(iv) the growth rate used to extrapolate cash flow projections beyond the
period covered by the most recent budgets/forecasts, and the
justification for using any growth rate that exceeds the long-term
average growth rate for the products, industries, or country or
countries in which the entity operates, or for the market to which the
unit (group of units) is dedicated.
(v) the discount rate(s) applied to the cash flow projections.
(e) if the unit’s (group of units’) recoverable amount is based on fair value less
costs to sell, the methodology used to determine fair value less costs to sell.
If fair value less costs to sell is not determined using an observable market
price for the unit (group of units), the following information shall also be
disclosed:
(i) a description of each key assumption on which management
has based its determination of fair value less costs to sell.
Key assumptions are those to which the unit’s (group of units’)
recoverable amount is most sensitive.
(ii) a description of management’s approach to determining the value (or
values) assigned to each key assumption, whether those values reflect
past experience or, if appropriate, are consistent with external sources
of information, and, if not, how and why they differ from past
experience or external sources of information.
If fair value less costs to sell is determined using discounted cash flow
projections, the following information shall also be disclosed:
(iii) the period over which management has projected cash flows.
172 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(iv) the growth rate used to extrapolate cash flow projections.
(v) the discount rate(s) applied to the cash flow projections.
(f) if a reasonably possible change in a key assumption on which management
has based its determination of the unit’s (group of units’) recoverable
amount would cause the unit’s (group of units’) carrying amount to exceed
its recoverable amount:
(i) the amount by which the unit’s (group of units’) recoverable amount
exceeds its carrying amount.
(ii) the value assigned to the key assumption.
(iii) the amount by which the value assigned to the key assumption must
change, after incorporating any consequential effects of that change
on the other variables used to measure recoverable amount, in order
for the unit’s (group of units’) recoverable amount to be equal to its
carrying amount.
IAS 36
1762 © IASCF
135 If some or all of the carrying amount of goodwill or intangible assets with
indefinite useful lives is allocated across multiple cash-generating units (groups
of units), and the amount so allocated to each unit (group of units) is not
significant in comparison with the entity’s total carrying amount of goodwill or
intangible assets with indefinite useful lives, that fact shall be disclosed, together
with the aggregate carrying amount of goodwill or intangible assets with
indefinite useful lives allocated to those units (groups of units). In addition, if the
recoverable amounts of any of those units (groups of units) are based on the same
key assumption(s) and the aggregate carrying amount of goodwill or intangible
assets with indefinite useful lives allocated to them is significant in comparison
with the entity’s total carrying amount of goodwill or intangible assets with
indefinite useful lives, an entity shall disclose that fact, together with:
(a) the aggregate carrying amount of goodwill allocated to those units (groups
of units).
(b) the aggregate carrying amount of intangible assets with indefinite useful
lives allocated to those units (groups of units).
(c) a description of the key assumption(s).
(d) a description of management’s approach to determining the value(s)
assigned to the key assumption(s), whether those value(s) reflect past
experience or, if appropriate, are consistent with external sources of
information, and, if not, how and why they differ from past experience or
external sources of information.
(e) if a reasonably possible change in the key assumption(s) would cause the
aggregate of the units’ (groups of units’) carrying amounts to exceed the
aggregate of their recoverable amounts:
(i) the amount by which the aggregate of the units’ (groups of units’)
recoverable amounts exceeds the aggregate of their carrying amounts.
(ii) the value(s) assigned to the key assumption(s).
(iii) the amount by which the value(s) assigned to the key assumption(s)
must change, after incorporating any consequential effects of the
change on the other variables used to measure recoverable amount, in
order for the aggregate of the units’ (groups of units’) recoverable
amounts to be equal to the aggregate of their carrying amounts.
136 The most recent detailed calculation made in a preceding period of the
recoverable amount of a cash-generating unit (group of units) may, in accordance
with paragraph 24 or 99, be carried forward and used in the impairment test for
that unit (group of units) in the current period provided specified criteria are met.
When this is the case, the information for that unit (group of units) that is
incorporated into the disclosures required by paragraphs 134 and 135 relate to
the carried forward calculation of recoverable amount.
137 Illustrative Example 9 illustrates the disclosures required by paragraphs 134
and 135.
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174 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

INVESTMENT INCOME
DEFINITIONS:
1. DEFINITION: Investment property is property (land or a building—or part of a building—or both) held (by the owner or
by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for administrative purposes; or
b. sale in the ordinary course of business.
1. DEFINITION: owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in
the production or supply of goods or services or for administrative purposes
1. DEFINITION : Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an
asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset when initially recognised in
accordance with the specific requirements of other IFRSs, eg IFRS 2 Share-based Payment.

SCOPE:
1. Does Apply to measure Finance Lease Investment property, but most of the rules are in IAS leases as to measurement .
2. DOES NOT APPLY TO:
a. BIOLOGICAL ASSETS related to agricultural activity.
b. MINERAL RIGHTS and mineral reserves .

Distinguish between Investment & Owner occupied Property.


1. DEFINITION: Investment property is property (land or a building—or part of a building—or both) held (by the owner or
by the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
a. use in the production or supply of goods or services or for administrative purposes; or
b. sale in the ordinary course of business.
1. DEFINITION: owner-occupied property is property held (by the owner or by the lessee under a finance lease) for use in
the production or supply of goods or services or for administrative purposes
2. INVESTMENT PROPERTY INCLUDES :
a. Land held for long term appreciation , NOT for short –term sale
b. If future use has not yet been determined, it MUST be INVESTMENT PROPERTY
c. Vacant , but held to be rented out.
d. Under contruction , to be rented out.
e. If a portion is held for owner –occupation, and the rest is rented out : ONLY if the separate portions are able to be SOLD or
LEASED OUT separately , then each part may be treated differently by this IAS.

f. If entity rents out to its parent or another subsidiary , it can be treated as Investmenmt property in his books, but not in the
Cons. Fin. Stats – there it may not be treated as invest,ent property..
g. If an insignificant part of property is owner occupied , it may be recognized.(5% may be , not sure yet about more)
h. Provide ancilliary services to occupants of rented out property Eg security : may be investment property, as long as it is
insignificant ( not a hotel!)
3. IS NOT / DOES NOT INCLUDE :
a. Being Constructed In Behalf Of 3rd Parties.
b. Owner-occupied, awaiting disposal.
c. Under construction /or held for owner occupation
d. OCCCUPIED BY EMPLOYEES, EVEN IF THEY PAY A MARKET RELATED RENTAL.
e. If leased out to others under a finance lease.

RECOGNITION & MEASUREMENT:


1. RECOGNITION:
a. Investment property shall be recognised as an asset when, and only when:
i. it is probable that the future economic benefits that are associated with the investment property will flow to the entity;
and
ii. the cost of the investment property can be measured reliably.
2. MEASUREMENT:

RECOGNITION :
1. Applies to costs initially and costs incurred later on.
a. Maintenance, Service & repairs : end up this DOES not comply, expensed,
175 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
b. Rebuid as wall : can be recognised, but then old wall must be derecognized.
c. (same principles as for PPE chapter apply eg add –on , or replace parts etc.)
2.

MEASUREMENT:
1-INITIAL MEASURMENT :
1. Same as for PPE.
2. INCLUDES specifically here :
a. Transaction costs for legal fees , (must be directly attributable to asset)
b. Property transfer taxes, (must be directly attributable to asset)
3. EXCLUDES :
a. Same as for PPE ; but take note of following:
b. Abnormal wastage of labour, materials , etc,
c. Oper4ating losses
d. Start up costs , unless used to bring asset to condition to be capable of operating as intended.
e. Finance costs – expense!
4. CREDIT GRANTED / DEFERRED PAYMENT : must be treated in same way as PPE. Take out interest portion, and assign it to a
“deferred finance costs “ account , then transfer a portion every year / month to “finance costs expense account” .
a. Use : take the price you paid as FV, PV of this price at the ‘discount rate given’ is
5. EXCHANGE TRANSACTIONS : same as for barter transactions.
2-SUBSEQUENT MEASUREMENT.
1. You must choose whether to hold items using the COST model or the REVALUATION model .it all works exactly same as
PPE.EXCEPT for revaluations NEVER goes to the OtherComprehensive Income with this .(it is doubtful whether the change from cost
model to reval. Model can be performed, as it is not evr likely to result in more relevant & reliable reporting. – per book) if it is too
expensive every year for firm to revalue all its asssets in class- is it more relvant to change to cost from reval. , due to firm cannot afford
proper reval. , and thus values are not shown at a relevant & reliable rate, so the costs model is better?)
2. REVAL. MODEL :
a. Entity may perform valuations itself, it is only “encouraged’ that an ‘independent qualified valuer’ do it (rem it must be
disclosed in fin stats whether it was done by a ‘independent qualified valuer ‘ or not.
b. (OCI)OTHERCOMPREHENSIVE INCOME : The difference to PPE methods for this , is that nothing ever goes to the
(OCI)OtherComprehensive Income with this. Any revaluation goes directly to P&L SCI . ,and any devaluation as well.
3. SAME MODEL FOR ALL INVESTMENT PROPERTIES :If you choose one model – it MUST APPLY to ALL investment
4. properties. – not just per class. EXCEPT
a. Investment property serving as a backing for liabiliitiesthat pay a return linked directlty to the fair value of (or returns from)
specified assets , including that investment property. : then it may do that single asset at the other models method of valuation.
b. INABILITY TO MEASURE FAIR VALUE :
1. If it is impossible to measure fair value FROM AT ACQUISITION DATE, then an entity may measure it at
cost, while at the same time measuring all other Inv. Properties at Reval. Value. Even if it is due to a change
in ‘use’ that the property becomes an ‘investment property’ if from ACQUISITION (buying it) till then they
could not measure fair value, then this can be done
a. Residual value MUST be made zero
2. During construction ; if during construction , inability , then may be at cost, till earlier of 1-finish
construction or 2-know fair value
5. CHANGE OVER :You may only change from the fair value to the cost model if it results in more relevant & reliable reporting ( use
IAS change in accounting policy) .
6. FAIR VALUE :
a. Should not be affected by future capital expenditure that will enghance it, it must ONLY reflect its CURRENT condition , nor
reflect the related benefits.
b. Willing buyer is motivated , but not compelled, willing seller is neither over-eager nor forced to cell.
c. Be careful of double counting when valuing assets:eg :
i. Furnished offices rented out are usually valued at PV of future rentals , which incl. furniture of course, so furniture
can not be recognised separately as well.
ii.Lifts & aircon is usually seen as integral , so the building was already valued with it in. no need to account for it
separately.
iii.Fair value of buildings excludes prepaid –or future operating lease income.
1. Note : if a building etc was valued using PV of future cash flows, then you must fund out which future cash
flows were included in this. If you have raised any of this future rent income in the books as a liability
already, for some reason or other, then it must be deducted from any upward revaluation you happen to be
doing at that moment – because the valuer forgot to ask if any of that FV money has already been recognized.
iv.INABILITY TO MEASURE FAIR VALUE :
1. If it is impossible to measure fair value FROM AT ACQUISITION DATE, then an entity may measure it at
cost, while at the same time measuring all other Inv. Properties at Reval. Value. Even if it is due to a change
in ‘use’ that the property becomes an ‘investment property’ if from ACQUISITION (buying it) till then they
could not measure fair value, then this can be done
a. Residual value MUST be made zero
176 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
2. During construction ; if during construction , inability , then may be at cost, till earlier of 1-finish
construction or 2-know fair value. If fair value can never be determined, after 1+2 , anyway, then may do at
cost.
3. SALE in ordinary course of business : when the entity begins to develop the propry for sale in the oprdinary
course of business, it may once again be placed at cost , never you mine what type the others are are .
4.

TRANSFERS:
The only transfer where any revaluation to fair value goes to OCI , is for PPE to Invetsment property transfer. ( and it may never be transferredto
ret. Earn. (and used ? for capitalization issue?)
TRANSFERS TO INVENTORIES
Look in book 3 pgs pg 639.

TRANSFERS FROM INVENTOTIES

TRANSFERS TO PPE
TRANSFER FROM PPE

DISPOSALS
INTRAGROUP INVESTMENT PROPERTY
DISCLOSURES
Look in book :
Note :
1. All expenses in profit before tax note , must be divided in 2 line items – that 1-genereate rent 2- that do not generate rental
a. Any fair value changes for all assets in pool
b. All rental income
c. Depreciation.
2. PPE table for revaluations :
a. this is a small table, no o/b or acc. depr. rem in yhis table needs line item for all ;
b. additions from capiatalisation of subsequent expenditure ,
3. additions from buying
4. additions from bus. Combinations.
5. Disposals
6. Classified as held for sale transfers
7. Gains /loss from fair value adjustnents.

DEFERRED TAX
177 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.

CHANGE IN ACCOUNTING ESTIMATE/ERRORS


1. SEE WHERE TAX EFFECTS ERRORS ARE DEALT WITH IN IAS INCOME TAXES ,SINCE IT IS NOT DEALT WITH IN
THIS IAS –SEE SCOPE EXCLISIONS.

SCOPE:
1. EXCLUSIONS : Tax Effects Errors Are Dealt With In Ias Income Taxes ,Since It Is Not Dealt With In This Ias –
See Scope Exclisions.

DEFINITIONS:
1. Material Omissions or misstatements of items are material if they could, individually or collectively,
influence the economic decisions that users make on the basis of the financial statements. Materiality
depends on the size and nature of the omission or misstatement judged in the surrounding circumstances.
The size or nature of the item, or a combination of both, could be the determining factor.

2. Prior period errors are omissions from, and misstatements in, the entity’s financial statements for one
or more prior periods arising from a failure to use, or misuse of, reliable information that:
a. was available when financial statements for those periods were authorized for
issue; and
b. could reasonably be expected to have been obtained and taken into account in
the preparation and presentation of those financial statements. Such errors
include the effects of mathematical mistakes, mistakes in applying accounting
policies, oversights or misinterpretations of facts, and fraud.

3. Retrospective application is applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied.

4. Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of


elements of financial statements as if a prior period error had never occurred.

5. Impracticable Applying a requirement is impracticable when the entity cannot apply it after making
every reasonable effort to do so. For a particular prior period, it is impracticable to apply a change in an
accounting policy retrospectively or to make a retrospective restatement to correct an error if:
a. the effects of the retrospective application or retrospective restatement are not determinable;
b. the retrospective application or retrospective restatement requires assumptions about what
management’s intent would have been in that period; or
c. the retrospective application or retrospective restatement requires significant estimates of amounts
and it is impossible to distinguish objectively information about those estimates that:
i. provides evidence of circumstances that existed on the date(s) as at which those amounts are
to be recognised, measured or disclosed; and
ii.would have been available when the financial statements for that prior period were authorised
for issue from other information.

6. Prospective application of a change in accounting policy and of recognising the effect of a change in
an accounting estimate, respectively, are:
a. applying the new accounting policy to transactions, other events and conditions occurring after the
date as at which the policy is changed; and
b. recognising the effect of the change in the accounting estimate in the current and future periods
affected by the change.

ACCOUNTING POLICIES:
1) Selecting an appropriate accounting policy :
a) Make sure it complies with all framework specific guidance ie ; relevant , prudent etc.
b) 1st Use the Relevent IAS
c) 2nd : Per IAS 8. 11 & 12 vertabim :
i) 11 : In making the judgement described in paragraph 10, management shall refer to, and
consider the applicability of, the following sources in descending order:
(1) the requirements in IFRSs dealing with similar and related issues; and
178 | P a g e DIPAC ACCOUNTING Tut. Letter 1 : Notes: Framework – Presentation – Revenue - Change in Acc Policies – Income Tax.
(2) the definitions, recognition criteria and measurement concepts for assets, liabilities,
income and expenses in the Framework.
ii) 12 : In making the judgement described in paragraph 10, management may also consider
the most recent pronouncements of other standard-setting bodies that use a similar
conceptual framework to develop accounting standards, other accounting literature and
accepted industry practices, to the extent that these do not conflict with the sources in
paragraph 11.
IS IT COMPULSORY TO AAPLY AN ACCOUNTING POLICY PRESCRIBED BY A STATEMENT:
1) Policiesw prescribed by statements neede not be appliedwhen the effect of applying them os immaterial.