Department of Finance & Accountancy

Faculty of Business Studies

ACC 3123: International Accounting
International Financial Reporting Standards
Handout -No-04

International Financial Reporting Standards

International Financial Reporting Standards, usually called IFRS, are standards issued by

the IFRS Foundation and the International Accounting Standards Board (IASB) to provide a
common global language for business affairs so that company accounts are understandable
and comparable across international boundaries.

Definition of IFRS

IFRS is short for International Financial Reporting Standard is a globally adopted method of
financial reporting issued by International Accounting Standard Board (IASB). Formerly, it is
known as International Accounting Standard (IAS). The standard is used for the
preparation and presentation of the financial statement i.e. balance sheet, income statement,
cash flow statement, changes in equity and footnotes, etc.

IFRS ensures comparability and understandability of international business. It is aimed to

provide users with information about the financial position, performance, profitability and
liquidity of the company, to help them in making rational economic decisions.

Definition of GAAP

Generally Accepted Accounting Principles or GAAP refers to the standard framework,

principles and procedures used by the companies for financial accounting. The principles are
issued by Financial Accounting Standard Board (FASB). It is a set of accounting standards
that consist of standard ways and rules for recording and reporting of the financial data i.e.
balance sheet, income statement, cash flow statement, etc. The framework is adopted by
publicly traded companies and a maximum number of private companies in the United States.

GAAP principles are updated at periodical intervals to meet with current financial
requirements. It ensures the transparency and consistency of the financial statement. The

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information provided as per GAAP by the financial statement is helpful to the economic
decision makers such as investors, creditors, shareholders, etc.

At present around 120 countries has adopted IFRS as a framework to govern accounting
statement. With the adoption of IFRS, the presentation of financial statement will be better,
easier and similar to the overseas competitors.

Benefits of IFRS Standards

IFRS Standards address this challenge by providing a high quality, internationally recognized
set of accounting standards that bring transparency, accountability and efficiency to financial
markets around the world.

IFRS Standards bring transparency by enhancing the international comparability and quality

of financial information, enabling investors and other market participants to make informed
economic decisions.

IFRS Standards strengthen accountability by reducing the information gap between the

providers of capital and the people to whom they have entrusted their money. Our Standards
provide information that is needed to hold management to account. As a source of globally
comparable information, IFRS Standards are also of vital importance to regulators around the
world.

And IFRS Standards contribute to economic efficiency by helping investors to identify

opportunities and risks across the world, thus improving capital allocation. For businesses,
the use of a single, trusted accounting language lowers the cost of capital and reduces
international reporting costs.

IAS 1 - Presentation of Financial Statements

Objective

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This standard prescribes the guide lines to be used by the entity, in the presentation of general
purpose financial statements, to make sure that financial statement of the entity are
comparable both with its previous periods financial statement and with the financial
statements of the other entity. For this purpose, it provides overall requirements for the
structure and contents of financial statements along with some general features.
Scope
The requirements of this standard are applicable to all the general purpose financial
statements (individual and consolidated both) which are prepared and presented in
accordance' with 'International Financial .Reporting Standards (IFRSs).
General Purpose Financial Statements
These are financial statements which are prepared and presented to satisfy the information
needs of the general users, who are not able to require the reporting entity to prepare
accounting reports according to their particular information needs.

Qualitative characteristics of financial information

Fundamental qualitative characteristics of financial information include:

 Relevance
 Faithful representation

Enhancing qualitative characteristics include:

 Comparability
 Verifiability
 Timeliness
 Understandability
Complete Set of Financial Statements
The complete set of financial statements entails the following:
 Statement of profit or loss and other comprehensive income
 Statement of financial position
 Statement of changes in equity
 Statement of cash flows
 Notes to accounts
 Comparative year information

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Recognition of elements of financial statements

An item is recognized in the financial statements when:[

 It is probable future economic benefit will flow to or from an entity.

 the resource can be reliably measured

In some cases specific standards add additional conditions before recognition is possible or
prohibit recognition altogether.

International Financial Reporting Standards (IFRSs)

These are accounting standards and related Interpretations, which are issued and regulated by
the International Accounting Standards Board (IASB) and these encompasses:
 International Financial Reporting Standards (IFRS)
 International Accounting Standards (IAS)
 Interpretations issued by IFRIC and
 Interpretations issued by SIC
General Features
Fair Presentation
This standard requires that the financial. Performance, financial position and cash flows of an
entity should be fairly presented.
Going Concern
At the end of each reporting period, when entity will prepare its financial statements, the
management is required to assess of whether the entity has ability to continue its business as a
going concern.
Accrual Basis of Accounting
The entity is required to report all the events and transactions in the financial statements in
the period to which these relate except for the cash flows.
Consistency of Presentation
The entity should use the same accounting policies in the preparation and presentation of
financial statements for the similar events and transactions, from one period to the next in
order to ensure the comparability of financial statements unless the change is required by the
circumstance laid down in IAS 8.

Materiality and Aggregation

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The entity is required to present each material class of items separately in the financial
statements, unless these are immaterial.
Offsetting
The entity should not offset any assets and liabilities or any income and expense, except it is
required by an IFRS
Frequency of Reporting
An entity shall present a complete set of financial statements (including comparative 
information) at least annually. When an entity changes the end of its reporting period and
presents financial statements for a period longer or shorter than one year an entity shall
disclose, in addition to the period covered by the financial statements
(a) The reason for using a longer or shorter period, and 
(b) The fact that amounts presented in the financial statements are not entirely comparable.
Comparative Information
This standard requires an entity to disclose the comparative information in respect of the
previous accounting period similar to those amounts which are presented in the financial
statements of the current accounting period
Identification of Financial Statements
The financial statements of the entity should be identified and distinguished from the other
information using the following:
 The title of the entity presenting financial statements
 Whether these are the financial statements of an individual entity or consolidated
financial statements for the group of entities:
 The reporting date for which financial statements are presented
 The presentation currency for the amounts reported in financial statements
 The level of rounding up for the amounts reported in financial statements

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 Elements of financial statements

Statement of financial position 

 Asset: A present economic resource controlled by the entity as a result of past events
which are expected to generate future economic benefits.

 Liability: A present obligation of the entity to transfer an economic resource as a

result of past events
 Equity: Nominal equity is the nominal residual interest in the nominal assets of the
entity after deducting all its liabilities in nominal value.

Comprehensive Income statement

 Revenues: increases in economic benefit during an accounting period in the form of

inflows or enhancements of assets, or decrease of liabilities that result in increases in equity.

 Expenses: decreases in economic benefits during an accounting period in the form of

outflows, or depletions of assets or incurrence of liabilities that result in decreases in equity.

Statement of changes in equity 

 Changes in the elements of equity due to transaction with owners in the current
accounting period
 Changes in the elements of equity due to the total comprehensive income for the year
 Changes in the components of equity due to the change in accounting policy
 Changes in the components of the equity due to the requirement of a standard
Cash flow statement

 Operating cash flows

 Investing cash flows
 Financing cash flows

Notes
 Basis used by the entity for the preparation of the financial statements
 Accounting policies of the entity
 Disclosures required by the standards

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IAS 2: Inventories
Inventory is an accounting term that refers to goods that are in various stages of being made
ready for sale, including: Finished goods (that are available to be sold) Work-in-progress
(meaning in the process of being made) Raw materials (to be used to produce more finished
goods)
Inventories what are they?
Held for resale:
 Held for sale in the ordinary course of business
Work in progress:
 In the process of production for sales.
Raw materials:
 Materials /supplies used in the production process.
Each of inventories valued at lowest level of:
1. Cost
Costs of purchase, cost of conversion and other cost incurred in bringing the inventories to
their present location and condition.
Purchase cost = purchase price + Delivery cost+ Import duties
Conversion cost = Direct labour + Direct Expenses + Share of production overhead
Other cost= consulting charges+ professional fee.

2. Net realizable value (NRV)

Net realizable value (NRV) is the amount we expect to gain from the sales of
inventory.

Expected Cost to complete Cost to sell Net realizable

selling price item for sale (ex-delivery = Value
  cost

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 Cost of information NRV information
In bringing an item of inventory to this current If the item were finished and sold we would
location and condition, the following cost were expect:
incurred: Selling price: LKR 320
Purchase price: LKR 250 Cost of complete: less LKR 10
Carriage in : LKR 10 Carriage out: less LKR 15
Import duties paid: LKR 20 LKR 95
Direct labour spent: LKR 30
LKR 310

SOLUTION: inventory is valued at lower of cost and NRV LKR 295

ISA 2 does not allow for the capitalization:
a) The cost of abnormal levels of waste
b) Storage cost where the storage is not part of the production process
c) Administrative costs
d) Selling cost

Example 01

Calculate the net realizable value of inventory having following particulars:

Total Units 19,000

Estimated Selling Price per Unit 35

Units Damaged (Included in Total Units 700

Cost to Repair each Damaged Unit $6

Other Selling Costs per Unit $2

Solution

Good Damaged

Estimated Price per Unit $35 $35

– Repair Cost 6

– Other Selling Costs 2 2

NRV per Unit $33 $27

× Units 18,300 700

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Net Realizable Value $603,900 $18,900

Total Net Realizable

$622,800
Value

Example 02

Rajan manufactures components for the retail industry. The inventory is currently valued at
cost.
The cost structure of the equipment is as follows.
Cost per unit selling price per unit

Production process- 1st stage $1000 1050

Conversion cost- 2nd stage $500 -
Finished product $1500 1700
The selling cost is $10 per unit and Rajan has 100000 units at the 1 st stage of production and
200000 units of finished product.
Shortly after the year- end a competitor released a new model and this has resulted in rajan
having to reduce it selling price to 1450 for the finished product and 950 for the first stage
production.
Calculate the value of closing inventory to be included in Rajan’s financial statement as at
closing date.

Example 03

Thunder Limited had inventory with a cost of $10,000 at the end of the financial period, 31
December 2013. It estimated the net realizable value of this inventory was $9,000 at 31
December. One week later, the inventory was sold for $7,000.

If their financial statements were finalized on 14 February 2014, what value should be
assigned to this inventory?

Example 04

Shaw & Co., imported raw materials from China worth $100,000. They paid $8,000 as
import duties and $2,000 as import taxes (the import taxes were subsequently refunded by the

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local government). They paid $15,000 for transportation of the materials from China and
another $2,000 as port handling charges for loading the materials at China.

Marketing expenses were $1,000 and the general administrative overheads amounted to
$2,000. What will be the value of inventories as per IAS 2?

Example 05

Zippy Machines is in the business of procuring a specific type of machine and sells them to
international markets. During the year, the Company bought four machines costing $120,000,
$140,000, $130,000 and $100,000 respectively.

During the year it sold only one machine for $140,000 and follows the FIFO method of
valuation.

a) Cost of inventory
b) Cost of sales

Example 06
Sticky Corp manufacturers and sells adhesive warning signs for workplaces. The stock of
signs was included in the closing inventory as of 31 December 2013 at a cost of $50 per pack.

During the final audit the auditors noted that the subsequent selling price for the inventory at
15th January 2014 was $40 per pack. Furthermore, inquiry reveals that during the physical
stock take, a water leakage has damaged the signs and glue. Accordingly in the following
week, Sticky Corp spent a total of $15 per pack for repairing and reapplying the glue to the
signs.

The net realizable value and inventory write-down (loss) amount to…

Example 07

Following costs relates to a unit of inventory

Cost of raw materials: $2.00
Direct labour: $ 1.50

The entity incurred $80000 towards production overheads. 7000 units were produced during
2016 and 9000 units were produced during 2017. The normal level of production was 8000
units. What will be the value of inventories as per IAS 2?

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IAS: 23 BARROWING COST
The core principle of IAS 23 Borrowing Costs is that you should
capitalize borrowing costs if they are directly attributable to the
acquisition, construction or production of a qualifying asset.

Other borrowing costs are expensed in profit or loss.

Here, there are three essential issues:

 

What are qualifying assets?

Qualifying assets are assets that take a substantial period of time to

get ready for their intended use or sale.

Note here that IAS 23 does not say it must necessarily be an item of a
property, plant and equipment under IAS 16. It can also include some
inventories or intangibles, too!

But what is a “substantial period of time”?

Well, that’s not defined in IAS 23, so here you need to apply
some judgment. Normally, if an asset takes more than 1 year to be
ready, then it would be qualifying.
 

What can we capitalize?

IAS 23 specifically mentions 3 types of borrowing costs that can be

capitalized:

1. Interest expenses (refer to the effective interest method under

IFRS 9/IAS 39);
2. Finance charges on finance leases under IAS 17; and
3. Exchange differences on borrowings in foreign currencies, but
only those representing the adjustment to interest costs.

However, IAS 23 is pretty silent on some types of expenses and there

are doubts whether they are borrowing costs or not, for example:

 Interest cost on derivatives used to manage interest rate risk on

borrowings;
 Dividends payable on preference shares (or other types of shares
classified as liabilities);
 Gains or losses arising from early repayment of borrowings, etc.

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Here again, we need to apply our knowledge from other IFRS standards
and sometimes, make a judgment, too.
 

How do you capitalize?

IAS 23 differentiates between capitalizing borrowing costs on general

borrowings and specific borrowings.

Capitalization of borrowing cost

Specific borrowings General borrowings

Actual costs incurred Use capitalization rate

Income on temporary
investments

Specific borrowings

If you borrowed some funds specifically for the acquisition of a qualifying

asset, then the capitalization is easy:

You simply capitalize the actual costs incurred less any income

earned on the temporary investment of such borrowings.

Example: 01

Question:

On 1st May 2018, DEF took a loan of $ 1 000 000 from a bank at the
annual interest rate of 5%. The purpose of this loan was to finance a
construction of a production hall.

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The construction started on 1 June 2018. DEF temporarily invested $ 800
000 borrowed money during the months of June and July 2018 at the rate
of 2% p.a.

What borrowing cost can be capitalized in 2018? (Assume all interest was
paid).

General borrowings

General borrowings are those funds that are obtained for various purposes
and they are used (apart from these other purposes) also for the
acquisition of a qualifying asset.

In this case, you need to apply so-called capitalization rate to the

borrowing funds on that asset, calculated as the weighted average of
the borrowing costs applicable to general pool.

Example: 02

Question:

KLM had the following loans in place at the beginning and end of 20X1:

Description 1 January 2018 31 December 2018

Bank loan, 6% p.a. 0 200 000

Bank loan, 8% p.a. 130 000 130 000

Debenture stock, 5.5%

50 000 50 000
p.a.

The bank loan at 6% p.a. was taken in July 2018 to finance the
construction of a new production hall (construction began on 1 March
2018).

The bank loan at 8% p.a. and debenture stock was taken for no specific
purpose and KLM used them to finance general spending and the
construction of new machinery.

KLM used $ 60 000 for the construction of the machinery on 1 February

2018 and $ 25 000 on 1 September 2018.

What borrowing cost should be capitalized for the new machinery?

Example: 03
On 1 October 20X1, Bash Co borrowed $6m for a term of one year,
exclusively to finance the construction of a new
piece of production equipment.

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The interest rate on the loan is 6% and is payable on maturity of the loan.

The construction commenced on 1 November 20X1 but no construction

took place between 1 December 20X1 to
31 January 20X2 due to employees taking industrial action.

The asset was available for use on 30 September 20X2 having a

construction cost of $6m.

What is the carrying amount of the production equipment in Bash Co’s

statement of financial position as at
30 September 20X2?

Example: 04

Let’s say you need 100,000 to build a house in 8 months but you’re going
to use general current borrowings to fund yourself rather than getting a
specific loan.

Your current borrowings are:

1 million of 10% loan finance
2 million of 6% loan finance

What borrowing costs should be capitalized?

Example: 05

On 1 January 20X6 Stremans Co borrowed $1.5m to finance the

production of two assets, both of which were expected to take a year to
build. Work started during 20X6. The loan facility was drawn down and
incurred on 1 January 20X6, and was utilised as follows, with the
remaining funds invested temporarily.

Asset A                       
Asset B

                                                                                                   $'000
$'000

1 January 20X6                                                                       250

500

1 July 20X6                                                                               250

500

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

Required

Ignoring compound interest, calculate the borrowing costs which may be

capitalised for each of the assets and consequently the cost of each asset
as at 31 December 20X6.

IAS 16: property, plant and equipment

IAS 16 establishes principles for recognizing property, plant and equipment as assets,
measuring their carrying amounts, and measuring the depreciation charges and impairment
losses to be recognized in relation to them. Property, plant and equipment are tangible items
that:
 are held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes; and
 Are expected to be used during more than one period.

The cost of an item of property, plant and equipment is recognized as an asset if, and
only if:

 it is probable that future economic benefits associated with the item will flow to the
entity; and
 the cost of the item can be measured reliably.

An item of property, plant and equipment is initially measured at its cost.

Cost includes:
 its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates;

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  any costs directly attributable to bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management;
and
 The estimated costs of dismantling and removing the item and restoring the site on
which it is located

After recognition, an entity chooses either the cost model or the revaluation model as its
accounting policy and applies that policy to an entire class of property, plant and
equipment:

 Under the cost model, an item of property, plant and equipment is carried at its cost
less any accumulated depreciation and any accumulated impairment losses.

 Under the revaluation model, an item of property, plant and equipment whose fair
value can be measured reliably is carried at a revalued amount, which is its fair value
at the date of the revaluation less any subsequent accumulated depreciation and
subsequent accumulated impairment losses.

There are essentially four key areas when accounting for property, plant
and equipment that you must ensure that you are familiar with:

 Initial recognition
 Depreciation
 Revaluation
 De-recognition (disposals).

Initial recognition The basic principle of IAS 16 is that items of property, plant and
equipment that qualify for recognition should initially be measured at cost. One of the
easiest ways to remember this is that you should capitalize all costs to bring an asset to its
present location and condition for its intended use.

Commonly used examples of cost include:

 purchase price of an asset (less any trade discount)
 directly attributable costs such as:

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  cost of site preparation
 initial delivery and handling costs
 installation and testing costs
 professional fees

 The initial estimate of dismantling and removing the asset and restoring the site on
which it is located, to its original condition (ie to the extent that it is recognized as a
provision per IAS 37, Provisions, Contingent Assets and Liabilities)

 Borrowing costs in accordance with IAS 23, Borrowing Costs.

Depreciation

Depreciation is defined in IAS 16 as being the systematic allocation of the depreciable

amount of an asset over its useful economic life. In other words, depreciation applies the
accruals concept to the capitalized cost of a non-current asset and matches this cost to the
period that it relates to.

Depreciation methods there are many methods of depreciating a non-current asset with
the most common being:

 Straight line % on cost or

Cost – residual value /Useful economic life

 Reducing balance % on carrying value

IAS 16 rules IAS 16 permits the choice of two possible treatments in respect of property,
plant and equipment:

 The cost model (carry an asset at cost less accumulated

depreciation/impairments).

 The revaluation model (carry an asset at its fair value at the revaluation date less
subsequent accumulated depreciation impairment).
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 Revaluation of the assets

If the revaluation policy is adopted this should be applied to all assets in the entire
category, ie if you revalue a building, you must revalue all land and buildings in that class
of asset. Revaluations must also be carried out with sufficient regularity so that the
carrying amount does not differ materially from that which would be determined using
fair value at the reporting date. Accounting for a revaluation there are a series of
accounting adjustments that must be undertaken when revaluing a non-current asset.
These adjustments are indicated below. The initial revaluation you may find it useful in
the exam to first determine if there is a gain or loss on the revaluation with a simple
calculation to compare

Carrying value of non-current asset at revaluation date X

Less Valuation of non-current asset X

Difference = gain or loss on revaluation

Accounting for a revaluation

Assume on December 31, 2011 the company intends to switch to revaluation concept and
carries out a revaluation exercise which estimates the fair value of the building to be
$200,000 as at December 31, 2011. The book value at the date is $150,000 and
revalued amount is $200,000 so an upward adjustment of $50,000 is required to building
account.

It is recorded through the following journal entry:

1 .For recording the revaluation surplus on the building. 

Building Account - Debit 50,000 

Revaluation Account -Credit         50,000

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2. For transferring the revaluation surplus to the equity share capital. 

Revaluation Account - Debit 50,000

Equity Share Capital Account - Credit 50,000

De-recognition (disposals).
Property, plant, and equipment is derecognized when it is sold or when no future economic
benefit is expected. The cost and any related accumulated depreciation are removed from the
accounting records. To account for the disposal of a PPE asset, the following must occur:

Journal Entries for Asset Disposals

The journal entries required to record the disposal of an asset depend on the situation in
which the event occurs.
Let’s consider the following example to analyze the different situations that require an asset
disposal.
Motors Inc. owns a machinery asset on its balance sheet worth $3,000.
 
Scenario 1: Disposal of fully depreciated asset
Motors Inc. estimated the machinery’s useful life is three years. The annual depreciation
expense is $1,000. At the end of the third year, the machinery is fully depreciated, and the
asset must be disposed of. In such a scenario, the asset’s value and the accumulated
depreciation must be written off. Initially, the machinery account is a debit account, while the
accumulated depreciation is a credit account. To reverse the accounts, the following journal
entry must be made:
 

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Scenario 2: Disposal by asset sale with a gain
Suppose that at the end of the second year, Motors Inc. decided to sell the machinery to
another company. At that time, the accumulated depreciation was $2,000. Therefore, the total
book value of the machinery was $1,000 (machinery value minus accumulated depreciation).
However, the company agreed to sell the machinery for $1,500. Thus, Motors Inc. must
recognize the gain from the sale. The journal entry for the disposal should be:
 

Scenario 3: Disposal by asset sale with a loss

Let’s consider the same situation as in the scenario 2, but the selling price was only $500.
Thus, there was a loss on the sale. The journal entries should be adjusted accordingly:
 

 
Asset Disposal on Financial Statements
The asset disposal results in a direct effect on the company’s financial statements. In all
scenarios, the asset disposal affects the balance sheet by removing the capital asset account.
Also, if a company disposes of assets by selling with gain or loss, the gain and loss should be
reported on the income statement.

EXAMPLE 1

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Paul Boyle incurs the following costs in relation to the construction of a new factory and the
introduction of its products to the local market.
Site preparation costs 240
Materials used 1,500
Labor costs, (including €90 incurred during an industrial dispute. No construction occurred
during the period of the dispute.) 3,190
Testing of various processes in factory 150
Consultancy fees re installation of equipment 220
Relocation of staff to new factory 110
General overheads 500
Costs to dismantle the factory at end of its useful life in 10 years time 100
Question: How much of the costs should be capitalized?

EXAMPLE 2

On 1 March 20X0 Yucca Co acquired a machine from Plant Co under the following terms:
List price of machine 82000
Import duty 1500
Delivery fees 2050
Electrical installation cost 9500
Pre-production testing 4900
Purchase a five year maintenance contract with plant 7000

In addition to the above information Yucca Co was granted a trade discount of 10% on the
initial list price of the asset and a settlement discount of 5% if payment for the machine was
received within one month of purchase. Yucca Co paid for the plant on 25 March 20X0.

How should the above information be accounted for in the financial statements?

EXAMPLE 3

A machine was purchased on 1 April 2010 for $120,000. It was estimated that the asset had a
residual value of $20,000 and a useful life of 10 years at this date. On 1 April 2012 (two
years later) the residual value was reassessed as being only $15,000 and the useful life
remaining was considered to be only five years.

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How should the asset be accounted for in the years ending 31 March 2011/2012/2013?

EXAMPLE 4

A company revalued its property on 1 April 20X1 to $20m ($8m for the land). The property
originally cost $10m ($2m for the land) 10 years ago. The original useful life of 40 years is
unchanged. The company’s policy is to make a transfer to realized profits in respect of excess
depreciation.

How will the property be accounted for in the year ended 31 March 20X2? 

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