SBR Notes

Conceptual framework
A set of theoretical principles on which the preparation and presentation of financial
statements is based.
Accounting standards supersede the conceptual framework.
According to conceptual framework, financial statements should be a faithful
representation and provide relevant information.
Faithful representation- neutral, complete and free from error
Asset
Control, inflow of economic resources, past event
Qualitative characteristics
Fundamental characteristics-
1. Relevant (Material information)
2. Faithful representation (Complete, neutral, free from error)
Secondary characteristics-
1. Comparability
2. Timeliness
3. Understandability
4. Verifiability
IFRS 13- Fair Value Measurement
It does not apply to IFRS 2- Share Based Payments and IFRS 16- Leases.

Fair value is the price received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.

Market participants consider the condition, location and restrictions on use.

Approaches to calculate fair value-

1. Market approach (Market value)
2. Cost approach (Replacement cost)
3. Income approach (Future cash flows)

Levels of input-
1. Level 1 input- Price of identical asset in active market
2. Level 2 input- Price of similar asset in active market, Price of identical asset in less
active market, yield rates, interest rates
3. Level 3 input- Unobservable inputs, estimates using judgements

Principal market- greatest level of activity

Most advantageous market- the market that maximises the net amount received when
selling the asset or minimises the amount paid to transfer a liability
First check the value in principal market, if not possible then most advantageous market.

Non-financial assets-
PPE and intangible assets
According to IFRS 13, fair value of non-financial asset should be based on its highest and
best use.

The highest and best use should take account of uses that are physically possible, legally
permissible and financially feasible.
Principles
1. Professional competence and due care (Continuous professional development)
2. Integrity (Being straightforward and honest, not being associated with any
misleading communication or report)
3. Objectivity
4. Confidentiality (Breach only when required by law or in public interest)
5. Professional behaviour (Comply with laws and regulations, do not bring disrepute
to the profession)
Threats
1. Advocacy (Promote client’s interest)
2. Self-interest (Manipulate for own interest)
3. Self-review (Checking your own work)
4. Intimidation (Undue influence)
5. Familiarity (Long personal/business associations)
Actions
Fines, Prison or Report to professional body
IAS 16- Property, Plant and Equipment
It defines PPE as tangible assets that-
1. Are held for use in production/supply of goods and services/rental to
others/administrative purposes.
2. Are expected to be used during more than one period.

Initial treatment-
Recognise asset at cost + directly attributable cost + dismantling cost at present value +
irrecoverable tax

Costs not regarded as direct costs-

1. Admin/general overheads
2. Training costs
3. Abnormal costs
4. Costs after asset is ready for use
5. Costs in initial operating period
6. Advertising cost
7. Costs of relocating/reorganising
Subsequent treatment-
1. Cost model (Cost – accumulated depreciation – impairment losses)
2. Revaluation model (Regular intervals, whole class of assets needs to be revalued,
take difference to OCI)
Journal entry-
Accumulated depreciation Dr.
Asset Dr.
Revaluation surplus Cr.

Disclosures-
1. Measurement bases used
2. Useful lives and depreciation rates
3. Reconciliation of the carrying amount in the beginning and at the end

Entities using revaluation model for PPE are required to disclose the carrying amounts
that would be recognised if the cost model had been used. Such disclosures enable better
comparison with entities that account for PPE using different measurement models.
IAS 20- Government Grants
1. Revenue grants
1.1. Credit side of SOPL
1.2. Subtract the grant from expense on the debit side of SOPL
2. Capital grants
2.1. Show in SOFP as deferred income (Deferred income in SOPL also to neutralise
the depreciation)
2.2. Subtract the grant from asset in the SOFP

Government grant should be recognised when there is reasonable assurance that:

1. The entity will comply with the conditions attached
2. The grant will be received
IAS 23- Borrowing Cost
Capital borrowing costs on qualifying assets (assets that take substantial time)

Start capitalising when:

1. Expenditure on asset is being incurred
2. Borrowing costs are being incurred
3. Activities to make asset ready for use are in progress

End capitalisation when:

1. Asset is ready for use
2. Construction has been stopped

Take weighted average rate if borrowings are taken on varying rates.

IAS 40- Investment Property
1. Cost model
 2. Fair value model (no depreciation is charged, take to fair value at each reporting
date, take difference to SOPL)

Owner occupied property will not be considered as investment property. Property rented
to employees will be deemed as owner occupied property.
Transfers
Until the day of transfer, the rules of the previous accounting standard will be applied.
Post that, rules of the new accounting standard will apply.
IAS 38- Intangible Assets
Criteria for intangible assets:
1. Asset is identifiable
2. Asset is controlled by entity
3. Asset will generate future economic benefit
4. Value of the asset can be measured reliably

Intangible assets are identifiable if it:

 Is separable
 Arises from contractual or other legal rights

Subsequent recognition-
1. Cost model
2. Revaluation model (Fair value – accumulated depreciation – impairment)
The revaluation model can only be adopted if fair value can be determined in an active
market.

Intangible assets with indefinite useful will be subject to an annual impairment review.
IAS 36- Impairment
Assets subject to annual impairment review-
1. Intangible assets with indefinite useful life
2. Goodwill

Types of indicators-
1. External
2. Internal
Compare two values

Carrying amount Recoverable amount, which is the higher of:

Cost -
Impairment - Fair value - Costs to sell
Depreciation
Value in use (Present value of future net cash flows and
ultimate disposal)
With regards to estimates of cash flows:
1. Cash flow projections should be based on reasonable assumptions and the most
recent budgets and forecasts.
2. Cash flow projections should relate to the asset’s current condition and should
exclude expenditure to improve or enhance it.
3. For periods in excess of five years, management should extrapolate from earlier
budgets using a steady, declining or zero growth rate.
4. Management should assess the accuracy of their budgets by investigating the
reasons for any differences between forecast and actual cash flows.

Discount rate should reflect:

1. Time value of money
2. Risks specific to the asset for which future cash estimates have not been adjusted

If revaluation surplus exists, adjust impairment first from there. Any remaining amount of
impairment will be debited to the SOPL.

IAS 36 defines CGU as smallest identifiable group of assets that generates cash inflows
that are largely independent of the cash inflows from other assets or other groups of
assets.
Impairment of a cash-generating unit-
First impair any specific asset that is impaired, then impair assets on pro-rata basis.
Do not impair monetary assets.

Reversal of an impairment loss-

 Impaired assets should be reviewed at each reporting date to see whether there
are any indicators that the impairment has reversed.
 A reversal of an impairment loss is recognised immediately as income in SOPL. If
the original impairment was charged against the revaluation surplus, it is
recognised as other comprehensive income and credited to revaluation reserve.
 Impairment cap- The reversal must not take the value of the asset above the
amount it would have been if the original impairment had never been recorded.
The depreciation that would have been charged in the meantime must be taken
into account.
 An impairment loss recognised for goodwill cannot be reversed in a subsequent
period.
IFRS 5- Non-current assets held for sale and discontinued operations
If asset is valued under cost model, it will be valued at lower of carrying amount and
recoverable amount (fair value less costs to sell). Loss will be taken to SOPL.

If asset is valued under revaluation model, take it to fair value and losses will go to SOCI.
Then, it will be valued at lower of carrying amount and recoverable amount (fair value
less costs to sell). Loss will be taken to SOPL.
Do not depreciate assets held for sale.

Definitions of operations-
1. Separate line of business or geographical area.
2. Single coordinated plan to dispose of a separate line of business.
3. Acquiring a subsidiary exclusively for resale.

Disclosure of discontinued operations-

In SOPL, disclose revenue, expenses, profits and tax expenses as a single line item.

Conditions for classifying as held for sale-

1. Committed to sell
2. Active plan
3. Present condition (No improvements or repairs)
4. Sale is highly probable
5. Within one year
6. No change in the plan
IAS 41- Agriculture
Living plants and animals are biological assets.

Initial and subsequent recognition-

Biological assets are valued at fair value less point of sales cost.

Gain or loss will go to SOPL.

IAS 2- Inventories
Value inventory at lower of cost and net realisable value.
IAS 19- Employee Benefit

Post employment benefits

Defined contribution Defined benefit

Defined benefit proforma-

Net deficit/asset brought forward + Net interest component + Service cost component –
Contributions into the plan
Do not do anything with the benefits paid.

Remeasurement component will go to SOCI.

Past service cost is recorded at the earlier of occurring of the curtailment or when
restructuring provision is created.
Asset ceiling-
If a defined benefit plan is in surplus, IAS 19 states that the surplus must be measured at
the lower of:
 The amount calculated as normal
 The total of the present value of any economic benefits available in the form of
refunds from the plan or reductions in future contributions to the plan.
This movement will go through OCI.
IFRS 2- Share Based Payments
Conditions-
1. Service conditions (Serving the company for a laid down period)
2. Performance conditions
2.1. Market conditions (Interest rates)
2.2. Non-market conditions (Company’s profits)

1) Equity settled share-based payments-

In case of services, we take fair value of options at grant date.
In case of goods, we take fair value of goods at grant date.

Upon settlement, transfer will be made from other components of equity to retained
earnings.

2) Cash settled share-based payments-

Major difference between cash settled and equity settled- In cash settled, liability is
credited as against equity in equity settled. In equity settled, fair value of options at grant
date is taken, whereas, in cash settled, fair value of share appreciation rights at each
reporting date is taken.

Cash payment is based upon the intrinsic value.

In a modification to an equity-settled, the entity must continue to recognise the grant

date fair value of the equity instruments in profit or loss, unless the instruments do not
vest because of a failure to meet a non-market-based vesting condition.

If the modification increases the fair value of the equity instruments, then an extra
expense must be recognised:
 The difference between the fair value of the new arrangement and the fair value of
the original arrangement at the date of the modification must be recognised as a
charge to profit or loss.
 The extra expense is spread over the period from the date of the change to the
vesting date.
IAS 12- Deferred Tax
Steps-
1. Calculate carrying amount and tax base.
2. Compare them to calculate the taxable temporary difference.
 3. Calculate the deferred tax position = Temporary difference * Tax rate passed by law
4. Classify as deferred tax asset/liability.
If CA > TB, it is a deferred tax liability.
If CA < TB, it is a deferred tax asset.
5. Show the movement in deferred tax position.

Specific situations-
1. Revaluation
Every time, CA > TB, so there will be a deferred tax liability. Movements due to
revaluation will go to SOCI and those due to difference in capital allowances will go to
SOPL.
2. Provisions
When liability > TB, then there will be a deferred tax asset.
3. Unused tax losses
Unused tax losses can be recognised as assets if it is certain that there is going to be a
profit in the following years.
IFRS 15- Revenue from Contracts with Customers
5 step approach-
1. Identify the contract
2. Identify the separate performance obligations within the contract
3. Determine the transaction price
4. Allocate transaction price to performance obligations in the contract
5. Recognise revenue as or when entity satisfies the performance obligation

Criteria to recognise revenue-

1. Parties have approved the contract and each party’s rights can be identified.
2. Payment terms can be identified.
3. The contract has commercial substance.
4. It is probable that the entity will be paid.

When determining the transaction price, the following must be considered-

1. Variable consideration
2. Significant financing components
3. Non-cash consideration
4. Consideration payable to a customer

Conditions for recognising revenue over the period of time-

1. Customer will simultaneously receive and consume benefits
2. Enhancing the asset
3. No alternative use

If progress cannot be reliably measured, then the revenue can only be recognised up to
the recoverable costs incurred.
Indicators of transfer of control-
1. The entity has a present right to payment for the asset.
2. The customer has legal title to the asset.
3. The entity has transferred physical possession of the asset.
4. The customer has the significant risks and rewards of ownership of the asset.
5. The customer has accepted the asset.

Contract modification-

Contract modification

Separate No separate
contract contract

Cancelling first contract and Part of the

creating a new one contract

Average of two prices Adjust amount of cumulative revenue

is taken recognised at modification date

The following contract costs will be capitalised-

1. The costs of obtaining a contract. This must exclude costs that would have been
incurred regardless of whether the contract was obtained or not (such as some
legal fees, or the costs of travelling to a tender).
2. The costs of fulfilling a contract if they do not fall within the scope of another
standard and the entity expects them to be recovered.
The capitalised costs of obtaining and fulfilling a contract will be amortised to the
statement of profit or loss as revenue is recognised.
General costs, and costs of wasted labour and materials are expensed to profit or loss as
incurred.
IFRS 16- Leases
Identify a lease- Right of Use is being granted
1. Right to substantially all of the identified asset’s economic benefits
2. Directing the use of the identified asset

IFRS 16 states that the non-lease components should be accounted for separately.

Low value leases and short-term leases can be omitted from being recorded in the books.

Lease liability is recorded at present value of future payments discounted using implicit
rate in the contract or the incremental rate of borrowing.
Lessee accounting-
Measuring Right
of Use

Other
Cost model
measurement

Cost less Accumulated Investment

PPE
Depreciation less property
Impairment Losses
Revaluation
FV Model
model

Reassessing lease liability-

If value of RoU increases, then debit RoU with the incremental amount and credit lease
liability.

Lease is a finance lease if one or more of the following apply-

1. Ownership is transferred to the lessee at the end of the lease.
2. The lessee has the option to purchase the asset for less than its expected fair value
at the date the option becomes exercisable and it is reasonably certain that the
option will be exercised.
3. The lease term (including any secondary periods) is for the major part of the asset’s
economic life.
4. At the inception of the lease, the present value of the lease payments amounts to
at least substantially all of the fair value of the leased asset.
5. The leased assets are of a specialised nature so that only the lessee can use them
without any major modifications being made.
6. The lessee will compensate the lessor for their losses if the lease is cancelled.
7. Gains or losses from the fluctuations in the fair value of the residual fall to the
lessee (for example- by means of a rebate of lease payments).
8. The lessee can continue the lease for a secondary period in exchange for
substantially lower than market rent payments.

Operational lease payments will be recorded in SOPL by the lessor.

Sale and leaseback-

Transfer is a sale Transfer is not a sale
Seller (Lessee) Derecognise the asset. Recognise the asset.
Recognise RoU and Lease Liability Recognise a loan.
Buyer (Lessor) Recognise the asset. Do not recognise asset.
Treat in accounts according to the type of Recognise financial
lease. asset.
When an asset is sold and leased back,
1. Derecognise the carrying amount of the asset.
2. Recognise the proceeds
𝑃𝑉 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
3. Recognise RoU = * Carrying amount
𝑆𝑎𝑙𝑒𝑠 𝑝𝑟𝑜𝑐𝑒𝑒𝑑𝑠 𝑜𝑟 𝑓𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
4. Recognise PV of lease liability
5. Recognise profit/loss on disposal = Sales proceeds + RoU – Carrying amount – Lease
liability

If asset is sold for less than fair value If asset is sold for more than fair value
Difference between sales price and fair Difference between sales price and fair
value is treated as prepayment. value is treated as loan.
𝑃𝑉 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦 𝑃𝑉 𝑜𝑓 𝑙𝑒𝑎𝑠𝑒 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦−𝐿𝑜𝑎𝑛 𝑎𝑚𝑜𝑢𝑛𝑡
RoU = [ * Carrying RoU = *
𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡 𝐹𝑎𝑖𝑟 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎𝑠𝑠𝑒𝑡
amount] + Prepayment Carrying amount
IFRS 9- Financial Instruments
Financial
Assets

Debt Equity

Initial recognition- Subsequent Initial Subsequent

Fair value measurement recognition- Fair measurement
value
Amortised cost FVOCI (Transaction
(Transation cost will cost will be capitalised FVPL (default)
be capitalised in in initial recognition)
initial recognition)

1. Must not be
FVOCI (Transaction cost held for trading
will be capitalised in
2. Irrevocable
initial recognition)
choice upon
designation

FVPL

Tests-
1. Business model test- Intention (If intention to hold till maturity, then Amortised
cost method).
2. Contractual cash flow test- If only principal + interest, take FVPL.

Only debt instruments held as amortised cost and FVOCI are subject to impairment.
Create loss allowance of 12 months expected loss if the credit risk has not significantly
risen.

Create loss allowance of lifetime expected loss if the credit risk has significantly risen. Do
not reduce loss amount from the carrying amount of the asset. Debit loss to SOPL and
credit OCI.

Derecognition is required if either:

 Contractual rights to the cash flows from the financial asset have expired, or
 Financial asset has been transferred and the transfer of that asset is eligible for
derecognition

Signs of credit impairment-

1. Financial difficulty
2. Breach of contract
3. Granted concessions
4. Bankruptcy

For receivables, always take the lifetime expected loss.

Contracts which are for the entity’s own use of a non-financial asset are exempt from the
requirements of IFRS 9.

Financial Liabilities

Subsequent
Initial recognition
measurement

FVPL
At fair value, which is
the present value of
future cash payments
Amortised cost
(Default)
Compound instruments-
Compound
instruments

Subsequent
Initial recognition
measurement

Liability component
= Present value of Equity- OCI
repayments
discounted at
market rate for
similar instrument
without conversion Liability- FVPL or
rights Amortised cost

Equity component =
Difference between
cash proceeds and
value of liability
component
Characteristics of derivatives-
1. Value changes with a change in value of underlying item
2. Requires little or no initial investment
3. Settled at a future date

Derivatives

Initial Subsequent
recognition measurement

Transaction
costs are Fair value at each
expensed to reporting rate
SOPL. Gain/loss goes to
SOPL

Derivatives are always measured at FV through P&L unless hedge accounting is applied.

Embedded derivatives-
Derivative component needs to be separated from host contract if:
1. Economic risk and characteristics are not closely related
2. Derivative component individually meets the definition of derivative
3. Host contract is not an equity/debt instrument through FVPL
Convertible bond is an example of embedded derivative.

Hedge accounting-
Forget about all other standards.

Hedge criteria-
1. Eligible hedging instruments and hedged items
1.1. Recognised asset/liability
1.2. Firm commitment
1.3. Highly probable forecast transaction
2. There should be formal documentation at inception.
3. The hedging relationship effectiveness requirements at inception and each
reporting date-
3.1. There must be an economic relationship between hedged item and the
hedging instrument.
3.2. The effect of credit risk does not dominate the value changes that result
from that economic relationship.
3.3. The hedge ratio of the hedging relationship is the same as that resulting from
the quantity of the hedged item that the entity actually hedges and the
quantity of the hedging instrument that the entity actually uses to hedge
that quantity of hedged item.

Types of hedges-
1. Fair value hedge (Recognised asset/liability or unrecognised firm commitment)
2. Cash flow hedge (Cash flow from recognised asset/liability or a highly probable
forecast transaction)

Treatment of fair value hedge-

Hedging instrument – fair value
Hedged item – fair value
Differences primarily go to SOPL. If held under FVOCI, then difference will go to SOCI.

Treatment of cash flow hedge-

Differences primarily go to SOCI.
Extra gain/loss goes to SOPL.
IFRS 10- Consolidated Financial Statements
Control = direct the use + obtain economic benefits

IFRS 10 says parent (investor) controls subsidiary (investee) if:

1. Investor has power over investee (more than 50%, majority in board)
2. Investor is exposed, or has rights, to variable returns from its involvement with
investee
3. Investor has ability to affect these returns
Less than 50% but still control-
1. Majority voting rights in investee
2. Contractual arrangements between investors and other parties
3. Holding less than 50% of voting shares, with all other equity interests held by a
numerically large, dispersed and unconnected group
4. Holding potential voting rights (such as convertible loans) that are currently
capable of being exercised
5. The nature of investor’s relationship with other parties that may enable an investor
to exercise control

Group SOFP-
1. Cancel investment in subsidiary with share capital (51%) and share premium of
subsidiary.
2. Include NCI in equity section by substituting the remaining share capital of
subsidiary.
3. Add all the items in SOFP at 100%.

Five fundamental working notes-

1. Group structure
2. Net assets of subsidiary at fair value
Share capital, share premium, retained earnings, other components of equity, fair value
adjustments, additional depreciation and PURP
3. Goodwill
3.1. Full goodwill (Paid by parent + Paid by NCI – Net assets at acquisition. If
impairment occurs, it will be charged to both parent and NCI)
3.2. Proportionate goodwill (Only take extra paid by parent, ignore extra by NCI. If
impairment occurs, it will only be charged to parent)
4. Non-Controlling Interest – Equity
Starting value of NCI + post-acquisition movement share of NCI – NCI share of impairment
5. Group retained earnings
Parent at reporting date 100% + Parent’s share in post-acquisition movement + gain on
bargain purchase – goodwill impairment – finance cost – PURP

Intra-group transactions-
1. Parent sells to subsidiary
Group retained earnings Dr.
Inventory Cr.
2. Subsidiary sells to parent
Group retained earnings Dr.
NCI Dr.
Inventory Cr.

Group SOPL-
Time-apportion incomes and expenses if acquisition is done mid-way through the year.
Calculate subsidiary’s profits to calculate the profit attributable to NCI.
IAS 28- Investments in Associates and Joint Ventures
Associate-
20% to 50%
IAS 28 says that equity method of accounting needs to be used.

SOPL SOFP

Share in associate's Cost + Share in

current year profit - profits -
Dividend received Impairment

Intra-group transactions between parent and associate-

1. Parent sells to associate
Group retained earnings Dr.
Cost of investment in associate Cr.
2. Associate sells to parent
Share of profit Dr.
Inventory Cr.
IFRS 11- Joint Arrangements
In case of parent and subsidiary, majority holder will take a decision. In joint venture,
decisions will be taken unanimously.

Joint ventures are usually a separate company. IAS 28 (one-line accounting) is done for
joint ventures.

Joint operations- Incomes and expenses and assets and liabilities are recorded by parties
incurring them in their SOPL and SOFP.
Business Combinations-
Concentration test-
Optional test used to assess whether not a business. The acquired asset is not a business
if substantially all of the fair value of the total assets acquired is concentrated in a single
identifiable asset or group of single identifiable assets.
If this test is not met, a detailed assessment (input, process, output) is done.

IFRS 3 defines a business as an integrated set of activities and assets that is capable of
being conducted and managed to produce returns.

IFRS 3 says an asset is identifiable if:

1. It is separable
2. It arises from contractual or other legal rights, regardless of whether it is separable
Important points-
1. Contingent liabilities are recognised at fair value at the acquisition date. This is true
even where an economic outflow is not probable. The fair value will incorporate
the probability of an economic outflow.
2. Provisions for future operating losses cannot be created as this is a post-
acquisition item. Similarly, restructuring costs are only recognised to the extent
that a liability actually exists at the date of acquisition.
3. Intangible assets are recognised at fair value if they are separable or arise from
legal or contractual rights. This might mean that the parent recognises an
intangible asset in the consolidated financial statements that the subsidiary did not
recognise in its individual financial statements, e.g., an internally generated brand
name).
4. Goodwill in the subsidiary's individual financial statements is not consolidated. This
is because it is not separable and it does not arise from legal or contractual rights.
Internally generated intangible assets-
1. Technically feasible
2. Intention to complete
3. Adequate resources available
4. Inflow of economic benefits is probable
5. Cost is reliably measurable
6. Ability to sell or use
Change in group structure-
Step acquisitions-
No control to control Control to control
Remeasure existing shareholder interest to fair value Reduce NCI through OCE
Take gain/loss to SOPL
Cash paid - Decrease in NCI
Calculate goodwill
Calculation of goodwill-
Fair value of previously held interest + Fair value of additional interest + NCI value – Net
assets of the subsidiary = Goodwill
Step disposals-

Control to no control Control to control

Proceeds + Fair value of remaining interest Cash proceeds received Dr. X

+ NCI at disposal date - Fair value of net Increase in NCI Cr. (X)
assets of subsidiary at disposal - Goodwill Increase Cr./Decrease Dr. in OCE
IAS 21- The Effects of Changes in Foreign Exchange Rates
Determining functional currency:
Primary factors include the currency which mainly influences the sales price for their
goods, currency of the country whose competitive forces and regulations determine the
sales price and also the currency which influences labour, material and overhead costs.
Secondary factors include the currency in which finances are obtained and currency in
which receipts from operating activities are retained.
Use average rate only if there is no significant movement in the rate.
Use closing rate for monetary items on closing.
Use historic rate for non-monetary items on closing.

Exchange gain/loss is taken to SOPL in individual financial statements.

Retranslation- When parent’s functional currency is different from subsidiary’s functional

currency
Income and expenses- historic rate/average rate
Assets and liabilities- closing rate

Foreign exchange retranslation reserve goes to other comprehensive income.

Goodwill translation-
Opening goodwill Opening rate
Less: Impairment loss Average rate
Exchange gain or loss Balancing figure
Closing goodwill Closing rate

On the disposal of a foreign subsidiary, the cumulative exchange differences recognised

as other comprehensive income and accumulated in separate component of equity are
taken to SOPL.
IAS 7- Statement of Cash Flows
Put interest paid in operating activities.

Adjustments-
1. Dividend paid to NCI will be shown in financing activities.
2. Purchase/disposal of subsidiary/associate will impact cash and cash equivalents,
inventory, trade receivables and payables.
3. Exchange gains/losses should not be considered in the cash flow as they are non-
cash. Only additional loans taken will be considered as inflows.

IAS 7 states that an investment normally qualifies as a cash equivalent only when it has a
short maturity of, say, three months or less from the date of acquisition.

The direct method presents separate categories of cash inflows and outflows whereas the
indirect method is a reconciliation of profit before tax reported in the SOPL to the cash
flow from operations. Adjustments are made for non-cash and non-operating items.
Comparability will be hampered if direct method is used as most companies use indirect
method. Direct method is too costly. Users prefer direct because it is easy to understand.
Adjustments in indirect method are difficult to understand and can be confusing for the
users. In many cases, adjustments cannot be reconciled to observed changes in the SOFP.
IAS 33- Earnings per share
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑙𝑜𝑠𝑠 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒 𝑡𝑜 𝑒𝑞𝑢𝑖𝑡𝑦 𝑠ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟𝑠
EPS =
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑖𝑛 𝑡ℎ𝑒 𝑝𝑒𝑟𝑖𝑜𝑑

Bonus issue-
Debit share premium, or retained earnings or SOPL.
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑎𝑓𝑡𝑒𝑟 𝑏𝑜𝑛𝑢𝑠 𝑖𝑠𝑠𝑢𝑒
Bonus fraction =
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑠ℎ𝑎𝑟𝑒𝑠 𝑏𝑒𝑓𝑜𝑟𝑒 𝑏𝑜𝑛𝑢𝑠 𝑖𝑠𝑠𝑢𝑒
Multiply the number of shares outstanding before bonus issue with the bonus fraction.
Restated EPS = EPS * Inverse of bonus fraction

Rights issue-
𝑀𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑏𝑒𝑓𝑜𝑟𝑒 𝑡ℎ𝑒 𝑟𝑖𝑔ℎ𝑡𝑠 𝑖𝑠𝑠𝑢𝑒
Bonus fraction =
𝑇ℎ𝑒𝑜𝑟𝑒𝑡𝑖𝑐𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑝𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 𝑎𝑓𝑡𝑒𝑟 𝑡ℎ𝑒 𝑟𝑖𝑔ℎ𝑡𝑠 𝑖𝑠𝑠𝑢𝑒
Restated EPS = EPS * Inverse of bonus fraction
Diluted EPS-
Where there are dilutive potential ordinary shares in issue, the diluted EPS must be
disclosed with the basic EPS.

Limitations of EPS-
1. Different accounting policies
2. Inflation
3. Does not provide predictive value
4. Diluted EPS is based on current earnings, not forecast earnings
5. Only measures profitability
Additional performance measures-
1. EBIT (Earnings before interest and tax)
2. EBITDA (Earnings before interest, tax, depreciation and amortisation)
3. Net financial debt (Gross debt less cash and cash equivalents and other financial
assets)
4. Free cash flow (Cash flows from operating activities less capital expenditure)

Benefits-
1. Helping users to evaluate entity through management’s eyes
2. Enables comparison
3. Strips out elements that are not relevant to current or future year operating
performance

Drawbacks-
1. An entity might calculate in different way year-on-year
2. Two entities may calculate same APM in different ways
3. Too little information on how APM is calculated
 4. Too much information can be confusing
5. May present overly optimistic picture of entity
6. May mislead users to think it is a requirement of IFRS

Non-financial performance measures-

1. Historical financial information, limited future information
2. Do not cover long-term success like customer satisfaction
3. Can be manipulated through accounting estimates and policy choices

Examples of non-financial performance measures-

Employee turnover, absentee rates, customer satisfaction, brand loyalty, employee
satisfaction, delivery times

Reporting standards and initiatives-

1. UNGC (United Nations Global Compact)
2. GRI (Global Reporting Initiative)
3. International Integrated Reporting Council

Selection of KPIs in Integrated Report-

1. Focused to material issues
2. Present a holistic view
3. Consistent with management’s KPIs
4. Consistency and comparability with previous years, other companies
5. Verifiable backup for the assumptions
IFRS 8- Operating Segments
Operating segment-
1. Earns revenue and incurs expenses
2. Operating results are regularly reviewed by the chief decision makers for resource
allocation
3. Discrete financial information is available

Aggregation-
1. Products and services
2. Production processes
3. Classes of customer
4. Distribution methods

Quantitative thresholds (meeting of 1 threshold is enough)-

1. Revenue (external customers and inter-segment sales) is 10% or more of combined
revenue of all operating segments
2. Reported profit or loss is 10% or more of the greater, in absolute amount of:
- Combined reported profit of all operating segments that did not report a loss
- Combined reported loss of all operating segments that reported a loss
3. Assets are 10% or more of the combined assets of all operating segments
At least 75% of entity’s external revenue must be included in reportable segments. Other
segments should be identified as reportable segments until 75% of external revenue is
reported.

Disclosing reportable segments-

1. Factors used to identify reportable segments
2. Types of products and services sold by each reportable segment
3. A measure of profit or loss
4. A measure of total assets
Small and medium entities-
Characteristics of small or medium entities-
1. Owner managed
2. Smaller entities with small revenues, assets, liabilities and lesser employees
3. Under less complex transactions

SMEs standard gets updated approximately every three years.

Omissions from SME standard-

1. EPS (IAS 33)
2. Interim reporting (IAS 34)
3. Segmental reporting (IFRS 8)
4. Assets held for sale (IFRS 5)

Exceptions in SME standard-

1. Only proportionate method of goodwill is available.
2. Revaluation model is not permitted for intangible assets.
3. Cost model for investment property will only be allowed if fair value cannot be
measured reliably or without undue cost or effort.
4. Borrowing costs are always expensed to SOPL.
5. Associates or jointly controlled entities can be held at cost (if there is no published
price quotation) or fair value.
6. Depreciation and amortisation estimates are not reviewed annually. Changes to
these estimates are only required if there is an indication that the pattern of an
asset’s use has changed.
7. Expenditure on research and development is always expensed to profit or loss.
8. If an entity is unable to make a reliable estimate of the useful of an intangible
asset, then the useful life is assumed to be 10 years.
9. Goodwill is amortised over its useful life. If the useful life cannot be reliably
established, then management should use a best estimate that does not exceed
ten years.
10. On the disposal of an overseas subsidiary, cumulative exchange differences that
have been recognised in other comprehensive income are not recycled to profit or
loss.
11. Simplifications with regards to financial instruments-
 - Measuring most debt instruments at amortised cost
- Recognising most investments in shares at fair value with changes in fair value
recognised in profit or loss. If fair value cannot be measured reliably then the
shares are held at cost less impairment.
IFRS 1- First Time Adoption of International Financial Reporting Standards
1. Explicitly state that adopting IFRS.
2. Current year with IFRS and restate previous year comparatives with IFRS.
3. Reconcile the current year profit under IFRS and what would have been the profit
under previous GAAP.
4. Recognise all assets and liabilities as per IFRS, derecognise all assets and liabilities
not permitted by IFRS, reclassify and measure all assets, liabilities and equity
according to IFRS.
Key practical considerations and financial statement implications when implementing a
new IFRS-
Practical considerations-
- Prepare impact assessment and project plan
- May need to spend money on training staff, on updating/replacing systems
- New processes and controls may need to be developed and documented
- Management should communicate impact of new standard to investors,
analysts
- Covenants could be breached; dividends may get affected
- Competitive advantage could be lost if standard requires extensive disclosures
- Bonus schemes may need to be reassessed
Financial statement implications-
- Consider requirements of IAS 8- Accounting Policies, Changes in Accounting
Estimates and Errors
- IAS 1- Presentation of Financial Statements requires a third SOFP if entity
retrospectively applies any changes
- Carrying amounts of assets and liabilities can change, leading to deferred tax
consequences
IAS 24- Related Party Disclosures
Related party- A person or entity related to the entity preparing financial statements.
Rules for persons-
1. Control or joint control
2. Significant influence
3. Member of key management personnel of reporting entity or parent

Rules for entities-

1. Members of the same group
2. One entity is associate or joint venture of other entity; or joint venture or associate
of member of group of which the other entity is a member
3. Both entities are joint ventures of same party
4. One entity is a joint venture of a third entity and other entity is an associate of
third entity
 5. The entity is a post-employment benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity. If the reporting
entity is itself such a plan, the sponsoring employers are also related to the
reporting entity
6. The entity is controlled or jointly controlled by a person identified in rules for
persons
7. A person identified in control/joint control has significant influence over the entity
or is a member of the key management personnel of the entity (or a parent of the
entity)
8. The entity, or any member of a group of which it is a part, provides key
management personnel services to the reporting entity or to the parent of the
reporting entity.

In the absence of related party disclosures, users of financial statements would assume
that an entity has acted independently and in its own best interests. Most importantly,
they would assume that all transactions have been entered into willingly and at arm’s
length.

Related party relationships and transactions may distort financial position and
performance, both favourably and unfavourably. Example- sale of goods from one party
to another on non-commercial terms.
IAS 10- Events after Reporting Period
Adjusting event- Condition of the event happening existed at the reporting date
Non-adjusting event- Conditions did not exist at reporting date

Non-adjusting events are only disclosed if material. If a non-adjusting event hampers the
going concern of the business, then the financial statements need to be prepared on the
break-up value basis.
IAS 37- Provisions, Contingent Liabilities and Contingent Assets
Provision is a present obligation arising due to past event, may be contractual or
constructive, recorded only when it is probable (50% or more).
Contingent liabilities are only disclosed if probability is between 20% to 50%.
Contingent assets are only disclosed if virtually certain (95% or more).

According to IAS 37, a provision is recognised if:

 There is an obligation from a past event
 An outflow of economic benefits is probable
 The outflow can be measured reliably
Provisions cannot be created for future operating losses and future repair of assets.
For onerous contracts, provision will be lower of costs of operating the contract and cost
of terminating the contract.

Environmental provision-
1. Consider time value of money
 2. Benefit will be recognised as an asset

Restructuring provision (formally announced)-

Retraining cost will not be provided.
IAS 32- Financial Instruments: Presentation
A financial liability is a contractual obligation to deliver cash or another financial asset to
the holder.

Equity is any contract which evidences a residual interest in entity’s assets after deducting
all its liabilities.
Prudence
It is the inclusion of a degree of caution in the exercise of the judgements needed in
making the estimates. Prudence is generally taken to mean that assets and income are
not overstated and liabilities and expenses are not understated.
Qualitative characteristics of financial information
Consideration should be given to enhance the qualitative characteristics of useful
financial information.
Using the same measurement bases as other entities in the same sector would enhance
comparability.
Using many different measurement bases in a set of financial statements reduces
understandability.
Verifiability is maximised by using measurement bases that can be corroborated.