KnS-Institute of Business Studies Paper P2

IAS 1 Presentation of Financial Statements

Disclosures in Statement of changes in equity

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AS 1 requires an entity to present a separate statement of changes in equity. The statement must
show: [IAS 1.106]

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total comprehensive income for the period, showing separately amounts attributable to
owners of the parent and to non-controlling interests
the effects of any retrospective application of accounting policies or restatements made in
accordance with IAS 8, separately for each component of other comprehensive income
reconciliations between the carrying amounts at the beginning and the end of the period for
each component of equity, separately disclosing:
o profit or loss
o other comprehensive income
o transactions with owners, showing separately contributions by and distributions to
owners and changes in ownership interests in subsidiaries that do not result in a loss
of control

Other disclosures

IAS 1 Presentation of Financial Statements requires that the notes disclose information about the
assumptions made about the future, and sources of estimation uncertainty at the end of the
reporting period, that have a significant risk of resulting in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.

Certain items must be disclosed separately either in the statement of comprehensive income or in
the notes, if material, including: [IAS 1.98]

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
restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
disposals of items of property, plant and equipment
disposals of investments
discontinuing operations
litigation
settlements
other reversals of provisions

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IAS 24 Related Party disclosure

What Are Related Party Transactions?

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A related party transaction is a transfer of resources, services, or obligations between related

parties, regardless of whether a price is charged. [IAS 24.9]

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Who Are Related Parties?

A related party is a person or entity that is related to the entity that is preparing its financial
statements (referred to as the 'reporting entity') [IAS 24.9].

a) A person or a close member of that person's family is related to a reporting entity if that
person:
i.
has control or joint control over the reporting entity;
ii.
has significant influence over the reporting entity; or
iii.
is a member of the key management personnel of the reporting entity or of a parent
of the reporting entity.
b) An entity is related to a reporting entity if any of the following conditions applies:
i.
The entity and the reporting entity are members of the same group (which means
that each parent, subsidiary and fellow subsidiary is related to the others).
ii.
One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
iii.
Both entities are joint ventures of the same third party.
iv.
One entity is a joint venture of a third entity and the other entity is an associate of
the third entity.
v.
The entity is a post-employment defined benefit plan for the benefit of employees
of either the reporting entity or an entity related to the reporting entity.
vi.
The entity is controlled or jointly controlled by a person identified in (a).
vii.
A person identified in (a)(i) has significant influence over the entity or is a member
of the key management personnel of the entity (or of a parent of the entity).

The following are deemed not to be related: [IAS 24.11]

two entities simply because they have a director or key manager in common
two venturers who share joint control over a joint venture
providers of finance, trade unions, public utilities, and departments and agencies of a
government that does not control, jointly control or significantly influence the reporting
entity, simply by virtue of their normal dealings with an entity (even though they may affect
the freedom of action of an entity or participate in its decision-making process)

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a single customer, supplier, franchiser, distributor, or general agent with whom an entity
transacts a significant volume of business merely by virtue of the resulting economic
dependence

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IFRS 5 NCA Held for sale & Discontinued Operations

Held-for-sale classification.

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In general, the following conditions must be met for an asset (or 'disposal group') to be
classified as held for sale: [IFRS 5.6-8]

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management is committed to a plan to sell

the asset is available for immediate sale
an active program to locate a buyer is initiated
the sale is highly probable, within 12 months of classification as held for sale (subject to
limited exceptions)
the asset is being actively marketed for sale at a sales price reasonable in relation to its fair
value
actions required to complete the plan indicate that it is unlikely that plan will be significantly
changed or withdrawn

The assets need to be disposed of through sale. Therefore, operations that are expected to
be wound down or abandoned would not meet the definition (but may be classified as
discontinued once abandoned). [IFRS 5.13]
Disposal group.

A 'disposal group' is a group of assets, possibly with some associated liabilities, which an
entity intends to dispose of in a single transaction. The measurement basis required for noncurrent assets classified as held for sale is applied to the group as a whole, and any resulting
impairment loss reduces the carrying amount of the non-current assets in the disposal
group in the order of allocation required by IAS 36. [IFRS 5.4]
Measurement.

The following principles apply:

At the time of classification as held for sale. Immediately before the initial classification of
the asset as held for sale, the carrying amount of the asset will be measured in accordance
with applicable IFRSs. Resulting adjustments are also recognised in accordance with
applicable IFRSs. [IFRS 5.18]
After classification as held for sale. Non-current assets or disposal groups that are classified
as held for sale are measured at the lower of carrying amount and fair value less costs to
sell. [IFRS 5.15]
Impairment. Impairment must be considered both at the time of classification as held for
sale and subsequently:
o At the time of classification as held for sale. Immediately prior to classifying an asset
or disposal group as held for sale, measure and recognise impairment in accordance
with the applicable IFRSs (generally IAS 16, IAS 36, IAS 38, and IAS 39). Any
impairment loss is recognised in profit or loss unless the asset had been measured at

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revalued amount under IAS 16 or IAS 38, in which case the impairment is treated as
a revaluation decrease.
o After classification as held for sale. Calculate any impairment loss based on the
difference between the adjusted carrying amounts of the asset/disposal group and
fair value less costs to sell. Any impairment loss that arises by using the
measurement principles in IFRS 5 must be recognised in profit or loss (IFRS 5.20),
even for assets previously carried at revalued amounts
Subsequent increases in fair value. A gain for any subsequent increase in fair value less
costs to sell of an asset can be recognised in the profit or loss to the extent that it is not in
excess of the cumulative impairment loss that has been recognised in accordance with IFRS
5 or previously in accordance with IAS 36. [IFRS 5.21-22]
Non-depreciation.

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Non-current assets or disposal groups that are classified as held for sale shall not be
depreciated. [IFRS 5.25]
Balance sheet presentation.

Assets classified as held for sale, and the assets and liabilities included within a disposal
group classified as held for sale, must be presented separately on the face of the balance
sheet (statement of financial position). [IFRS 5.38]

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IFRS 8 Operating Segments

Operating Segments

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IFRS 8 defines an operating segment as follows. An operating segment is a component of an entity:

that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the
same entity)
whose operating results are reviewed regularly by the entity's chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance and
for which discrete financial information is available.

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Reportable segments

IFRS 8 requires an entity to report financial and descriptive information about its reportable
segments. Reportable segments are operating segments or aggregations of operating segments that
meet specified criteria:

its reported revenue, from both external customers and intersegment sales or transfers, is
10 per cent or more of the combined revenue, internal and external, of all operating
segments; or
the absolute measure of its reported profit or loss is 10 per cent or more of the greater, in
absolute amount, of (i) the combined reported profit of all operating segments that did not
report a loss and (ii) the combined reported loss of all operating segments that reported a
loss; or
Its assets are 10 per cent or more of the combined assets of all operating segments.

If the total external revenue reported by operating segments constitutes less than 75 per cent of the
entity's revenue, additional operating segments must be identified as reportable segments.

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IAS 17 Leases
1. Identification of lease (If any of the below criterias are met, the lease will be classified as
finance lease, otherwise operating lease)
Asset is legally transferred to lessee at the end of the lease term
Lease term substantially covers the life of the asset. (75% or more)
PV of MLP substantially covers the FV of the asset. (90% or more)
Asset is of a specialised nature that no one other than lessee can use the asset
without modification.
Lessee has an option to purchase the asset at the end of the lease term at a price
lower than the fair value, and it is probable that lessee will exercise the option.
2. Operating lease
i. Lessee
1. Record rentals as an expense over straight line basis
2. In case of any transaction cost it is spread over the lease term. (Will
increase the expenses)
ii. Lessor
1. Record rentals as an income over straight line basis
2. In case of any transaction cost it is spread over the lease term. (Will
decrease the income)
3. Finance lease
Lessee
i. Entry
Dr. Asset
Dr. Finance Cost
Cr.
Bank (Replaced by a temporary account given in the TB)
Cr.
FLO (CL)
Cr.
FLO (NCL)
ii. Measurement
1. Lessee will record the asset and FLO at the lower of FV and the PV of
MLP.
iii. Depreciation
1. Lessee will charge depreciation over the lower of life and the lease
term
Lessor (Non-Manufacturing)
i. Entry

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Dr. FLR (NCA)
Dr. FLR (CA)
Dr. Bank
Cr.
Interest Income
Cr.
Asset (Carrying Amount before disposal)
Cr.
Gain / loss on disposal (Balancing Figure)

ii. Measurement
1. Lessor will record the FLR at Net Investment Lease
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2. Net Investment in Lease = PV of Gross investment in Lease

3. Gross investment in lease = Minimum Lease rentals + Unguaranteed
Residual value
4. Minimum Lease payments = Total Rentals + Guaranteed Residual
Value.
Lessor (Manufacturing)
i. Entry

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Dr. FLR (NCA)
Dr. FLR (CA)
Dr. Bank
Cr.
Interest Income
Cr.
Sales
Dr. Cost of sales
Cr.
Revenue

ii. Measurement
1. Lessor will record the FLR at Net Investment Lease
2. Discount factor to be used should be the higher of actual interest
and the market interest.

4. Sale and finance leaseback

Gain on Disposal

Entry
Dr. Bank
Cr.
Asset
Cr.
Deferred Income (Liability)
+ Lease Entries
+ Depreciation
+ Amortisation of deferred income
Dr. Deferred Income
Cr.
Other income

Loss on Disposal (Immediately recognise)

Entry
Dr. Bank
Dr. PnL (loss)
Cr.
Asset

+ Lease Entries
+ Depreciation
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5. Sale and operating leaseback

SP above fair value & Agreed rentals also above fair rentals Loan agreement
SP above fair value & Agreed rentals = fair rentals Deferred Income
SP below fair value & Agreed rentals also below fair rentals Prepaid rentals
SP below fair value & Agreed rentals = fair rentals Loss (Immediately recognise)

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IAS 18 Revenue

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1. Goods
Criterias
i. Revenue can be measured reliably
ii. Cost can be measured reliably
iii. It is probable the economic benefit associated with the transaction will flow
to the entity
iv. Risk and rewards should be transferred
v. No managerial involvement or control should exist

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Exam perspective
i. Sale to a customer in financial difficulty (revenue cannot be recorded, cost
will still be recorded)
Correct entry
Dr. Cost of sales
Cr.
Inventory

ii. Commission sales (Revenue received by the company should be recorded

only)
Correct Entry
Dr. Bank (Cash received from the customer)
Cr.
Sales (SP of own product + Commission)
Cr.
Payable (Amount payable to the vendor)
iii. Sales or return basis (sales will be recorded when the right to return is
expired)
Correction Entry (Assuming that the sales are recorded, however the right to
return still exists)
Dr. Sales
Cr.
Receivables
Dr. Inventory
Cr.
Cost of sales

iv. Sale and buy back agreement

1. Buyback at fixed price (Sales cannot be recorded)
Correct entry
Dr. Bank
Cr.
Liability
Dr. Finance Cost
Cr.
Liability
2. Buyback at fair value (Sales should be recorded)

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2. Services
Criterias
i. Revenue can be measured reliably
ii. Cost can be measured reliably
iii. It is probable the economic benefit associated with the transaction will flow
to the entity
iv. Percentage of completion can be measured reliably
3. Interest
Interest income is recorded using effective rate
4. Royalties
Accrual basis
5. Dividends
When the right to receive the dividend is developed. (Date of announcement)

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IAS 19 Employee Benefits

1. Short Term Benefits
Paid leaves
i. Accumulating
Entry
Dr. Expense
Cr.
Liability
ii. Non Accumulating
1. Vesting
Entry
Dr. Expense
Cr.
Bank / Liability
2. Non Vesting (No accounting)

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2. Long Term Benefits
Post-Retirement benefits
i. Defined Contribution Plan
1. Contribution paid by the company is treated as an expense
2. Any under provision shall be treated as a liability
3. Any over contribution will be treated as an asset only if can be
recovered from the employee, otherwise treated as an expense
ii. Defined Benefit Plan
1. Liability is measured using projected unit credit method at the PV of
the future cash flows
2. Discount factor used should be rate of High Quality Corporate
Bonds, if available, otherwise at the rate of government bonds
3. Plan asset is measure at FV
4. Current service cost, past service cost, gain/loss on curtailment and
settlement and net interest cost is recorded in PnL
5. Actuarial gain/loss is recorded in OCI
Other long term benefits
i. Expense = P.V of all future C.Fs / n
3. Termination Benefits
Expense is recorded at the earlier of date of termination and the date when the
criterias as per IAS 37 are met.

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