Answering an ACC3009W Theory Question

Deferred Tax Big Discussion Question

1) Intro Deferred Tax should be recognised for all temporary differences
arising from the treatment of assets and liabilities (IAS12:24), except
where those temporary differences are exempt (IAS12:15).
2) Speak about the value on the accounting balance sheet and the tax base
(speak about the SARS treatment and apply to why tax base is what it is)
and hence the temporary difference that arises. Note W&T is a deduction
for use and SARS does not revalue assets for tax purposes
3) Speak about how/when the temporary differences will reverse in the
future and why they are not exempt
4) Speak about what will happen to future taxable income and accounting
profit and whether we will or will not pay more tax and what type of
temporary difference it is (taxable/deductible)
5) Speak about rate we use and why (method of recovery) and whether it is
recognised in profit and loss or OCI (depends on underlying that bought
about the DT)
6) Conclude and say what deferred tax balance of a particular amount can be
recognised
7) Possibly speak about offsetting
8) Reconciling items What did the company expect to pay (and do calc)?
What do SARS charge (If CGT, say its because they arent a regular
trader? Speak about if difference is permanent. Speak about tax expense
and compare it to what was expected and based on this conclude whether
or not there is a reconciling item and what it was due to
Non-Current Asset held for sale
1) Is the asset recovered principally through sale?
2) List and apply all criteria
Available for sale in present condition approval?
Sale highly probable? manangement commitment/ active
programme to locate buyer?
Sale expected to be completed within a year? Exception = if events
beyond entitys control and sufficient evidence of committed plan
to sell that asset (IFRS5:9)
3) Mental Note : Method of recovery = sales, thus could potentially have a
CGT component when calculating DT

4) Conclude
o On a side note, a subsidiary which a parent decides to sell can also be
classified as NCAHFS if criteria are met.
Onerous Contracts
1) When an unavoidable loss is set to take place i.e. loss is inevitable
2) Show alternatives and their losses i.e. that their costs (mention costs)
exceed their FEBs (mention FEBs, e.g. use etc)
3) Conclude that there is an onerous contract and that a provision must be
recognised to the value of the lowest net cost of the alternatives and that
the time value of money must be taken into account if material.
4) Note, if finance leased asset, cant recognise a provision, as this would be
double counting.
Leases
1) IAS 17 (IFRIC 4 only for things that legally arent leases but in
substance may be) Does it contain a lease? 4 Thing to look for Dont
list, simply speak about whether criteria are met e.g. Carlisle has the use
of a specific asset, no other parties take an insignificant amount of the
output
Is there use of a specific asset?
Are no other parties taking more than an insignificant amount of
the output?
Is the price paid by the lessee not contractually fixed nor equal to
the current market price?
2) Conclude that there is a lease
3) Operating or finance? Must meet IAS17:10 criteria. If operating simply
say its operating because none of these criteria are met and thus the
payments will be treated as operating lease payments, measured on the
straight line basis with the disclosure being split into 3 time periods
given.
4) If meets ONE of criteria, finance lease Asset included on the SOFP of
lessee, recognise a liability, payments split between capital (SFP) and
interest portion (SOCI), depreciation will occur and disclosure as per IAS
17 for finance leases will apply

Groups Undervaluation of Subs Assets

1) At acquisition, the asset was undervalued.

2) Assets and liabilities of the sub should be measured at fair value of
acquisition and this is the cost to the group.
3) The increase is the asset value results in an increase in the NAV of the
group and the acquisition date.
Speak about impact on NCI (if measured at FV, no impact)
Speak about the impact on goodwill higher asset means lower
goodwill due to higher cost of acquisition less NAV of sub
4) Speak about DT
Temporary difference given rise to
Not exempt as this is a business combination
Is it depreciable? If not, recovered through sale, if not, speak about
method of recovery (likely to be use,) conclude on measurement
and speak about how future tax consequences will be affected. You
can also throw in the fact that they dont regularly trade in the asset
if its recovered through sale
Conclude on DT amount and how it will reverse in future
o (Similar, but not identical concept for associates, however the discussion
structure is the same, but the group just has a share of these increases and
related deferred tax consequences.)
Groups- Intergroup transactions
Simply speak about the line items from the perspective of each individual
entity, from the group perspective and compare
Conclude on the adjustment that therefore needs to be made in order to
reflect the transactions at a group level
Groups Investment property leased intergroup
1) Classification of the building is dependent on how FEBs will be derived.
2) This requires consideration of the nature of the business activities for
which the building is employed together with the entities occupying the
building.
3) If different portions of the building can be sold separately, they can be
accounted for separately. Speak about each portion of building and based
on that classify each portion (Note, only Investment property if operating
lease apply above theory. Finance leased asset is not recognised)
4) If leased to sub first mention why they are a sub (i.e. own more than
50% of voting rights if big question that is) and therefore 100% of

these items will be recognised on group statements. If this is the case,

owner occupied by virtue of the sub and thus meets definition of PPE
5) Leased to unrelated party means Investment Property
Revenue
IFRS 15
Start off with - In terms of IFRS 15, revenue should be recognised to depict
the transfer of promised goods or services to a customer in an amount that
reflects the consideration to which the company expects to be entitled in
exchange for those goods and services.
Asset may not always be revenue e.g. if we are developing flats and
keep some for ourselves, these flats are investment property.
Steps :
1) Identify contract(s) - Only speak about in depth is theres a fat
question in which case you simply apply IFRS15:9 criteria,
however for a 10 marker or so, this most probably will not be the
issue and thus will not even have to be touched on briefly (unless
the question specifically asks if a contract exists, which generally
wont be the case.)
2) Identify separate performance obligation(s) Each one should be a
distinct good or service / a series of distinct goods/services i.e.
benefits are separately identifiable e.g. sale of car and subsequent
services, which customer can benefit from on their own and are
separately specified in the contract. Note, if providing a product
consists of multiple services e.g. building a house (tiling, painting
etc.,) this is one performance obligation, as these services are
interrelated and significantly integrated, thus not distinct
goods/services. Also note that a machine and installation are not
separate obligations, as the benefits of the machine cannot be
enjoyed on its own i.e. without the installation.
3) Identify transaction price Mention what it is (if significant
financing component i.e. time value of money is considered
material MENTION for payments earlier / later than pass of
control, take out.) A special note Interest is excluded from the
scope of IFRS15, however this interest relates to the cost of time.
In tut 22.3, The customer pays 9% interest a year after control is
passed with a fair market interest rate of 11%. This 9% is included

in the transaction price, as it is a payment relating to the asset and a

premium for paying late. This figure (including the 9%) will be
discounted at 11% to get the transaction price. As time passes, the
11% is recognized separately as interest expense and not revenue,
as this relates to the cost of time mentioned above. Thus interest for
late payment is included in the transaction price and interest due to
the unwinding of the discount at the fair market rate is excluded
from the transaction price.
4) Allocate based on stand-alone selling prices This will be given if
a calculation is required. If not, just mention how the transaction
price will be allocated based on these prices.
5) Identify when performance obligations are satisfied This takes
place when control passes. Control is the ability to direct the use
of and obtain substantially the remaining benefits of the asset
(give a scenario-related example of how customer can do so.)
Mention when control is likely to pass (could be when risks and
rewards of ownership pass etc.) If control appears to pass over time
mention why i.e. which para 35 requirement it meets, thus revenue
is recognised over time separately for each performance obligation,
using an appropriate measure of progress.
Give a brief conclusion which is dependent on what the question is
asking.
IAS 18
Identify the economic substance of the transaction i.e. how many forms
of revenue arise from it.
List all the forms of revenue
Discuss recognition of each type of revenue, as each form has its own
criteria. Mention date of recognition and why this is the correct e.g. sales
(This is where most marks are at.) For recognition of sales revenue
(IAS18:14.) Service revenue deals with performance.
Discuss measurement for each period asked fair value of consideration
receivable = PV of consideration which will be received at a later stage
less expected costs to cover the related services of the product. Make sure
discounts are taken out.
Mention presentation and disclosure (SPLOCI and Note mentioning what
revenue consists of.)

Be very careful however, question may only ask for recognition and
measurement for example
Related Parties
Discuss if they are related and why. Simply turn to IAS24:9 and thus the
related party can influence the entity(ies) to transact.
Disclosure
1) Mention the relationship between the related parties.
2) Transactions:
o Mention who the transaction occurred between
o Mention the nature of the transactions, their amounts, and any
change in selling price which occurred as a result of the related
party relationship.
o Mention whether amounts are outstanding, where amounts have
been included and (if applicable which will probably be the
case) that the transaction was not at arms length.
Operating segments
Is the component of the entity an operating segment?
1) Does it engage in business activity (where revenues are earned and
expenses are incurred?)
2) Are its operating results regularly reviewed by the chief operating
decision maker of the entity? (not the component of the entity)
3) Is the components discrete financial information available?
Can operating segments be aggregated i.e. combined?
1) Do they have similar economic characteristics and
2) Do they have similar
2.1) Nature of products and/or services
2.2) Nature of production processes
2.3) Types/ classes of customers
2.4) Distribution methods
2.5) Regulatory environments
Is the operating segment a reportable segment? Do they meet one of the
quantitative thresholds?
1) Is total segment revenue (internal + external) >= 10% of total entity
revenue or
2) Is the absolute profit/loss of segment >= 10% of the greater of 1)
combined profit of all profitable segments or 2) absolute value of

combined loss of all loss-making segments. First identify which is

greater. or
3) Total Assets of segment >= 10% of Total Assets of entity
If none of the quantitative thresholds are met and the segments do not
qualify as reportable segments, the segments that do not meet such
thresholds may be lumped into a reportable segment called all other
segments. In order for this to happen, these segments below the
threshold must:
1) Have similar economic characteristics
2) Meet the majority of the criteria listed in 2.1-2.5 i.e. 3 of these

General
Look at as many perspectives as possible
Always look at big picture. It depends is usually the best answer
Think recognition, measurement (initial and subsequent [i.e. transactions
and tax],) classification and disclosure
Dont list, simply speak about whether criteria are met and why e.g. The
amount of revenue can be reliably measured as the transaction price of X
is known.
Impairment reversal Asset cannot be recognised at an amount higher
than if it had not been impaired i.e. CA if there had been no impairment
less current CA. So be careful if depreciation occurs.
Acquisition of more of subs shares is effectively a transaction with the
owner, thus gain/loss is directly recognised to equity
If we are dealing with an exception, speak about what usually would
happen
Keep discussion as open as possible, especially if not enough info given,
as this is often done deliberately.
Be very careful to only answer what question asks e.g. if recognition and
measurement are asked to be discussed, dont speak about presentation
and disclosure.
If a big question, there are many marks for stating the obvious e.g. in an
IFRS15 revenue question, speak about why there is a contract.
Decommissioning fund treatment depends on level of influence (Control
subisidiary, thus consolidate ; Significant influence assosciate, thus
equity account.)

Note: I didnt put conceptual framework discussion, Biological Assets or

intangibles expense capitalization on this document, as it was too much
effort for questions I felt were not too important, but you may want to go
look over that in your own capacity