Study Aid: 5.

1 Foreign Currency Transactions and Balances

IAS 21 The Effects of Changes in Foreign Exchange Rates
Applied in accounting for transactions and balances in foreign currencies except for those derivative transactions and balances that are within the scope of IAS 39
(para.3(a));
Applied in translating the results and financial position of foreign operations that are included in the financial statements of the entity by consolidation, or the equity
method (para. 3(b));
Applied in translating an entitys results and financial position into a presentation currency (para. 3(c)).

INITIAL RECOGNITION OF TRANSACTIONS

All applicable transactions

At spot exchange rate (exchange rate for immediate delivery)

IAS21 para. 21

Foreign currency monetary items

At closing rate (spot exchange rate at the end of the reporting period)

IAS21 para. 23(a)

Non-monetary items measured

at historical cost

Exchange rate at date of transaction

IAS21 para. 23(b)

Non-monetary items measured

at fair value

Exchange rates at the date when the fair value was measured

IAS21 para. 23(c)

RECOGNISING EXCHANGE DIFFERENCES

In Profit or Loss in period in which they arise except Monetary items part of net investment in foreign operation
(Refer Unit 16 Accounting for subsidiaries)

IAS21 para. 28

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AT THE END OF SUBSEQUENT REPORTING PERIODS

Study Aid: 5.2 Foreign Currency Translation

IAS 21 The Effects of Changes in Foreign Exchange Rates
INCOME AND EXPENSES
Exchange rate at date of transaction

IAS21 para. 39(b)

Closing rate (spot exchange rate at reporting date)

IAS21 para. 39(a)

All applicable transactions

ASSETS AND LIABILITIES

All applicable balances

Share Capital pre-acquisition

Spot exchange rate in force at date of acquisition

Share Capital post-acquisition

movements

Spot exchange rate in force at dates the amounts were originally recognised in equity

Reserves pre-acquisition

Spot exchange rate in force at date of acquisition

Reserves post-acquisition transfers

Spot exchange rate in force at dates the amounts were originally recognised in equity

Reserves post-acquisition movements

Spot exchange rate in force at the date the movement was recognised

Retained earnings pre-acquisition

Spot exchange rate in force at date of acquisition

Retained earnings post-acquisition

TRANSLATION NOT REQUIRED Cumulative balance comprises profit or loss translated

on a transactional basis

IAS21 paras 21 and 39(b)

NOTE All resulting exchange differences shall be recognised in other comprehensive income (IAS21 para. 39(c))

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EQUITY

Study Aid: 6.1 Fair Value Measurement

STEP 1 Determine the ASSET

orLIABILITY to be measured

The asset or liability measured might be either a stand-alone or part of a group of assets or liabilities (para. 13)
Factor in characteristicsthat would be considered by market participants e.g. condition and location of asset; restrictions
onsale or use of asset (para. 11)

STEP 2 Measure fair value using

anEXIT PRICE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the
principal market at the measurement date under current market conditions (para. 24)

STEP 3 Assume transaction is in the

PRINCIPAL MARKET

Assumes that the transaction takes place either in the principal market (i.e. market with greatest volume and activity) or, in the
absence ofaprincipal market, inthe most advantageous market (i.e. where amount received to sell the asset is maximised or
amount paid to transfer a liability is minimised) (para. 16)

STEP 4 Use assumptions of MARKET

PARTICIPANTS

Measure the fair value of an asset or liability using the assumptions that market participants would use when pricing the asset
or liability, assuming that they act in their best interests (para. 22)
Market participants are independent, knowledgeable, willing and able to enter into a transaction

STEP 5 B
 ased on HIGHEST AND
BEST USE for non-financial
assets

A fair value measurement of a non-financial asset takes into account a market participants ability to generate economic
benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset
inits highest and best use (para. 27) taking into account physically possible, legally permissible and financially feasible to use
(para. 28)

STEP 6 Use APPROPRIATE

VALUATION TECHNIQUES

An entity shall use valuation techniques that are appropriate in circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs (para. 61)
Common methods are market, cost and income approaches (para. 62)

STEP 7 Based on FAIR VALUE

HIERARCHY

The hierarchy gives the highest priority to Level 1 inputs and the lowest to Level 3 inputs (para. 72)
LEVEL 1 quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the
measurement date (para. 76)
LEVEL 2 inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly
orindirectly (para. 81) (Refer para. B35 for examples)
LEVEL 3 unobservable inputs for the asset or liability (para. 86) (Refer para. B36 for examples)

STEP 8 Determine FAIR VALUE

In measuring exit costs, IFRS 13 explicitly excludes an adjustment for transaction costs (para. 25). However transport costs to
the market can be included (para. 26)

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IFRS 13 Fair Value Measurement

Study Aid 7-1: IAS 16 Measurement of PPE

Initial
Measurement
IAS 16.15

Purchase Price
IAS 16.16(a)

Directly attributable
condition/location
costs
IAS 16.16(b)+17

FX purchase?
Go to IAS 21

Cost

Initial estimate of
dismantling, removal
& restoration costs
IAS 16.16(c)

Go to IAS 37

Capitalised
borrowing costs
self constructed
asset (qualifying
asset)
IAS 16.22
Go to IAS 23

EXCLUSIONS IAS 16 paras 19 & 20 (E.g. admin; training; moving)

Subsequent
Measurement
IAS 16.29
Accounting policy choice
(class by class)

Subsequent costs Expense or Capitalise

(IAS 16 paras 12-14)
E.g. Servicing expense
Capitalise is extend useful life/ improve output quality /
reduce operating costs

COST
Cost less accumulated depreciation &
accumulated impairment

REVALUATION
Fair Value less accumulated depreciation &
accumulated impairment

Study Aid
7-2 = steps
to record
revaluation
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Deferred
Tax
Go to
IAS 12

Depreciation
IAS 16.48, 50, 60
Allocate on a systematic basis over useful life to reduce asset to
residual amount
Recognise in Profit & Loss (some exceptions)
Changes accounted for as Change in Estimate Go to IAS 8

Straight Line
Method

Diminishing
Balance Method

Units of Production
Method

Study Aid 7-2: IAS 16 Accounting for a Revaluation of PPE

STEP 1:
RESTATE OR
ELIMINATE
ACCUMULATED
DEPRECIATION

STEP 2:
CALCULATE AMOUNT
OF REVALUATION

STEP 3:
CLASSIFY
REVALUATION
ADJUSTMENT

STEP 4:
PREPARE ADJUSTING
JOURNALS
[IAS 16.39&40]

Eliminate Accumulated Depreciation against Carrying Amount [IAS 16.35]

DR. Acc. Depreciation
CR. PPE
OR
Restate Acc Depr. & Carrying Amount proportionally as part of revaluation
exercise [IAS 16.35]

Fair Value at revaluation less [net] Carrying Amount from Step 1

Classify the revaluation adjustment as revaluation increase or decrease

Consider tax implications (IAS 12) (see * in journal in step 4)

Increase in value:
DR. PPE
CR. DTL*,
CR. Revaluation Surplus in OCI (but 1st reverse in P&L any previous
revaluation expenses recognised in P&L)
Decrease in value:
DR. Revaluation Expense in P&L ,
DR. DTA*,
CR. PPE (but 1st reverse in OCI any revaluation surpluses in OCI)

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Study Aid 8-1: IAS 38 Intangible Assets

Recognise if meet
Definition + Recognition criteria

Identifiability

Control over
a resource

Definition
Non-monetary asset
without physical
substance (para. 8)
3 Principal
characteristics

Future
economic
benefits

Potential exceptions for Internally

Generated Assets

Prohibited Assets

Internally
generated
goodwill

Internally
generated
brands,
mastheads,
titles, lists

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Research &
Development

Research Period
Expenditure Expense

Future
economic
benefits are
probable

Recognition
Criteria
(para. 21)

Development Period
Expenditure Capitalise
Conditions Para. 57
a) technically feasible to
complete;
b) intend to complete;
c) able to use or sell;
d) probable future
economic benefits;
e) adequate technical,
financial and other
resources to
complete and to use
or; and
f) able to measure
reliably the
expenditure during
its development.

Cost
measured
reliably

Measurement after Recognition

Initial
measurement
Cost
= Purchase price
(para. 27 (a))
+ Directly
attributable costs
(para. 27(b))
(or Fair Value in
Business
Combination)

Subsequent
measurement
Cost OR
Revaluation
Model (if there
is an active
market)

Study Aid 8-2: IAS 38 Intangible Assets Dissecting the Standard

Identification of expenditure on intangible items
(Para 1 to 7)

Recognition and measurement of

intangible assets
(Para 18 to 67)

Recognition of an expense
(Para 68 to 71)

Measurement after recognition

(Para 72 to 73, 88 to 111)
Is there an active market for the
intangible asset?

No

Yes
Accounting policy choice (para 72)

Cost model with accumulated

amortisation (finite life assets only) &
accumulated impairment
(Para 74, 88-110)

Revaluation model FV
(Para 75 to 87)

Derecognition
(Para 112 to 117)

Derecognition
(Para 112 to 117)

Disclosure
(Para 118 to 128)

Disclosure
(Para 118 to 128)

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Study Aid 9-1: Financial instruments

Category or
class of
financial
instruments
Financial asset
or financial
liability at fair
value through
profit or loss
(FVTPL)
IAS 39 para. 9

Held to maturity
investments
(HTM)
IAS 39 para. 9
Loans and
receivables
(L&R)
IAS 39 para. 9

Asset, Liability Characteristics

or Equity

Held for trading:

Asset or liability

Plan to sell / part of

traded portfolio OR

Derivative
Designated FVTPL

Asset

Active market

Fixed payments

Fixed maturity

Initial
measurement

Subsequent
measurement

Fair value
(Transaction
costs are
recorded as
expenses when
they are
incurred)
IAS 39 para. 43

Fair value
IAS 39 para. 46

Profit or loss
IAS 39 para.
55

Amortised cost
IAS 39 para. 46

N/A

Note: Consider tainting

rule

Asset

No active market

Fixed payments

Fixed maturity

Fair value plus

transaction costs
IAS 39 para. 43

Available-forsale financial
assets (AFS)
IAS 39 para. 9

Asset

Residual asset category

Fair value
IAS 39 para. 46

Other financial
liabilities (FL)
IAS 39 para. 9

Liability

Outflow in future

Amortised cost
IAS 39 para. 47

Equity*
IAS 32 para. 11

Equity

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Residual of assets
and liabilities
Controlled by
organisation

Fair value
gains and
losses

Fair value less

transaction costs
IAS 39 para. 43

* Class of financial instruments under IAS 32

Impairment
assessment

N/A

Profit or loss
IAS 32 para.
35

Yes
IAS 39 para. 58
(Note:
Impairment loss
generally to P&L
Refer Unit 11 for
specific rules).

Other
comprehensive
income
IAS 39 para.
55

N/A
Not
remeasured

Interest and
dividend

Equity
IAS 32 para.
35

N/A

Study Aid 9-2: IAS 39 Categories of Financial Assets

CATEGORY
A financial asset or
financial liability at fair
value through profit or
loss
(FVTPL)

Held to maturity (HTM)

investments

CHARACTERISTICS
(a) It is classified as held for
trading (HFT);

or

OTHER REQS
To be classified as HFT, a financial asset or financial liability must be:
(i) acquired or incurred principally for the purpose of selling or repurchasing it in the
near term;
(ii) part of a portfolio of identified financial instruments that are managed together
and for which there is evidence of a recent actual pattern of short-term profit taking;
or
(iii) a derivative (except for a derivative that is a financial guarantee contract or a
hedging instrument)

(b) Upon initial recognition it is

designated by the entity as at
FVTPL and will result in more
relevant information being
presented.

Two conditions for designation on initial recognition:

(i) such designation eliminates or reduces a measurement or recognition
inconsistency that would otherwise arise; or
(ii) the instrument is part of a group of financial instruments managed together
whose performance is evaluated on a FV basis.

(a) Are non-derivative financial

assets with fixed or determinable
payments and fixed maturity; and
(b) The entity has the positive
intention and ability to hold these
investments to maturity

Excludes investments:
> designated as FVTPL
> designated as AFS
> that meet the definition of loans and receivables

Loans and receivables

Non-derivative financial assets

with fixed or determinable
payments and fixed maturity that
are not quoted in an active
market

Available for sale

(AFS) financial assets

Non-derivative financial assets

that are designated as AFS or do
not fall into any of the above 3
categories

EXAMPLES
Derivatives, Share portfolio
held for short-term gains;
forward exchange contract;
interest rate swap; equity
call option

Commercial bill investments;

government bonds;
corporate bonds; converting
notes; fixed-term/ maturity
debentures

Note that the ability to designate an investment as held to maturity relies heavily on
management intent.
Must comply with Tainting Rule: if the entity has reclassified/sold > an insignificant
amt of HTMs pre maturity.
Excludes loans and receivables:
> designated as at FVTPL
> intended to be sold in the near term, which must be classified as HFT
> designated as AFS
> those for which the holder may not recover substantially all of its initial investment,
other than because of credit deterioration, which must be classified as AFS

Accounts receivable; loans

to other entities (including
intercompany loans);
mortgage loans (financial
institutions)
Ordinary share investments;
convertible notes;
preference share
investments

Note: The first category (FVTPL) in this table is applicable to financial assets and liabilities. All other categories apply only to financial assets. Other financial liabilities and equity are not shown on this table.

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Study Aid 9-3: IAS 39 Financial Instruments Classification Decision Tree

Account
for at cost

START

Is the financial instrument

an investment in an
equity instrument?

Yes

Is the financial asset an

interest in a subsidiary,
associate or joint venture?

No

Yes

Account for under

other relevant
standard or per other
requirement

(1) = Exclusions may include rights or obligations to

which another standard applies / arising through:

- leases;
- employee benefit plans;
- insurance contracts;
- equity instruments issued by the entity (incl.

Yes

The financial instrument is

classified as FVTPL

Yes

Is there no initial or a
relatively small initial
net investment?

- business combination forward contracts;

- [some] loan commitments;
- share based payments;
- provisions
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Is the derivative
designated a
hedging
instrument and it
is effective?

No

No

The derivative is
held for trading

Yes

Is the derivative linked

to/settled by unquoted
equity instruments and
whose fair value cant be
measured reliably?

Yes

No

No

options & warrants);

Yes

No

Yes

Does the value of the

financial instrument change
in response to a specific
interest rate, commodity
(e.g. gold) price, foreign
exchange rate, price index
or other rate or variable?

Account
for at
cost

Yes

Does the financial asset

have a quoted market
price in an active market?

Does the entity choose to measure the

financial instrument as FVTPL because it
results in more relevant info or its a qualifying
contract with embedded derivatives?
No

No

Can the fair value of

the financial asset be
measured reliably?
No

No

No

Is the financial instrument

excluded from the IAS39
scope? (1)

Yes

Account for using

Consolidation/Joint
Arrangement
standards

Account for
under HEDGE
ACCOUNTING
RULES

No

Is there a future
settlement date?

Yes

The financial
instrument is a
derivative

Study Aid 9-3: IAS 39 Financial Instruments Classification Decision Tree (cont)

Is the financial instrument acquired/incurred with the principal view for sale/repurchase in the near term? OR
On initial recognition, is the financial instrument part of a portfolio that is managed together and where there is evidence of recent
shortterm profit making?

Yes

The financial
instrument is held
for trading

No

Does the financial

instrument give rise to
a liability?

Yes

The financial liability is accounted

for at amortised cost

No

The financial asset is

classified as AFS

Yes

The financial
instrument is classified
as FVTPL

Does the entity wish to

designate the financial
asset as AFS?
No

Are there fixed or

determinable
payments?

Yes
No

Is the financial asset

quoted in an active
market?

Yes

Is there a fixed maturity

with an intention and
ability to hold to
maturity?
Yes

No

Does the entity intend to

sell the financial asset
immediately or in the
near term?

No

The financial asset is

classified as HTM (2)

(2) = An entity shall not use held to

maturity if during the current and preceding
2 years has sold or reclassified certain HTM
investments before maturity. (Tainting rule)

Yes

No

The financial asset is

classified as loans
and receivables

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Yes

Will the holder recover

substantially all the
initial investment?

No

The financial asset

is classified as AFS

Study Aid 9-4: IAS 39 Recognition and Measurement of Financial Instruments

1.

2.

3.

4.

CATEGORIES
Financial asset/liability @ fair value
through profit and loss (FVTPL)
Classified as held for trading;
designated as FVTPL; Fin Asset (FA)
or Fin Liab (FL)
Held to maturity investments (HTM)
Non-derivative FA; fixed /
determinable pmts; intend/able to hold
to maturity
Loans and receivables
Non-derivative FA; fixed /
determinable pmts; not quoted on
active market
Available for sale financial assets
(AFS)
Non-derivative FA; available for
sale; not category 1, 2 or 3.

DERECOGNITION
Removal of a previously recognised
financial asset or financial liability from
an entitys statement of financial
position
Financial Liability = when
extinguished
Financial Asset = Economic
substance (e.g. contractual rights to
cash flow expire or risks/rewards of
ownership substantially transferred.)
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RECOGNITION & MEASUREMENT

of Financial Instruments
IAS 39

>
>
>
>

MEASUREMENT

Initial
Measurement

All categories

>

Subsequent
measurement:

FVTPL &
AFS

FAIR VALUE
IFRS 13
Active market = prices:
BID (fin asset)
OFFER / ASK (fin liab)
Refer Study Aid 6-1

IMPAIRMENT (IAS 39.58, 59)

Assess every reporting period
Incurred Loss Model
Objective evidence of the loss
event
FA HTM carried at amortised
cost using EIM
FA AFS subsequent
measurement at FV through
equity. Impairment losses
recognised in profit and loss.

HTM,
Loans &
Receivables
AMORTISED COST
= FV + transaction costs
Less Subsequent principal &
interest repayments
Less reductions for
impairment

RECLASSIFICATION - Transfer between categories?

Generally remain in category where initially recognised until derecognition.
Exception: HTM tainting rule

Study Aid 9-5: IAS 32 Presentation of Financial Instruments

Financial Instrument
any contract that gives rise to a financial
asset of one entity and a financial liability or
equity instrument of another entity.
(para. 11)
Financial Liability
+
Equity

Compound
Instrument

Equity component =
Total value of
instrument
less
FV of liability at issue

Intent to settle
liability/realise asset
on a net
basis/simultaneously

PRESENTATION of Financial Instruments

IAS 32

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Legally
enforceable

Financial
Liability
(para. 11)
Equity
(para. 11)

Classify

OFFSETTING
i.e. net position in statement of
financial position. Can do if:

Financial
Asset
(para. 11)
Features:
Maturity
Div. Entitlement
Conversion
Features

DISTRIBUTIONS
Interest/Dividends
Fin. Liability = income/expense
Equity = reduction in equity

Gains/Losses
On Remeasurement
Fin. Liability = income/expense
Equity = N/A (not remeasured)

Study Aid 9-6: IAS 39 Hedge Accounting

DESIGNATING
IAS 39 (para. 88)
> At inception
> Criteria to be met:
Valid item & instrument
Formal documentation
Expectation: highly effective
Measure effectiveness reliably
Must be effective throughout
Cash flow hedge forecast
transaction must be highly
probable

HEDGE ITEM
Asset/Liability
Firm commitment
(binding agreement)
Highly probable forecast
transaction (uncommitted
but expected future
transaction)

HEDGING INSTRUMENT
A designated instrument
whose fair value or cash flows
is expected to offset changes
in the fair value or cash flows
of a designated hedged item
Derivative use for most
market risks
Non-derivative use for FX
risk only

3 TYPES OF HEDGE
HEDGE EFFECTIVENESS
Ineffective if:
> Mismatch in terms
> Changes to forecast transaction
> Commodity price risk basis risk
from grades/types.
Effective = 80 125%

Cumulative Method
Cum. Change in FV hedging instrument
Cum. Change in FV hedged item
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HEDGE
ACCOUNTING
IAS 39

WHEN TO ASSESS
EFFECTIVENESS
Must assess both prospectively
and retrospectively
Prospective testing current
date to maturity date
Retrospective testing
inception date to current date.

Fair Value Hedge

Risk: changes in FV of
asset/liability/firm
commitment.
Cash Flow Hedge
Risk: volatility in future
cash flows from
assets/liabilities/highly
probable forecast
transactions.
Net Investment Hedge
Refer Study Aid 9-7

Study Aid 9-7: IAS 39 Hedge Accounting Fair value vs. Cash Flow Hedge by Item & Risk

Hedged item

Hedged Risk
Foreign Exchange Risk

Asset or liability

Fair Value or Cash Flow

Interest Rate Risk

> Floating to fixed
interest rate hedge
= cash flow hedge

Commodity Risk

Equity Risk

Fair Value or Cash

Flow

Fair Value or Cash

Flow

> Fixed to floating

interest rate hedge
= fair value hedge
Firm Commitment Fair Value or Cash Flow
(e.g. a purchase
order)

Fair Value

Fair Value

Fair Value

Highly probable
forecast
transaction
(uncommitted but
expected future
transaction)

Cash Flow

Cash Flow

Cash Flow

Cash Flow

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Study Aid 9-8: Accounting for designated hedges Fair value vs. Cash Flow Hedge
Fair Value Hedge
Hedging Instrument

Hedged Item

Calculate FV at reporting date

Calculate Gain/Loss on Item re hedged risk

Recognise change in FV since last reporting

date with gain/loss to P&L:

Adjust carrying amount of hedged item & take

gain/loss to P&L:

DR/CR Hedging Instrument

CR/DR Gain/Loss on hedging instrument

DR/CR Hedged Item

CR/DR Gain/Loss on hedged item

N.B. To the extent effective, amounts in P&L offset hence no journal for ineffective portion

Cash Flow Hedge

Hedging Instrument

Cash Flow Hedge Reserve (CFHR)

Calculate FV at reporting date

Determine if hedged cash flows are in P&L in

current period.

Recognise effective & ineffective portions of

the change in FV since last reporting date:
Effective portion to OCI (CFHR)
Ineffective portion to P&L
DR/CR Hedging Instrument
CR/DR CHFR (effective portion)
CR/DR Gain/Loss on hedging instrument
(ineffective portion)
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If so, calculate amount in CFHR that has

affected the P&L and reclassify
DR/CR CFHR
CR/DR Gain/Loss on hedging instrument
(reclassified to P&L)