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PDF Certificate in International Financial Reporting

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2012 Association of Chartered Certified Accountants

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Welcome Certificate in International Financial Reporting

Welcome to the course

The primary objectives of this course are:

To help you understand how International Financial Reporting


Standards (IFRS) are used around the world
To explain the workings of the IASB and how these are being
changed
To examine the fundamental requirements of IFRS on a standard-
by-standard basis, for the benefit of preparers, auditors and users
of financial statements
To provide guidance on how to use IFRS in practice, with the aid of
questions, cases and exercises

The course includes questions and interactive exercises which you should
complete before moving on. Avoid skimming the material in the hope that
you will glean the appropriate points - you wont, you must set aside time
to study the material fully.
.
If you do need to get in touch with the course administrator click here (NB.
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Financial Reporting.)

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Welcome Certificate in International Financial Reporting

Course navigation

To move from page to page, click the next and previous buttons at To access external web pages, all you need to do is click the link
the top and bottom of each page. that appears within the text of the page. Off-page links always look
and behave like this (this will launch the ACCA home page). Here are
Once in the course, all you need to do is click course menu at the top of some tips for using external pages:
this page and select the module that you wish to study. Some external web pages are large, for example the Deloitte IAS
web site. For ease of navigation maximize your browser window
To navigate directly to any page within the current module, click using the maximize button (the centre button of the three at the top
module contents at the top of the page. right of the window frame).
When you have finished with the external page use your browsers
During exercises and activities you are invited to enter your answer and close button (or File Close) to close the window. The ACCA e-
review the answers of others within the course blog. qualification course will remain open in another window for you to
continue studying.

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Welcome Certificate in International Financial Reporting

Course contents and the learning process

You can work on this course whenever you like, 24 hours a day, The course contains the following modules:
seven days a week. Module 1 - The nature and operations of the IASB
Module 2 - The status and use of IAS/IFRS around the world
You decide when you want or need to learn; you decide just how long you Module 3 - Presentation and profit
will spend reviewing and revising a topic, and you decide when you are Module 4 - Accounting for assets and liabilities - part 1
ready to move on. Module 5 - Accounting for assets and liabilities - part 2
Module 6 - Group accounting
It should take you between 20 and 30 hours to complete, but you can take Module 7 - Disclosure standards
as long as you wish to complete the course, within the time limit of your Module 8 - Principal Differences between IFRS & UK GAAP/US GAAP
course licence. Module 9 - Forthcoming proposals for change
Mock Assessment
You can also download and print this course as an Acrobat Reader
document to use for study when you are not near a PC. If you do not have A number of pages in this course refer you to IAS Plus - a website
Adobe Acrobat Reader installed on your PC, click the Get Adobe dedicated to international financial reporting standards and to related
Reader button. current issues and developments. It is maintained by Deloitte Touche
Tohmatsu.

www.iasplus.com
To download the printable copy of this course click the file icon below.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Module 1: What you will learn - the nature and operations of the IASB

In this module you learn about the following:

The origins of the International Accounting Standards Board (IASB)


The organisation of the IASB
A list of International Accounting Standards (IASs) and
International Financial Reporting Standards (IFRSs)
The purpose of financial statements The Conceptual Framework
for Financial Reporting
The future of accounting standards
Frequently asked questions

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Table of contents

Select a topic to study or click next.

Module 1: What you will learn - the nature and operations of the IASB
Formation of the IASB
Current IASB standards
The Conceptual Framework for Financial Reporting
Frequently asked questions
Quick Quiz

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Formation of the IASB

The International Accounting Standards Committee (now IFRSF) was Accounting standards were set by a part-time, volunteer IASC Board
founded in 1973 after a conference in Sydney in 1972. The IASC was that had 13 country members and up to 3 additional organisational
formed through an agreement made by the professional accountancy members. Each member was generally represented by two
bodies from Australia, Canada, France, Germany, Japan, Mexico, the representatives and one technical advisor. The individuals came from
Netherlands, the United Kingdom with Ireland, and the United States of a wide range of backgrounds accounting practice, multinational
America. businesses, financial analysis, accounting education, and national
accounting standard-setting. The Board also had a number of observer
The accounting rule makers in these countries were often not members.
these professional accountancy bodies. In considering the
requirements for international accounting standards, it was regarded as The IASC concluded in 1997 that to continue to perform its role
too difficult for governments to reach agreement - so the accountancy effectively, there must be convergence between national accounting
bodies have worked together to try to devise a consistent set of global standards and practices and global accounting standards. The IASC
guidelines. saw, therefore, a need to change its structure. A new Constitution took
effect from 1 July 2000 under which was established a requirement for full
From 1973 to 2001 the number of accountancy bodies with constitutional review every five years. At this point the standards-setting
membership of the IASC increased to over 140. These accountancy body was renamed the International Accounting Standards Board (IASB).
bodies represented over 100 countries, including China, represented by
the Chinese accountancy body from 1997. On 1 April 2001, the new IASB took over from the IASC the
responsibility for setting International Accounting Standards.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The organisation of the IASB

The IASB sits under the wider parent body the IFRS Foundation
and is supported by a number of other groups and advisory panels.
Since its creation in 2000, there have been two full constitutional reviews.
The latest was completed in March 2010. The key elements of the
resulting structure, operational now, are illustrated in the diagram below
and discussed further on subsequent pages.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The organisation of the IASB

The IFRS foundation is the umbrella organisation. It oversees the


work of the IASB, its structure and strategy and has fundraising
responsibility. It is made up of 22 trustees:

Six from North America


Six from Europe
Six from the Asia/Oceania region
One from Africa
One from South America
Two from any area, subject to maintaining overall geographical
balance

The Trustees act by simple majority vote except for amendments to the
Constitution, which require a 75% majority.

The Monitoring Board was created under the latest constitutional


review to provide a link between the trustees of the IFRS foundation
Membership of the monitoring board will initially comprise six specific
and public authorities. It will participate in, and approve, appointment of
persons including the responsible member of the European Commission,
trustees of the IFRS foundation. It will also provide advice to and meet at
the chair of the US Securities and Exchange Commission and the
least annually with the trustees.
Commissioner of the Japanese Financial Services Agency.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The organisation of the IASB

The IASB has sole responsibility for publication of IFRSs.


The principal responsibilities of the IASB are to
develop and issue International Financial Reporting There are currently 14 members of the Board up to three of whom may
Standards and Exposure Drafts, and approve serve on a part-time basis. By no later than 1 July 2012 this number will
grow to 16, to include:
Interpretations developed by the IFRS Interpretations
Committee. Four from North America
Four from Europe
Four from the Asia/Oceania region
One from Africa
One from South America
Two from any area, subject to maintaining overall geographical
balance.

The Board has full discretion over developing and


pursuing its technical agenda. The trustees annual review
of the strategy of the IFRS Foundation, its effectiveness, and the IASB
includes consideration, but not determination, of the IASBs agenda.

The publication of a Standard, Exposure Draft, or final


Interpretation requires approval by 9 of the boards members if there are
fewer than 16 in total, or by 10 members if there are 16 in total.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The organisation of the IASB

The IASB normally form Working Groups or other types The IFRS Interpretations Committee (Interpretations Committee)
of specialist advisory groups to give advice on major was known as the International Financial Reporting Interpretations
projects. The Board is required to consult the IFRS Committee (or IFRIC) until the latest constitutional review. The
Advisory Council on major projects, agenda decisions and Interpretations Committee has 14 members, appointed by the Trustees.
work priorities.
Its responsibilities are to:
The IFRS Advisory Council (Advisory Council) provides a forum for
organisations and individuals with an interest in international Interpret the application of International Financial Reporting
financial reporting with the objective of: Standards (IFRSs) and provide timely guidance on financial
Advising the Board on priorities in the Boards work reporting issues not specifically addressed in IFRSs or IASs
Informing the Board of the views of the organisations and Publish Draft Interpretations for public comment and consider
individuals on the Council on major standard-setting projects, and comments made within a reasonable period before finalising an
Giving other advice to the Board or to the Trustees Interpretation.

Under the constitution of the IFRS Foundation, the Advisory Council Approval of draft or final Interpretations requires that not more than four
should have a minimum of 30 voting members vote against the Draft or final Interpretation.
members.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Current IASB standards

International Accounting Standards (IASs) were issued by the IASC


from 1973 to 2000. The IASB replaced the IASC in 2001. Since then, the
IASB has amended some IASs, has proposed to amend other IASs, has
proposed to replace some IASs with new International Financial
Reporting Standards (IFRSs), and has adopted or proposed certain new
IFRSs on topics for which there was no previous IAS. Through
committees, both the IASC and the IASB have also issued Interpretations
of Standards. Financial statements may not be described as complying
with IFRSs unless they comply with all of the requirements of each
applicable standard and each applicable interpretation.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Current IASB standards

The list below outlines the standards as they currently exist.


IAS 18 Revenue
IFRS 1 First-time Adoption of International Financial Reporting Standards IAS 19 Employee Benefits
IFRS 2 Share-based Payment IAS 20 Accounting for Government Grants and Disclosure of
IFRS 3 Business Combinations Government Assistance
IFRS 4 Insurance Contracts IAS 21 The Effects of Changes in Foreign Exchange Rates
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations IAS 23 Borrowing Costs
IFRS 6 Explanation for and Evaluation of Mineral Resources IAS 24 Related Party Disclosures
IFRS 7 Financial Instruments: Disclosures IAS 26 Accounting and Reporting by Retirement Benefit Plans
IFRS 8 Operating Segments IAS 27 Separate Financial Statements (revised 2011)
IFRS 9 Financial Instruments IAS 28 Investments in Associates and Joint Ventures (revised 2011)
IFRS 10 Consolidated Financial Statements IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 30 Disclosure in the Financial Statements of Banks and Similar
IFRS 11 Joint Arrangements
Financial Institutions
IFRS 12 Disclosure of Interests in Other Entities
IAS 32 Financial Instruments: Disclosure and Presentation
IFRS 13 Fair Value Measurement
IAS 33 Earnings Per Share
IAS 1 Presentation of Financial Statements
IAS 34 Interim Financial Reporting
IAS 2 Inventories
IAS 36 Impairment of Assets
IAS 7 Statement of Cash Flows
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 8 Accounting Policies, Changes in Accounting Estimates and
IAS 38 Intangible Assets
Errors
IAS 39 Financial Instruments: Recognition and Measurement
IAS 10 Events After the Reporting Period
IAS 40 Investment Property
IAS 11 Construction Contracts
IAS 41 Agriculture
IAS 12 Income Taxes
IAS 16 Property, Plant and Equipment
IAS 17 Leases

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Current IASB standards

The standards are frequently changed in order to improve and remove


You will note that a number of standards seem to be
options and establish more detailed rules in certain areas. Sometimes
missing, e.g. IASs 3, 4, 5, and 6. This is because they standards are amended retaining the same standard number where the
have been replaced by later standards, e.g. IAS 3 scope of the standard has remained broadly the same.
(which related to consolidated financial statements)
was replaced by the much more detailed standards 27, The latest standards (IFRS 10, 11, 12 and 13) were issued in May
28 and (more recently) IFRS 10, 11 and 12. 2011.

The application dates of standards (i.e. when companies start to use the
guidance they contain) are normally somewhat after their date of
publication, e.g. these latest standards will all come into force for
accounting years beginning on or after January 1st 2013. Early
The above standards are examined in more detail in later modules. application is possible though.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The Conceptual Framework for financial Reporting

A major item in the list of publications is the Conceptual Framework The framework is particularly designed to be used by the Board
for Financial Reporting 2010 (the framework). This establishes the itself when preparing standards but is also addressed to companies and
purpose of financial statements and the major principles lying behind their auditors when preparing financial statements in accordance with IFRSs.
preparation.
One of the key components of the framework is the definition of the
The framework suggests that the main purpose of financial five main elements of financial statements. In the statement of
statements is to give information to users (particularly investors) so financial position, three elements can be found:
that they can make financial decisions. The most useful information An asset is a resource controlled by the enterprise as a result of
would therefore be that which enables the prediction of future cash flows. past events and from which future economic benefits are expected
It is clear from this that the purpose of financial statements is little to do to flow to the enterprise
with taxation or management accounting. The context is that companies A liability is a present obligation of the enterprise arising from past
and users are presumed to be living in an international world so that events, the settlement of which is expected to result in an outflow
comparisons need to be made across national borders. This also implies from the enterprise of resources embodying economic benefits
that national laws including tax laws have to be ignored when Equity is the residual interest in the assets of the enterprise after
international standards are being drafted. . deducting all its liabilities

Equity does not need to be defined separately because it is just the


arithmetical difference between total assets and total liabilities.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The Conceptual Framework for financial Reporting

The framework stresses the definitions of asset and liability such In this case, it could be argued that the expense relates to 2007. If
that the definitions of income and expense are secondary i.e. for this is the case, then at the end of financial year 2007, a debit has to
example, an expense is defined as an increase in a liability or a decrease appear in the accounts for the repair expense, and a credit as a provision
in an asset. This is different from conventional accounting in most for the repair. This will mean that the balance sheet on 31st December
countries where in practice accounting is focused on the definitions of 2007 will show a liability for the provision for repair.
income and expenses based upon the accruals concept.
While it is difficult to say that this way is wrong, it is certainly
To help explain this, lets take a look at an example. Imagine that a different from current practice. The framework suggests that you
business needs to repair a piece of equipment on the 20th February should ask the question Is there a liability? on the 31st December 2007.
2008. The company has a financial year running from 1st January to 31st The answer is no. Therefore there is no need for a double entry and so
December. no expense. This is clearer.

Is the repair bill an expense of financial year 2007 or of 2008? The application of the asset/liability framework underpins conventional
accounting practice.
Some accounting systems would treat this as an expense of 2007, as the
wear and tear that caused the equipment to breakdown was in 2007. Not
only this, but the repair is tax deductible in 2007 if so charged.

The conventional definition of an expense of year X is that it is a payment


made in any year that relates to year X.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The Conceptual Framework for financial Reporting


Summary of position

International accounting guidance exists in the IASBs framework, The following hierarchy, in decreasing authority of guidance within
IFRS and Interpretations. The IASB published the framework to outline IFRS, is followed in developing and applying an accounting policy
the concepts that underlie the financial reporting process. The framework where no IFRS specifically deals with the transaction:
is used as a guide by both international and national standard setters to The requirements and guidance in the International
set consistent and logical accounting standards. It also assists preparers Financial Reporting Standards and IFRIC Interpretations dealing
and auditors in interpreting standards and dealing with issues that the with similar and related issues
standards do not cover. The framework
The most recent pronouncements from other
The Standards provide guidance for preparers to deal with the standard setting bodies that use a similar conceptual framework to
recognition, measurement, presentation and disclosure develop accounting standards, other accounting literature and
requirements for transactions and events. Most IFRS are intended for accepted industry practice to the extent that these do not conflict
application across industries. A second tier of guidance comes from the with (a) and (b) above.
Interpretations developed by the IFRIC. These pronouncements clarify or
interpret the standards where there is a need for improved guidance.
.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

The future of accounting standards

Under the original understanding the aim was to achieve full convergence
In September 2009 the G20 leaders stated We call i.e. a set of common standards, by June 2011. Following concerns raised
on our international accounting bodies to redouble regarding the volume of draft standards due for issue in a short time
their efforts to achieve a single set of high quality, though, the IASB and FASB announced jointly in 2010 that the scope of the
global accounting standards within the context of project would be reduced. By June 2011 a converged solution would be
their independent standard setting process, and found for all the areas identified by the original MoU, plus for other issues
complete their convergence project by June 2011.. not in the MoU where a solution was urgently required.

This project has largely been completed on time. Still outstanding remains
final publication of new standards for leasing and revenue recognition, now
due in 2012.

Since publication of a memorandum of understanding (MoU) in 2006, The Securities and Exchange Commission (SEC) in the US is expected to
the IASB has been committed to a joint work programme with the announce towards the end of 2011 whether and how to incorporate IFRS
FASB (the board responsible for issuing accounting standards in the US) into the US financial system. In August 2011, in response to the SECs
to bring IFRS and US GAAP in line. request for comments, the American Institute of Certified Public Accountants
(AICPA) recommended that the SEC allow optional adoption of IFRS by US
public companies.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Frequently asked questions

1. Are International Financial Reporting Standards recognised in all 1. International Financial Reporting Standards (IFRSs) have
financial capital markets in the world? achieved recognition universally as a highly influential set of
2. What are accounting standards and what is the difference between accounting standards. The IASB says that over 100 countries have
IAS and IFRS? required or permitted the use of IFRSs since 2001.

2. Accounting standards are authoritative statements of how


particular types of transactions and other events should be reflected
in financial statements. Accordingly, compliance with accounting
standards will normally be necessary for the fair presentation of financial
statements.

Standards issued by the International Accounting Standards Board


are designated International Financial Reporting Standards (IFRSs).
Standards originally issued by the Board of the International Accounting
Standards Committee (1973-2001) continue to be designated
International Accounting Standards (IASs).

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Frequently asked questions

1. What is IOSCO, and what is its link with the IASB? 1. The International Organisation of Securities Commissions
2. How does the IASB decide what subjects to add to its agenda? (IOSCO) is the representative body of the worlds securities markets
3. Is the framework anything like the UKs Statement of Principles? regulators. High quality financial information is vital to the operation of
4. Are the IASBs standards always in line with the framework? an efficient capital market, and differences in the quality of the accounting
policies and their enforcement between countries leads to inefficiencies
between markets. IOSCO has been active in encouraging and promoting
the improvement and quality of IFRSs for over ten years.

2. Board members, members of the IFRS Advisory Council, national


standard-setters, securities regulators, other organisations and
individuals and the IASB staff are encouraged to submit suggestions
for new topics that might be dealt with in the IASBs standards.

3. Yes, the IASBs framework is closely in line with that of the US


standard setter and the UKs Statement of Principles.

4. Not exactly. The framework was written after some of the


standards. Also, sometimes, practical or political necessity forces the
Board to stray from the framework.

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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting

Quick Quiz

Module 1 quick quiz


.
Click next to continue

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Module 1 quick quiz Certificate in International Financial Reporting

Question 1
What is the role of the IFRS Interpretations Committee?

A. To promote generally the acceptability of International Accounting


Standards and enhance the credibility of the IAS.

B. Advise the IASB board on technical issues in specific projects

C. To consider, on a timely basis, accounting issues that are likely to


receive divergent or unacceptable treatment in the absence of
authoritative guidance

D. To work generally for the improvement and harmonisation of


regulations, accounting standards and procedures relating to the
presentation of financial statements

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Module 1 quick quiz Certificate in International Financial Reporting

Question 2
Which of the following is not one of the four enhancing qualitative
characteristics?

A. Understandability

B. Materiality

C. Comparability

D. Timeliness

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Module 1 quick quiz Certificate in International Financial Reporting

Question 3
The definition of an asset includes which of the following terms:
1. Control
2. Future economic benefits
3. Ownership
4. Past transaction

A. All of the above

B. 1, 2, and 4

C. 2, 3, and 4

D. 1, 2, and 3

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Module 1 quick quiz Certificate in International Financial Reporting

Question 4
The principle of commercial substance over legal form is being applied
when:

A. An asset is depreciated on the straight-line basis

B. The costs of a patent are capitalised

C. An asset bought under a leasing contract is capitalised by the


buyer

D. Provision is made for doubtful debts

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Module 1 quick quiz Certificate in International Financial Reporting

Question 5
The monitoring board is responsible for:

A. Approving IFRSs before publication

B. Deciding on a work plan for the IASB

C. Providing a link between the IFRS foundation and public authorities

D. All of the above

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Module 2: What you will learn: the status and use of IFRSs around the world

This module will cover the following:

A brief summary of the development of International Financial


Reporting Standards (IFRSs) and their adoption
The growth of the International Accounting Standards Board (IASB)
The recommended publication for this course.

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Table of contents

Select a topic to study or click next.

Module 2: What you will learn: the status and use of IFRSs around the
world.
Introduction: Where have IFRSs been adopted
Growth of the IASB and IFRSs: a roadmap
IFRSs for Small and Medium Enterprises (SMEs)
IFRS for SMEs
The annual IASB bound volume and its use
Frequently asked questions

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Introduction: Where have IFRSs been adopted

In many countries, stock exchange listing requirements or national On 27 August 2008, the US Securities and Exchange Commission
securities legislation permits foreign companies that issue voted to publish for public comment a proposed roadmap that
securities in those countries to prepare their consolidated financial could lead to the use of International Financial Reporting Standards
statements using IFRSs. The principal capital markets in this category (IFRSs) by US issuers beginning in 2014. Currently, US issuers must use
are Australia, Germany and the United Kingdom. From 1 January 2005, US GAAP, though foreign registrants (of which there are around 1,100
all publicly listed companies in the European Union were required to from 52 jurisdictions) may elect to use IFRSs. The proposal suggests
prepare their financial statements in conformity with IFRSs. From the mandatory adoption by US registrants could be phased in from 2014 to
same date, Australia adopted IFRSs as its national accounting standards. 2016 depending on company size:
New Zealand required IFRSs from 2007. Large accelerated filers in 2014
Accelerated filers in 2015
In 2007, Brazil, Canada, Chile, India, Japan and Korea all established Non-accelerated filers in 2016
timelines to adopt or converge with IFRSs. In the USA, the Securities
and Exchange Commission (SEC) removed the reconciliation requirement In 2011, the Commission will evaluate the progress of IFRSs against
for non-US companies reporting under IFRSs, and consulted on IFRSs for certain defined milestones and make a decision on whether to go ahead
domestic companies. with adoption starting in 2014, later, or not at all..
.

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Growth of the IASB and IFRSs: a roadmap

The IASB, the board responsible for issuing IFRSs, has come a long 1995
way since its inception in 1973. Here is a brief list of the major agreement between the IASC and IOSCO on list of core standards
developments that have marked the life of the IASB: 1998
laws to permit use of IASs in France, Germany and Italy and the
1973 IASC passes last major core standard (IAS 39, financial
the IASC was founded in by accountancy bodies from nine instruments)
countries 1999
1970s-80s the IASC decides on reform; welcomed by SEC, etc.
the codifying of best practice, including many national options 2000
1989 IOSCO recommends use of IAS to its members and the EU
publication of the first version of the Conceptual Framework for Commission proposes compulsory use of IAS for listed companies
Financial Reporting and initial discussions with IOSCO consolidated statements by 2005
1990s 2001
gradual adoption of IASs as national standards, particularly by European Commission presents legislation to require use of IASC
Commonwealth countries Standards for all listed companies no later than 2005
1993 Trustees bring new structure into effect 1 April 2001 IASC
ten revised standards, in force in 1995 now becomes IASB and assumes responsibility for setting
1994+ accounting standards, designated International Financial reporting
adoption of IASs by a number of continental companies for Standards (IFRSs).
consolidated statements.

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Growth of the IASB and IFRSs: a roadmap

2002 The IASB meets the US Financial Accounting Standards Board


After extensive consultation with the SAC, national accounting (FASB). They conclude the Norwalk Agreement, a memorandum
standard-setters, regulators and other interested parties, the IASB of understanding that commits the boards to work together to
announces new programme of technical projects remove differences between IFRSs and US GAAP and to co-
The IASB meets the US Financial Accounting Standards Board ordinate their future work programmes
(FASB). They conclude the Norwalk Agreement, a memorandum of 2005
understanding that commits the boards to work together to remove The Trustees publish an amended Constitution for the IASC
differences between IFRSs and US GAAP and to co-ordinate their (IFRS) Foundation
future work programmes European commissioner supports roadmap development by staff
2003 of US SEC towards the removal by 2008 of the requirement for
The Trustees launch review of the IASC( now IFRSF) Foundations companies to reconcile from IFRS to US GAAP when listing in the
Constitution US
The IASB completes its general improvements project by issuing 2006
13 revised IASs, and revised versions of the two standards on IASB and FASB agree roadmap for convergence between IFRSs
financial instruments and US GAAP
2004 China adopts accounting standards substantially in line with IFRSs
By issuing four IFRSs, two revised IASs and an amendment to the 2007
financial instruments standard by the end of March, the IASB Brazil, Chile, Canada, India, Japan agree timelines for
brings to completion its stable platform of standards for use by convergence
companies adopting its standards from January 2005. 2011
US SEC to decide whether to go ahead with adoption starting in
2014, later, or not at all.

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

IFRSs for Small and Medium Enterprises (SMEs)


Publication of a new IFRS for SMEs

Because full IFRSs were designed to meet the needs of investors in


public companies, they are very detailed and fairly burdensome to
implement for smaller companies. In July 2009 the IASB published an
International Financial Reporting Standard (IFRS) designed for use by
small and medium-sized entities (SMEs).

This new standard is designed for non-publicly accountable entities, and


reflects an important development in international reporting, since SMEs
are estimated to represent more than 95 per cent of all companies. The
IFRS for SMEs is derived from full IFRSs with appropriate modifications
based on the needs of users of SME financial statements and cost-benefit
considerations (simplifications generally allow only more straightforward
accounting policy options and a more concise written style is used
throughout)..

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

IFRS for SMEs


Implementation of the IFRS for SMEs in the UK

In August 2009, the UK Accounting Standards Board announced a draft The result will be a three-tier approach:
policy for implementation of IFRS by non-publicly accountable UK
companies (publicly accountable companies are required to prepare 1. Publicly accountable entities prepare financial statements in
financial statements in accordance with full IFRS already). Under the accordance with full IFRS
latest draft of these proposals, the ASB will publish the Financial 2. Non-publicly accountable entities which are not small prepare
Reporting Standard for Medium Sized Entities (FRSME). This will be financial statements in accordance with the FRSME (based upon
based upon the IFRS for SMEs, modified as little as is feasible to ensure the IFRS for SMEs).
compliance with UK and EU legal requirements. 3. Small entities continue to comply with the UK FRSSE

UK GAAP will be phased out and non-publicly accountable companies will Any entity could choose to adopt the policy of a higher tier i.e. a small
be required to prepare financial statements in accordance with the company could choose to comply with the FRSME.
FRSME for accounting periods beginning on or after 1 July 2013.

Companies qualifying as small under the UK Companies Act 2006, and


preparing accounts in accordance with the UK Financial Reporting
Standard for Smaller Entities (FRSSE) will not be affected by these
changes. The ASB intends to retain the FRSSE for the foreseeable future
For further information and a summary of this standard
for small companies as defined by the Companies Act 2006.
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrsforsmes.htm

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

The annual IASB bound volume and its use

It would be useful for reference purposes to have with you a copy of


the bound volume of International Financial Reporting Standards
2011. You can purchase this direct from the IASB web site.

This contains the text of the current international standards and the
interpretations. It also contains the text of the framework and a glossary
of terms used in IASB documents. From time to time, this course will
direct you towards particular standards to carry out short exercises.

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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting

Frequently asked questions

1. Which national standards are closest to the IASBs? 1.In terms of subjects covered and level of detail, the UKs
2. Is it necessary to adhere to all requirements of IFRS for financial standards used to be very close to IFRS, but since the roadmap for
statements to state compliance? convergence with US accounting there are now significant differences
3. What version of the English language is used by the IASB: British emerging..
or American?
2. Yes, in order to claim compliance with IFRSs, all the requirements
of the IFRS must be met. There are no exceptions. Use of local GAAP
and IFRS together is not allowed.

3. The terminology is largely British. However, there are some


exceptions, such as the use by IASB of inventory rather than stock,
because the latter word means share in some countries

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Module 3: Presentation and profit Certificate in International Financial Reporting

Module 3: What you will learn: presentation and profit

This module begins the process of looking at IFRSs on a topic-by-


topic basis. It deals with three introductory standards:
Presentation of financial statements - IAS 1
Revenue - IAS 18
Accounting policies, changes in accounting estimates, and errors-
IAS 8.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Table of contents

Presentation of financial statements - IAS 1


Exercise - IAS 1 Question 1
Exercise - IAS 1 Answer 1
Exercise - IAS 1 Question 2
Exercise - IAS 1 Answer 2
Exercise - IAS 1 Question 3
Exercise - IAS 1 Answer 3
Revenue - IAS 18
Accounting policies, changes in accounting estimates and errors - IAS 8
Frequently asked questions
Quick Quiz

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Module 3: Presentation and profit Certificate in International Financial Reporting

Presentation of financial statements - IAS 1

The following represent the key points that you should take from the Under the revised IAS 1, published in September 2007 and effective
standard: for accounting periods beginning on or after 1 January 2009, a
complete set of financial statements should include: [IAS 1 para 10]
1. This standard contains several aspects taken from the framework, a. A statement of financial position at the end of the period,
including that the purpose of financial reporting is to give useful b. A statement of comprehensive income for the period,
information to investors for the purposes of making economic decisions. c. A statement of changes in equity for the period
d. A statement of cash flows for the period, and
2. The objective of general purpose financial statements is to e. Notes, comprising a summary of accounting policies and other
provide information about the financial position, financial explanatory notes.
performance, and cash flows of an entity that is useful to a wide range
of users in making economic decisions. To meet that objective, financial The revised IAS 1 introduced a change to the titles of the financial
statements provide information about an entitys: [IAS 1 para 7] statements as used in the IFRSs:
a. Assets. a. Balance sheet became statement of financial position
b. Liabilities. b. Income statement became statement of comprehensive income
c. Equity. c. Cash flow statement became statement of cash flows.
d. Income and expenses, including gains and losses.
e. Other changes in equity. Entities are not required to use the new titles in their financial statements,
f. Cash flows. but all existing Standards and Interpretations have been amended to
reflect the new terminology.
That information, along with other information in the notes, assists users
of financial statements in predicting the entitys future cash flows and, in
particular, their timing and certainty.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Presentation of financial statements - IAS 1

3. In addition to changing the titles of the financial statements, the 4. The statement of changes in equity must be of the same status as
revised IAS 1 also requires that an entity must: the other three statements. The statement must show: (IAS1 para 106).
Present all non-owner changes in equity (that is, comprehensive total comprehensive income for the period
income see below) either in one statement of comprehensive for each component of equity, the effects of changes in accounting
income or in two statements (a separate income statement and a policies and corrections of errors recognised in accordance with
statement of comprehensive income). Components of IAS 8
comprehensive income may not be presented in the statement of for each component of equity, a reconciliation between the
changes in equity. carrying amount at the beginning and the end of the period
Present a statement of financial position (balance sheet) as at the
beginning of the earliest comparative period in a complete set of 5. IAS 1 requires that financial statements should present fairly the
financial statements when the entity applies an accounting policy financial position, performance, and cash flows of an enterprise. It is
retrospectively or makes a retrospective restatement. said that nearly always this will be achieved by compliance with the
Disclose income tax relating to each component of other requirements of the standards. However, in what are said to be extremely
comprehensive income. rare circumstances, it may be necessary to depart from such a
Disclose reclassification adjustments relating to components of requirement in order to achieve a fair presentation. IAS 1 requires
other comprehensive income. departure in such circumstances, but with extensive disclosures,
including the financial impact of the departure from the standard.
Comprehensive income for the period includes profit or loss for the period
plus other income recognised including changes in revaluation surplus,
actuarial gains and losses, and gains or losses from translating overseas
operations.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Presentation of financial statements - IAS 1

6. The two main requirements of accounting information are that it 9. It is necessary to present assets and liabilities on the basis of the
should be relevant and reliable. As part of being reliable, financial distinction between current items and non-current items except
statements should: where a presentation based on liquidity is reliable and more relevant.
- represent faithfully the results and financial position,
- reflect economic substance and not merely legal form, 10. IAS 1 does not lay down particular formats for financial
- be free from bias, statements but does have minimum requirements for the presentation of
- be prudent, and items on the face of the financial statements.
- be complete in all material respects.
Several other principles are said to be normally required, such as going 11. In June 2011 an amendment to IAS 1 was issued to improve the
concern, accruals, consistency and materiality. consistency and clarity of the presentation of items in other comprehensive
income.
7. The off-setting of assets and liabilities is not allowed except
where another standard requires or permits it. Income and expense
items should not be offset except where a standard permits or requires it.

8. IAS 1 generally requires that comparative information for the


previous period should be disclosed for all numerical information in
financial statements.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Exercise - IAS 1 Question 1


Please review the following exercise:

Should the going concern convention be dropped when a significant part Consider your answer to the question, when you are ready click next to
of the reporting entity is thought not to be a going concern? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Exercise - IAS 1 Question 2


Please review the following exercise:

Is consistency of accounting policies from year to year Consider your answer to the question, when you are ready click next to
required? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Exercise - IAS 1 Question 3


Please review the following exercise:

Can a loan which is expected to be paid back in four months be a non- Consider your answer to the question, when you are ready click next to
current liability? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Revenue - IAS 18

The following represent the key points that you should take from the 3. When the outcome of a process of revenue earning can be
standard: reliably measured, revenue should be recognised by stage of
completion, otherwise only to the extent of expenses recoverable
1. Revenue is to be measured at the fair value of the consideration (paragraphs 20 and 26).
received. This includes, where material, discounting, if the consideration
will be received in the future (paragraphs 9 and 11). 4. Where there are several components to a transaction (e.g. a
company sells goods and services together), then the revenue
2. Revenue arising from the sale of goods should be recognised recognition rules should be applied to each component separately
when all the following criteria have been satisfied (paragraph 14): i.e. revenue attributable to the sale of goods will be recognised
a. The seller has transferred to the buyer the significant risks and immediately whilst the revenue associated with provision of services will
rewards of ownership be deferred and recognised over the period during which the service is
b. The seller retains neither continuing managerial involvement to the performed (paragraph 13).
degree usually associated with ownership nor effective control over
the goods sold 5. There are also general rules for the recognition of interest,
c. The amount of revenue can be measured reliably royalties and dividends. None of these rules would be surprising in
d. It is probable that the economic benefits associated with the most countries (paragraph 30).
transaction will flow to the seller
e. The costs incurred or to be incurred in respect of the transaction
can be measured reliably.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Revenue - IAS 18
Revenue measurement a worked Example

IAS 18 states that if consideration will be received in the future then, Because the consideration is receivable in the future, it should be
where material, it should be discounted to present value. The following discounted back two years at 5% to find the revenue recognised:
example illustrates this point with some figures.
$1,000 x (1/1.052) = $907
Supersofas Limited, a furniture company, launches a promotional offer
that allows customers to buy now, pay two years later with no interest Supersofas will recognise revenue in the income statement and a
charged. receivable on the statement of financial position equal to $907.

On 31 August 2009 Supersofas Limited sell two sofas to Judy for $1,000. Over the two year period of interest-free credit, the discount unwinds, and
Judy takes advantage of the offer of interest-free credit and will pay in this will create investment income in the income statement and increase
August 2011. If interest rates are currently 5% per annum, how should the receivable on the statement of financial position.
this transaction be recorded by Supersofas Limited in the year ended 31
December 2009? In 2009, Supersofas will recognise investment income for four months
(September to December inclusive):

$907 x 0.05 x 4/12 = $15

The receivable balance will also increase by $15 to stand at $922 at 31


December 2009.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Accounting policies, changes in accounting estimates and errors - IAS 8

The following represent the key points that you should take from the
standard:

1. In the absence of a Standard or an Interpretation, management


must use its judgement in developing and applying an accounting
policy that results in information that is relevant and reliable.
Management must refer to, and consider the applicability of, the following
sources in descending order:
a. The requirements and guidance in IASB standards and
interpretations dealing with similar and related issues
b. The definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the framework
(paragraph 11)

Management may also consider the most recent pronouncements of other


standard-setting bodies that use a similar conceptual framework to
develop accounting standards, other accounting literature and accepted
industry practices, to the extent that these do not conflict with paragraph
11.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Accounting policies, changes in accounting estimates and errors - IAS 8

2. An entity shall select and apply its accounting policies 5. The general principle in IAS8 is that an entity must correct all
consistently for similar transactions, other events and conditions. material prior period errors retrospectively in the first set of
financial statements authorised for issue after their discovery by
3. An entity is permitted to change an accounting policy only if the (paragraph 42):
change: a. Restating the comparative amounts for the prior period(s)
a. Is required by a standard of interpretation; or presented in which the error occurred; or
b. Results in the financial statements providing reliable and more b. If the error occurred before the earliest prior period presented,
relevant information restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.
4. The effect of a change in an accounting estimate shall be
recognised prospectively by including it in profit or loss in:
a. The period of the change, if the change affects that period only; or
b. The period of the change and future periods, if the change affects
both

However, to the extent that a change in an accounting estimate gives rise


to changes in assets and liabilities, or relates to an item of equity, it is
recognised by adjusting the carrying amount of the related asset, liability,
or equity item in the period of the change (paragraph 37)..

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Module 3: Presentation and profit Certificate in International Financial Reporting

Frequently asked questions

1. Click here to enter text Is there a true and fair override in IASs? 1. IAS 1 talks of fair presentation rather than true and fair view.
2. What is the status of interpretations? However, there is an override, which is said to be necessary only in very
3. Suppose that a company has entered into a binding contract to sell rare circumstances. Substantial disclosures are required.
an asset soon for a fixed amount. Can any implied gain be
recorded? 2. IAS 1 gives interpretations the same status as standards. That is,
they must be complied with.

3. The framework would appear to suggest that the gain is both


relevant and reliable information. However, IAS 18 requires control to
be passed, so it seems that the gain cannot be recorded yet.

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Module 3: Presentation and profit Certificate in International Financial Reporting

Quick Quiz

Module 3 quick quiz


Click next to continue

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Module 3: Presentation and profit Certificate in International Financial Reporting

Question 1
During the year to 30 September 2008, the following events occurred in
relation to Pipe, a limited liability company. All were material to the
companys accounts:
1. A claim for tax relief, submitted in 2005, was rejected by the Tax
authorities. No appeal will be made. The resulting liability of
$15,000 was not provided at 30 September 2007, since the
company had expected the claim to succeed.
2. The company had decided to include attributable overheads in its
inventory valuation for the first time in 2008. The effect at 30
September 2007 would have been $5,000.
3. A cut-off error on inventory at 30 September 2007 was discovered
which would have reduced the value of inventory by $24,000.
4. Obsolete inventory which had been written down to its estimated
net realisable value of $17,000 at 30 September 2007 was sold for
$7,000.
How much should be accounted for as a prior period adjustment in the
accounts to 30 September 2008?

A. $10,000

B. $19,000

C. $29,000

D. $34,000

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Module 3: Presentation and profit Certificate in International Financial Reporting

Question 2
Which of the following does not have to be included in the Statement of
Changes in Equity (SOCIE)?

A. Total comprehensive income for the period

B. A reconciliation between the carrying amount at the beginning and


the end of the period for each component of equity

C. Each item of income and expense which is recognised directly in


equity

D. The cumulative effect of changes in accounting policy and the


correction of fundamental errors

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Module 3: Presentation and profit Certificate in International Financial Reporting

Question 3
Which item must be shown separately on the face of the SOFP?

A. Intangible assets

B. Work in progress

C. Trade receivables

D. Taxation

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Module 3: Presentation and profit Certificate in International Financial Reporting

Question 4
Balances under the following headings are extracted from the books of
Ego, a limited liability company:
1. Changes in inventories of finished goods and work in progress
2. Raw materials and consumables used
3. Consulting expense
The accountant wishes to use a Format 2 type of expenditure income
statement.
Which of the above balances may be included without further analysis on
the face of the income statement/ statement of comprehensive income?

A. 1 and 2

B. 1 and 3

C. 2 and 3

D. 1, 2 and 3

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Module 3: Presentation and profit Certificate in International Financial Reporting

Question 5
Does the Job Ltd, a software company, make a sale for $500,000 at the
end of their reporting period. The amount charged to the customer
includes $470,000 for software and $30,000 for support services for the
next two years. How much revenue should Does the job Ltd recognise in
the current reporting period?

A. $500,000

B. $485,000

C. Nil

D. $470,000

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Module 4: What you will learn: accounting for assets and liabilities part 1

In this module you will look at the following standards:


Property plant and equipment - IAS 16
Intangible assets - IAS 38
Investment property - IAS 40
Impairment of assets - IAS 36
Borrowing costs - IAS 23
Accounting for government grants and disclosure of government
assistance - IAS 20
Inventories - IAS 2
Construction contracts - IAS 11
Leases - IAS 17
Noncurrent assets held for sale and discontinued operations
IFRS 5

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Table of contents
Select a topic to study or click next.

Introduction Exercise - IAS 17 Question


Property plant and equipment - IAS 16 Exercise - IAS 17 Answer
Exercise - IAS 16 Question 1 Noncurrent assets held for sale and discontinued operations - IFRS 5
Exercise - IAS 16 Answer 1 Exercise - IFRS 5 Question
Exercise - IAS 16 Question 2 Exercise - IFRS 5 Answer
Exercise - IAS 16 Answer 2 Frequently asked questions
Intangible Assets - IAS 38 Quick Quiz
Exercise - IAS 38 Question 1
Exercise - IAS 38 Answer 1
Exercise - IAS 38 Question 2
Exercise - IAS 38 Answer 2
Investment property - IAS 40
Impairment of assets - IAS 36
Exercise - IAS 36 Question
Exercise - IAS 36 Answer
Case study - Impairment of assets
Borrowing costs - IAS 23
Accounting for government grants and disclosure of government
assistance - IAS 20
Exercise - IAS 20 Question
Exercise - IAS 20 Answer
Inventories - IAS 2
Construction contracts - IAS 11
Exercise - IAS 11 Question
Exercise - IAS 11 Answer
Leases - IAS 17
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Introduction

The definition of asset is: a resource controlled by It should be noted that an asset is not necessarily something which
is owned but which is controlled. One example of an implication of this
the enterprise as a result of past events is that a lessee might treat an item as an asset even though it is not
and from which future economic benefits are owned by the lessee. Of course, for an item to be an asset at all, it must
expected to flow to the entity. produce some future benefit to the entity.

However, not all of an entitys assets should be recognised in the


statement of financial position. Some of them cannot be measured
with sufficient reliability to be included. It is necessary to have some
The treatment of assets involves a three-stage process: measure of either cost or value.
1. Is the item an asset? Having decided to recognise an asset there might then be several ways
2. Should the item be recognised (recorded) in the statement of in which it could be valued, such as depreciated cost or current market
financial position? value. Each IFRS on the subject of assets deals with both recognition and
3. How should the asset be valued? measurement. There are also usually many requirements relating to
disclosures of these issues.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Property plant and equipment - IAS 16

The main elements of this standard are as follows:

An asset should initially be recognised at its cost, which includes all Revaluation gains and losses should be recorded in other
those costs of bringing it to its present condition and location, ready for comprehensive income and taken to equity under the heading of
productive use (paragraph 15). revaluation surplus. There are some special rules where a revaluation
loss occurs in cases where there has previously been a revaluation gain
Capitalisation of subsequent expenditure should occur when it is (paragraphs 39 and 40).
probable that the asset will produce future benefits in excess of the
originally assessed standard of performance. The carrying amount of an asset should be depreciated over its
useful life. The depreciable amount takes account of the residual value
Subsequently the entity can continue using cost (with depreciation, expected at the end of the useful life. This value should be measured at
see below) but assets may be revalued to fair value. This alternative the price level ruling when the cost or value of the asset was determined
must be used continually at each reporting date and must be applied to a (paragraphs 6).
whole class of assets rather than to an individual asset only. A class of
assets is a heading on a statement of financial position, such as land and The gain or loss on the disposal of an asset is calculated as the
buildings. Fair value is defined by IFRS 13 as the price that would be difference between the proceeds and the carrying amount. Since the
received to sell an asset or paid to transfer a liability in an orderly latter could be based on either cost or revaluation, the gain on sale would
transaction between market participants at the measurement date This is be lower if an asset had been revalued upwards.
different from net realisable value because that amount is net of various
items including cost of sale (paragraphs 29, 30 and 31).

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 16 Question 1


Please review the following exercise:

A company bought some land for $15m in 2000, revalued it at various Consider your answer to the question, when you are ready click next to
dates up to $23m in 2007, and sold it for $21m in 2007, but did not enter it into the course blog.
receive any cash until 2008. Ignoring tax, the gain/loss recorded in 2007 You may wish to discuss this with a colleague before finally submitting it.
should be:
You can then review the ideas of other students on this subject.
a. zero
b. +$6m
c. -$2m
d. +$21m

You should refer to the text of the standard when answering all exercises.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 16 Question 2


Please review the following exercise:

A company owns five properties, all capitalised and held at cost within Consider your answer to the question, when you are ready click next to
property, plant and equipment. Two of these properties are office enter it into the course blog.
buildings in central London. Market information suggests that these two You may wish to discuss this with a colleague before finally submitting it.
properties have increased in value significantly and management would
like to book a revaluation in the accounts to reflect this gain at the year You can then review the ideas of other students on this subject.
end. They believe this will provide more relevant information to
shareholders and others reviewing the financial statements. Would IAS 16
permit this treatment?

You should refer to the text of the standard when answering all exercises.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Intangible Assets - IAS 38

The main elements of this standard are as follows:

As with any other asset, intangible items should be recognised In some countries items such as the legal and other expenses of
where there is a probable future benefit that can be measured setting up a company are capitalised, but this is not allowed under IAS
reliably (paragraph 21). With intangibles this may be more difficult than 38 because there is not an asset (paragraph 66).
for tangible assets. Certain items are therefore not recognised. For
example, internally generated goodwill cannot easily be traced back to a Just as tangible assets are allowed to be revalued by IAS 16, so
transaction and therefore the cost or value is difficult to measure; it is not intangibles may be revalued, but there are some restrictions.
even clear that the enterprise has control over it, consequently it is not to Intangibles can only be revalued with reference to an active market that
be recognised as an asset (paragraph 48). Also research expenditure involves many buyers and sellers and publicly available prices (paragraph
cannot be capitalised for similar reasons (paragraph 54). The same 75). This makes it difficult in practice to re-value most intangibles.
applies to several other internally generated assets, such as brands
(paragraph 63). Intangible assets are classified as (paragraph 88):
a. Indefinite life: no foreseeable limit to the period over which the
Development expenditure that meets certain criteria should be asset is expected to generate net cash inflows for the entity
capitalised. One of the conditions is that there is a technically feasible b. Finite life: a limited period of benefit to the entity.
project that can be separately measured (paragraph 57). .

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Intangible Assets - IAS 38

The cost less residual value of an intangible asset with a finite An intangible asset with an indefinite useful life should not be
useful life should be amortised over that life (paragraph 97): amortised (paragraph 107). Its useful life should be reviewed each
a. The amortisation method should reflect the pattern of benefits reporting period to determine whether events and circumstances continue
b. If the pattern cannot be determined reliably, amortise by the to support an indefinite useful life assessment for that asset. If they do
straight line method not, the change in the useful life assessment from indefinite to finite
c. The amortisation charge is recognised in profit or loss unless should be accounted for as a change in an accounting estimate
another IFRS requires that it be included in the cost of another (paragraph 109). The asset should also be assessed for impairment in
asset accordance with IAS36 (paragraph 111).
The amortisation period should be reviewed at least annually (paragraph
104).

The asset should also be assessed for impairment in accordance


with IAS 36 (paragraph 111).

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias38.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 38 Question 1


Please review the following exercise:

Can brand names be capitalised? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 38 Question 2


Please review the following exercise:

Can development expenditure be revalued upwards? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Investment property - IAS 40

IAS 40 deals with investment property, which is property held to For those enterprises that choose the cost model, there must be
earn rentals or capital gain, rather than being owner occupied. disclosure in the notes of fair value (paragraph 75).
Paragraphs 8 and 9 expand on this definition by providing examples of
what would constitute investment property. The standard does not apply An entity must apply its chosen model to all its investment property.
to biological assets and mineral rights (paragraph 4).

An entity should decide whether it wishes to follow a cost model or


a fair value model for all its investment property (paragraph 30). The
fair value model includes taking gains and losses to income (paragraph
35).

In the fair value model, individual properties whose fair value cannot
be reliably measured should also be measured at cost (paragraph
53).

When a property changes from investment property to owner


occupied or to inventory, the propertys cost for subsequent accounting
should be its fair value at the date of its change of use. (paragraph 74). For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias40.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Impairment of assets - IAS 36


The main elements of this standard are as follows:

This standard applies to most assets, but not to inventories because The value in use is the discounted present value of the future net
they are already valued at the lower of cost and net realisable value, cash flows expected to relate to the asset or cash generating unit. A
which takes into account any loss of value (paragraph 1). cash generating unit is simply the smallest element of a company that
can independently generate revenue/cash flow (paragraph 6).
The process of applying this standard begins by looking at each
asset at the end of each reporting period for any indication of For many assets it may be impossible to measure specific cash
impairment such as physical damage or fall in selling price of the product flows relating to them, so it becomes necessary to do the exercise with
made with the asset (paragraph 9). the smallest group of assets for which independent cash flows can be
measured.
Normally one would expect no indication of impairment, but in cases This group of assets is called a cash generating unit (paragraph 6).
where there is, an entity must then test whether there is an impairment.
This involves comparing the carrying amount of the asset with its There is a series of rules on cash flow projections designed to stop
recoverable amount, which is the higher of its fair value less cost to sell an enterprise from being too optimistic (paragraphs 33, 39, 44, 50 and
and value in use. 52). The cash flows should, of course, be discounted and the discount
rate should be pre-tax and asset-specific (paragraph 55).

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Impairment of assets - IAS 36

The extent to which the carrying value is in excess of the


recoverable amount is the measure of the impairment loss. This
should be charged immediately to the income statement (paragraph 60).
However, there are some special rules relating to assets that have
previously been revalued upwards.

The allocation of an impairment loss to the various elements of a


cash generating unit should first be against any goodwill and then
pro rata to other assets in the unit (paragraph 104).

Impairment losses should be reversed if there has been a change in


the estimates used to determine the recoverable amounts (paragraph
99). This does not apply to goodwill.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias36.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 36 Question


Please review the following exercise:

Will an assets recoverable amount usually be fair value less costs to sell Consider your answer to the question, when you are ready click next to
or value in use? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Case study - Impairment of assets

This case study is loosely based on a real example. Suppose that a


Malaysian company, Goodtimes Co, prepares its statements according to
IFRSs. It has a flow of net profit as follows:

Year 2006 2007 2008 2009 2010


Net Profit 570 630 102 610 590
(RMB (estimate) (estimate)
million)

In the 2008 Annual Report, the following was noted:


In December 2008 a review of our assets indicated that the value of the
oil and gas operations in our Sector B production area was lower than we
had previously been estimating. Management carried out an impairment
test of our oil and gas pipelines by comparing their carrying value with the
present value of the expected net cash flows. This resulted in a write
down of RMB650 million, and an impairment loss of that size was charged
to income.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Case study - Impairment of assets

What sort of estimates are involved in impairment tests? Do you think that there is any incentive for management to overstate
or understate the impairment loss?
The impairment is being calculated under the rules of IAS 36, which
requires annual impairment review, followed by tests where there is The impairment loss for 2008 is so large in the context of the five
any indication of impairment. The test requires a comparison of year run of profits that analysts would probably have to ignore it on
carrying value with recoverable amount, which is the higher of fair value the grounds of unusual / abnormal / non-recurring. Once the
less costs to sell and value in use. The former is unlikely to be relevant management realises this, they might as well make the loss as big as
because there is no market and no intention to sell. It would normally be possible so that future depreciation expenses are lower and gains on
lower than the value in use, which is measured as the discounted disposal higher.
expected net cash flows. It is presumed here that the cash generating
unit is the pipeline system. This answer is written in the context of countries where impairment losses
are not treated as tax deductible expenses. Of course if they are tax
However, the estimates of value in use rely on knowing the life of the deductible, then a company would usually want to maximise them.
pipeline to the present owner, the disposal proceeds, the cash flows
in and out over the future life, and a suitable pre-tax discount rate.
IAS 36s discusses this, but there is still considerable room for
manoeuvre.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Borrowing costs - IAS 23


The main elements of this standard are as follows:

This standard examines the issues of whether the costs of Where a business borrows specifically to fund a project, the
borrowing should be added to the capitalised cost of an asset. For borrowing costs that may be capitalised will be those actually
example, if an enterprise is constructing its own office building, what are incurred (paragraph 12). Where an entity borrows funds generally, the
the costs? It is clear from IAS 16 (above) that these costs would include amount that may be capitalised re the construction of a specific asset
the bricks, the labour to put the bricks on top of each other, the architects should be calculated by applying the weighted average cost of borrowing
fees, and so on. However, do they include the interest cost on money to the expenditure on that specific asset (paragraph 14).
borrowed to build the building?
IAS 23 contains detailed guidance around when an entity should
Borrowing costs that are directly attributable to the acquisition, commence and cease capitalising borrowing costs (paragraphs 17,
construction or production of a qualifying asset form part of the cost 20 and 22).
of that asset and, therefore, should be capitalised whilst other borrowing
costs are recognised as an expense (paragraph 8).

This reflects the revision to IAS 23 that prohibits immediate


expensing of borrowing costs and therefore aligns the treatment
under IFRS with that under US GAAP. The revision to IAS 23 became
effective for borrowing costs relating to assets for which the
commencement date for capitalisation was on or after 1st January 2009. For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias23.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Accounting for government grants and disclosure of government assistance - IAS 20

The objective of IAS 20 is to prescribe the


accounting for, and disclosure of, government
grants and other forms of government assistance.

The main elements of this standard are as follows:

IAS 20 requires that government grants should be recognised only


when there is reasonable assurance that the entity will comply with
any conditions attached to them and that the grants will be received
(paragraph 7).

Grants should be recognised as income over periods that enable


them to be matched against the costs being compensated and
should not be credited direct to equity (paragraph 12).
For further information and a summary of this standard
Grants related to assets should be presented in the statement of please click on the following hyperlink to Deloittes IAS Plus
financial position either as deferred income or as a deduction from website where a summary of the standard can be accessed:
the related assets (paragraph 24).
http://www.iasplus.com/standard/ias20.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 20 Question


Please review the following exercise:

An enterprise has received a government grant relating to an asset which Consider your answer to the question, when you are ready click next to
is expected to last for ten years. It is highly probable that the conditions of enter it into the course blog.
the grant will continue to be met. Does the framework suggest the same You may wish to discuss this with a colleague before finally submitting it.
recognition requirement as IAS 20?
You can then review the ideas of other students on this subject.
You should refer to the text of the standard when answering all exercises.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Inventories - IAS 2

The objective of IAS 2 is to prescribe the The main elements of this standard are as follows:
accounting treatment for inventories. It provides IAS 2 requires the age-old rule of the lower of cost and net realisable
guidance for determining the cost of inventories and value (paragraph 9). Net realisable value (NRV) is the estimated selling
for subsequently recognising an expense, including price in the ordinary course of business less any estimated costs of
completion and sale (paragraph 6).
any write-down to net realisable value. It also
provides guidance on the cost formulas that are IAS 2 allows a choice of ways of determining cost where the specific
cost is not obvious. FIFO or weighted average are the recommended
used to assign costs to inventories.
treatments.

However, IAS2 excludes certain inventories from its scope: work in


process arising under construction contracts, financial instruments
and biological assets. .

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Inventories - IAS 2

Cost should include all: The LIFO formula, which had been allowed prior to the 2003 revision
a. costs of purchase (including taxes, transport, and handling) net of of IAS2, is no longer allowed.
trade discounts received
b. costs of conversion (including fixed and variable manufacturing The same cost formula should be used for all inventories with
overheads) and similar characteristics as to their nature and use to the enterprise.
c. other costs incurred in bringing the inventories to their present For groups of inventories that have different characteristics, different cost
location and condition. formulas may be justified.

Inventory cost should not include abnormal waste, storage costs or Any write-down to NRV should be recognised as an expense in the
administrative overheads unrelated to production. period in which the write-down occurs.

The standard cost and retail methods may be used for the
measurement of cost, provided that the results approximate actual cost.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias02.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Construction contracts - IAS 11


The main elements of this standard are as follows:

This standard relates to specifically negotiated contracts for the


construction of assets. It requires that when the outcome of the contract
can be estimated reliably, then the revenues and costs should be
recognised at each reporting date by reference to the stage of completion
of the contract (paragraph 22). Stage of completion can be measured with
reference to value of work certified to date, costs incurred to date
compared to total estimated costs or physical proportion of work
completed.

Any loss expected should be recognised immediately.


There are criteria to help determine whether these estimates can be
reliably made, including that the costs and revenues of the contract must
be separately identifiable (paragraphs 23, 24).
When the outcome of a contract cannot be estimated reliably,
revenue should be recognised only to the extent of contract costs that will
probably be recoverable, and contract costs should be recognised when
For further information and a summary of this standard
they are incurred. Again, expected losses should be recognised
please click on the following hyperlink to Deloittes IAS Plus
immediately (paragraph 32).
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias11.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 11 Question


Please review the following exercise:

Buildahouse Ltd is a construction company that uses costs incurred to Consider your answer to the question, when you are ready click next to
date to measure stage of completion. At the end of the reporting period, enter it into the course blog.
the following information is available regarding project A: You may wish to discuss this with a colleague before finally submitting it.

Contract value $5,000,000 You can then review the ideas of other students on this subject.
Value of work certified to date $3,000,000
Costs incurred to date $2,600,000
Estimated costs to complete $1,400,000

Assuming that the outcome of the project can be estimated reliably, how
much revenue and profit should be recognised for project A in the current
reporting period?

You should refer to the text of the standard when answering all exercises.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Leases - IAS 17

IAS 17 applies to all leases other than lease The main elements of this standard are as follows:
agreements for minerals, oil, natural gas, and similar
regenerative resources and licensing agreements for IAS 17 requires the capitalisation of finance lease assets and
films, videos, plays, manuscripts, patents, liabilities at the lower of the fair value of the asset and the
discounted minimum lease payments (paragraph 20).
copyrights, and similar items.
A finance lease is one that transfers substantially all the risks and
rewards associated with the leased asset to the lessee (paragraph 4).
There are a number of suggestions about how it is possible to identify a
finance lease but no numerically based criteria of the proportion of value
or life.

As a general rule, the depreciation period for the capitalised leased


assets is to be consistent with any other assets as under IAS 16
(paragraph 27). Unless it is reasonably certain that the lessee will retain
ownership of the asset at the end of the lease term though, the asset
should be depreciated over the shorter of the lease term and the useful
economic life.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Leases - IAS 17

Operating leases (i.e. those leases which are not finance leases)
should be treated as rentals. Operating lease rental payments should
be recognised on a straight-line basis over the life of the lease, even
where the lease is written with low rentals at the beginning and high
rentals later (paragraph 33).

Lessors should recognise a lease as finance or operating in a mirror


image way. Consequently, although the lessor owns the assets involved
in a finance lease, the statement of financial position shows a receivable
rather than the leased asset.

Lessors should recognise income as a constant return on the net


investment in the lease (paragraph 39).

If a sale and lease back transaction results in a finance lease, in


substance there has been no sale. Rather than recognising a profit
on disposal of the asset, any income should be deferred and
amortised over the lease term (paragraph 59).
For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias17.htm

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IAS 17 Question


Please review the following exercise:

Is the definition of a finance lease consistent with the Frameworks Consider your answer to the question, when you are ready click next to
definition of asset and liability? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.
You can then review the ideas of other students on this subject.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Noncurrent assets held for sale and discontinued operations - IFRS 5

IFRS 5 sets out the accounting treatment and disclosure requirements A disposal group is a group of assets, possibly with some
when part of a company is either for sale or has already been disposed. associated liabilities, which an entity intends to dispose of in a single
transaction.
In the statement of financial position IFRS 5 establishes a
classification for non-current assets held for sale. In general, the Immediately before the initial classification of the asset as held for
following conditions must be met for an asset (or disposal group) to be sale, the carrying amount of the asset should be measured in accordance
classified as held for sale (paragraphs 6-8): with applicable IFRSs (e.g. if the asset is held in PPE at revalued amount
a. management is committed to a plan to sell under IAS 16, then it should be revalued before applying IFRS 5).
b. the asset is available for immediate sale
c. an active programme to locate a buyer is initiated After classification as held for sale, non-current assets or disposal groups
d. the sale is highly probable, within 12 months of classification as that are classified as held for sale are measured at the lower of carrying
held for sale (subject to limited exceptions) amount and fair value less costs to sell (paragraph 15).
e. the asset is being actively marketed for sale at a sales price
reasonable in relation to its fair value
f. actions requires to complete the plan indicate that it is unlikely that
the plan will be significantly changed or withdrawn.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Noncurrent assets held for sale and discontinued operations - IFRS 5

Impairment must be considered both at the time of classification as


held for sale and subsequently:
a. noncurrent assets or disposal groups that are classified as held for
sale are not to be depreciated (paragraph 25)
b. 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 statement of financial
position
A discontinued operation is a component of an entity that either has
been disposed of or is classified as held for sale and (paragraph 32):
a. represents a separate major line of business or geographical area
of operations
b. is part of a single co-ordinated plan to dispose of a separate major
line of business or geographical area of operations, or
c. is a subsidiary acquired exclusively with a view to resale.
Detailed disclosures of discontinued operations are required
For further information and a summary of this standard
(paragraph 33). The main requirement is that in the statement of
please click on the following hyperlink to Deloittes IAS Plus
comprehensive income the result for the discontinued operation,
website where a summary of the standard can be accessed:
combined with any gain or loss on disposal, or on remeasurement of
assets held for sale, be disclosed separately from the results of continuing
http://www.iasplus.com/standard/ifrs05.htm
operations..

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Exercise - IFRS 5 Question


Please review the following exercise:

If shares are sold such that a subsidiary becomes an associate, can that Consider your answer to the question, when you are ready click next to
be a discontinued operation? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Frequently asked questions

1. Click here to enter text What is the difference between fair value 1. NRV is a market price net of selling costs. Fair value is a market
and net realisable value (NRV)? price with costs neither deducted or added. For some assets (e.g.
2. Because revaluation increases subsequent depreciation and buildings) in some countries, transaction costs could be a large
decreases gain on sale, would this not discourage revaluation? percentage.
3. IAS 16s rule on the calculation of the gain on revalued assets
seems to mean that some realised gains never appear as income. 2. It is not the IASBs intention to discourage the use of relevant
Can this be right?. current values. A transfer can be made from revaluation reserve to
accumulated reserves of the increase in the depreciation charge. This
maintains realised profits at the same level.

3. That is, indeed, the implication. However, the gain does appear in
the statement of comprehensive income which if the company
chooses can be published directly beneath the main income statement.

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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting

Quick Quiz

Module 4 quick quiz


Click next to continue

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Module 4 quick quiz Certificate in International Financial Reporting

Question 1
Sandy Limited enters into an operating lease agreement on 1 July 2009.
The lease term is 5 years. Annual rental payments in advance are $1,500.
To incentivise Sandy to enter into the lease, the lessor has agreed to a
six-month rent-free period, so that the first rental payment will be made on
1 January 2010. What should be recorded in the income statement for the
year ended 31 December 2009?

A. An expense of $750

B. An expense of $675

C. Income of $750

D. No income or expense

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Module 4 quick quiz Certificate in International Financial Reporting

Question 2
During the year Project Co constructed a new head office building costing
$2m. It took 6 months to complete and the work was funded from existing
loan finance:

$1m loan at an interest rate of 6%


$1.5m loan at an interest rate of 4%
$0.5m loan at an interest rate of 5%

Under IAS 23, what borrowing costs should be capitalised?

A. $48,333

B. Nil

C. $42,500

D. $96,667

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Module 4 quick quiz Certificate in International Financial Reporting

Question 3
Crazy Constructing Plc are in the process of preparing year end accounts
and have the following information regarding a project to build a bridge:

Costs to date $5,000,000


Estimated costs to complete $3,000,000
Contract price $7,000,000

The project is accounted for under IAS 11. What should be recorded in
the income statement for revenue and overall result for this project at the
year end?

Revenue Result
A. $7,000,000 Loss of $1,000,000

B. $5,000,000 Nil profit or loss

C. $4,375,000 Loss of $1,000,000

D. $7,000,000 Profit of $2,000,000

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Module 4 quick quiz Certificate in International Financial Reporting

Question 4
New Designs Limited is working on a groundbreaking piece of machinery
for use in toy manufacture. If successful the new machinery should
improve efficiency ten-fold, and New Designs are in no doubt that it would
be sought after by all of the major toy manufacturers.
They began work on the project on 1 February 2009. At this point they set
aside money to fund the project and set up a new laboratory where the
work would take place. By 31 July they had produced a prototype and by
30 September had completed successfully a rigorous testing process to
check the product conformed to safety requirements etc.
They launched the product onto the market on 1 December 2009. Costs
incurred on the project were as shown below:
$'000s $'000s

February 450 July 450

March 450 August 600


April 450 September 650
May 500 October 200
June 550 November 100

How much, if any, of the expenditure should be capitalised in the year


ended 31 December 2009?

A. $100,000
B. $1,550,000
C. Nil
D. $300,000
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Module 4 quick quiz Certificate in International Financial Reporting

Question 5
Zone Ltd, a company specialising in provision of sports equipment,
purchase a property which they decide to rent out for two years to
Partition Limited for $5,000 per calendar month. Which of the following is
true?

A. The property should be capitalised under property, plant and


equipment and depreciated over an appropriate useful life.

B. The rental income should be recorded as revenue by Zone Ltd.

C. The property should be classified as an investment property and


either recorded at cost less depreciation or revalued to fair value
each year.

D. Zone Limited should not record the purchase of the property as


they will not occupy or use it.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Module 5: What you will learn - Accounting for assets and liabilities part 2

This module deals with a number of IFRSs that give rise to the
recognition of liabilities:

Fair value measurement - IFRS 13


Financial Instruments: Presentation IAS 32, Recognition and
measurement IFRS 9 and IAS 39, Disclosure IFRS 7
Provisions, contingent liabilities and contingent assets - IAS 37
Events after the reporting period - IAS 10
Employee benefits - IAS 19
Income taxes - IAS 12
Shared-based payment - IFRS 2
Agriculture IAS 41
Exploration for and evaluation of mineral resources IFRS 6

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Table of contents
Select a topic to study or click next.

Fair value measurement IFRS 13 Share-based payment - IFRS2


Financial Instruments Agriculture IAS 41
Exercise IFRS 9 Question Exploration for and evaluation or mineral resources - IFRS 6
Exercise IFRS 9 Answer Frequently asked questions
Provisions, contingent liabilities and contingent assets - IAS 37 Quick Quiz
Exercise - IAS 37 Question
Exercise - IAS 37 Answer
Case study - provisions, contingent liabilities and contingent assets
Case study Question - provisions, contingent liabilities and contingent
assets
Case study Answer - provisions, contingent liabilities and contingent
assets
Events after the reporting date - IAS 10
Exercise - IAS 10 Question
Exercise - IAS 10 Answer
Employee benefits - IAS 19
Exercise - IAS 19 Question 1
Exercise - IAS 19 Answer 1
Exercise - IAS 19 Question 2
Exercise - IAS 19 Answer 2
Income taxes - IAS 12
Exercise - IAS 12 Question
Exercise - IAS 12 Answer
Case study Question - deferred tax
Case study Answer - deferred tax

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Fair Value Measurement IFRS 13

IFRS 13 was published in May 2011 and established for the first time The key points from the standard are as follows:
a single source of guidance for fair value measurement of assets
and liabilities under IFRS. Fair value is defined by IFRS 13 as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
It is effective for accounting periods beginning on or after 1 January between market participants at the measurement date (appendix A).
2013, with early application permitted. It should be applied prospectively
from the period in which it is adopted (i.e. there is no need for entities to In order to measure fair value the entity must determine (paragraph B2):
go back to prior periods and restate fair values for the new requirements
of IFRS 13). The asset or liability to be measured
The principal market for the asset or liability (i.e. the one with the
It does not prescribe when fair value should be used, only how to greatest volume and level of activity)
apply it when required by another standard. The appropriate valuation technique to use (to reflect the
assumptions market participants would use when valuing the asset
This standard is applicable to all transactions and balances or liability)
requiring measurement at fair value under another standard, with the For a non-financial asset, the highest and best use
exception of share-based payments accounted for under IFRS 2 and
leases falling within the scope of IAS 17.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Fair Value Measurement IFRS 13


Measurement Guidance Valuation Techniques

Fair value measurement should then IFRS 13 outlines three valuation techniques that may be applied
(paragraph 62):
Take account of any characteristics that might be relevant to a
market participant (e.g. condition and location of an asset) 1. Market approach uses prices and other relevant information
Assume an orderly transaction between market participants at the generated by market transactions involving identical or similar assets
measurement date under current market conditions or liabilities
Assume the transaction takes place in the principal market (or 2. Cost approach current replacement cost
failing this the most advantageous market) 3. Income approach discounted future cash flows or income and
Take account of highest and best use re a non financial asset expenses
(even if this is not its current use)
Assume transfer of a liability or own equity instrument (i.e. assume Either one, or where appropriate a combination, of these valuation
the liability remains outstanding but is passed to a 3rd party, not techniques should be selected and consistently applied..
that the liability is paid off or settled)
Reflect non-performance risk where a liability is concerned
(including the entitys own credit risk).

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Fair Value Measurement IFRS 13


Disclosure

The standard outlines a fair value hierarchy.

Inputs used to measure fair value are divided into three categories, with
each fair value measurement fitting into the category of the lowest level
input that is significant to the overall measurement in that case.

The three categories are:

Level 1 quoted prices in active markets for identical assets and


liabilities
Level 2 observable inputs other than those classified in level 1
Level 3 unobservable inputs

Detailed disclosure requirements are prescribed by the standard, for the


most part following the fair value hierarchy described. The disclosures are
both qualitative and quantitative
For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs13.htm

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Financial instruments
The topic of financial instruments is sufficiently complicated that it
was necessary to split it into three standards. Originally these were:

IAS 32 dealing with presentation issues (i.e. where to record items IFRS 9 is not yet complete. However in response to requests that the
in the income statement and statement of financial position). accounting for financial instruments be improved quickly, the IFRS 9 project
IAS 39 dealing with recognition and measurement issues (i.e. has been split into phases. As each phase is completed the relevant
when to record an item in the financial statements and at what portions of IAS 39 are deleted and chapters in IFRS 9 are created.
value)
IFRS 7 looking at disclosures (all the extra information that should So far, the IASB has issued the chapters of IFRS 9 relevant to all areas
be supplied about financial instruments in addition to the numbers except impairment and hedging. These sections will follow with the aim that
that appear in the primary financial statements). IAS 39 will be replaced in its entirety in 2012.

For the purposes of this course, the main standard examinable is


IFRS 9. All questions in the assessment will test IFRS 9 unless
However the IASB has been working on a new standard, IFRS 9 specifically stated otherwise. Therefore if there is no specific reference to
Financial Instruments (IFRS 9) that will ultimately replace IAS 39 entirely a standard, you should assume that the question is testing IFRS
in dealing with recognition and measurement issues. It was originally 9.
intended to be effective for accounting periods beginning on or after 1
January 2013. However the IASB are currently proposing to defer this to 1 A summary of the key points from the remaining chapters of IAS 39 on
January 2015. Early application is permitted though. impairment and hedging are included and this is part of the examinable
material of the course. If a question is testing IAS 39 this will be specifically
stated.

Following the key definitions on the next page, IAS 32, IFRS 7, IFRS 9 and
the relevant remaining chapters of IAS 39 will each be covered in turn.

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Financial instruments
Definitions

Key elements of definitions are provided below. For full definitions refer to
paragraph 11 of IAS 32.

Financial asset cash, an equity instrument of another entity (i.e. an


investment) or a contractual right to receive cash (e.g. trade receivables).

Financial liability a contractual obligation to deliver cash or another


financial asset to another entity.

Equity any contract that evidences a residual interest in the assets of


an entity after deducting all of its liabilities.

Financial instrument any contract that gives rise to a financial asset in


one entity and a financial liability or equity instrument of another entity
(e.g. debentures are a financial instrument as the issuing company has a
liability and the investing entity has a financial asset, or right to receive
cash).

Note that investments in subsidiaries, associates and joint ventures and


employee benefit obligations are excluded from the scope of IAS 32, 39
and IFRS 7.

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Financial instruments
IAS 32 - Presentation

Financial instruments of an issuer should be classified Offsetting of financial assets against financial liabilities is only
on the basis of whether their substance is that they are allowed when there is a legally enforceable right of set off which the
equity or liability. For example, if an enterprise has issued enterprise intends to use..
some preference shares that contain elements that fit the
definition of liability (the shares could be redeemable on a
specified date such that the entity has an obligation to deliver
cash) then the share is to be treated as a liability despite its
legal classification.

Compound instruments should be split into their


component parts. For example, a convertible debenture is in
economic substance partly a debt and partly a share. Its price
in the market will depend on the relative importance of these
two parts. According to IAS 32 such a debenture should be
presented as partly debt and partly equity.

The presentation of the returns on such instruments should follow


the above classifications. For example, any instrument shown as debt For further information and a summary of this standard
should have a return shown as an interest expense even if it is legally please click on the following hyperlink to Deloittes IAS Plus
called a dividend.. website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias32.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Financial instruments
IAS 32 - Presentation

Convertible debt: Worked example Equity component:


On 1 January 20X9, an entity issues convertible loan notes totalling The equity component = (5,000 x $100) - $483,063 = $16,937
$500,000. Interest is payable annually in arrears at 6%. The market rate
of interest for similar loan notes with no conversion rights attached is 7%. Comment:
The loan notes are redeemable on 31 December 20Y2. Show how they On 1 January 20X9, the entity will record a liability equal to $483,063 and
should be treated in the financial statements when issued. in a separate reserve in equity the amount $16,937, which represents the
value of the option to convert to shares at a later date.
IAS 32 states that compound instruments should be split into their
components parts. The liability component should be valued as if it were Subsequently the discount of 7% will unwind, creating a finance charge
a similar liability with no conversion rights attached. The difference each year in the income statement and increasing the value of the liability
between this figure and the value of the compound instrument as a whole in the statement of financial position. Each annual payment of interest at
is the value of the equity part. 6% (i.e. $30,000) will reduce the liability..

Liability component:
Date Cash Flow Discount Factor Present value
31 Dec 20X9 $30,000 (w) 1/1.07 $28,037
2
31 Dec 20Y0 $30,000 (w) 1/1.07 $26,203
3
31 Dec 20Y1 $30,000 (w) 1/1.07 $24,489
4
31 Dec 20Y2 $30,000 (w) 1/1.07 $404,334
+ $500,000
Total value of
Liability $483,063
component:
(w) ($500,000 x 6%) = $30,000.

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Financial instruments
IFRS 7 - Disclosures

An entity must group its financial instruments into classes of similar


instruments and, when disclosures are required, make disclosures by
class.

The two main categories of disclosures required by IFRS 7 are:


a. Information about the significance of financial instruments
b. Information about the nature and extent of risks arising from
financial instruments.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs07.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Financial instruments
IFRS 9 - Financial Instruments

The main elements of this standard are as follows: 4. A financial asset shall be measured at amortised cost if
both of the following conditions are met:
1. An entity shall recognise a financial asset or financial liability
when the entity becomes a party to the contractual provisions of the The asset is held within a business model whose objective is to hold
instrument (note this differs from the standard recognition criteria laid assets in order to collect contractual cash flows
down in the Conceptual Framework for Financial Reporting). The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding

2. All financial assets are initially measured at fair value plus 5. Financial assets not measured at amortised cost as
transaction costs with the exception of financial assets at fair value described in point 4 above shall be measured at fair
through profit or loss, which are held at fair value only (no transaction value.
costs).
6. Aside from the guidance as outlined in points 3 to 5
3. Subsequent measurement is determined by classification of the above, an entity may also, at initial recognition, decide to
financial asset either at amortised cost or fair value on the basis of: designate a financial asset as measured at fair value
through profit or loss if doing so eliminates or significantly
The entitys business model for managing the financial assets reduces a measurement or recognition inconsistency
The contractual cash flow characteristics of the financial asset (sometimes referred to as an accounting mismatch) that
would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases.

7. Gains and losses on both categories of financial asset


described above are recognised in profit or loss, except
for an investment in equity instruments that is not held for trading where, at
initial recognition, an entity chooses to make an irrevocable election to
present gains and losses through other comprehensive income where a
hedging relationship exists (hedging rules from IAS 39 still apply).

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Financial instruments
IFRS 9 - Financial Instruments

8. There are two categories of financial liability:

those held for trading or designated at fair value through profit or


loss (FVTPL)
any other financial liability

9. An entity can only choose to designate a liability at FVTPL if doing


so eliminates or significantly reduces an accounting mismatch. The result is
that most financial liabilities will fall into the second default category of
the two listed above.

10. Financial liabilities are initially measured at fair value plus


transaction costs with the exception of those held for trading or
designated at fair value through profit or loss, which are held at fair value
only (no transaction costs).

11. After initial recognition liabilities held for trading or those designated
at FVTPL are held at fair value. All other financial liabilities are held at For further information and a summary of this standard
amortised cost.. please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs09.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Financial instruments
IAS 39: Recognition and measurement

Whilst IFRS 9 remains incomplete, IAS 39 offers the only guidance in 12. Hedge accounting constitutes an extra, special set of rules that
relation to impairment of financial assets and hedging rules..RS 9 remains can be applied to financial instruments when an entity enters a
incomplete, IAS 39 remains the only source of guidance relating to hedging arrangement. An entity can designate a hedging instrument so
impairment of financial assets and hedging rules. that its change in fair value is offset against the change in fair value of a
hedged item. For
A financial asset is only impaired where there is objective evidence example, if an enterprise has committed to pay an amount of
resulting from one or more events that occurred after the initial foreign currency in six months time, it might buy the currency
recognition of the asset. Such objective evidence could include the in advance in order to avoid the risk of the foreign currency
counterparty defaulting on repayments of interest or capital, or going into rising in value before the date of payment. Hedge accounting
liquidation, such that the full value of the financial asset may not be involves designating the advance purchase as designed to
recoverable. fulfil the future obligation. It is allowed when certain
conditions are met (e.g.. formal documentation, hedge is effective)..
Financial assets should be reviewed for objective evidence of
impairment at each reporting date and a full impairment review
performed where evidence is identified (paragraph 58).

The amount of impairment loss is measured as the difference between the


For further information and a summary of this standard
carrying amount and the present value of estimated future cash flows
please click on the following hyperlink to Deloittes IAS Plus
recoverable (discounted at the financial assets original effective interest
website where a summary of the standard can be accessed:
rate paragraph 63).
http://www.iasplus.com/standard/ias39.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Exercise - IFRS 9 Question


Please review the following exercise:

How can an auditor tell whether a financial asset should be held at fair Consider your answer to the question, when you are ready click next to
value through profit or loss or at amortised cost? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all
exercises.. You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Provisions, contingent liabilities and contingent assets - IAS 37


Key definitions of IAS 37:

Provision
A liability of uncertain timing or amount.

Liability
Present obligation as a result of past events
Settlement is expected to result in an outflow of resources
(payment)

Contingent liability
a possible obligation depending on whether some uncertain future
event occurs, or
a present obligation but payment is not probable or the amount
cannot be measured reliably

Contingent asset
a possible asset that arises from past events, and
whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within
the control of the enterprise.

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Provisions, contingent liabilities and contingent assets - IAS 37

This standard excludes certain items covered by Basic feature of IAS 37


other standards such as financial instruments dealt It defines provisions as liabilities of uncertain timing or amount.
with by That is, a provision must meet the definition of liability as found in the
IASs 32 and 39 and IFRS 7 and also excludes framework that there should be an expectation of an outflow of:
resources,
executory contracts a past event
where both sides of the contract are equally
unperformed (paragraph 1). and at the reporting date:
a legally enforceable obligation to a third party or a constructive
obligation (paragraph 10)..

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Provisions, contingent liabilities and contingent assets - IAS 37


Provisions

A provision should be recognised in the statement of financial There should be no provision for future operating losses, but there
position when it meets the definition of a liability, where there is a may be provision for onerous contracts (paragraph 63).
probable outflow of resources and, the extra feature as usual for the
recognition of assets and liabilities, is that there should be a reliable There are a number of explanations about restructuring provisions
estimate (paragraph 14). in the context of this standard, but they make it clear that such
provision should not be set up unless there is an obligation at the
Once a provision has been recognised it should be measured at the reporting period end date (paragraph 72). .
best estimate of the future outflow. This means that it is also required
to discount the numbers where this would be material, at pre-tax discount
rates assuming that the provision is measured in pre-tax terms
(paragraphs 36,45 and 47).

Any expected gains from disposals of assets related to the setting


up of provisions should be ignored, but reimbursements, for example
from insurance contracts, should be accounted for (paragraphs 51 and
53)..

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Provisions, contingent liabilities and contingent assets - IAS 37


Liabilities

A contingent liability is defined in two different ways:


1. It includes possible obligations.
2. Existing obligations at the reporting date which are unrecognisable.

This is because they will probably not lead to an outflow or are not able to
be measured reliably (paragraph 10).

Contingent liabilities should be disclosed where they are material in size


and not remote.

Contingent gains should not be recognised, but should be noted where


material (paragraph 31)..

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias37.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Exercise - IAS 37 Question


Please review the following exercise:

A provision can only be recognised when there is an obligation at the Consider your answer to the question, when you are ready click next to
reporting date. Should one recognise a provision for the possible loss of a enter it into the course blog.
law case? You may wish to discuss this with a colleague before finally submitting it.

You should refer to the text of the standard when answering exercises.. You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Case study - provisions, contingent liabilities and contingent assets

Newberg is a German company. On the right you can see Newbergs


income statements for 2007and 2008. Consolidated statements of income (in billions Euro) 2007 2008
Sales 32 38
On the following page you can see some accounting policies and notes. Cost of goods sold (10) (12)
The facts are loosely based on a real case, but the company, year and . ------ ------
exact numbers have been changed. . Gross profit 22 26
Marketing and distribution (8) (10)
Research and development (5) (6)
Administrative (2) (2)
Other expenses (1) (1)
. ------ ------
Operating profit 6 7
Non-operating income 3 3
. ------ ------
Results before special charges and taxes 9 10
Special charges
Acquired in-process research and development - (9)
Restructuring - (6)
Taxes
On result before special charges (2) (2)
Benefit from special charges - 3
. ------ ------
7 (4)
Net income (loss)
------ ------

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Case study - provisions, contingent liabilities and contingent assets


Extracts from significant accounting policies and notes

Basis of preparation of financial statements. The consolidated Obtaining clearance from the regulatory authorities caused a delay
financial statements of the Newberg Group are prepared in accordance in completing the transaction. These final clearances were received on
with International Financial Reporting Standards. 24 February 2009 and the purchase of the shares was completed on 10
March 2009.
Consolidation policy. The consolidated financial statements of the
Group include the parent and the companies which it controls The acquisition was accounted for under the purchase method of
(subsidiaries). Control is the power to govern the financial and operating accounting. Accordingly, the cost of the acquisition, including expenses
policies of an enterprise so as to obtain benefits from its activities. Control incidental thereto, was allocated to identifiable assets and liabilities and to
is normally evidenced when the Group owns, either directly or indirectly, in-process research and development based on their estimated fair
more than 50% of the voting rights of a companys share capital. values. The portion of the acquisition cost allocated to in-process
research and development was charged in full against income. This
Changes in group organisation. On 24 June 2008, a subsidiary of approach is consistent with the Groups accounting policy for research
Newberg entered into an agreement with the shareholders of Orange and development costs. After consideration of these items, the excess of
Limited to purchase all of the issued and outstanding common shares. the acquisition cost over the fair values was recorded as goodwill.
Completion of the transaction was not possible until certain regulatory
clearances had been obtained. In view of the overall materiality of the When you have studied the notes and table please go to the next page to
transaction and the advanced state of the integration planning, the see a question relating to the case study..
consolidated financial statements of the Group give effect to the
acquisition of Orange Limited from 31 December 2008..

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Case study Question - provisions, contingent liabilities and contingent assets


Please review the following case study question:

Do you think that a provision for restructuring costs should have been set Consider your answer to the question, when you are ready click next to
up at 31 December 2008? (Other questions on this case will be asked in enter it into the course blog.
Module 6). You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Events after the reporting date - IAS 10


The main elements of this standard are as follows:

The standard deals with two types of event that occur after the Whether or not an enterprise is a going concern should be assessed
reporting date. First, adjusting events, which are those that provide at the stage at which the financial statements are being prepared, which
information concerning conditions which did exist at the reporting date. is, of course, after the reporting date.
These should lead to recognition changes, that is changing the numbers
in the statement of financial position. The second type of events after theIf it is determined that an enterprise is not a going concern, then the
reporting date are non-adjusting events. These give information about accounts should be prepared on the break up basis (even if the
conditions that did not already exist at the reporting date and they shouldevents leading to the conclusion occurred after the reporting date).
not lead to changes to the numbers in the statement of financial position, This of course does not apply if only part of the enterprise is not a going
but, if material, to disclosures in the notes (paragraphs 3, 8 and 10). concern. The reporting unit is the whole of the enterprise and the status
of going concern should be assessed for that whole reporting enterprise
Examples of adjusting events are better information about the status (paragraph 14).
of customers at the reporting date, enabling an entity to measure the
size of its receivables more accurately. An example of a non-adjusting
event would be the destruction of some of an entity's assets accidentally,
perhaps by fire, after the reporting date (paragraph 22 for more
examples).
If dividends on ordinary shares are proposed, but not declared, after
the reporting date then these should not be recognised as liabilities For further information and a summary of this standard
(paragraph 12). please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias10.htm

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Exercise - IAS 10 Question


Please review the following exercise:

Can proposed dividends be a liability? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Employee benefits - IAS 19


The main elements of this standard are as follows:

This standard applies to all employee benefits not just to pensions Defined benefit plans are much more complicated, and a large part
except those to which IFRS 2 Share Based Payment applies of the standard deals with them. Constructive obligations as well as
(paragraph2). written contractual ones should be accounted for (paragraph 61).

The standard deals with such issues as accounting for accumulating An entity recognises the net defined benefit liability in the statement of
paid absences and for bonus plans. In each case the standard requires financial position (paragraph 63).
an enterprise to establish whether there is a liability at the reporting date
and to account for any liability (paragraphs 16 and 19). Where an entity has a surplus in a defined benefit plan, the net
defined benefit asset can be recognised but there are limits on the size
In a country with special forms of employee benefit systems such as of this asset (paragraph 64). .
multi-employer plans and government plans, these should be
accounted for as other plans on the basis of their legal and institutional
arrangements (paragraphs 32 and 43).

Defined contribution plans (where the entitys obligation for each


reporting period is simply the amount to be contributed for that period)
present few difficulties for accounting but the standard does cover them
(paragraph51).

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Employee benefits - IAS 19

The Basic Principle of IAS 19: Actuarial gains and losses for retirement benefits are recognised in
The cost of providing employee benefits should full immediately through other comprehensive income (i.e. outside
profit or loss) (paragraph 57).
be recognised in the period in which the benefit
is earned by the employee, rather than when Past service costs, which are caused, for example, if the benefits in
it is paid or payable. the plan are increased, should be recognised in the period they were
granted, with no reference to vesting criteria (paragraph 103).

When calculating the value of the obligation, the projected unit credit
method should be used and a discount rate measured by reference to
interest rates on high quality corporate bonds (paragraphs 67 and 83).

Until recently actuarial gains and losses were allowed to be


recognised immediately or could remain unrecognised to the extent that
they fell within a corridor which is equal in size to 10% of the larger of
the obligation or the fund.
For further information and a summary of this standard
To the extent that gains and losses fell outside the corridor they please click on the following hyperlink to Deloittes IAS Plus
were recognised over the remaining average service lives of the website where a summary of the standard can be accessed:
employees in the plan.
http://www.iasplus.com/standard/ias19.htm
Under the latest revision of the standard (published June 2011) this
corridor method is no longer permitted.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Exercise - IAS 19 Question 1


Please review the following exercise:

Do possible future pay rises give rise to a present liability for pensions? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all You may wish to discuss this with a colleague before finally submitting it.
exercises..
You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Exercise - IAS 19 Question 2


Please review the following exercise:

When a defined benefit plan is enhanced, when should the cost of Consider your answer to the question, when you are ready click next to
improving the benefits for existing pensioners be recognised? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all
exercises.. You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Income taxes - IAS 12


The main elements of this standard are as follows:

This standard largely concerns accounting for deferred tax. It There are also special rules for investments in subsidiaries,
changed the basis of calculation to temporary differences, which are associates and joint ventures. They amount to saying that temporary
calculated by reference to the difference between the tax basis and the differences that are unlikely to reverse where the investor is in control of
financial reporting basis of assets and liabilities, instead of timing that process (for example, by being able to stop the payment of
differences, which are based on tax and book differences for revenues dividends) need not be accounted for (paragraphs 39 and 44).
and expenses (paragraph 5).
The measurement of deferred tax assets and liabilities should be
Deferred tax liabilities should be recognised for all temporary based on tax rates that are expected to apply, but that generally
differences, except those relating to non-deductible goodwill amortisation means current tax rates, although future rates can be used where they
and the initial recognition of certain assets and liabilities in transactions have been enacted (paragraphs 47 and 51).
that affect neither accounting profit nor taxable profit.
Deferred tax amounts should not be discounted. At first sight, this
Deferred tax assets should similarly be recognised assuming that seems surprising because other liabilities are required to be discounted
future taxable profit is probable. Deferred tax assets include, of course, (see IAS 37). However, discounting would require knowledge of when
those arising on tax loss carry forwards (paragraphs 24 and 34). temporary differences would reverse, which would require a large amount
of guesswork (paragraph 53).

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Income taxes - IAS 12

Temporary difference: The double entry for the creation of deferred tax assets and
A difference between the carrying amount of liabilities should be charged to profit or loss or directly in equity
(and disclosed in the statement of comprehensive income)
an asset or liability and its tax base.
(paragraphs 58 and 61).

Taxable temporary difference: Deferred tax assets should be presented on the statement of
financial position separately from deferred tax liabilities (paragraphs
A temporary difference that will result in taxable
69 and 74).
amounts in the future when the carrying amount
of the asset is recovered or the liability is settled.

Deductible temporary difference:


A temporary difference that will result in amounts
that are tax deductible in the future when the
carrying amount of the asset is recovered For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
or the liability is settled. website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias12.htm

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Exercise - IAS 12 Question


Please review the following exercise:

A deferred tax liability is recognised on the revaluation of an asset that is Consider your answer to the question, when you are ready click next to
intended for continuing use in the business. Does this meet the enter it into the course blog.
frameworks definition of liability? You may wish to discuss this with a colleague before finally submitting it.

You should refer to the text of the standard when answering exercises. You can then review the ideas of other students on this subject.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Case study Question - deferred tax


Please review the following exercise:

Suppose that a British company, Acrobat, applies IFRS. Consider your answer to the question, when you are ready click next to
It purchases a machine for $10,000 in early 2008. The machine is enter it into the course blog.
expected to last for ten years and to have no residual value. The You may wish to discuss this with a colleague before finally submitting it.
accounting year is the calendar year. The company is fairly small and is
able to claim 40% tax depreciation (capital allowances) in the year of You can then review the ideas of other students on this subject.
purchase. Suppose also, that Acrobat buys land at $3m in early 2008,
and revalues it to fair value of $5m at 31 December 2008. What are the
temporary differences in 2008?

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Share-based payment - IFRS 2


The main elements of this standard are as follows:

A share-based payment is a transaction in which the company received For example, if a company grants a director 200 share options on 1
goods or services in exchange for share capital or a liability based on the January 2006, and these vest after two years, and assuming each option
companys shares, i.e. a cash payment based on the change in the has a value of $3 at the date of the grant, then at 31 December 2006, the
companys share price. Examples are share appreciation rights, accounting entry would be:
employee share purchase plans, employee share ownership plans and $
share option plans. Debit Share Option expense (1 year) 300
IFRS2 applies to all entities and there is no exemption for private or Credit Equity 300
small companies.
It is important to differentiate between shares issued to acquire a IFRS2 applies to all equity based payments granted after 7
company which is accounted for under IFRS3 Business Combinations November 2002 which was the date that the exposure draft was issued.
and shares issued for employee services accounted for under IFRS2. Thus any schemes set up earlier than that date are exempt from its
requirements.
The issue of shares or rights to acquire shares requires an increase
in equity and the debit entry will be an expense when the goods or
services are consumed. If the share issue is linked to past services,
then the value of the shares given to the employees will be expensed
immediately.
For further information and a summary of this standard
If the issue of shares relates to a future vesting period, then the value
please click on the following hyperlink to Deloittes IAS Plus
of the shares should be expensed over that period. .
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs02.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Agriculture - IAS 41
The main elements of this standard are as follows:

It covers all biological assets to the point of harvest (paragraph 1).

Biological assets are measured at each reporting period end date at


their fair values less point-of-sale costs (paragraph 12).

Agricultural produce is measured at harvest at fair value less point-


of-sale costs. This becomes the cost of inventory (paragraph 13).

Gains and losses go to income (paragraphs 26 and 28).

If fair value is not reliably determined, then measure at cost


(paragraph 30).

Government grants are treated as income when their conditions are


met (paragraph 34).

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias41.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Exploration for and evaluation or mineral resources - IFRS 6

An entity adopting IFRS 6 may continue to use the accounting


policies applied immediately before adopting the IFRS.

IFRS 6 requires entities recognising exploration and evaluation


assets to perform an impairment test on those assets when facts and
circumstances suggest that the carrying amount of the assets may
exceed their recoverable amount.

IFRS 6 requires disclosure of information that identifies and explains


the amounts recognised in its financial statements arising from the
exploration for and evaluation of mineral resources, including:
a. its accounting policies for exploration and evaluation expenditures
including the recognition of exploration and evaluation assets
b. the amounts of assets, liabilities, income and expense and
operating and investing cash flows arising from those assets.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs06.htm

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Frequently asked questions

1. If a companys board of directors has decided on a restructuring, 1. It depends on the facts. In some cases, a board decision does not
should the company not make a provision for the restructuring, create an obligation to a third party, and the board could change its mind.
redundancy costs, etc? In such cases, IAS 37 does not allow a provision. This may not be
2. Surely it gives useful information to the users of financial prudent but this is overridden by the need to comply with the
statements to show a proposed dividend as a liability? frameworks definition of a liability.
3. Can a deferred tax asset be shown in the financial statements if
the company is making losses? 2. IAS 10 is based on the idea that it is not useful to show something
as a liability that is not in accordance with the definition of a liability.
The information about the proposed dividend can be given in the notes,
and the amount can be shown separately in equity.

3. It is unlikely as it must be probable that taxable profit will be available


against which to use the asset.

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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting

Quick Quiz

Module 5 quick quiz


Click next to continue

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Module 5: quick quiz Certificate in International Financial Reporting

Question 1
Dodo Ltd is preparing its financial statements to 31 December 20X3. The
accounts are due to be finalised by 31 March 20X4.

Which of the following should not be adjusted in the financial statements?

A. On 1st February Dodo receives written confirmation that a


customer, Looney Bin, has gone into Liquidation. At the year end
the balance due from Looney Bin was material.

B. On 27th March torrential rain causes one of three warehouses to


flood, damaging some of the inventory held there. Dodo continues
to trade successfully although at a reduced level.

C. Dodo manufactures a specialist component for the computer


hardware industry. It costs $3.35 to produce and would normally
sell for $5.20. At the year end this component is held in inventory
at cost. After the year end, due to the launch of an updated
product, this component is only selling for $2.90

D. On 15th March a legal case against Dodo is settled for $300,000.


In the draft financial statements a provision is included for
substantially more.

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Module 5: quick quiz Certificate in International Financial Reporting

Question 2
The management team at Super Safe Ltd try to be as prudent as possible
when preparing the annual financial statements. Under IAS 37 which of
the following can they provide in the financial statements:

A. The overall operating loss they expect the company to record in the
following financial year.

B. Costs associated with the restructuring of their sales and marketing


division. Plans have been drafted by the board but not yet
announced.

C. The loss they are anticipating on a contract they have in place to


buy rubber matting at $15 per metre. The contract runs until the
end of next year and they are currently able to sell the matting for
$12 per metre.

D. All of the above.

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Module 5: quick quiz Certificate in International Financial Reporting

Question 3
A company purchased an item of plant for $270,000 on 1 January 20X0.
The plant is depreciated in the financial statements straight line over 5
years. For tax purposes the plant is has a life of 3 years. What is the
deferred tax balance in respect of the plant on 31st December 20X1?

A. Liability of $10,800

B. Asset of $10,800

C. Liability of $21,600

D. Asset of $21,600

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Module 5: quick quiz Certificate in International Financial Reporting

Question 4
I C Ltd manufactures fridge freezers and with each one sold offers a free
guarantee. In one year the company expects to sell 30,000 fridge
freezers. Of these they expect 1% to be returned under the guarantee
requiring major repair work costing on average $300. They also expect
5% to be returned requiring minor repairs costing on average $100.

How should the company record this guarantee policy in their financial
statements?

A. Recognise a provision of $240,000 on the statement of financial


position and disclose details in the notes.

B. Disclose the details of the guarantee policy in the notes to the


financial statements

C. Disclose the details of the guarantee policy in the notes, including


an estimate of the likely cost to the company of fulfilling the
guarantee.

D. No disclosure of the guarantee policy is required.

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Module 5: quick quiz Certificate in International Financial Reporting

Question 5
Sha La La Ltd recently suffered a small fire in one corner of the
warehouse. They have placed a claim with their insurer for $220,000 to
cover the cost of repairing the damage. They have not had confirmation
yet but believe it is more likely than not that they will receive the payout.

How should the company treat this in the annual financial statements?

A. Nothing should be recognised or disclosed in relation to the claim


until the company is certain of the outcome.

B. A receivable for the full amount should be recognised on the


statement of financial position.

C. A receivable for half the value of the claim should be recognised at


this stage, as it is not certain that the money will be received and
this is more prudent than recognising the full amount.

D. The details of the insurance claim should be disclosed in the notes


to the financial statements.

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Module 5: quick quiz Certificate in International Financial Reporting

Question 6
Under IFRS 9, which of the following financial assets should be held at
amortised cost:

1. A fixed interest rate loan


2. An investment in a convertible loan note
3. A zero coupon bond

A. All of the above

B. 1 and 3

C. 1 only

D. 1 and 2

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Module 6: Group accounting Certificate in International Financial Reporting

Module 6: What you will learn - Group accounting

This module covers eight IFRSs that concern the preparation of


consolidated financial statements and covers a few other issues
relating to investments within groups:
IFRS 10 looks at the preparation of consolidated financial statements
IAS 27 (revised 2011) considers accounting for investments in
separate entity financial statements
IFRS 3 looks at the treatment of goodwill in the context of business
combinations
IFRS 11 defines joint arrangements (including joint ventures)
IAS 28 (revised 2011) deals with accounting for both associates and
joint ventures
IFRS 12 covers disclosure of interests in other entities
IAS 21 and IAS 29 deal with items related to foreign currency and
what to do when subsidiaries operate in hyperinflationary
environments

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Module 6: Group accounting Certificate in International Financial Reporting

Table of contents
Select a topic to study or click next.

Consolidated and separate financial statements - IAS 27


Exercise - IAS 27 Question 1
Exercise - IAS 27 Answer 1
Exercise - IAS 27 Question 2
Exercise - IAS 27 Answer 2
Business combinations - Introduction to revised IFRS 3
Business combinations - IFRS 3
Exercise - IFRS 3 Question 1
Exercise - IFRS 3 Answer 1
Exercise - IFRS 3 Question 2
Exercise - IFRS 3 Answer 2
Exercise - IFRS 3 Question 3
Exercise - IFRS 3 Answer 3
Case study - IFRS 3
Case study - IFRS 3 Question 1
Case study - IFRS 3 Answer 1
Case study - IFRS 3 Question 2
Case study - IFRS 3 Answer 2
Investments in Associates and Joint Ventures- IAS 28
Joint arrangements - IFRS 11
Disclosure of Interests in Other Entities IFRS 12
The effects of changes in foreign exchange rates - IAS 21
Financial reporting in hyperinflationary economies - IAS 29
Frequently asked questions
Quick Quiz

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Module 6: Group accounting Certificate in International Financial Reporting

Consolidated Financial Statments IFRS 10

IFRS 10 was published in May 2011 and supersedes SIC-12 A parent should start to consolidate from the date control is obtained
Consolidation and elements of IAS 27 Consolidated and Separate and cease when control is lost (paragraph 20). There is just one
Financial Statements. It is effective for annual periods beginning on or exemption available to this under IFRS 5. Consolidation is not required
after 1 January 2013. The main elements of this standard are as where temporary control is acquired because the subsidiary is held
follows: exclusively with a view to its subsequent disposal in the near future.

A subsidiary is defined as an entity controlled by another entity. An A partial disposal of an interest in a subsidiary in which the parent
investor controls an investee if they have ALL the following (paragraph 7): retains control, does not result in a gain or loss but an increase or
Power over the investee; decrease in equity. Purchase of some or all of the non-controlling interest is
Exposure, or rights, to variable returns from its involvement with the treated as a treasury share-type transaction and accounted for in equity.
investee; and
The ability to use its power over the investee to affect the amount of
the investors returns Once an investment ceases to fall within the definition of a
subsidiary, the parent company should derecognise the assets and
Note that an entity could have power over the investee without holding a liabilities of the subsidiary, derecognise the carrying amount of any non
majority of the voting rights. Returns could be either positive or negative and controlling interest and recognise the consideration received. Any
could include dividends, change in the value of the investment, management investment retained in the subsidiary should be recognised at fair value,
or service fees etc. and treated as an associate under IAS 28, as a joint arrangement IFRS
11 or as an investment under IFRS 9 as appropriate (paragraph B98).
A parent prepares consolidated financial statements applying uniform
accounting policies throughout (paragraph 19)

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Module 6: Group accounting Certificate in International Financial Reporting

Consolidated Financial statements IFRS10

A parent is exempted from the preparation of


consolidated accounts if it is itself a wholly or partially owned
subsidiary and the ultimate or any intermediate parent company produces
consolidated financial statements that comply with IFRS (paragraph 4).

Any difference between the reporting date of the parent and the
reporting date of a subsidiary should not exceed three months
(paragraph B93).

To coincide with publication of IFRS 10, IAS 27 has been revised such
that it now contains guidance for preparation by a parent company of
separate single entity financial statements (eg. where they are required by
local regulations or the parent company elects to do so).

In separate financial statements investments in subsidiaries,


associates and joint ventures are accounted for either at cost, or in
.
accordance with IFRS 9 (IAS 27 paragraph 10).

For further information and a summary of these standards


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standards can be accessed:

http://www.iasplus.com/standard/ifrs10.htm
http://www.iasplus.com/standard/ias27_2011.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Exercise - IFRS 10 Question 1


Please review the following exercise:

How should one value a subsidiary that is about to be sold, when there is Consider your answer to the question, when you are ready click next to
already a binding sales contract? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.
You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Exercise - IFRS 10 Question 2


Please review the following exercise:

Can non controlling interests be presented inside of shareholders funds? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Business combinations - IFRS 3

On 10 January 2008 the International Accounting Standards Board The identifiable assets acquired and the liabilities
(IASB) published revised IFRS 3 Business Combinations the output of assumed should be measured at their fair values (paragraph 18). In
one of the various joint projects undertaken by the IASB and FASB general the identifiable assets acquired
promoting convergence between IFRS and US GAAP. The main elements and liabilities assumed must meet the definition of assets and
of this standard are as follows: liabilities per the framework (paragraph 11).

A business combination is a transaction or other event in which an There are limited exceptions to the general recognition
acquirer obtains control of one or more businesses (appendix A). and measurement principles above, which will lead to
some items being recognised at an amount other than
All business combinations within the scope of IFRS 3 acquisition date fair value, and with results that differ from
must be accounted for using the acquisition method applying normal recognition principles and conditions
(paragraph 4). This requires identification of the acquirer and
(paragraphs 21 to 31). For example, the acquirer in a
determination of the acquisition date. The acquirer is the
business combination recognises a contingent liability
entity that obtains control.
assumed even if it is not probable that there will be an outflow
The acquirer recognises goodwill at the acquisition date, of economic resources, which is contrary to the guidance
measured as the excess of consideration transferred plus the given in IAS 37.
amount of any non-controlling interest in the acquiree over
amounts of identifiable assets acquired and liabilities Under the revised IFRS 3 more intangibles are expected
assumed (paragraph 32). to be recognised. For the purposes of a business
combination IFRS 3 eliminates the reliability of measurement
The consideration transferred shall be measured at fair value as a recognition condition and therefore requires the acquirer
(paragraph 37). to recognise identifiable assets acquired regardless of the
degree of probability of an inflow of economic benefits. This
will lead, for example, to recognition of internally generated
research and development as an asset that had been
previously been expensed by the acquiree for failing to meet
the recognition criteria laid down in IAS 38.

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Module 6: Group accounting Certificate in International Financial Reporting

Business combinations - IFRS 3

Non-controlling interests can be measured following one of the two


alternative methodologies:
At fair value
This full goodwill approach results in the recognition of the whole
goodwill of the acquired business and not just the acquirers share
of goodwill as required by the old version of IFRS 3
At the non-controlling interests proportionate
share of the acquirees identifiable net assets
Effectively only the share of goodwill purchased, and therefore
owned, by the acquirer is recognised (as per the methodology
under the previous version of IFRS 3).

Goodwill must be tested for impairment annually in accordance with


IAS 36 Impairment of Assets.

Negative goodwill must be recognised immediately in the income


statement as a gain. Before concluding that negative goodwill has
arisen, however, IFRS 3 requires that the acquirer re-assess the situation
to ensure the accuracy of the negative goodwill (paragraph 34).. For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs03.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Exercise - IFRS 3 Question 1


Please review the following exercise:

Can goodwill be amortised under IFRS 3? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Exercise - IFRS 3 Question 2


Please review the following exercise:

When should negative goodwill be recognised immediately as income? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Exercise - IFRS 3 Question 3


Please review the following exercise:

Missile has acquired a subsidiary on 1 January 2008 for $2,145 million. Consider your answer to the question, when you are ready click next to
The fair value of the net assets of the subsidiary acquired were $2170 enter it into the course blog.
million. Missile acquired 70% of the shares of the subsidiary. The non You may wish to discuss this with a colleague before finally submitting it.
controlling interest was fair valued at $683 million. Calculate goodwill
based on the partial and full goodwill methods under IFRS 3. You can then review the ideas of other students on this subject.

You should refer to the text of the standard when answering exercises.

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Module 6: Group accounting Certificate in International Financial Reporting

Case study - IFRS 3

This case study once again reviews Newberg and the details that
were presented to you in Module 5. The company, Newberg, is Consolidated statements of income (in billions Euro) 2007 2008
German. Its income statements for 2007 and 2008 are shown right. On Sales 32 38
the following page you can see some accounting policies and notes. Cost of goods sold (10) (12)
. ------ ------
Gross profit 22 26
Marketing and distribution (8) (10)
Research and development (5) (6)
Administrative (2) (2)
Other expenses (1) (1)
. ------ ------
Operating profit 6 7
Non-operating income 3 3
. ------ ------
Results before special charges and taxes 9 10
Special charges
Acquired in-process research and development - (9)
Restructuring - (6)
Taxes
On result before special charges (2) (2)
Benefit from special charges - 3
. ------ ------
7 (4)
Net income (loss)
------ ------

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Module 6: Group accounting Certificate in International Financial Reporting

Case study - IFRS 3


Extracts from significant accounting policies and notes

Basis of preparation of financial statements. The consolidated Obtaining clearance from the regulatory authorities caused a delay
financial statements of the Newberg Group are prepared in accordance in completing the transaction. These final clearances were received on
with International Financial Reporting Standards. 24 February 2009 and the purchase of the shares was completed on 10
March 2009.
Consolidation policy. The consolidated financial statements of the
Group include the parent and the companies which it controls The combination was accounted for under the acquisition method of
(subsidiaries). Control is evidenced by power over the investee, exposure, accounting. Accordingly, the cost of the acquisition, including expenses
or rights, to variable returns from the investee and ability to use that power incidental thereto, was allocated to identifiable assets and liabilities and to
to affect the amount of return to the investor. Control is normally evidenced in-process research and development based on their estimated fair
when the Group owns, either directly or indirectly, more than 50% of the values. The portion of the acquisition cost allocated to in-process
voting rights of a companys share capital. research and development was charged in full against income. This
approach is consistent with the Groups accounting policy for research
Changes in group organisation. On 24 June 2008, a subsidiary of and development costs. After consideration of these items, the excess of
Newberg entered into an agreement with the shareholders of Orange the acquisition cost over the fair values was recorded as goodwill.
Limited to purchase all of the issued and outstanding common shares.
Completion of the transaction was not possible until certain regulatory When you have studied the notes and table please go to the next page to
clearances had been obtained. In view of the overall materiality of the see a question relating to the case study.
transaction and the advanced state of the integration planning, the
consolidated financial statements of the Group give effect to the
acquisition of Orange Limited from 31 December 2008.

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Module 6: Group accounting Certificate in International Financial Reporting

Case study IFRS 3 Question 1


Please review the following case study:

At what date did Newberg start consolidating Orange? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Case study IFRS 3 Question 2


Please review the following case study:

Is Newbergs treatment of purchased R&D in line with IFRSs? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 6: Group accounting Certificate in International Financial Reporting

Investments in Associates and Joint Ventures - IAS 28


IAS 28 (revised 2011) was published in May 2011 to coincide with
publication of IFRSs 10, 11 and 12 and IAS 27 (revised). The main
elements of this standard are as follows:

The standard defines an associate as an entity over which the The investment in an associate or joint venture (incorporating any
investor has significant influence. This could include the power to goodwill on acquisition is tested annually for impairment.
participate in policy making process, representation on the Board of
directors, or interchange of management personnel or provision of Unrealised profits and losses should be eliminated to the extent of the
essential technical information (paragraph 6/). This is presumed to exist investors interest in the associate.
where the investor owns twenty percent or more of the voting power in the
investee.

Associates and joint ventures are to be included in consolidated


financial statements by using the equity method (paragraph 11).

Under the equity method, an equity investment is initially recorded


at cost and is subsequently adjusted to reflect the investor's share of the
net post acquisition profit or loss of the associate.(paragraph 10)

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias28_2011.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Joint arrangements - IFRS 11


IFRS 11 was published in May 2011 and supersedes IAS 31. It is
effective for annual periods beginning on or after 1 January 2013. The main
elements of this standard are as follows:

A joint arrangement is one in which two or more parties have, by IFRS 11 requires interests in joint ventures to be equity accounted
contractual arrangement, joint control (paragraph 4 and 5). (eliminating the alternative proportionate consolidation method
allowed under IAS 31). Joint operators recognise their share of assets,
IFRS 11 envisages two types of joint arrangement. In a joint operation liabilities, revenues and expenses in accordance with applicable IFRSs
the joint operators have rights to the assets, and obligations for the liabilities,
relating to the arrangement (paragraph 15). In a joint venture the joint
venturers have rights to the net assets of the arrangement (paragraph 16)..

To qualify as a joint venture, the joint arrangement must be


established as a separate legal vehicle. However this fact alone will not
be sufficient to meet the definition of a joint venture rather than a joint
operation

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs11.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Disclosure of Interests in Other Entities IFRS 12

IFRS 12 was published in May 2011 alongside the other new standards The standard outlines detailed disclosure provisions in relation to
covering group accounting. It is effective for annual periods beginning on investments in each of subsidiaries, associates, joint arrangements, and
or after 1 January 2013 but entities are permitted to incorporate any of the unconsolidated structured entities.
new disclosures into their financial statements before that date. The main
elements of this standard are as follows:

Entities should disclose information that helps the users of its


financial statements to evaluate the nature of, and risks associated
with, its interests in other entities (paragraph 1). In order to achieve this
objective the disclosure requirements introduced by IFRS 12 are extensive.
However the entity must also make any additional disclosures necessary to
meet the overall objective if those required by IFRS 12 and other standards
are not sufficient.

An entity should disclose the significant judgements and assumptions


it has made in determining whether it controls or has joint control or
significant influence over an entity and also in determining the type of
joint arrangement where applicable (paragraph 7). For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs12.htm

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Module 6: Group accounting Certificate in International Financial Reporting

The effects of changes in foreign exchange rates - IAS 21

Exchange difference. The difference resulting from translating a given


The objective of IAS 21 is to prescribe how to number of units of one currency into another currency at different
include foreign currency transactions and foreign exchange rates.
operations in the financial statements of an entity
and how to translate financial statements into a Foreign operation. A subsidiary, associate, joint venture, or branch
presentation currency. whose activities are based in a country other than that of the reporting
enterprise. It is important to distinguish between foreign currency
transactions and the translation of foreign currency financial statements
of overseas investees.

Transactions involving foreign currencies are recorded at the rate of


exchange ruling on the date of the transaction. Subsequently any
The main elements of this standard are as follows: non-monetary items should continue to be recorded at that exchange rate
(paragraphs 20 and 21).
Functional currency. The currency of the primary economic environment
in which the entity operates. The term functional currency is used in the Monetary items resulting from past transactions should be
2003 revision of IAS 21 in place of measurement currency but with translated at the closing rate at each reporting date, and the resulting
essentially the same meaning. gains and losses should be taken to income immediately (paragraph 23)..

Presentation currency. The currency in which financial statements are


presented..

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Module 6: Group accounting Certificate in International Financial Reporting

The effects of changes in foreign exchange rates - IAS 21

However, exchange differences on the net investment in a foreign


entity should be recognised in the group accounts as a separate
component of equity, and will be recognised in profit and loss on
disposal of the net investment.

IAS 21 sets out two definitions of currency. The currency of the


environment in which a company operates is called the functional
currency and the currency in which the financial statements are presented
is called the presentation currency.

Only one translation method is used for foreign operations. Assets


and liabilities are translated at the closing rate. Income and expenses at
the rate at the date of the transaction (average rate). Exchange
differences go to a separate component of equity and are recognised in
the income statement on disposal of the entity.

Special rules apply for foreign entities operating in hyper


For further information and a summary of this standard
inflationary conditions (IAS29 also applies)..
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias21.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Financial reporting in hyperinflationary economies - IAS 29

This standard should be applied by any enterprise that reports in the A gain or loss on the net monetary position should be included in
currency of a hyperinflationary economy. Hyperinflation is not net income and disclosed separately (paragraph 9)..
specifically defined, but an indication would be where there is a
cumulative inflation rate of one hundred percent or more over three years.
For most countries this would not apply at present. However, groups
might have a subsidiary in such a country, which is why this standard has
been included here in this module on group accounting.

The main elements of this standard are as follows:

IAS 29 requires the financial statements of a hyperinflationary


enterprise to be restated into current measuring units (paragraph 8).

If the enterprise is using historical cost financial statements, this


suggests the application of a general price index to non-monetary
items. Even those enterprises using current cost accounting would need
to re-express certain numbers using a measuring unit current at the For further information and a summary of this standard
balance sheet date.. please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias29.htm

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Module 6: Group accounting Certificate in International Financial Reporting

Frequently asked questions

1. When a European company adopts IFRSs for its consolidated 1. Possibly; in the UK the tax authorities allow IFRSs to be used for tax
statements, does this change its tax bills? purposes.
2. If a foreign subsidiary is using non-IFRS policies, what happens on
consolidation? 2. The policies have to be corrected for consolidation, usually by
3. What are reclassification adjustments (i.e. recycling) consolidation adjustments rather than by changing the foreign statutory
4. Do the parties to a joint venture each need to own exactly the accounts.
same proportion of shares?
3. Recycling often refers to the practice of reporting a profit in
equity in one period and then recycling or reporting it again in the
income statement in another period. An example of this is the reporting
of exchange differences on the translation of a foreign subsidiary again in
the income statement when it is sold.

4. No. For example, there is nothing to stop a 30/30/40 arrangement.


The key point is that to have joint control, decisions regarding the entity must
require the unanimous consent of all parties that together control the
arrangement.

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Module 6: Group accounting Certificate in International Financial Reporting

Quick Quiz

Module 6 quick quiz


Click next to continue

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Module 6: quick quiz Certificate in International Financial Reporting

Question 1
Netley, a limited liability company, purchased the whole of the share
capital of Orell, a limited liability company, for $2,500,000 cash.
Shareholders funds of the two companies at the date of the purchase
were as follows:

Netley Orell
$ $
Share capital 5,000,000 2,000,000
Retained earnings 600,000 250,000

The fair value of Orells tangible assets exceeded their book value by
$150,000. What balance should appear in the consolidated statement of
financial position of Netley for goodwill at acquisition?

A. $400,000

B. $100,000

C. $250,000

D. $500,000

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Module 6: quick quiz Certificate in International Financial Reporting

Question 2
One third of the shares, and also voting rights, in Snow White Limited are
held by each of Sneezy, Sleepy and Dopey. Which of the following
statements is true?

A. The agreement specifies that decision making requires at least


60% of the voting rights. Sneezy therefore has joint control.

B. The agreement specifies that decision making requires as a


minimum unanimous agreement by Sleepy and Dopey. Due to the
equal share in voting rights though, Sneezy has joint control.

C. The agreement specifies that decision making requires unanimous


consent of Sneezy, Sleepy and Dopey. Sneezy has joint control.

D. None of the above

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Module 6: quick quiz Certificate in International Financial Reporting

Question 3
Harwich, a limited liability company, holds 70,000 $1 preference shares in
Sall, a limited liability company. These are non-voting but rank equally
with the ordinary shares in a winding-up.

Felixstowe, a limited liability company, holds 20,000 $1 voting ordinary


shares in Sall.

The share capital of Sall is made up of the following:

$
100,000 preference shares of $1 each 100,000
30,000 ordinary shares of $1 each 30,000
130,000

Sall is a subsidiary undertaking of:

A. Both Harwich and Felixstowe

B. Harwich

C. Felixstowe

D. Neither Harwich and Felixstowe

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Module 6: quick quiz Certificate in International Financial Reporting

Question 4
What is disclosed in the statement of financial position of an investing
group under the equity method of accounting for associates?

A. Receivables but not share of net assets of the associate

B. Investment in associate at cost plus /minus the groups share of the


associates post acquisition profits or losses.

C. Share of net assets of the associate and receivables.

D. Cost of investment plus goodwill on acquisition less amounts


written off but not receivables.

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Module 6: quick quiz Certificate in International Financial Reporting

Question 5
Inveresk, a limited liability company, has equity shareholdings in three
other companies, as shown below, and has a seat on the board of each.

Inveresk Other shareholders


Raby 40% No other holdings larger than 10%
Seal 30% Another company holds 60% of Seals
equity
Toft 15% Two other companies hold respectively 50%
and 35% of Tofts equity, and each has a
seat on its board. Inveresk exerts significant
influence over Toft.

The associated undertakings of Inveresk, are:

A. Raby only

B. Raby and Seal

C. Raby and Toft

D. Raby, Seal and Toft

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Module 7: Disclosure standards Certificate in International Financial Reporting

Module 7: What you will learn - Disclosure standards

This module discusses the eight IASs that relate to disclosure and
presentation:
Statements of cash flow - IAS 7
Operating segments - IFRS 8
Related party disclosures - IAS 24
Earnings per share - IAS 33
Interim financial reporting - IAS 34
First-time adoption of international financial reporting standards
IFRS 1
Insurance contracts IFRS 4.

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Module 7: Disclosure standards Certificate in International Financial Reporting

Table of contents
Select a topic to study or click next.

Introduction
Statement of cash flow - IAS 7
IFRS 8 Operating segments
Exercise - IFRS 8 Question
Exercise - IFRS 8 Answer
Related party disclosures - IAS 24
Earnings per share - IAS 33
Interim financial reporting - IAS 34
Exercise - IAS 34 Question
Exercise - IAS 34 Answer
First-time adoption of international financial reporting standards - IFRS 1
Insurance Contracts - IFRS 4
Frequently asked questions
Quick Quiz

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Module 7: Disclosure standards Certificate in International Financial Reporting

Introduction

This module concerns a number of IFRSs that do not affect the


recognition and measurement of items in the statement of financial
position and income statement.

However, in the case of certain standards, they do affect the


presentation of numbers in the main financial statements. This is
particularly obvious for the first standard (IAS 7) which concerns the major
statement on cash flows. In most other accounting standards dealt with in
the previous modules there are many disclosure requirements which on
the whole have not been discussed so far in the course, but which you
could examine by going to the end of each accounting standard where
there is a section on disclosures. .

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Module 7: Disclosure standards Certificate in International Financial Reporting

Statement of cash flow - IAS 7


The main elements of this standard are as follows:

This standard requires an enterprise to present cash flow Actual or average exchange rates should be used for cash flows
statements as an integral part of its financial statements (paragraph from a foreign subsidiary (paragraph 26).
1).
Cash flows from interest or dividends either received or paid can be
Cash flows should be reported classified into three main headings classified as either operating, investing or financing (paragraph 31).
(paragraph 10):
operating Non-cash transactions should not be included in the statement of
investing cash flows, but should be disclosed in the notes (paragraph 43).
financing activities
The statement should reconcile to cash and cash equivalents. Cash
equivalents are somewhat vaguely defined as short-term highly liquid
investments that are readily convertible to known amounts of cash, but
there is no exact limit on maturity dates on such investments.

Cash flows can be calculated either directly by observing cash


receipts and payments, or indirectly by adjustments for such items as
non-cash amounts (paragraph 18).
For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias07.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

IFRS 8 Operating segments


The main elements of this standard are as follows:

This standard concerns note disclosures on a segmental basis. It is For each segment, the entity must report a measure of profit or loss
compulsory for those enterprises with securities that are publicly traded and total assets. A measure of liabilities, plus various other key figures
(paragraph 2), but is only required for consolidated financial statements in including revenue and interest expense, should be reported if regularly
those cases where parent and consolidated statements are in the same reviewed by the chief operating decision maker (paragraph 23).
document (paragraph 4).
In addition to the disclosures on operating segments described above, an
The standard requires entities to report financial information for entity should disclose revenue and non-current assets split by
those parts of the business whose operating results are regularly geographical area (paragraph 33)..
reviewed by the chief operating decision maker (paragraph 13). It is
intended that this management approach to identification of segments
will lead to entities reporting information that is used regularly internally
for evaluating segment performance and deciding how to allocate
resources to operating segments.
A segment must be reported if it comprises at least ten percent of
total revenue or total result or total assets (paragraph 13). In addition
the total revenue of all reported operating segments should constitute at
least 75% of the entitys total revenue (paragraph 15). Some operating
segments may therefore be added as reportable even if they do not meet
the ten percent threshold..

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Module 7: Disclosure standards Certificate in International Financial Reporting

IFRS 8 Operating segments

Segment disclosures are based on information used internally,


which may differ from what is used to prepare the income statement
and statement of financial position. IFRS 8 therefore requires
explanations of the basis on which the segment information is prepared
and reconciliations to the amounts recognised in the income statement
and statement of financial position (paragraph 28).
IFRS 8 became effective from 1 January 2009. It supersedes IAS 14
and aligns segment reporting with the requirements of the equivalent US
accounting standard.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs08.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

Exercise - IFRS 8 Question


Please review the following exercise:

How is a reportable segment defined under IFRS 8? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises.. You may wish to discuss this with a colleague before finally submitting it.

You can then review the ideas of other students on this subject.

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Module 7: Disclosure standards Certificate in International Financial Reporting

Related party disclosures - IAS 24


The main elements of this standard are as follows:

A related party is defined in terms of control or significant influence,


but several types of exemption are granted, particularly for
relationships within a group (paragraphs 5 to 7).

The standard requires the disclosure of transactions between


related parties. Transactions include those that are carried out at arms
length (paragraphs 12 to 22).

Relationships between parents and subsidiaries shall be disclosed


irrespective of whether there have been transactions between them
(paragraph 12)..

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias24.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

Earnings per share - IAS 33


The main elements of this standard are as follows

Like IFRS 8, this standard is only mandatory for those enterprises Diluted earnings per share is calculated by dividing earnings by the
with publicly traded securities, and parent company reports can be number of shares adjusted for all dilutive potential ordinary shares
exempted (paragraphs 2 and 3). (paragraphs 26 to 29). Shares are dilutive when their conversion would
decrease net profit per share (paragraph 41).
Earnings is defined as the net profit from the income statement
but after deduction of dividends on preference shares (paragraph Earnings per share should be disclosed even if the amount is
11). negative (paragraph 69)..

The disclosure of earnings per share should be done on the basis of


a basic and a diluted calculation. For the basic calculation the
earnings should be divided by the weighted average number of ordinary
shares outstanding during the period (paragraph 19). This should be
adjusted for such things as bonus issues which change the number of
shares (paragraphs 21).

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias33.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

Interim financial reporting - IAS 34


The main elements of this standard are as follows:

This standard is not mandatory and no frequency of reporting is The same accounting policies are required in the interim reporting
prescribed (paragraph 1). The standard is designed to be used by those as for annual reporting, although changes in accounting policy might be
companies that are required by regulatory authorities or stock exchanges made at the interim stage rather than waiting for a year end. The
to present interim reporting on a half yearly or quarterly basis. If reporting frequency with which interim reporting is carried out must not be allowed
is to be described as in compliance with international standards then the to affect the annual result (paragraph 28).
rules of IAS 34 should be followed.
For interim reporting, the use of year end practices with respect to
IAS 34 requires condensed versions of all four primary statements whether items should be anticipated or deferred is required
(see IAS 1) to be disclosed, and earnings per share (paragraphs 8 and (paragraphs 37 and 39). That is, interim reports should largely be seen as
11). periods in their own right..

The minimum content of these condensed financial statements is


specified (paragraph 16).

Comparative figures for previous interim periods and previous full


years are specified. This is fairly complicated in the case of quarterly
reporting (paragraph 20).
For further information and a summary of this standard
please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ias34.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

Exercise - IAS 34 Question


Please review the following exercise:

Once development expenditure has been expensed it cannot Consider your answer to the question, when you are ready click next to
subsequently be capitalised (see IAS 38). Does this fit with IAS 34, enter it into the course blog.
paragraph 29? You may wish to discuss this with a colleague before finally submitting it.

You should refer to the text of the standard when answering exercises.. You can then review the ideas of other students on this subject.

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Module 7: Disclosure standards Certificate in International Financial Reporting

First-time adoption of international financial reporting standards - IFRS 1

For example, if the companys previous GAAP had allowed accrual


IFRS 1 applies if an entitys first IFRS financial of liabilities for general reserves, restructurings, future operating
statements are for a period beginning on or after 1 losses, or major overhauls that do not meet the conditions for
January 2004. Earlier application is encouraged. recognition as a provision under IAS 37, these should be eliminated in
the opening IFRS statement of financial position.

The company should recognise all assets and liabilities that are
required to be recognised by IFRS even if they were never
recognised under previous GAAP. For example, IAS 37 requires
The main elements of this standard are as follows: recognition of provisions as liabilities including a companys obligations
for restructurings, onerous contracts, decommissioning, etc.
IFRS 1 sets out the procedures that must be followed when a
company IFRSs for the first time. The company should reclassify previous GAAP opening statement
of financial position items into the appropriate IFRS classification.
A first-time adopter makes an explicit and unreserved statement that For example IAS 10 does not permit classifying dividends declared or
its general purpose financial statements comply with IFRSs for the proposed after the reporting date as a liability at that date. In the opening
first time. IFRS statement of financial position these would be reclassified as
retained earnings.
The company should eliminate previous GAAP assets and liabilities
from the opening statement of financial position if they do not qualify
for recognition under IFRSs.

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Module 7: Disclosure standards Certificate in International Financial Reporting

First-time adoption of international financial reporting standards - IFRS 1

The company should apply IFRS in measuring all recognised assets


and liabilities. Any adjustments should be recognised directly in retained
earnings or equity at the date of transition to IFRSs.

There are some important exceptions to the general restatement and


measurement principles set out above.

In preparing IFRS estimates retrospectively, the company must use


the transactions and assumptions that had been used to determine
previous GAAP estimates in periods before the date of transition to
IFRS, provided that those transactions and assumptions are consistent
with IFRS.

For further information and a summary of this standard


please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:

http://www.iasplus.com/standard/ifrs01.htm

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Module 7: Disclosure standards Certificate in International Financial Reporting

Insurance Contracts - IFRS 4

The main elements of this standard are as follows:

IFRS 4 is the first guidance from the IASB on accounting for


insurance contracts but not the last. A second standard is being
developed.

The Board issued IFRS 4 because it saw a need for improved


disclosures for insurance contracts, and improvements to recognition
and measurement practices, in time for the adoption of IFRS by listed
companies throughout Europe and elsewhere in 2005.

The improvements to recognition and measurement are ones that


will probably not be reversed when the IASB completes the second
phase of the project..

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Module 7: Disclosure standards Certificate in International Financial Reporting

Frequently asked questions

Why did the IASB issue IFRS 4 Insurance Contracts?. Many insurance companies had accounting policies which were in
conflict with IFRSs. In order to ensure compliance with IFRS for the
purpose of the 2005 deadline, the IASB had to issue a stop-gap
standard which allowed insurance companies to follow more or less their
existing policies so that they could state compliance with IFRSs..

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Module 7: Disclosure standards Certificate in International Financial Reporting

Quick Quiz

Module 7 quick quiz


Click next to continue

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Module 7 quick quiz Certificate in International Financial Reporting

Question 1
In accordance with IFRS 8 Operating segments which of the following
must be disclosed for a reportable segment?

1. Revenue - external
2. Segment result
3. Total assets
4. Non-current assets

A. All of the above

B. 2 and 3

C. 1, 3 and 4

D. 2, 3 and 4

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Module 7 quick quiz Certificate in International Financial Reporting

Question 2
In accordance with IFRS 8 Operating Segments which of the following
must be disclosed by geographical area?

1. Revenue - external
2. Segment result
3. Total assets
4. Non-current assets

A. All of the above

B. 1, 2 and 3

C. 1 and 4

D. 2, 3 and 4.

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Module 7 quick quiz Certificate in International Financial Reporting

Question 3
A segment should be treated as reportable under IFRS 8 when its
reported internal and external revenue is what percentage of the
combined revenue (internal and external)?

A. 5% or more

B. 10% or more

C. 15% or more

D. 20% or more.

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Module 7 quick quiz Certificate in International Financial Reporting

Question 4
Which of the following would not be classed as a potential ordinary
share?

A. Convertible debt

B. Redeemable preference shares

C. Share options

D. Shares which will be issued subject to certain conditions being met

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Module 7 quick quiz Certificate in International Financial Reporting

Question 5
A company, whose shares currently sell at $75 each, plans to make a
rights issue of one share at $60 for every four existing shares.

What is the theoretical ex-rights price of the shares after the issue?

A. $75.00

B. $72.00

C. 467.50

D. $63.00

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Module 7 quick quiz Certificate in International Financial Reporting

Question 6
On 1 January 2008 a company has 10m $1 ordinary shares in issue. On
1 April 2008 it issues a further 2m shares in a share for share exchange
deal.

What is the number of ordinary shares to be used in the basic EPS


calculation for the year ended 31 December 2008?

A. 10m

B. 10.5m

C. 11.5m

D. 12m

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Module 7 quick quiz Certificate in International Financial Reporting

Question 7
At 31 December 2008 a company has 1200 share options in issue. The
exercise price of these options is $5 per share. The average fair value of
shares for the period was $6 per share.

What is the number of shares that will be added to the basic EPS share
figure for the diluted EPS calculation?

A. 200

B. 240

C. 1000

D. 1200

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Module 7 quick quiz Certificate in International Financial Reporting

Question 8
At 31 December 2008 a company has in issue 10% $1,000,000
convertible debenture stock. Income tax is at the rate of 30%.

By what amount will the profit figure increase in the diluted EPS
calculation?

A. Nil

B. $70,000

C. $100,000

D. $130,000

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Module 7 quick quiz Certificate in International Financial Reporting

Question 9
Which of the following may not be classed as a prior period error?

A. Mathematical mistake

B. Mistake in applying accounting policies

C. Fraud

D. Estimate

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Module 7 quick quiz Certificate in International Financial Reporting

Question 10
Which of the following conditions is not required for an asset to be
classified as held for sale under IFRS 5?

A. Management is committed to a plan to sell

B. Asset is available for immediate sale

C. Asset has not been revalued

D. Sale is highly probable

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Module 7 quick quiz Certificate in International Financial Reporting

Question 11
How should a gain on the disposal of a non-current asset be shown in a
companys cash flow statement and the supporting notes?

A. As a reconciling item between operating profit and net cash flow


from operating activities

B. As an operating cash flow

C. As an investing cash flow

D. It will not appear at all

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Module 7 quick quiz Certificate in International Financial Reporting

Question 12
Scaffold, a limited liability company, has increased its bad debts
provision by $25,000.

How would this be reflected in Scaffolds cash flow statement?

A
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
Decrease No change
B
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
Decrease Decrease
C
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
No change No change
D
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
No change Decrease

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Module 7 quick quiz Certificate in International Financial Reporting

Question 13
A company incurs expenditure on development during the year which is
capitalised.

How would this expenditure be shown in a cash flow statement?

A. As an operating cash flow

B. As a capital expenditure cash flow

C. As an item in the reconciliation of operating profit and net cash


inflow from operating activities

D. It will not appear at all.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Module 8: What you will learn - principal differences between IFRS and UK GAAP/US GAAP

This module will deal with the following items:


Principal differences between IFRS and UK GAAP
Principal differences between IFRS and US GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Table of contents

Principal differences between IFRS and UK GAAP


Principal differences between IFRS and US GAAP
Frequently asked questions
Quick Quiz

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP


The Conceptual Framework for Financial Reporting

ASB statement of principles for financial reporting: FRS 3 reporting financial performance:
Includes chapters on the reporting entity, presentation and Specifies certain exceptional items that must be presented on the
accounting for interests in other entities but there is no direct face of the profit and loss account after operating profit. IAS 1 does
equivalent in the framework not contain the concept of exceptional items
Measurement chapter is more detailed with an emphasis on the
deprival value model FRS 18 accounting policies:
The disclosure requirements for estimation techniques are not as
IAS 1 presentation of financial statements extensive

ASB statement of principles for financial reporting: FRS 28 corresponding amounts:


Under UK GAAP profit and loss account classifications of Does not specifically require comparative information for narrative
expenses are similar to IAS 1. However, IAS 1 requires further and descriptive information to be disclosed.
detail
Companies Acts balance sheet (statement of financial position)
formats are less flexible than IAS 1 formats
Differences in terminology used.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS7 statement of cash flow IAS 8 accounting policies, changes in accounting estimates, and
errors
FRS 1 cash flow statements:
Allows certain exemptions from preparing a cash flow statement for FRS 3 reporting financial performance:
subsidiaries and small companies. No exemptions in IAS 7 Comparative financial information is restated where a fundamental
The definition of cash is more restrictive and only includes cash prior period error has occurred which is more restrictive than IAS 8
and deposits repayable on demand (within 24 hours). IAS 7 uses which requires restatement for material prior period errors
the wider terminology of cash and cash equivalents
Cash flows are classified under eight standard headings rather FRS 18 accounting policies:
than three. There is less flexibility as to where certain cash flows, Impending changes to accounting policies are not required to be
such as interest paid are presented. disclosed

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS 11 construction contracts IFRS 8 operating segments (superceded IAS 14 segment reporting

SSAP 9 stocks and long-term contracts: SSAP 25 segment reporting:


Unlike IAS 11, service contracts may fall within its scope Omission of segment information is allowed where disclosure may
Requires the asset representing the gross amount due from be seriously prejudicial to the entitys interests. No exemption
customers for contract work to be split between amounts exists under IFRS 8
recoverable on contracts (debtors) and long-term contract Requires disclosures for both geographic and business segments.
balances (stocks) IFRS 8 uses a different basis for defining segments by requiring
managerial approach In addition it then requires disclosure of just
IAS 12 income taxes two figures (revenue and non-current assets) on a geographical
basis.
FRS 19 deferred tax:
Requires deferred taxation to be recognised on the basis of timing
differences rather than temporary differences
FRS 19 permits, but does not require, the discounting of deferred
tax balances, whereas IAS 12 prohibits this
FRS 19 does not normally recognise deferred taxation on the
revaluation of assets.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS 16 property, plant and equipment

FRS 15 tangible fixed assets:


Where assets have been revalued FRS 15 requires the use of The residual values of assets are assessed at the date of
existing use value (EUV) rather than fair value acquisition and not adjusted for expected future price changes.
FRS 15 specifies a maximum period of five years between full However, residual values should be reviewed at each reporting
valuations and an interim valuation every three years. IAS 16 does date and revised if appropriate. IAS 16 requires them to be
not specify a maximum period and the timing of revaluations reassessed every reporting date taking into account current price
depends on changes in market values changes. This may affect the depreciation expense
FRS 15 requires impairment losses to be debited first against any Annual impairment reviews are required for all assets, which are
revaluation surplus in respect of the asset unless it reflects a either depreciated over a period of more than 50 years or not
consumption of economic benefits. IAS 16 does not include such a depreciated. IAS 16 does not include such a requirement.
limitation

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS 17 leases IAS 18 revenue

SSAP 21 accounting for leases and hire purchase contracts: There is no comprehensive UK accounting standard covering revenue.
SSAP 21 contains the 90% test presumption for determining the
classification of finance and operating leases IAS 19 employee benefits
IAS 17 specifically requires leases of land and buildings to be split
at inception as a separate lease of the land and a separate lease FRS 17 retirement benefits:
of the buildings. Under SSAP 21 they are considered together The scope of IAS 19 is wider and covers different types of
The net cash investment method is used for lessor accounting. IAS employee compensation
17 requires the net investment method IAS 19 allows a similar immediate recognition approach to
UK GAAP requires operating lease rental incentives to be spread actuarial gains and losses as FRS 17.
over the shorter of the lease term and the period until the next rent
review. IAS requires any incentives to be spread over the whole
lease term.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS 20 accounting for government grants and disclosure of IAS 24 related party disclosures
government assistance
FRS 8 related party disclosures:
The Companies Act does not allow government grants to be deducted Unlike IAS 24, parent companys individual financial statements
from cost. Hence there is no option but to show them as deferred income. are exempt from providing disclosures when consolidated financial
statements are presented
IAS 23 borrowing costs Unlike IAS 24, UK subsidiaries are exempt from disclosing
transactions with the parent entity where 90% or over of the voting
FRS 15 tangible fixed assets: rights are controlled within the group
FRS 15 limits the capitalisation of borrowing costs to the finance Disclosure requirements differ. In general FRS 8 requires the
costs incurred on the expenditure incurred. disclosure of the name of the related party where a transaction has
occurred whereas IAS 24 does not
IAS 24 does not consider the materiality of related party
transactions. FRS 8 considers materiality from the perspective of
both the company and related party.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IFRS 10 Consolidated financial Statements IFRS 11 Joint arrangements


IAS 27 Separate financial statements IAS 28 Investments in associates and joint ventures (revised 2011)

FRS 2 accounting for subsidiary undertakings: FRS 9 associates and joint ventures:
Includes an exclusion of a subsidiary from consolidation on the Prescribes detailed format for equity accounting. IAS 28 does not
grounds of severe long-term restrictions. No exemption exists prescribe guidance for the income statement presentations.
under international standards However, IAS 1 provides limited guidance which uses a pre-tax
Under IFRS 10 the existence of potential voting rights should be presentation of the associates income after tax. FRS 9 prescribes
considered in assessing control. No consideration is required how the components of the investors share of associate income
under UK GAAP should be shown on the profit and loss account
Requires the minority interest (i.e. non-controlling interest using Requires investors to recognise their share of any interest in net
international terminology) to be presented separately from liabilities. IAS 28 only requires this where there is a legal or
shareholders funds. IFRS 10 requires it to be shown as a separate constructive obligation to make good those losses
component of equity.
For joint ventures requires the use of the gross equity method
rather than the equity method allowed by IFRS 11

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IAS 40 investment property FRS 7 fair values in acquisition accounting:


Provides specific guidance on fair value measurement. IFRS 3
SSAP 19 accounting for investment properties: only offers brief guidance on fair value measurement
Requires measurement at open market value. IAS 40 allows a Only requires separable intangible assets to be fair valued. Hence,
choice between cost and fair value. more intangibles could be recognised under IFRS 3
Investment gains and losses are taken to STRGL unless they
represent a permanent deficit in fair value. Under IAS 40 all gains FRS 10 goodwill and intangible assets:
and losses are recognised in the income statement. Goodwill is often amortised over its estimated useful economic life.
There is a presumption that it is not more than 20 years. IFRS 3
IFRS 3 business combinations prohibits amortisation and requires annual impairment reviews
Negative goodwill is capitalised as a separate item within goodwill
FRS 6 acquisitions and mergers: and amortised over the period over which any related losses are
Merger accounting is required when criteria are met. Not permitted expected and as acquired non-monetary assets are realised. IFRS
under IFRS 3 requires immediate recognition as a gain in the income
Group reconstructions are merger accounted for statement.
Common control transactions are not within scope of IFRS 3. Full goodwill method, which requires measurement of the non-
controlling interest (introduced by IFRS 3 revised), not allowed
under FRS 10.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and UK GAAP

IFRS 5 non-current assets held for sale and discontinued operations

FRS 3 reporting financial performance:


Continuing and discontinued activities must be analysed. A more
detailed analysis is shown on face of the P&L account under FRS
3
Discontinued classification will often be at a later date than IFRS 5
as disposal must be completed during this reporting period or
before the earlier of the approval of the financial statements and
three months after year-end

FRS 15 tangible fixed assets:


Classification and measurement of assets generally continues as
normal without regard for the disposal. This includes depreciation
until the date of disposal IFRS 5 on the other hand requires
depreciation to cease while a non-current asset is held for sale.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

The Conceptual Framework for Financial Reporting IAS 1 presentation of financial statements

No revaluations allowed by US GAAP except for some derivatives and Specific line items required by IAS 1
securities at fair value. One year comparative financial information required by IAS 1
Certain standards require specific presentation of certain items.
General approach Public companies are subject to SEC rules and regulations which
require specific line items under US GAAP
More rules-based standards with specific application guidance.. Three years information required for SEC registrants except
statement of financial position (2 years) under US GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

Extraordinary items IAS 7 cash flow statement

Extraordinary items are prohibited by IAS 1 Classification of interest received and paid in the cash flow
Extraordinary items are permitted, but are restricted to items that statement:
are both infrequent in occurrence and unusual in nature. Negative May be classified as an operating, investing or financing activity
goodwill is an extraordinary item under US GAAP under IAS 7
Must be classified as an operating activity by US GAAP
IAS 2 inventories
Bank overdrafts included in cash if they form an integral part of an
LIFO is prohibited by IAS 2 entitys cash management:
LIFO is permitted by US GAAP. Excluded by US GAAP

IAS 11 construction contracts

Method of accounting for construction contracts when the


percentage of completion cannot be determined:
Cost recovery method used by IAS
Completed contract method by US GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

IAS 12 income taxes IAS 16 property, plant and equipment

Classification of deferred tax assets and liabilities: IAS 16 says may use either revalued amount or historical cost
Always non-current under IAS 12 Generally required to use historical cost under US GAAP
Under US GAAP classification is split between current and non- US GAAP generally does not require the component approach for
current components based on the classification of underlying asset depreciation
or liability, or on the expected reversal of items not related to an There is no requirement for an annual review of residual values
asset or liability under US GAAP.

Impact of temporary differences related to inter-company profits:


Deferred tax effect is recognised at the buyers tax rate by IAS 12
Deferred tax effect is recognised at the sellers tax rate, as if the
transaction had not occurred under US GAAP

Other:
Deferred tax not recognised for taxable temporary differences that
arise from the initial recognition of certain assets and liabilities
under IAS 12
No similar exemption under US GAAP
Use enacted or substantively enacted tax rate under IAS 12
Use enacted tax rate under US GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

IAS 17 leases IFRS 10 Consolidated financial statements


IAS 27 Separate financial statements
Leases may be classified differently under IFRS than under US
GAAP Basis for consolidation is different:
Under US GAAP there are quantitative thresholds to apply in Power to control is key under IFRS 10 (defined as exposure or
determining classification (e.g. whether the present value of rights to variable returns from involvement with the investee and
minimum lease payments equals or exceeds 90% of the fair value ability to affect those returns through power over the investee).
of the lease item) US GAAP approach depends on the type of entity. For voting
interests, entities generally look to majority voting rights. For
Recognition of a gain on a sale and leaseback transaction where the variable interest entities, look to a risks and rewards model
leaseback is an operating lease:
Under IFRS the gain is recognised immediately but under US Different accounting policies of parent and subsidiaries:
GAAP the gain is amortised over the lease term Must conform to policies under IFRS
No specific requirement to conform to policies under US GAAP.
IAS 19 employee benefits Consolidated financial statements generally prepared by using
uniform accounting policies for all entities in a group but some
Under IFRS, actuarial gains and losses may be recognised immediately in exceptions where a subsidiary conforms with specialised industry
other comprehensive income; this is not permitted under US GAAP. accounting principles.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

Non-controlling interests IAS 33 earnings per share


Under US GAAP, non-controlling interests are measured at full fair
value. Basic and diluted income from continuing operations per share and
Under IFRS, there is a choice. The non-controlling interest is either net profit or loss per share is disclosed under IFRS
measured as their proportion of the fair value of the identifiable net Basic and diluted income from continuing operations, discontinued
assets or at full fair value. The use of the full fair value option operations, extraordinary items, cumulative effect of a change in
results in full goodwill being recorded on both the controlling and accounting policy, and net profit or loss per share is disclosed
non-controlling interest. under US GAAP

IAS 36 impairment of assets

IAS 32 financial instruments: presentation Impairment is recorded when an assets carrying amount exceeds
the higher of the assets value-in-use (discounted present value of
Classification of convertible debt instruments: the assets expected future cash flows) and fair value less costs to
Split the instrument into its liability and equity components and sell under IFRS
measure the liability at fair value with the equity component Impairment is recorded when an assets carrying amount exceeds
representing the residual under IFRS the expected future cash flows to be derived from the asset on an
Classify the entire instrument as a liability under US GAAP undiscounted basis under US GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

Measurement of impairment loss for long-term assets other than IAS 38 intangible assets
goodwill that are subject to amortisation is:
Based on the recoverable amount (the higher of the assets value- Development costs are:
in-use and fair value less costs to sell) under IFRS Capitalised if certain criteria are met under IFRS, but
It is based on the fair value under US GAAP Expensed (except for certain website development costs and
Cash generating unit (CGU), the lowest level to which goodwill can certain costs associated with developing internal use software)
be allocated under IFRS under US GAAP
Reporting unit an operating segment of one organisational level
below is the lowest level under US GAAP IAS 38

Subsequent reversal of an impairment loss is required for all assets, other Revaluation of intangible assets is:
than goodwill, if certain criteria are met but under US GAAP is prohibited. Permitted only if the intangible asset trades in an active market
under IFRS (fairly uncommon)
Generally prohibited under US GAAP

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

IAS 40 investment property

Measurement basis for investment property:


Under IFRS is the option of historical cost model or fair value model with
value changes through profit or loss
Generally required to use historical cost model (depreciation, impairment)
under US GAAP

IAS 41 agriculture

Measurement basis of agricultural crops, livestock, orchards, forests is at:


Fair value with value changes recognised in profit or loss under IFRS
Historical cost is generally used. However, fair value less costs to sell is
used for harvested crops and livestock held for sale under US GAA.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Principal differences between IFRS and US GAAP

IFRS 1 first time adoption of IFRS IFRS 4 insurance contracts

First time adoption: IFRS 4 addresses recognition and measurement in only a limited way. It
General principle is retrospective application of IFRSs in force at is an interim standard pending completion of a comprehensive project.
the time of adoption
No specific standard under US GAAP Several comprehensive pronouncements and other comprehensive
industry accounting guides have been published under US GAAP
IFRS 3 business combinations

Treatment of contingent consideration; contingent liabilities and


intangible assets different in acquisition accounting under US
GAAP.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Frequently asked questions

1. Have the differences between the UK, US and IFRS requirements 1. On a number of recent standard-setting issues, there has been a
been growing or shrinking recently? concerted US/IFRS or UK/IFRS effort. For example, IAS 33 (earnings
2. What is the difference between incompatible and inconsistent? per share) was written jointly with the FASB; and IAS 37 (provisions) was
written jointly with the UK. Also, IAS 39 (financial instruments) and IAS 12
(income tax) are based closely on the US rules. The UK influenced the
IASB on IAS 36 (impairment) and IAS 38 (intangibles). However, because
IFRSs are becoming tighter (with fewer options), the incompatibilities
have been increasing. Also the differences between UK GAAP and IFRS
are growing because of the convergence of US GAAP and IFRS. An
example of this is IFRS 3 (Revised).

2. Incompatible means that it is impossible to obey both


instructions at the same time. Inconsistent means that the rules
allow different choices.

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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting

Quick Quiz

Module 8 quick quiz


Click next to continue

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Module 8 quick quiz Certificate in International Financial Reporting

Question 1
When preparing financial statements under UK GAAP rather than IFRS,
which of the following statements is true?

A. Under FRS 15 an entity is not permitted to revalue tangible fixed


assets.

B. FRS 15 permits revaluation of tangible fixed assets if the valuation


is updated fully at least every five years.

C. FRS 15 permits revaluation of tangible fixed assets but does not


specify any minimum requirement for the frequency of valuations

D. FRS 15 permits revaluation of tangible fixed assets to fair value

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Module 8 quick quiz Certificate in International Financial Reporting

Question 2
When considering the differences between US and UK GAAP which of
the following statements is true?

1. IFRS does not allow the use of extraordinary items; US GAAP


does and includes negative goodwill under this heading
2. The LIFO method of inventory valuation is not permitted under UK
or US GAAP
3. In the IFRS statement of cash flows, interest received or paid may
be classified under any of the 3 main headings; US GAAP
specifies interest as an operating cash flow.

A. 1 only

B. 2 and 3

C. 1 and 3

D. All of the above

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Module 8 quick quiz Certificate in International Financial Reporting

Question 3
When preparing consolidated financial statements, which of the following
statements are true:

1. Under US GAAP the non controlling interest must be measured at


full fair value
2. Under IFRS the non controlling interest may be measured at full
fair value or as their proportion of the fair value of the identifiable
net assets.
3. Under US GAAP joint ventures are generally accounted using the
equity method

A. 3 only

B. 1 and 3

C. None of the above

D. All of the above

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

Module 9: What you will learn - Forthcoming proposals for change

This last module will look at the following items:


Memorandum of understanding between the FASB and the IASB
IASB taking steps to assist adoption of IFRS
The ASB and future reporting requirements for UK companies
IASB workplan
Findings from the first IFRS annual reports under UK GAAP.

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

Table of contents

Memorandum of understanding between the FASB and the IASB.


The ASB and future reporting requirements for UK companies
IASB work plan at 26th July 2011
Findings from the first IFRS annual reports under UK GAAP
Course conclusion

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

Memorandum of understanding between the FASB and the IASB

After their joint meeting in September 2002, the US Financial In 2010, the boards made a joint announcement that by June 2011
Accounting Standards Board (FASB) and the International they would reach a converged solution in those areas identified as
Accounting Standards Board (IASB) issued the Norwalk Agreement most urgent by the MoU. This deadline has largely been met, with only
in which they each acknowledged their commitment to the development of final publication of the new leasing and revenue recognition standards still to
high quality, compatible accounting standards that could be used for both come in 2012..
domestic and cross-border financial reporting. At that meeting, the FASB
and the IASB pledged to use their best efforts to make their existing In meeting this target they will assist the SEC, who have pledged to make
financial reporting standards fully compatible as soon as is practicable an announcement in the latter stages of 2011 concerning if and when IFRS
and to co-ordinate their future work programmes to ensure that once might be adopted in the US.
achieved, compatibility is maintained.

In 2006 they produced a joint memorandum of understanding (MoU)


outlining the projects that would be addressed as a priority as part of a
joint work programme to achieve convergence.

More recently the FASB and the IASB reaffirmed their commitment
to the convergence of US GAAP and IFRSs, following identification of
this work as a priority by the G20 leaders in September 2009.

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

The ASB and future reporting requirements for UK companies

The current financial reporting model in the UK is that some Companies qualifying as small under the Companies Act 2006 are
companies prepare accounts in accordance with IFRS and other the only exception; these entities will be able to continue to prepare
companies use UK GAAP. The use of two financial reporting financial statements in accordance with the UK FRSSE, which will
frameworks introduces additional cost and risk and results in a lack of remain in existence for the foreseeable future..
comparability between listed and unlisted companies.

The ASB is committed to eliminating differences between UK


accounting standards and IFRS and current proposal documents signal
that for accounting periods commencing on or after 1 July 2013, UK
GAAP will be phased out and all non-publicly accountable entities will
comply with the FRSME (a standard based on the new IFRS for SMEs).
Publicly accountable entities already comply with full IFRS in the UK.

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

IASB work plan at 26th July 2011

IASB-FASB collaboration projects: Other projects:


Leases Management commentary
Revenue recognition Three-yearly public consultation re IASB workplan
Financial instruments (impairment and hedge accounting)
Insurance contacts
Less urgent and so left for consideration as part of 2011 agenda
consultation:
Emissions-trading schemes
Financial statement presentation
Income taxes
Liabilities (IAS 37 amendments)
Conceptual framework

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

Findings from the first IFRS annual reports under UK GAAP

From 1 January 2005, all publicly listed companies in the European Segmental reporting is one of the more controversial issues for
Union have prepared their financial statements in conformity with companies, having the potential to reveal commercially sensitive data to
IFRSs. Some trends have emerged upon review of the financial competitors and other stakeholders. Many companies have changed their
statements of companies that have undergone the transition to IFRS. segments in some way compared to previous years to come in line with
the requirements of IFRS.
One of the least surprising findings was the increased size of the
annual reports: over 50% longer on average with some annual reports Many companies took advantage of the IAS 19 amendment
(financial services institutions), more than doubling in size compared to regarding actuarial gains and losses, to allow such gains and losses to
previous years. Some of the increase in length can be attributed to IFRS go through other comprehensive income.
1 reconciliations.
82% opted to take the IFRS 1 exemption not to restate comparatives
Whilst IFRS includes broad guidelines for the presentation of under IAS 32/39.
financial statements, it has little to say regarding which line items
must be included and hence companies have had to decide on the best Many companies in the survey retained local GAAP for their parent
way of portraying their results. Many used either extra columns or boxes company accounts. IFRS at the parent level can impact the tax paid by
on the face of their income statements, separating out exceptional or the entity and its ability to pay dividends to shareholders.
special items, discontinued operations, acquisitions, re-measurements,
fair value adjustments or actuarial gains and losses.

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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting

Course conclusion

The increased complexity and level of disclosures required by IFRS


is here to stay. This challenge affects preparers of financial statements
and their users.

The convergence of US GAAP and IFRS continues to present the


accounting world with new convergence issues.

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Conclusion Certificate in International Financial Reporting

Course Feedback

Course feedback questionnaire

To conclude this course, you are invited to complete our course feedback
questionnaire. Please remember to be open, honest and constructive in
your feedback.

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