IAS-1 Illustrative Example-Critical Accounting Estimates and Judgements

Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Critical accounting estimates and assumptions The company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (a) Estimated impairment of goodwill The company tests annually whether goodwill has suffered any impairment, in accordance with the accounting policy stated in Note --. The recoverable amounts of cash-generating units have been determined based on value-inuse calculations. These calculations require the use of estimates (Note --). If the revised estimated gross margin at 31 December 2006 had been 10% lower than managements estimates at 31 December 2005, the company would need to reduce the carrying value of goodwill by Rs50 and property, plant and equipment by Rs350.

If the revised estimated pre-tax discount rate applied to the discounted cash flows had been 10% higher than managements estimates, the company would need to reduce the carrying value of goodwill by Rs50 and property, plant and equipment by Rs250. If the actual gross margin had been higher or the pre-tax discounted rate lower than managements estimates, the company would not be able to reverse any impairment losses that arose on goodwill. (b) Income taxes The company is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The company recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made. Were the actual final outcome (on the judgement areas) to differ by 10% from managements estimates, the company would need to: increase the income tax liability by Rs120 and the deferred tax liability by Rs230, if unfavourable; or decrease the income tax liability by Rs110 and the deferred tax liability by Rs215, if favourable.

IAS-1 Illustrative Example-Critical judgements in applying the entitys accounting policies

Revenue recognition The company has recognised revenue amounting to Rs950 for sales of goods to Leatherex & Co in Lebanon during 2005. The buyer has the right to rescind the sale if there is 5% dissatisfaction with the quality of the first 1,000 pairs of shoes sold. The profit recognised for this sale was Rs665. The company believes that, based on past experience with similar sales, the dissatisfaction rate will not exceed 3%. It is therefore appropriate to recognise revenue on this transaction during 2005. The company will suffer an estimated loss of Rs700 in its 2006 financial statements if the sale is cancelled, Rs665 being the reversal of 2005 profits and Rs35 of costs connected with returning the stock to the warehouse.

Key assumptions used for value-in-use calculations: Eurozone

Gross margin1 Growth rate2 Discount rate3 60.0% 1.8% 10.5%

US
59.0% 1.8% 10.0%

UK
60.0% 1.8% 10.7%

Others
56.0% 1..9% 12.8%

1 Budgeted gross margin 2 Weighted average growth rate used to extrapolate cash flows beyond the budget period 3 Pre-tax discount rate applied to the cash flow projections

These assumptions have been used for the analysis of each cash generating unit (CGU) within the business segment. Management determined budgeted gross margin based on past performance and its expectations for the market development. The weighted average growth rates used are consistent with the forecasts included in industry reports. The discount rates used are pre-tax and reflect specific risks relating to the relevant segments.
The impairment charge arose in a CGU in Swaziland (included in Other countries) following a decision to reduce the manufacturing output allocated to these operations (see also Note --). This was a result of a redefinition of the companys allocation of manufacturing volumes across all CGUs in order to benefit from advantageous market conditions. Following this decision, the company reassessed the depreciation policies of its property, plant and equipment in this country and estimated that their useful lives will not be affected following this decision.

IAS 16 contd.
Choice of model-Cost or Revaluation What if company has already revalued assets but wants to adopt cost model under revised IAS?
Treat

opening balance of valuations as cost (no retrospective adjustment required) Leave surplus untouched on the balance sheet Amortise surplus in accordance with the Companies Ordinance requirements When asset disposed of, reverse surplus to equity

Property, plant and equipment

Land & Building At 1 January 2005 Cost or valuation Accumulated depreciation Net book amount Year ended 31 December 2005 Opening net book amount Exchange differences Revaluation surplus Additions Disposals Depreciation charge Closing net book amount At 31 December 2005 Cost or valuation Accumulated depreciation Net book amount Vehicles & Machinery Furniture Fittings & Equipment XXX (XXX) XXX Total

XXX (XXX) XXX

XXX (XXX) XXX

XXX (XXX) XXX

XXX XXX XXX XXX (XXX) (XXX) XXX

XXX XXX XXX XXX (XXX) (XXX) XXX

XXX XXX XXX XXX (XXX) (XXX) XXX

XXX XXX XXX XXX (XXX) (XXX) XXX

XXX (XXX) XXX

XXX (XXX) XXX

XXX (XXX) XXX

XXX (XXX) XXX

IAS 39 Financial Instrument Recognition and Measurement 4 Categories of Financial Assets

Loans and receivables Held to maturity Fair value through P&L Available for sale Amortised cost Amortised cost Fair value*, value changes to P&L Fair value*, value changes to equity

* If FV cannot be measured reliably, then use cost.

IAS 39 Financial Instrument Recognition and Measurement Overview of Derecognition

Situation Substantially all risks and rewards are transferred
Transferred and retained risks and rewards are both significant

Accounting Derecognize the old asset

Control is transferred Control is retained Continuing involvement approach Continue to recognize the old asset

Substantially all risks and rewards are retained