Presentation of financial statements (IAS 1)

Companies will typically prepare Financial Statements under the Going Concern concept.

If the company has going concern doubts, these should be disclosed in the Financial Statements.

If the company is not considered a going concern, its Financial Statements should be presented
under an alternative basis.

Inventories (IAS 2)
Inventories should be valued 'at the lower of cost and net realisable value' (IAS 2, para 9).

Net realisable value is selling price less any necessary costs which must be incurred to make the
sale.

Cashflow statements (IAS 7)

Various Notes can be presented in different ways, and if a new method is chosen in one year, the
prior year presentation would need to be changed as well.

IAS 8 Accounting Policies, Changes in accounting estimates and errors

A change in accounting policy must be dealt with retrospectively. The change and its effects must
be described in the notes to the accounts.

Accounting estimates

Changes in accounting estimates, such as depreciation rates, are recognised in the statement of
profit or loss in the same period as the change. If the change is material then it should be disclosed
in the notes to the financial statements.

Prior period errors

Must be dealt with retrospectively. Restating the opening balance of assets, liabilities and equity as
if the error had never occurred.

IAS 10 Events After the Reporting Period

Adjusting events affect the amounts stated in the financial statements so they must be adjusted.

Non-adjusting events do not concern the position as at the reporting date so the financial
statements are not adjusted. If the event is material then the nature and its financial effect must be
disclosed.

Any event becomes adjusting if it affects going concern.

IAS 12 Income Taxes
Income tax covers both current tax and deferred tax.

Current tax

1)The tax charge for the period shown as an expense in p and L.

2)any unpaid amount of tax are recognized as liability in the statement of Financial position.

3)Any excess tax paid should be recognised as an asset.

4)benefits due to c/f losses on taxes is recognised as an asset.

Deferred tax

The charge for deferred tax is recognised in the statement of profit or loss unless it relates to a gain
or loss that has been recognised in other comprehensive income e.g. revaluations, in which case the
related deferred tax is also recognised in other comprehensive income.

IAS 12 states that a deferred tax asset can only be recognised where the recoverability of the asset
can be demonstrated.

Ensure that all necessary disclosures have been made- Disclosure: items on which deferred tax has
been calculated, the change in liability (reconciliation of opening and closing balance) and major
components of income tax expense.

IAS 16 Property Plant and Equipment

IAS 16 states that property, plant and equipment is initially recognised at cost.

And subsequent measurement at cost and revaluation.

Revaluation of PPE is optional. If one asset is revalued, all assets in that class must be revalued.

Revaluation gains are credited to other comprehensive income

Revaluation losses are debited to the statement of profit or loss unless the loss relates to a previous
revaluation surplus.

IAS 19 Employee Benefits

Defined contribution pension schemes

1) Defined contribution pension schemes should be recognised as expense in the period they
are payable.
2) Any liability for unpaid contribution that are due at the end of period should recognised as
liability. (accrued expense)
3) Any excess contribution paid should be recognised as an asset. (Prepaid expense).
Defined benefit pension schemes

1) The future benefit cannot be estimated exactly, the employer have to pay them and
therefore liability should be recognised now.
2) To estimate future obligations, it is necessary to use Actuarial assumption.
3) The obligation payable in future years should be recognised on a present value (discounted
basis).
4) If actuarial assumption change, the required contribution will change that will lead to
actuarial gain and loss that should be reconciled in the OCI Statement together with the
return on plan asset and changes due to asset ceiling.

IAS 20 Accounting for Government Grants and Disclosure of Government

Assistance
Grants shall be recognised in the statement of profit or loss so as to match them with the
expenditure towards which they are intended to contribute.

There are two acceptable accounting treatments for grants related to non-current assets:

• Deduct the grant from the cost of the asset and depreciate the net cost, or

• Treat the grant as deferred income and release it to the statement of profit or loss over the
life of the asset.

A government grant that becomes repayable shall be accounted for as a change in accounting
estimate.

IAS 23 Borrowing Costs

IAS 23 requires finance costs to be capitalised providing they are directly attributable to the
construction or acquisition of a qualifying asset.

IAS 24 Related Party Disclosures

Examples of related parties: subsidiaries, JV, shareholder with significant influence, directors,
other senior management like CFO.

ISA 550 Related Parties requires that the auditor evaluates whether identified related party
relationships and transactions have been appropriately accounted for and disclosed in
accordance with the applicable financial reporting framework.
IAS 28 Investments in Associates and Joint Ventures
The consolidated statement of profit or loss will show a single figure in respect of the associate
or joint venture. This is calculated as the investor’s share of the associate or joint venture's profit
for the period.

On the consolidated statement of financial position, the ‘investment in the associate/joint

venture’ is presented in non-current assets. It is calculated as the initial cost of the investment
plus/(minus) the investor's share of the post-acquisition reserve increase/(decrease).

Associates and joint ventures are not part of the group. Therefore transactions and balances
between group companies and the associate or joint venture are not eliminated from the
consolidated financial statements.

IAS 33 Earnings Per Share

Basic earnings per share is:

The weighted average number of equity shares takes into account when the shares were issued
in the year.

Diluted earnings per share

IAS 33 requires diluted earnings per share to be disclosed as well as basic EPS.

1) Basic and diluted EPS presented in statement of p and l and OCI for each class of ordinary
shares with equal prominence.
2) Disclosure should still be made even if one or both the EPS figures are negative.

IAS 36 Impairment of Assets

If the carrying amount exceeds the recoverable amount, the asset is impaired and must be
written down.

If an individual asset is impaired

1) If the asset is held at historic cost the impairment loss is recognised as an expense in p and l.
2) If the asset is held at revalued amount the impairment is charged firstly to OCI and any
remainder is recognised as an expense in p an l

When CGU is impaired

Impairment losses are allocated to assets with specific impairments first, then allocated in the
following order:

a) Goodwill
b) Remaining assets on a pro rata basis. Assets cannot be written down below the higher of fair
value less costs to sell, value in use and zero.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Provision

It is recognised as a financial liability in the financial statement.

A restructuring provision can only be recognised where an entity has a constructive obligation to
carry out the restructuring.

A contingent liability is a possible obligation arising from past events whose existence will only
be confirmed by an uncertain future event outside of the entity's control. Contingent liabilities
should not be recognised. They should be disclosed unless the possibility of a transfer of
economic benefits is remote.

A contingent asset is a possible asset that arises from past events and whose existence will only
be confirmed by an uncertain future event outside of the entity’s control. Contingent assets
should not be recognised. If the possibility of an inflow of economic benefits is probable they
should be disclosed.

IAS 38 Intangible Assets

IAS 38 states that an intangible asset is initially recognised at cost.

Intangible assets should be amortised over their useful lives.

If it can be demonstrated that the useful life is indefinite no amortisation should be charged,
but an annual impairment review must be carried out.

Research and development

Research: treated an expense in p and l.

Development: Capitalized as intangible non-current asset if it all leads to PIRATE criteria.

IAS 40 Investment Property

An entity can choose either the cost model or the fair value model.

The cost model in IAS 40 is the same as the cost model in IAS 16 Property, Plant and Equipment.

The fair value model requires that investment properties are recognised in the statement of
financial position at fair value. Gains and losses on revaluation when using the fair value model
are recognised in the statement of profit or loss.
 IAS 41 Agriculture
Biological assets should be valued at fair value less estimated costs to sell and revalued each
year-end. Any changes in fair value should be recognised in the statement of profit or loss.

At the date of harvest, agricultural produce should be recognised and measured at fair value
less estimated costs to sell. It is then accounted for under IAS 2 Inventories.

IFRS 1 First-time Adoption of International Reporting Standards

Any gains or losses arising on the adoption of IFRS Standards are recognised in retained earnings.

IFRS 2 Share Based Payments

If an entity issues share options (e.g. to employees), the fair value of the option at the grant date
should be used as the cost of the services received.

For cash settled share-based payments, the fair value of goods and services is measured and a
liability recognised. The liability is re measured at each statement of financial position date until it
is settled with changes in value being taken to the statement of profit or loss.

The expense in relation to the share-based transaction must be recognised over the period in which
the services are rendered or goods are received (vesting period).

IFRS 3 Business Combinations

Purchase consideration

Purchase consideration is measured at fair value. Note that:

• Deferred cash consideration should be discounted to present value using a rate at which the
acquirer could obtain similar borrowing.

• The fair value of the acquirer’s own shares is the market price at the acquisition date.

• Contingent consideration is included as part of the consideration at its fair value, even if payment
is not probable

Non-controlling interest

The non-controlling interest (NCI) at acquisition is measured at fair value or NCI’s proportionate
share of fair value.
Goodwill

Positive goodwill is capitalised as an intangible non-current asset and tested annually for
impairment. Any impairment charge will be charged as an expense in the consolidated statement of
profit or loss.

Gain on bargain purchase/Negative Goodwill

the gain on bargain purchase is credited to profit or loss.

IFRS 5 Non-current Assets Held for Sale & Discontinued Operations

Where an asset satisfies the criteria for asset held for sale it will be remeasured and disclose
separately in the statement of financial position.

If the criteria are met after the statement of financial position date but before the accounts are
authorised for issue, the assets should not be classed as held for sale but the information should be
disclosed.

IFRS 5 says that information about discontinued operations should be presented on the face of the
statement of profit or loss as a single amount and OCI.

IFRS 8 Operating Segments

IFRS 8 requires an entity to disclose information about each of its operating segments.

15% and more than that be considered as other segments.

IFRS 9 Financial Instrument

●Financial Instruments comprise Financial Assets, Financial Liabilities.

●Financial Assets include cash, receivables, investments in shares (equity) and

investment in debt.

●Financial Liabilities include overdrafts, payables, loans etc.

●For Financial Assets:

A) Investments in Shares usually held at “Fair Value Through Profit or Loss” (FVTPL)

B) If not held for trading, can elect to take changes in FV through Other Comprehensive Income (OCI)
instead of profit or loss

C) Investments in Debt also usually held at FVTPL, unless:

▪ Held for long term, to receive fixed repayments, can hold at Amortised Cost instead.

●For Financial Liabilities:

A) Usually held at Amortised Cost, unless:

▪ Held for trading, in which case FVTPL

▪ Company can choose FVTPL, if the business manages the Financial Liability at FV for internal
purposes.

B) Financial Liabilities are removed from the financial statements only when paid off.

C) Financial Assets may get derecognised on a risks and rewards basis (eg debts have been factored).

There are a lot of disclosures required about Financial Instruments.

Accounting treatment of a fair value hedge

At the reporting date: • The hedging instrument will be remeasured to fair value.

he gain (or loss) on the hedging instrument and the loss (or gain) on the hedged item will be
recorded:

• in profit or loss in most cases, but

• in other comprehensive income if the hedged item is an investment in equity that is measured at
fair value through other comprehensive income.

Accounting treatment of a cash flow hedge

For cash flow hedges, the hedging instrument will be remeasured to fair value at the reporting date.
The gain or loss is recognised in other comprehensive income.

IFRS 10 Consolidated Financial Statements

IFRS 10 states that consolidated financial statements must be prepared if one company controls
another company and has CONTRO i.e., power over investee, majority of voting rights, Exposure or
rights to variable returns, ability to use power to affect the investor's returns.

It is normally assumed that control exists when one company owns more than half of the ordinary
shares in another company.

IFRS 11 Joint Arrangements

IFRS 11 requires that:

Joint operators recognise their share of assets, liabilities, revenues and expenses of the joint
operation.

Joint ventures are accounted for using the equity method.

IFRS 12 Disclosure of Interests in Other Entities

IFRS 12 details disclosure requirements for entities that have an interest in subsidiaries, joint
arrangements and associates, i.e., where there is control, joint control or significant influence.
IFRS 13 Fair Value Measurement
IFRS 13 establishes a hierarchy that categorises the inputs used when measuring fair value:

Level 1 inputs comprise quoted prices (‘observable’) in active markets for identical assets and
liabilities at the measurement date.

Level 2 inputs are observable inputs, other than those included within Level 1. Level 2 inputs include
quoted prices for similar (but not identical) asset or liabilities in active markets, or prices for identical
assets and liabilities in inactive markets.

Level 3 inputs are unobservable inputs for an asset or liability.

IFRS 15 Revenue from Contracts with Customers

1) Identify the contract
2) Identify the separate performance obligations within a contract
3) Determine the transaction price
4) Allocate the transaction price to the performance obligations in the contract’
5) Recognise revenue when (or as) a performance obligation is satisfied

For each performance obligation an entity must determine whether it satisfies the performance
obligation over time or at a point in time.

An entity satisfies a performance obligation over time if one of the following criteria is met:

(a) 'The customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs.

(b) The entity’s performance creates or enhances an asset (for example, work in progress) that the
customer controls as the asset is created or enhanced, or

(c) The entity’s performance does not create an asset with an alternative use to the entity and the
entity has an enforceable right to payment for performance completed to date' (IFRS 15, para 35).

If a performance obligation is not satisfied over time then it is satisfied at a point in time. The entity
must determine the point in time at which a customer obtains control of the promised asset.

IFRS 16 Leases
Lessee accounting

If the lease is short-term (less than 12 months at the inception date), or of a low value, the lessee
can choose to recognise the lease payments in profit or loss on a straight line basis.
IFRS 16 requires that the lessee recognises a lease liability and a right-of-use asset at the
commencement of the lease:

1) The right-of-use asset is initially recognised at cost.

2) The right-of-use asset is subsequently measured at cost less accumulated depreciation and
impairment losses
3) The lease liability is initially measured at the present value of the lease payments that have
not yet been paid
4) The carrying amount of the lease liability is increased by the interest charge, which is also
recorded in the statement of profit or loss. Cash repayments reduce the carrying amount of
the lease liability.

Lessor accounting

If the lease is a finance lease then the lessor will:

1) Derecognise the asset.

2) Recognise a lease receivable equal to the net investment in the lease (the present value of
the payments).
3) Interest income arising on the lease receivable is recorded in profit or loss.

If the lease is an operating lease then the lessor recognises the lease income in profit or loss on a
straight line basis over the lease term.

Sale and leaseback

1) If the leaseback means the rights and obligations of ownership have been transferred to
the new legal owner, then in substance the asset has been sold – so a gain or loss on
disposal will occur in the normal way. The new lease is then accounted for as with any new
lease (see above) If the sale price is above fair value, any excess “gain” is not treated as a
gain, but is deferred income, to be released over the lease term to match the (presumably
higher) lease payments.

2) If the leaseback means the previous legal owner has kept the rights and obligations (e.g. it
will continue to use the asset for the rest of its UEL), then in substance no asset disposal has
occurred and the asset should remain on the statement of financial position. The entire
“sale proceeds” are simply dealt with as a loan.