P2 Lecture Notes

1 Professional and ethical behaviour of the
accountant
2 Conceptual framework
3 Non-current assets
3.1 IAS 16 Property Plant and Equipment
3.2 IAS 40 Investment Property
3.3 IAS 38 Intangible Asset
3.4 IAS 36 Impairment of assets
3.5 IFRS 5 Non-current Assets Held for Sale
4. Provisions, contingencies and events after the

reporting date
4.1 IAS 37 Provisions
4.2 IAS 10 Adjusting and non adjusting events
5 IAS 17 Leases
6 Financial instrument
6.1 IAS 32
6.2 IFRS 9
6.3 IAS 39
7 IAS 19 Employee Benefit
8 IFRS 2 Share based payment

9 Performance Reporting
10 Related Parties
11 Segment Reporting
12 Reporting requirement for SME’s
13
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1. Professional and Ethical duties of the b. A guide to resolve accounting issues not
accountant addressed in a standard
The professional duty of the accountant is simply the

duty to adhere to the fundamental principles of the Elements of financial statements
professional body (ACCA). As a brief reminder of Assets - A resource controlled by an entity as a result
earlier studies this includes integrity, objectivity, of passed event and from which future economic
confidentiality, professional competence and due benefits are expected to flow to the entity.
care and professional behaviour. NB: Control is key not legal ownership
Ethics may be described as well founded standards Liabilities - A present obligation of an entity arising
on what ought to be done, especially in terms of from past event which is expected to result in an
rights, obligations, fairness and other virtues. outflow from the entity resources embodying
economic benefit e.g. decommissioning cost
Question 1(group accounting) of P2 requires an
assessment of professional and ethical duty of the Equity - Residual interest in an entity’s asset after
accountants in scenarios. Such questions are better deducting all its liabilities.
approached with a structure to enable an organised
response and the score of allotted marks. Income - increase in economic benefit during an
accounting period in the form of inflows or
The following structure can be followed. enhancements of assets or decreases of liabilities that
result in increases in equity, other than those relating
1. What is the real issue in the scenario? to contributions from equity participants.
2. Are there threats to compliance with the ACCA’s
fundamental principles? Expenses - decrease in economic benefit during an
3. Are the threats clearly significant? accounting period in the form of outflows or
4. Are there safeguards to mitigate threats or reduce depletions of assets or increase in liabilities that
them to acceptable level? result in decreases in equity, other than those relating
5. Choose the best option to distributions to equity participants.
Note: This is only a guide to generate ideas and The underlying assumption in the preparation of
should not be listed in the exams. financial statements is going concern. This basis
assumes that an entity does not have the need or
2. Conceptual Framework: intention to liquidate or curtail significantly its scale
This is a statement of basic theories or principles of of operations.
accounting. It is not a standard and where there is
perceived to be a conflict between the Framework Qualitative Characteristics of useful financial
and the specific provisions of an accounting standard statements
then the accounting standard prevails. The two fundamental characteristics are relevance
(capable of affecting the economic decision of users
Importance: either through a predictive value or confirmatory
a. Reference document for the development of value) and faithful representation (complete,
accounting standards unbiased and free from error). The four enhancing
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characteristics include comparability, verifiability, Test 1
timeliness and understandability. The IASB has issued the Conceptual Framework for
Financial Reporting 2010 which focuses on the
Measurement objective of financial reporting and the qualitative
An item can measured at historical cost, current characteristics of financial statements. Current
value, fair value or present value. The framework discussions are ongoing for other sections of the
does not prescribe a particular measuring basis. This framework.
has led to some accounting standards like IAS 40, 38 Briefly discuss the key points of this current
and 16 allowing an entity to formulate accounting development including the reasons why a new
policy on subsequent measurement. conceptual framework is required. (12marks)
Recognition
An item is recognised if it meets the definition of an
element and;
 it is probable any future economic benefit
associated with the item will flow to or from the
entity and.
 the cost or value of item can be measured
reliably.
Derecognition
An item is derecognised when,
 an event occurs that eliminates a previously
recognised asset or liability. e.g. demolition of a
building.
 there is no longer sufficient evidence to support
continued recognition.
Example 1
K Ltd leased building for five years. The lease
cannot be cancelled. The landlord retains
responsibility for maintaining the premises. The
directors are aware that in accordance with IAS 17
the lease is classified as an operating lease, and that
rent payable is expenses to the P&L.
Required
As an applicant for the position of the company’s
financial accountant, explain how such a lease can be
regarded as creating an asset and liability per the
Framework.
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3. Non-current assets The parts being replaced are derecognized when the
derecognition criteria are met. Major inspection costs
3.1 IAS 16 – Property, plant and equipment can be capitalized and any amounts relating to a
Property, plant and equipment are tangible items previous inspection are derecognized when a new
that: inspection is capitalized, regular inspection of
a. are held for use in the production or supply of aircrafts.
goods or services, for rental to others, or for
administrative purposes; and
 Cost model - PPE carried at cost less
b. are expected to be used during more than one
period accumulated depreciation and impairment loss.
 Revaluation model – PPE carried at fair value
Scope: less any subsequent accumulated depreciation
The standard applies in accounting for all PPE and impairment loss.
except when another Standard requires or permits a  Sufficient regularity to ensure no material
different accounting treatment. Examples are IAS difference in fair value and carrying value
40, IFRS 5 and IAS 41  If an item is revalued its entire class must be
revalued
Initial Recognition and measurement:  Increases in value of assets should be
The cost of an item of property, plant and equipment disclosed under other comprehensive income
shall be recognised as an asset only if and credited directly to other components
of equity under the heading “Revaluation
 it is probable that future economic benefits surplus.” A reversal of an increase previously
associated with the item will flow to the entity taken to other comprehensive income can be
and debited to other comprehensive income.
 the cost of the item can be measured reliably.  Decreases should be recognized (debited) in
Cost of items of PPE includes: profit or loss. A reversal of a previous loss for
a. Purchase price and duties paid, after deducting the same asset is reported in profit or loss to
trade discounts and rebates. the extent that it reverses the previous loss.
b. Directly attributable cost in bringing assets to The excess is disclosed under other
location and condition necessary for comprehensive income.
management’s intended use.
c. Initial estimate of dismantling item or restoring When assets are exchanged and the transaction has
site when asset is installed or used. The amount commercial substance, items are recorded at the fair
is usually a discounted expected cash outflow. value of the asset(s) received, if the fair value can be
Subsequent unwinding of interest is recognised reliably measured. In other cases, items are recorded
in P&L. at the carrying amount of the asset(s) given up.
Depreciation
Subsequent cost and measurement: IAS 16 requires a tangible non asset to be
Costs of day to day servicing costs are recognised in depreciated over its economic useful life using a
profit or loss as incurred since they protect rather consistent method. Depreciation starts when asset is
than increase the economic benefit. available for use.
Cost of replacing parts of PPE items are capitalised Components of a complex asset have different
as it meets the recognition criteria for example economic useful life; hence it is depreciated on a
aircraft interiors such as seats. component by component basis.
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Advise the accountant of PK ltd on how to account
Derecognition for its property, plant and equipment in its financial
The carrying amount of an item of property, plant statements for the years ending 31st March 2012 and
and equipment shall be derecognised: 31st March 2013?
 on disposal or
Test 2
 when no future economic benefits are expected The policy of R Group is now to state PPE at
from its use or disposal depreciated historical cost. The group changed from
An entity is required to derecognise the carrying revaluation model to cost model as per IAS 16 in the
amount of an item of PPE that it disposes of on the year ending 30 November 20X2 and restated all PPE
date the criteria for the sale of goods in IAS 18 except the PPE of subsidiary Z Ltd which had been
Revenue would be met. revalued by Z Ltd directors on 1 December 20X1. A
revaluation surplus of $70m resulted. The PPE of Z
Example 2 ltd were originally purchased on 1st December 20X0
PK Ltd paid lease premium of $5,000 to secure a 15 at $300million. The assets were depreciated over 6
year lease agreement for a land due to aggressive years on a straight line basis. The group does not
expansion plans by its board of directors. make annual transfer from revaluation reserves to the
As at its year ending 31st March 2013 the company retained earnings in respect of the excess
had a freehold land with carrying value of $10,000. depreciation charged on revalued PPE. There were
The company had bought a manufacturing plant on no additions or disposals of the PPE of Z ltd for the
1st January 2011 at the following costs: two years ending 30 November 20X2 (Dec 07
Invoice amount less 5% trade discount and 2% Exams).
settlement Discount - $350,000
Installation cost $5,100 Prepare an extract of the financial position of Z ltd as
Cost of test run $3,000 at 30 November 20X2. The current carrying value of
PPE and revaluation surplus of Z ltd is $256m and
PK Ltd paid for the plant within a month and $70m respectively (4 marks).
received a cash discount of 2% on list price. The
installation cost includes $1,200 used in correction
errors due to faulty electrical design from
manufacturer - Fix Inc.
The plant became ready for use on 1st April 2011 but
PK Ltd started production on 1st June 2012 due to
delays in clearing chemicals from the Port.
PK Ltd also paid an insurance premium of $2,000

for a four year insurance contract with respect of the
plant. Cost of test run above includes employee
benefit and professional fees at a cost of $1,500 and
$1,000 respectively.
The company has adopted the revaluation model for

measurement of plants. As at 31st March 2013 the
revalued amount of the plant was $300,000. On 1st
November 2013, the plant got damaged. Upon
impairment review, an impaired amount of $200,000
was noted.
PK Ltd depreciates plant 4 years on a straight line
basis.
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3.2 IAS 40 – Investment Property value. A gain in revaluation is accounted for in
other comprehensive income as in IAS 16. A
Investment property is property (land or a building— decrease in value is however charged to profit for
or part of a building—or both) held (by the owner or the period.
by the lessee under a finance lease) to earn rentals or
for capital appreciation or both. Derecognition
Owner-occupied property is property held (by the An investment property shall be derecognised
owner or by the lessee under a finance lease) for use (eliminated from the balance sheet) on disposal or
in the production or supply of goods or services or when the investment property is permanently
for administrative purposes. Example property withdrawn from use and no future economic benefits
occupied by employees (whether or not the are expected from its disposal. The property’s
employees pay rent at market rates). carrying value is expensed on derecognition.
Scope:
IAS 40 applied in the recognition, measurement and
disclosure of investment property. Example 3: T Ltd
The property of the former administrative centre of T
Recognition: Ltd is owned by the company. T Ltd had decided in
Investment property shall be recognised as an asset the year that the property was surplus to
only when: requirements and demolished the building on 10
a. it is probable that the future economic benefits June 2006. After demolition, the company will have
that are associated with the investment property to carry out remedial environmental work, which is a
will flow to the entity; and legal requirement resulting from the demolition. It
b. the cost of the investment property can be was intended that the land would be sold after the
measured reliably. remedial work had been carried out. However, land
prices are currently increasing in value and,
Key notes: therefore, the company has decided that it will not
sell the land immediately. T Ltd uses the cost model
a. Initially measured at cost as indicated in IAS 16 in IAS16 Property, plant and equipment and has
b. Subsequently measured at either fair value model owned the property for many years.
(property remeasured at fair value each year) or
cost model (property held at historical cost less
accumulated depreciation) based on an entity’s Required
accounting policy. Advise the directors how to treat the above in the
c. Gains or losses on fair value measurement are financial statements for the year ended 31 May 2006.
recorded directly in profit for the period. (7Marks).
d. A property interest that is held by a lessee under Note: The remedial work will result from demolition
an operating lease may be classified and of building and not its erection. At initial recognition
accounted for as investment property only if the of the property, T Ltd may decide to demolish,
property would otherwise meet the definition of refurbish or sell the building after its useful life.
an investment property and the lessee uses the Hence T Ltd does not have a present obligation to do
fair value model. the remedial work and will not recognise an estimate
e. Transfers to and from investment property are of the cost of remedial works as initial cost.
made only when there is a change in use.
f. Transfer from investment property to owner
occupied property is accounted for at fair value
at the date of the change and subsequently as
under IAS 16
g. Transfer from owner-occupied property to
investment property is accounted for at fair
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3.3 IAS 38 – Intangible Assets determined, an entity should amortize the asset over
it estimated economic useful life.
An intangible asset is an identifiable non-monetary
asset without physical substance. Where an entity estimates the life of an intangible to
Monetary assets are money held and assets to be be infinite the asset should not be amortized but
received in fixed or determinable amounts of money. should be reviewed for impairment annually even
where no indicator of impairment exists.
Recognition:
An intangible asset is recognized if: Where an intangible is acquired as part of a business
a. It is probable that future economic benefit
combination and can be measured reliably that
attributable to the asset will flow to the entity.
b. The cost of the asset can be measured reliably. intangible should be capitalize separately but where
c. Clearly identifiable the intangible cannot be measured reliably it should
 separable - capable of being separated or be included in Goodwill.
divided from the entity and sold, transferred,
licensed, rented or exchanged, either Note: Internally generated Goodwill is not
individually or together with a related recognised. Only Goodwill acquired usually through
contract, asset or liability. a business combination must be recognised.
 Arises from contractual or other legal rights
Other internally generated intangible assets that may
d. Control - the power to obtain the future economic not be recognized include brands, mastheads and
benefits flowing from the underlying resource customer lists.
and to restrict the access of others to those
benefits. Example 4
Initial measurement A direct-mail marketing company acquires a

customer list and expects that it will be able to derive
Initially intangible asset should be measured at cost benefit from the information on the list for at least
as per IAS 16. one year, but no more than three years.
An intangible asset which is not available for use
will be held at cost and tested for impairment Advise on the treatment of the acquired list.
annually.
Subsequently an entity can measure an intangible Research and Development

asset using: Research expenditure is recognized as an expense
a. The cost model (initial cost less accumulated when incurred.
amortization or impairment)
Development expenditure is recognized as an
b. The revaluation model (fair value less
accumulated amortization and impairment). intangible asset if all of the following can be
Revaluation changes are recorded as per IAS 16. demonstrated by an entity:
Note: the revaluation model can only be use if an a. Control - the ability to use or sell the intangible
intangible have an active market. An active market is asset
a market in which the homogenous items are traded, b. Probable inflow of economic benefit - the
willing buyers and sellers can normally be found at demonstration of how the intangible asset will
any time and prices are available to the public. generate probable future economic benefits
c. Reliable measurement of cost – the
ability to measure the expenditure.
Amortization
Where the economic useful life of an intangible is
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d. The technical feasibility of completing the 3.4 IAS 36 – Impairment of Assets
intangible asset so that it will be available for use
or sale; An asset is said to be impaired when the carrying
e. The availability of adequate technical, financial, value of the asset is higher than it recoverable
and other resources to complete the development amount. The recoverable amount of an asset is the
of the intangible asset and to use or sell it; higher of:
f. The intention to complete the intangible asset a. The fair value of the asset (the selling price of
and use or sell it; the asset less direct selling cost)
b. The value in use of the asset (the present value of
Note: all the future cash flows that can be generated
 Development expenditure previously recognized from the asset including it residual value).
as an expense cannot be subsequently capitalized
as an asset. IAS 36 requires impairment reviews (comparing
 Capitalize only direct costs. carrying value of an asset and its recoverable
 Derecognize developments cost as they fail the amount) to be made whenever there is an indicator of
above criteria. impairment. There are internal and external
indicators of impairment. Examples include
In determining whether an asset that 1 Internal indictors
incorporates both intangible and tangible  Evidence of an asset being damage or
elements should be treated under IAS 16 or obsolete.
IAS 38, an entity uses judgement to assess  Asset being sold at a huge loss just after a
which element is more significant. year end.
For example, computer software for a computer-  Changes in the intended use of the asset.
 An asset with no immediate use
controlled machine tool that cannot operate without
that specific software is an integral part of the related g. External indicators
hardware and it is treated as property, plant and  Net Asset higher than market value
equipment. The same applies to the operating system  Fall in market share
of a computer. When the software is not an integral The key to scoring on impairment scenarios is to
part of the related hardware, computer software is identify the existence on an indicator. The above
treated as an intangible asset. points are not exhaustive.
Website cost can only qualify as an intangible if it is Note: Any event that does not affect the fair value
probable that economic benefit can be generated via less cost to sell or the value in use of an asset is not
an indicator of impairment.
the website example website that can take orders and
The following items must be tested for impairment
payments. annually even when there is no indicator of
impairment. No amortization is allowed.
Derecognition  Goodwill
An intangible asset should be derecognized on  Intangible assets with an indefinite useful life
disposal or when no future economic benefits are  Intangible assets that are not available for use
expected from its use or disposal. The gain or loss
that arises from derecognition should be included in
profit or loss. Example 5
Burley has purchased a transferable interest in an oil
exploration licence. Initial surveys of the region
designated for exploration indicate that there are
substantial oil deposits present but further surveys
will be required in order to establish the nature and
extent of the deposits. Burley also has to determine
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whether the extraction of the oil is commercially Discuss whether the accounting treatments proposed
viable. Past experience has shown that the licence by the company are acceptable under International
can increase substantially in value if further Financial Reporting Standards. (5 marks)
information as to the viability of the extraction of the Impairment of Goodwill
oil becomes available. Burley wishes to capitalise Goodwill is not amortised but tested annually for
the cost of the licence but is unsure as to whether the impairment. Since Goodwill does not generate
accounting policy is compliant with International cashflow on its own, impairment is tested within the
Financial Reporting Standards. cash generating unit that has goodwill.
Discuss how the above event would be accounted for

in the financial statements of Burley (4 marks) Reversal of Impairment
Impairment loss can only reverse itself if the
Example 6 condition that causes the earlier impairment
At 30 November 20X4 PK Ltd's office has carrying improves. Impairment can only reverse up to the
value $18m. The plant has become surplus to lower of:
requirement upon purchase of a more fuel efficient  The carrying value of the asset assuming earlier
model. The company is undecided as to whether to impairment loss did not occur
sell the plant or lease it to customers under finance  The recoverable amount as at the date of the
lease. The fair value less selling costs of the building reversal
is $9m and the value in use is estimated at $19m.
Requirement: If the impairment loss is in excess of the lower of the
1. Identify any impairment indicators and carry out above, the excess of can be accounted for as a
an impairment review. revaluation gain as under IAS 16.
2. Assuming the plant's value in use is $15m. Advise Note that reversed impairment will be credited to the
the accountant on the treatment of the impairment profit or loss account but a revaluation gain will be
loss (if any) as at 30 November 20X4. presented under other comprehensive income and
credited to other components of equity.
Example 7
At 31 May 2010 Cate held an investment in and had Example 8:
a significant influence over Bates, a public limited PK Ltd is also reviewing the accounting treatment of
company. Cate had carried out an impairment test in its plants. The Group uses the revaluation model for
respect of its investment in accordance with the its plants. PK ltd bought plant at cost of $20m on 1
procedures prescribed in IAS 36, Impairment of July 20X5 and had a useful economic life of 5 years.
assets. Cate argued that fair value was the only They are being depreciated on a straight line basis.
measure applicable in this case as value-in-use was The plant was revalued downwards on 30 June 20X6
not determinable as cash flow estimates had not been to $12m which was the plants recoverable amount.
produced. Cate stated that there were no plans to At 30 June 20X7 the value of the plant had risen to
dispose of the shareholding and hence there was no $21m which is to be included in the financial
binding sale agreement. Cate also stated that the statements. Advise PK Ltd on how to treat the above
quoted share price was not an appropriate measure events.
when considering the fair value of Cate’s significant
influence on Bates. Therefore, Cate estimated the
fair value of its interest in Bates through application
of two measurement techniques; one based on
earnings multiples and the other based on an option–
pricing model. Neither of these methods supported
the existence of an impairment loss as of 31 May
2010.
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3.5 IFRS 5 - Non Current Assets held for sale and c. Held for sale assets are not depreciated or
discontinued operations: amortised but measured at the lower of carrying
amount and fair value less costs to sell
Non-current assets held for sale:
This is an asset whose recoverable value will be
recovered principally through sale and not
continuous use.
Extract of Statement of Financial Position
Two main criteria: Current Assets

Trade and other receivables xxx
a. Available for immediate sale in present condition Non current assets held for sale xxx
b. Sale should be highly probable
 Management committed to sell Current Liabilities
 Actively marketing at reasonable price Trade and other payables xxx
 Unlikely significant change in plan Liabilities directly related to
 Sale expected with 1 yr of date of non current assets held for sale xxx
classification (NB: sale can go beyond a year
if the cause of delay is outside the control of
both buyer and seller. Test 3
The board of the company approved the relocation of

Key Notes: the head office site on 1 March 20X3. The head
a. Assets are measured as the lower of their office land and building were renovated and
carrying amount and fair value upgraded in the year to 31 March 20X3 with a view
b. Assets held for sale is not depreciated even if is to selling the premises. During the improvements,
still in use subsidence was found in the foundations of the main
c. If assets are not sold within one year, the asset building. The work to correct the subsidence and the
could still be classified as held for sale if: renovations were completed on 1 June 20X3. As at
 delay is due to events beyond the entity’s control 31 March 20X3 the renovations had cost $2.3 and
 the entity is still committed to the sale the cost of correcting the subsidence was $1m. The
carrying value of the head office land and buildings
d. Assets classified after the reporting period is non was $5m at 31 March 20X3 before accounting for
adjusting event and only disclosed in the notes. the renovation. The company moved its head office
to the new site in June 20X3 and at the same time,
the old head office property was offered for sale at a
Presentation: price of $10.
a. Assets and liabilities of disposal group are Advise on the treatment of the above event as at the
presented separately under current assets and year ending 30 March 20X3. (4marks)
current liabilities respectively in the statement of
financial position.
b. Comparative statement of financial position is
not restated
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4.1 IAS 37 Provisions, Contingent Liabilities and A provision for dismantling or removing a non
Contingent Assets current asset after its useful life: if there is an
obligation to dismantle or remove an asset after its
A provision is a liability of uncertain timing or economic useful life, the present value of the amount
amount. required to settle the obligation is added to the initial
To recognise a provision the following criteria must cost of the asset and the provision is created in the
be met: balance sheet. The non current asset is depreciated in
 The existence of an obligating event (a past event the normal way that is over its economic useful life
that leads to a present obligation) and the discount is unwinding to adjust the provision
 Probable outflow of economic benefit on the yearly basis
 Reliable estimate of cost (best estimate –
Example 9
incorporating material time value of money and risk)
A Ltd manufactures and sells cranes. All cranes are
A provision should be reviewed at the end of each
guaranteed for 24 months. M Ltd introduces a crane
year and any adjustment made to reflect best
for building ships, SM 300, a month before the end
estimate.
of the reporting period. Although sales have been
A provision can only be use for expenditures that the made, no warranty claims have been made in respect
provision was initially recognized for. of the SM 300 when the financial statements are
prepared. However, based on previous experience
A provision should be revised if it is no longer with similar models, it is probable that there will be
probable that economic benefit will require to claims for manufacturing defects.
settling the obligation.
M Ltd has decided not to recognise or disclose any
There may be a legal or constructive obligation. A liability in the financial statement.
legal obligation usually results from contractual Advise the company. (4 marks)
agreement whiles a constructive obligations usually
results from past practice that raises a valid A contingent liability is
expectation that an entity will fulfil a present
a. a possible obligation that arises from past events
obligation.
and whose existence will be confirmed by the
Special Application of IAS 37: occurrence or non-occurrence of one or more
uncertain future events outside the control of the
Future operating losses: Provisions shall not be entity; or
recognised for future operating losses. An b. a present obligation that arises from past events
expectation of future operating losses is an indication but is not recognise either because there is no
that certain assets of the operation may be impaired. probable outflow of economic benefits or no
reliable estimate of the obligation can be made.
Onerous contract: this is a contract where the
unavoidable costs under the contract exceed the An entity should not recognise a contingent liability
benefit to be derived from the contract. A provision but disclose it, unless the possibility of an outflow of
should be made for any losses under an onerous economic benefits is remote.
contract.
NB: the above definition (b) does not apply in IFRS 3 business
Environmental Provision: is only recognised when combination. Here a contingent liability is recognised if a
there is a legal or constructive obligation. present obligation exists and can be reliably measured.
Probable outflow of economic benefit does not matter.

Contingent asset is a possible asset that arises from  A detailed formal plan for restructuring,
past events and whose existence will be confirmed indicating the location, business and employees
only by the occurrence or non-occurrence of one or affected.
more uncertain future events not wholly within the  Those affected have a valid expectation that
control of the entity. restructuring will occur. E.g. plan implemented
or announced to them.
IAS 37 does not define what is probable or possible.  Constructive obligation must exist at reporting
But usually the figure below representing the date. If it occurs after yearend, treat as non
probability of occurrence depicts them fairly. adjusting event (IAS 10).
 A constructive obligation exists only when a
Possible Probable
purchaser is found and there is a binding sale
5% 50% 95% agreement and not when an announcement to sell
Remote Virtually certain an operation is made.
Only direct restructuring costs are accrued for. These

Generally, when an entity can recover the cost should be necessarily included in the plan and should
required to settle the provision the amount to recover not be related to ongoing business activities.
and the liability should be treated as separate assets
and separate liability. This is to recognise that the
entity still remains solely liable for the full amount.
Example 10
When the entity is no longer liable for part of the Greenie, a public limited company, builds, develops and
cost to be met by a third party, such amounts can be operates airports. During the financial year to 30
offset. November 2010, a section of an airport collapsed and as a
result several people were hurt. The accident resulted in
Note that a provision is usually not made for future the closure of the terminal and legal action against
expenses as there is no obligating event. For Greenie. When the financial statements for the year ended
example, the cost of replacing the lining of a furnace 30 November 2010 were being prepared, the investigation
in not provided as the obligating event (repair) will into the accident and the reconstruction of the section of
happen in future. the airport damaged were still in progress and no legal
action had yet been brought in connection with the
Restructuring accident. The expert report that was to be presented to the
civil courts in order to determine the cause of the accident
A programme that is planned and controlled by
and to assess the respective responsibilities of the various
management and affects significantly the scope of an parties involved was expected in 2011.
entity’s business activities and the manner in which
business is undertaken. Financial damages arising related to the additional costs
and operating losses relating to the unavailability of the
This usually includes, sale or terminating of a line of building. The nature and extent of the damages and the
business (i.e. a product division or location) details of any compensation payments had yet to be
established. The directors of Greenie felt that at present,
A restructuring provision is recognised when there is there was no requirement to record the impact of the
a constructive obligation to restructure. This exists accident in the financial statements. Compensation
only if the following occur. agreements had been arranged with the victims, and these
claims were all covered by Greenie’s insurance policy. In
each case, compensation paid by the insurance company
was subject to a waiver of any judicial proceedings

against Greenie and its insurers. If any compensation is 4.2 IAS 10 Events after the Balance Sheet date
eventually payable to third parties, this is expected to be
covered by the insurance policies. The directors of Events after the balance sheet date are those events,
Greenie felt that the conditions for recognising a favourable and unfavourable, that occur between the
provision or disclosing a contingent liability had not been balance sheet date and the date when the financial
met. Therefore, Greenie did not recognise a provision in statements are authorised for issue. Two types of
respect of the accident nor did it disclose any related events can be identified:
contingent liability or a note setting out the nature of the
accident and potential claims in its financial statements (a) those that provide evidence of conditions that
for the year ended 30 November 2010. existed at the balance sheet date (adjusting events
after the balance sheet date); and
Discuss how the above will be accounted in the financial
statement (6 marks)
(b) those that are indicative of conditions that arose
after the balance sheet date (non-adjusting events
after the balance sheet date).
Note that if adjusting events occur after the financial

statement has been authorised for issue then usually
no changes can be made except where shareholders
have the authority to amend the financial statement.
Adjusting events after the financial statement has

been authorised for issue are usually treated as
correction of prior year errors in subsequent year’s
financial statement.
Recognition and measurement
Adjusting events: An entity shall adjust the amounts

recognised in its financial statements to reflect
adjusting events after the balance sheet date.
Examples:
a. the discovery of fraud or errors that show that the
financial statements are incorrect
b. the receipt of information after the balance sheet
date indicating that an asset was impaired at the
balance sheet date. For example, the bankruptcy
of a customer that occurs after the balance sheet
date usually confirms that a loss existed at the
balance sheet date on a trade receivable and that
the entity needs to adjust the carrying amount of
the trade receivable or the sale of inventories
after the balance sheet date may give evidence
about their net realisable value at the balance
sheet date
Non adjusting events: An entity shall not adjust the

amounts recognised in its financial statements to
reflect non-adjusting events after the balance sheet 5 IAS 17 Leases
date.
If non-adjusting events after the balance sheet date A lease is an agreement whereby the lessor conveys
are material, an entity shall disclose the nature of to the lessee in return for a payment or series of
the event and an estimate of its financial effect, or a payments the right to use an asset for an agreed
statement that such an estimate cannot be made. period of time.
Examples:
a. a major business combination after the balance A finance lease is a lease that transfers substantially
sheet date (IFRS 3 Business Combinations all the risks and rewards incidental to ownership of
requires specific disclosures in such cases) or
an asset.
disposing of a major subsidiary
b. the destruction of a major production plant by a An operating lease is a lease other than a finance
fire after the balance sheet date
lease.
c. announcing, or commencing the implementation
of a major restructuring Whether a lease is a finance lease or an operating
lease depends on the substance of the transaction
Note: usually to identify an adjusting event you must
rather than the form of the contract. Examples of
ask the question: “should/could the entity have
situations that individually or in combination would
known that the event will occur? If yes, then this is
normally lead to a lease being classified as a finance
an adjusting event.
lease are:
Dividend: If dividends are declared (ie the dividends
a. the lease transfers ownership of the asset to the
are appropriately authorised and no longer at the
lessee by the end of the lease term;
discretion of the entity) after the balance sheet date b. the lessee has the option to purchase the asset at
but before the financial statements are authorised for a price that is expected to be sufficiently lower
issue, the dividends are not recognised as a liability than the fair value at the date the option becomes
at the balance sheet date because they do not meet exercisable for it to be reasonably certain, at the
the criteria of a present obligation in IAS 37. Such inception of the lease, that the option will be
dividends are disclosed in the notes in accordance exercised;
c. the lease term is for the major part of the
with IAS 1.
economic life of the asset even if title is not
Going Concern: An entity shall not prepare its transferred;
d. at the inception of the lease the present value of
financial statements on a going concern basis if
the minimum lease payments amounts to at least
management determines after the balance sheet date substantially all of the fair value of the lease
either that it intends to liquidate the entity or to cease asset;
trading, or that it has no realistic alternative but to do e. the leased assets are of such a specialised nature
so. that only the lessee can use them without major
modifications.
Note: If a lease agreement is classified as a finance
lease. It will be a finance lease for both the lessee
and the lessor.
For example, PK Ltd rents a building from B Ltd for
20 years. From the agreement PK Ltd could extend
the lease for 5 more years. The building’s estimated
useful life is 25years. This is a finance lease. PK Ltd
will recognise the building as an asset but B Ltd
must derecognise the building but recognise a

receivable (net investments). more representative of the time pattern of the user’s
benefit.
Accounting for a lease in the books of Lessee Any difference between the amount charged and
paid will be recognised in the statement of financial
Finance Lease position.
Initial Recognition and measurement:
At the commencement of the lease term, lessee shall Example 12
recognise finance leases as assets and liabilities in
their balance sheets at amounts equal the lower of M Ltd hires out industry plant on long term
a. The fair value of the leased property or asset and operation leases from PK Ltd. On 1 January 20X6, it
b. Present value of the minimum lease payments entered into a seven year lease on a mobile crane
Each is determined at the inception of the lease with PK ltd. The terms of the lease are $ 175,000
payable on 1 Jan 20X6, followed by six rentals of
Subsequent measurement $70,000 payable on 1 January 20X7- 2012. The
Lease payments shall be apportioned between the crane cost $880,000 and has a 25-year useful life
finance charge (expensed through P&L) and the with no residual value.
reduction of the outstanding liability.
The asset is depreciated over the shorter of the useful Required:
life of the asset and the lease term. Calculate the annual rental expense and prepare an
A finance lease gives rise to depreciation expense for extract of the financial statement of M Ltd as at 31
depreciable assets as well as finance expense for December 20X6 and 20X7
each accounting period.
Contingent rents shall be charged as expenses in the Accounting for a lease in the books of Lessor
periods in which they are incurred.
A contingent rent is that part of the rent that is not Finance Lease
fixed in amount but is based on the future amount of The lessor derecognises the leased asset and
a factor that change other than with the passage of recognises the difference between the carrying
time. amount of the leased asset and the finance lease
receivable (or net investment) in profit or loss when
Example 11 recording the finance lease receivable.
W Ltd acquired the use of plant over three years by The net investment is the present value of the
way of a lease from PK Ltd. Instalments of $70,000 minimum lease payment plus any unguaranteed
are paid six monthly in arrears on 30 June and 31 residual value accruing to the lessor.
December. Delivery of the plant was on 1 January Over the lease term, the lessor accrues interest
2012. The present value of minimum lease payment income on the net investment. The receipts under the
is $304,870. Interest implicit in the above is 10% per lease are allocated between reducing the net
six months. W ltd will pay PK Ltd $10,000 if its investment and recognising finance income, so as to
sales in 2012 increases by 20% of 2011. The plant produce a constant rate of return on the net
would normally be expected to last three years. W is investment.
required to insure the plant and cannot return it to the
lessor without a penalty of $50,000. Example 13
As in example 11 above, advice on the treatment of
Required: the above transaction in the year ending 31 Dec 2012
Advise on the treatment of the above transaction in in the books of PK ltd assuming the plant had a
the year ending 31 Dec 2012 in the books of W ltd. carrying value of 320,000 on the date of delivery.
Operating Leases Operating Lease

Lease payments under an operating lease shall be The asset is presented in the statement of financial
recognised as an expense on a straight-line basis position based on its nature and depreciated if
over the lease term unless another systematic basis is applicable in the normal way.

Any difference between the amount earned and Note that: If fair value is less than carrying value
received is recognised in the statement of financial (CV), the loss (CV-FV) will be recognised
position as receivable or deferred income. immediately.
Example 14
As in example 12 above, prepare an extract of the Example 15
financial statement of PK ltd as at 31 December PK Ltd currently accounts for its football stadium
20X6 and 20X7 assuming the plant had been used using the cost model in IAS 16. The carrying value
for 4 years as at 1 January 2006. of the stadium as at 31 December 20X6 is $ 12m and
a remaining useful life of 20 years. The stadium was
Special Considerations sold to N Ltd on 1 January 20X7 and leased back
Land and buildings: When land and building is under a 20-year finance lease. The sale price and fair
leased together the building can either be classified value is $ 15m which is the present value of the
as a finance or operating lease depending on the minimum lease payments. The agreement transfers
lease agreement. Land can only be classified as a the title if $1m is paid per annum in advance
finance lease if title will pass to the lessee after the commencing on 1 January 20X7. The directors do
lease period. not wish to treat this transaction as the raising of a
secured loan. The implicit interest rate of the lease is
Sale and leaseback: 5.6%.
The accounting treatment of a sale and leaseback
transaction depends upon the type of lease involved. Required
Account for the above transaction in the financial
If the agreement is a finance leaseback, then no sale statement of PK Ltd as at 31 December 20X7.
has taken place and the asset continuous to be
recognised. Example 16
Any gain or loss on the assumed sale is deferred and The following are transactions of PK Ltd
amortised over the lease term.
Any sales proceeds are accounted for as a finance Fair
lease liability and any lease payment is accounted for Sale valu Book
as a normal finance lease. proceeds e value
$m $m $m
If the agreement is an operating leaseback, then there (a) Sale and finance
is a sale. lease back 30 30 23
The operating lease rental is accounted for as a (b) Sale at fair value
normal operating lease. and operating
The asset is derecognised and any profit or loss on leaseback 50 50 42
disposal will be based on the fair value of the asset. (c) Sale at overvalue
Three scenarios may arise. and operating lease
1. Sales price (SP) is equal to fair value (FV): back 70 68 60
Recognise the gain or loss immediately in the (d) Sale at undervalue
P&L. and operating lease
2. Sales price is higher than fair value: back 20 25 23
Defer and amortise the gain or loss on disposal
over the lease term. Required:
3. Sales price is less than fair value: Profit or loss Discuss how the above transactions might be
will be recognised immediately in P&L unless accounted for in the current financial statements.
the loss is compensated for by future lease
payments below market price.

6. Financial Instrument Example 17
PK Ltd issues preference shares with the following
6.1 1AS 32 – Financial Instrument - Presentation terms:
A financial instrument is any contract that gives rise (a) The shares are non-redeemable
to both a financial asset of one entity and a financial (b) Dividends are paid subject to the availability of
liability or equity instrument of another entity. profits after tax
Required:
Deferred revenue and prepaid expenses are not How would the preference shares be classified?
financial instruments because they are settled by the
delivery or receipt of goods or services. Interest, dividend, losses and gains
Also a tax liability is not a financial instrument The accounting treatment of interest, dividend,
because it results from a tax law and not a losses and gains relating to financial instrument
“contract”. depends on how the instrument has been accounted
for.
A Financial Asset is: Example, dividend paid in respect of redeemable
a. Cash preference shares will be accounted for as finance
b. Equity instrument on another entity charge because the preference share is accounted for
c. a contractual right: as a liability.
- to receive cash or another financial asset; or Offsetting a financial asset and financial liability
- to exchange financial instrument under potentially Financial asset and liability can only be offset when
favourable conditions; an entity:
• has a legally enforceable right to set them off
A Financial Liability is a contractual obligation: • intends to settle liability with the asset.
- to deliver cash or another financial asset to another
entity; or Currently IFRS 9 accounts for only financial asset
- to exchange financial instruments under potentially whiles IAS 39 continues to account for financial
unfavourable conditions. liabilities.
An equity instrument is any contract that evidences
residual interest in the assets of an entity after 6.2 IFRS 9 Financial Instrument
deducting all of its liabilities. Financial Asset
According to IAS 32 financial instrument (FI) is Initial Recognition and measurement
classified on initial recognition according to its Financial asset (FA) is recognised in financial
substance. The key to note her is when an issuer
classifies an instrument as a financial liability (FL) statement only when an entity becomes party to the
or equity instrument (EI). contractual provisions of the instrument. Example,
PK Ltd receives a sales order for 10 cartons of PK.
A financial instrument is classified as FL if the issuer Trade receivable (FA) will only be recognised on
has a contractual obligation to: delivery of the product, since; PK ltd will only be
- to deliver cash (other financial asset) entitled to receive cash from buyers on delivery.
- to exchange FI on potentially unfavourable terms.
Example a redeemable preference share has an
obligation to pay cash to holder on redemption. Initial recognition of financial assets is at fair value.
This is usually the cost incurred and normally
A financial instrument is classified as EI if excludes transaction costs, which are charged to
- it has no contractual obligation as explained in FL profit or loss as incurred.
above. Transaction costs are incremental costs that are
directly attributable to the acquisition, issue or
disposal of a financial instrument.

Transaction costs include fees and commissions paid collect contractual cash flow consisting solely of
to agents but exclude debt premiums or discounts, payment of interest and principal. Convertible bond
financing costs or internal administrative or holding will fail this test as equity may be earned at maturity.
costs.
Subsequent measurement Example 18

What should be the initial measurement of the following
Financial financial instrument?
Asset (a) A company granted a loan to another company for an
amount of $25 million at a discount of 6%, the loan
Debt Equity
carries an interest rate of 12%
Instrument Instrument
(b) A company granted loan to its employees the amount
Amortised is $20 million at no interest rate, the loan will be repay
Cost FVTPL FVTPL FVTOCI over four years period . Similar loans carry interest rate of
a*& b* default default c*& d* 9%
a* - held to maturity (c) A company was granted a loan of $12 million; the
b* - earn only principal and interest on outstanding principal loan carries an interest rate of 12%. The loan was issued
c* - not held for trading
at a discount of 10% and an issued cost of 400,000. The
d*- irrevocable designation on initial recognition
loan have a life of four years
FVTPL – Fair value through profit or loss
FVTOCI – Fair value through other comprehensive income
6.3 IAS 39 Financial instrument- Recognition and
At initial recognition, financial assets are classified measurement
Financial liabilities
in three ways:
Initial recognition and measurement
An entity recognises financial liabilities in financial
1. Fair value through profit or loss (FVTPL) statement only when the entity becomes a party to the
Both debt and equity instruments can be classified as contractual provision of the instrument.
FVTPL. Likewise assets held for trading. Initial
recognition is at fair value usually the cost incurred Subsequent measurement:
excluding transactions cost. Remeasurement to fair
value takes place at each reporting date, with any Raising
Finance
movement in fair value taken to profit or loss for the
Financial Equity
year.
Liability Instrument
Amortised FVTPL FV but not
2. Fair value through other comprehensive income
Cost remeasured
(FVTOCI)
This applies only to equity instruments intended to Financial liabilities are classified in two ways:
be held to maturity. Initial recognition at fair value
would normally include the associated transaction 1. Financial liabilities at fair value through P&L: Initial
costs of purchase. measurement is at fair value and so is Subsequent
measurement with gains and losses recognised in P&L
Upon derecognition, there is no recycling to P&L of
any amounts previously taken to equity (OCI). 2. Other financial liabilities: Initial measurement is at fair
value less issue costs and then subsequent measurement is
3. Financial assets at measured amortised cost at amortised cost. (Initial cost +effective interest –repayment)
This applies to only debt instrument that are intended
to be held to maturity (Business model test) and to

For issued equity instruments: Initial measurement is at Required:
fair value less issue costs and subsequently, there is no Discuss the accounting for the above financial liabilities
change as equity instruments are not re-measured. under current accounting standards using amortised cost,
and additionally using fair value as at 30 November 2009.
The initial fair value of a financial liability is usually the
cash/consideration received (net proceeds) from the issue.
Impairment of financial assets
Example 19 – Financial liability at FVTPL
IFRS 9 automatically incorporates an impairment review
B issued three year 5% $ 30m loan notes on 1 Jan 20X6
for financial assets classified as FVTPL and FVTOCI
at nominal value when the effective rate of interest was
with any change in fair value taken P&L and equity
also 5%. The loan notes will be redeemed at par. The
respectively.
liability is held for trading purposes.
The market interest rate was as follows: For financial assets measured at amortised cost, an entity
31 Dec 20X6 - 6% and 31 December 20X7 - 7% must make an assessment at each reporting date whether
required: there is evidence of possible impairment; if there is, then
Account for the above transactions, showing accounting an impairment review should be performed. If
entries in the first year of the issue. impairment is identified, it is expensed to profit or loss
immediately.
Example 20 – Deep Discount
Impairment loss is measured by:
W issued $20,000 6% four year bond on 1 Jan 20X4 at a
10% discount. The bonds will be redeemed on 31 Dec Carrying value X
20X7 at a premium $1,015. The effective interest rate is Less PV of estimated cashflow discounted
12%. The issue costs were $1,000 at original effective interest rate X
Required:
Account for the above transactions, showing accounting Impairment loss x
entries in the first year of the issue.
if PV > CV, then no impairment exists.
Example 21 – Compound Instrument
Example 22
C Ltd issues a $100,000 4% three-year convertible loan
on 1 January 20X6. The market rate of interest for a Included in the financial assets of Traveler is a ten-year
similar loan without conversion rights is 8%. The 7% loan. At 30 November 2011, the borrower was in
conversion terms are one equity shares ($1 nominal financial difficulties and its credit rating had been
value) for every $2 of debt. Conversion or redemption at downgraded. Traveler has adopted IFRS 9 Financial
par takes place on 31 December 20X8. Instruments and the loan asset is currently held at
Required: amortised cost of $29 million. Traveler now wishes to
Account for the above instrument: value the loan at fair value using current market interest
(a) Assuming all holders elect for the conversion? rates. Traveler has agreed for the loan to be restructured;
(b) Assuming no holder elect for the conversion? there will only be three more annual payments of $8
million starting in one year’s time. Current market
Test 4 interest rates are 8%, the original effective interest rate is
A company borrowed $47 million on 1 December 2008 6·7% and the effective interest rate under the revised
when the market and effective interest rate was 5%. On payment schedule is 6·3%. Dec 11
30 November 2009, the company borrowed an additional
$45 million when the current market and effective interest
rate was 7.4%. Both financial liabilities are repayable on Required:
30 November 2013 and are single payment notes, Advise Traveler on how to account for the above
whereby interest and capital are repaid on that date. D 09 transactions. Show working for impairment loss (if any)

Derecognition Hedge Accounting
A financial asset is derecognised:
(a) on expiration of the contractual rights to the cash Hedging is a means of reducing risk to changes to the fair
flows of the financial asset or value or cash flow of a hedge item.
(b) on sale where all the risk and reward of ownership has The P2 syllabus identifies two out of the three types of
been substantially transferred to the buyer. hedges for our consideration.
A financial liability is derecognised when the contractual • Fair value hedge: This hedge against the risk of changes
obligation is discharged, cancelled or expires. in fair value of asset and liability.
• Cash flow hedge: This hedge against the changes in
Example 23 cash flows.
J Ltd bought an investment for $40m plus associated Summary of accounting treatment of hedges & derivatives
transaction costs of $1m. The asset was designated upon
Derivativ
initial recognition as FVTOCI. At the reporting date the
e FVTPL
fair value of the financial asset had risen to $60m. Shortly
after the reporting date the financial asset was sold for Fin
Instru
$ 70m.
m
Required: Advise J ltd
FV Hedge FVTPL
(a) on how the above should be accounted for
Hedge
(b) assuming the investment was classified as FVTPL Effective FVTOC
how would your response in (a) be different? I
CF Hedge
Derivatives Ineffective FVTPL
A derivative is a financial instrument that has the
following characteristics Fair value hedge
• It value changes in response to the change in specified Under lAS 39 hedge accounting rules can only be applied
interest rate, commodity prices, exchange rate etc. to fair value hedge if the following conditions are met.
• It requires little or no initial investment
• There is a formal documentation for the hedge
• It is settled at a future date.
• The hedge is expected to be highly effective: 80% -125%
Examples of derivatives include forward contract, • The effectiveness of the hedge can be measured reliably
forward rate arrangement, swaps, and options. • The hedge has been assessed on an ongoing basis and is
determined to be effective.
Measurement of derivatives
Derivatives are initially measured at fair value normally The hedge instrument and hedged portion of hedged item
excluding transaction cost and subsequently at fair value are measured at fair value through profit or loss.
through profit or loss. Where derivative is used as a
Example 24
hedge, subsequent measurement is at fair value through
A Ltd is concerned that its building held as investment
other comprehensive income.
property will fall in value and it wishes to cover this risk.
Embedded derivatives are also measured at fair value Thus during the year it has entered into derivative
through profit or loss and are no longer separated from contract to cover any fall in value. In fact, the asset
the host contract. An example is a convertible bond. increased in value by $8.5 million. The contract was
initially entered into at no cost. The increase in the fair
If a derivative contract is entered into at no cost the initial value asset resulted in the loss contract 0.1 million.
fair value is zero until it obtains value when there is a
change in the underlying asset. Required
Explain how the above should be accounted for in line
with relevant accounting standards.

Cash flow hedge 7. IAS 19 – Employee Benefit
For cash flow hedge IAS 39 can only be applied if
the above conditions plus the following is met. Scope
This Standard is applied by an employer in
 the transaction resulting in the cash flow risk is accounting for all employee benefits, except those to
highly probable and will affect profits. which IFRS 2 Share-based Payment applies.
A cash flow hedge is initially accounted for at fair The two main types of post employment benefits are:
value i.e. the initial cost of entering into contract.
Subsequent changes in fair value are classified as a. Defined contribution plan
either: b. Defined benefit plan
a. Effective (where it results in a gain) or
Defined contribution plan
b. Ineffective (where it results in a loss).
This is a pension plan where an employer pays fixed
The effective portion of any change is recognized in
contributions into a separate fund and has no legal or
equity (OCI) whiles the ineffective portion is
constructive obligation to pay further contributions
recognized immediately in the profit or loss account.
for shortfall in schemes assets. The employer usually
pays a fixed % of employee’s salary.
Example 25
A Ltd is concerned about the potential for raw Accounting treatment:
material prices to rise. It wishes to cover the risk that The employer’s contribution is charged to the P&L.
future costs will rise over the next two to three years. An accrual or prepayment will also arise where the
Thus it has entered into a futures contract contribution is underpaid or overpaid.
(derivative). At the year-end the raw material prices
have risen, potentially giving the company an Example 26
increased future cost of $24 million. Taking out his PK Ltd contributes 10% of employee’s salary into a
contract has been beneficial to A Ltd. pension fund. The total salary for the year ending
31/12/12 is $6m. PK Ltd paid $ 45,000 each month.
Required
Required:
Explain how the above transaction will be accounted Prepare the accounting entries with explanations for
for In line with relevant accounting standards. the above transactions as at 31/12/12.
Example 27
M Ltd under the terms of its pension scheme does
not guarantee any return on the contributions paid
into the fund. The company’s legal and constructive
obligation is limited to the amount that is contributed
to the fund. The following details relate to this
scheme:
Fair value of plan assets at 31 October 2007 is $21m
Contributions paid by company for year to 31 October
2007 is $10m
Contributions paid by employees for year to 31 October
2007 is $10m

Required: Profit & Loss Items
Advice M Ltd on how to account for the pension scheme Service Cost
• Current service cost: This is an entity's obligation under
Defined benefit plan pension in respect of employee's services for the current
This pension plan is usually based on the final or average year.
salary of the employee. • Past service cost: This is increase in an entities
obligation in the current year due to employee's service in
E.g. 2/5 *final salary* number of yrs worked/30yrs
past period. This is usually due to improvement in the
scheme benefit. E.g. 2.5% of final salary increased to 2%.
Here the employer makes further payment for any
shortfall and earns refunds or reduced contribution where
Curtailment and settlements
the plan asset exceeds the obligation.
Curtailment occurs when an entity makes a significant
The differentiating factor between defined benefit and reduction in the number of employees in the scheme e.g.
defined contribution schemes is in determining whether closing an operation.
the risk lies on the employer or employee.
A settlement occurs when an entity transacts to eliminate
Accounting treatment: some or its entire obligation under the scheme.
Statement of financial position items: Gain or loss on curtailment and settlement is recognised
The employer recognises both the plan liability (i.e. the in the P&L as it occurs.
obligation to pay future pension benefit) and the plan Where this change has been factored in actuarial
assets (contributions into the scheme) in its financial assumptions, it will not be recognised.
statement.
Net Interest Component
• If the liability exceeds the assets a net pension liability • Interest cost: This result from unwinding the interest on
is reported in the statement of financial position (SFP) the liability at the discount rate.
• If the asset exceeds the liability the net pension asset is
• Expected return on asset: This is the expected return
recorded in the SFP.
from the assets in the scheme.
Schemes assets and liability
Other comprehensive income item
An actuary values the schemes asset and liability
Remeasurement Component
regularly to ensure that the carrying values of assets and
Actuarial gains and losses: This is the increase or
liability not significantly different from their fair values
decrease in pension asset or liability due to the valuation
• The plan assets are measured at fair value which is by an actuary. These changes result due to differences
usually the market value. Valuation models are used to between the assumption and what actually happens.
make estimates where market values are not available
Example 28
• The schemes liability is measured at present values
Alexandra’s pension plan was accounted for as a defined
using the projected unit credit method.
benefit plan in 2010. In the year ended 30 April 2011,
• The discount rate used in computing present values is Alexandra changed the accounting method used for the
the yield on a high quality corporate bond. scheme and accounted for it as a defined contribution
plan, restating the comparative 2010 financial
• Unpaid contribution should be treated as a liability information. The effect of the restatement was significant.
(accrual) and should not be included in the scheme assets. In the 2011 financial statements, Alexandra explained
that, during the year, the arrangements underlying the
Note: The discount and expected rate as the beginning of
retirement benefit plan had been subject to detailed
the period is used for computing the interest expense and
review. Since the pension liabilities are fully insured and
return respectively.
indexation of future liabilities can be limited up to and
including the funds available in a special trust account set

up for the plan, which is not at the disposal of Alexandra, The following details relate to the plan in the year to 31
the plan qualifies as a defined contribution plan under October 2007:
IAS 19 Employee Benefits rather than a defined benefit $m
Present value of obligation at 1 November 2006 200
plan. Furthermore, the trust account is built up by the
Present value of obligation at 31 October 2007 240
insurance company from the surplus yield on Fair value of plan assets at 1 November 2006 190
investments. The pension plan is an average pay plan in Fair value of plan assets at 31 October 2007 225
respect of which the entity pays insurance premiums to a Current service cost 20
third party insurance company to fund the plan. Every Pension benefits paid 19
year 1% of the pension fund is built up and employees Total contributions paid to the
pay a contribution of 4% of their salary, with the scheme for year to 31/10/07 17
Actuarial gains and losses are recognised in the
employer paying the balance of the contribution. If an
‘statement of recognised income and expense’.
employee leaves Alexandra and transfers the pension to
another fund, Alexandra is liable for, or is refunded the The discount rates and expected return on plan assets for
difference between the benefits the employee is entitled the two plans are:
to and the insurance premiums paid. Jun 11 01/11/06 31/10/07
Discount rate 5% 6%
Required: Expected return on plan assets 7% 8%
Discuss how the above transaction should be dealt with in
the financial statements of Alexandra for the year ended
30 April 2011. (7 marks) Asset Ceiling
Where plan assets excess the liabilities, IAS 19 requires
Example 29 the excess to be measured at the lower of:
Ribby operates a defined benefit pension plan that
provides a pension of 1.2% of the final salary for each a. The net plan asset or surplus (plan assets less plan
year of service, subject to a minimum of four years liabilities)
service. On 1 June 2007, Ribby improved the pension b. The total present value of future economic benefits
entitlement so that employees receive 1.4% of their final from the surplus (i.e.in the form or refunds or reduced
salary for each year of service. This improvement applied contribution)
to all prior year’s service of the employees. As a result,
the present value of the defined benefit obligation on 1 Note that right to earn the economic benefits should be
June 2007 increased by $4 million as follows: Jun 08 unconditional.
$m Example 31
Employees with more than four years service 3 Below are information relating to PK Ltd defined benefit
Employees with less than four years service plan: $
(average service of two years) 1 FV of plan assets 800
4 PV of plan obligation 500
P V of future refunds 200
Required:
Account for the above transaction. Required:
What is the carrying value of the assets in the statement
Example 30 of financial position?
The terms of PK Ltd’s plan are as follows:

(i) Employees contribute 6% of their salaries to the plan
(ii) Macaljoy contributes, currently, the same amount to
the plan for the benefit of the employees
(iii) On retirement, employees are guaranteed a pension
which is based upon the number of year’s service with the
company and their final salary.

8. IFRS 2 – Share based Payment Equity settled share based payment
Share-based payments are transactions where an entity If the fair value of goods or services can be reliably
obtains goods or services and settles the obligation in measured, its fair value must be used as the fair value of
shares or cash linked to its share price. the transaction.
Equity-settled share-based payment: The entity receives If the fair value of the good or service cannot be reliably
goods or services as consideration for equity instruments measured (i.e. because its transactions with employees)
(including shares or share options) of the entity. the fair value of the equity instrument at the grant date
should be used to measure the transaction.
Cash-settled share-based payment: the entity acquires
goods or services in exchange for cash or other assets The fair value of the equity instrument is its market value
based on the price of shares or other equity instruments of and if there is no market value a valuation technique
the entity. should be used.
Arguments against share based payments (IASB’s Where the equity instrument vests immediately then the
response): whole amount is accounted for immediately.
Where the instrument granted vests over a number of
1. Earnings per share will be hit twice (nature of periods IFRS2 requires that the liability should be
transaction has dual impact) estimated at the grant date and apportioned on a straight
2. Wrong recognition as there is no cost (goods or service line basis over the vesting period.
have been received so recognise)
3. Disincentive for business (reflects economic Example 31
consequence of arrangement)
On 01/01/01 M Ltd grants 100 share options to each of its
Key Definitions 50 employees with an exercise price of $3 for each $1
The grant date is the date at which the entity and another nominal value shares. Each grant is on condition that the
party agree to the arrangement. employee works until 31/12/20X3. The fair value of the
option on the grant date was $0.5. During 20X1, 10
Vesting conditions are conditions that must be satisfied employee leave and it was estimated that 30% of
for the counterparty to become entitled to receive cash, employee will leave during the 3 year period. During
other assets or equity instruments of the entity, under a 20X2 a further 10 employee left and it was estimated that
share-based payment arrangement. Includes service 20% of employee will leave during the three years.
conditions (completion of specified period of service) and During 20X3 a further 10 employees left
performance conditions (meeting specified performance
targets e.g. profit). Account for the above transactions assuming the
following.
The vesting period is the period during which all the 1. The share price rose to $5 and each qualifying
specified vesting conditions of a share-based payment employee exercises the option.
arrangement should be satisfied. 2. The share price falls to $1.5, thus employees allowed it
to lapse
Market conditions are conditions relates to the market
price of an entity’s equity instrument. This is already Cash settled share based payment
included in the fair value shares at grant date.
IFRS 2 stipulates the following key points in the
Accounting treatment measurement of cash settled share base payment:
Initial recognition and measurement The goods and services received should be measured at
All transactions are measured at fair value when goods or the fair value of the liability incurred.
service are received.

Until the liability is settled, the entity should remeasure Cash alternative - Share alternative = Equity component
the fair value of the liability at each reporting date and NB: if the entity has the choice of settlement, then the
at the settlement date. The liability is remeasured even transaction will be treated as equity settled unless the
after vesting so long as it remains unsettled. entity usually settles in cash (i.e. present obligation).
Any changes in fair value recognized in profit or loss for If employee or counter party has the option, then its cash
the period. settled share based payment.
If the share-based payment granted does not vest until the Example 33
counterparty completes a specified period of service, the
amount recognized should be adjusted over any vesting The directors of Ribby announced on 1 June 2007 that a
period for changes in the estimate of the number of bonus of $6 million would be paid to the employees of
benefits expected to vest and for changes in the fair value Ribby if they achieved a certain target production level by
of those securities. 31 May 2008. The bonus is to be paid partly in cash and
partly in share options. Half of the bonus will be paid in
Example 32 cash on 30 November 2008 whether or not the employees
are still working for Ribby. The other half will be given
The company granted share appreciation rights (SARs) to in share options on the same date, provided that the
its employees on 01/11/03 based on 10 million shares. employee is still in service on 30 November 2008. The
The SARs provide employees at the date the rights are exercise price and number of options will be fixed by
exercised with the right to receive cash equal to the management on 30 November 2008. The target
appreciation in the company's share price since the grant production was met and management expect 10% of
date. The rights vested on 31 October 20X5 and payment employees to leave between 31 May 2008 and 30
was made on 1 December 20X5. November 2008. No entry has been made in the financial
statements of Ribby. Jun 08
The following are the fair value of the SARs at the
respective dates: Discuss with computations of how the above will be
31 October 20X4 $6 accounted for in Ribby’s financial statement as at
31 October 20X5 $8 30/11/12
1 December 20X5 $9
The company has recognized a liability for the SARs as at Group settled share based payment
31 October 20X4 based upon IFRS 2share-based payment
but the liability was stated at the same amount at 31 A share-based payment transaction may be settled usually
October 20X5 by a parent company on behalf of a subsidiary receiving
the goods or services.
Discuss with calculations the impact of the arrangement The subsidiary receiving the service should account for
on the financial statement. the transaction regardless of who is settling.
Hybrid transactions Modification – Altering the terms of an arrangement
This applies when either the entity or the other party has a The basic rule in the event of modification is that entities
choice of settlement in cash or equity instrument. If the should recognise as a minimum the amount that should
fair value of the goods or service can be measured have been recognised assuming the modification had not
reliably then the equity part of the transaction is the occurred.
difference between the fair value of the goods or service Thus an increase in the value of the service is spread over
and the cash consideration expected to be paid. the remaining period (i.e. from the date of change to the
vesting date) but a decrease is ignored.
If fair value of the goods or service cannot be reliably
measured compare the fair value of the shares alternative Example 34
at the grant date with the fair value of the cash alternative PK Ltd a crane leasing company, grants 100 share options
at the grant date. with fair value (FV) of $20 to each of its 15 directors on

1st Jan 20X1 for service over three years. During 20X1, 2
directors leave. PK Ltd estimates that 6 more will leave in
20X2 and 20X3. On 31/12/01 PK Ltd reprices its share
options due to fall in its share price. The FV of each
option before repricing is $10. The FV of each repriced
share option is $15.
In 20X2, 3 more directors left and 3 more were estimated
to leave in 20X3. In 20X3, 3 more directors left.
Explain with calculations how the above transaction will

be recognised in the FS of PK ltd for the three years.
Cancellation and settlement during vesting period
Upon cancellation (unless forfeiture by the counter party

due to unfulfilled service conditions) an entity must
recognise immediately the remaining amount of the
instrument.
Upon settlement, payment made is deducted from the

amount recognised as equity. Any settlement in excess of
the equity amount is recognised in P&L. For example if
employees are paid $150 for equity amount of $100.
DR Equity $100
DR P&L $50
CR Cash $150

ANSWERS
Computation of Carrying values
Example 1 Cost @ 01/04/11 364,043
The risk and reward of ownership has not yet been Depn (1/4 * 364,043) 91,011
transferred to K ltd since the landlord maintains the
facility and the building’s expected useful life will NBV @ 31/03/12 273,032
far exceed five years. IAS 17 requires that the rent Revalued Amount 31/03/12 300,000
payable is expensed as incurred. The future rent
payable is then disclosed in the notes. Revaluation Gain 26,968
The framework however proposes a radically Revalued Amount 01/04/12 300,000

different treatment. Depn to 30/11/12 (8/36 * 300,000) 66,667
Note that the framework requires the existence of a
present obligation from past event in order to NBV @ 30/11/12 233,333
recognise a liability. The signing of the lease is a Impaired Amount @ 30/11/12 200,000
sufficient past event and creates a present obligation Impairment loss (33,333)
to pay the rentals for the whole period of the lease.
Also, K Ltd controls the use of the building for five Impaired Amount @ 30/11/12 200,000
years and has the economic benefits that it brings.
Consequently, when considering the Framework, a Depn to 31/03/13 (200,000* 4/28) 28,571
different potential treatment arises as follows: NBV @ 31/03/13 171,429
On signing of the lease agreement a liability is

recognised, measured at the present value of the The lease premium will be treated as an asset since it
future cash flow obligations to reflect the time value guaranties control over the land for 15 years.
of money. In turn an asset would also be recognised
After the initial recognition of the liability, a finance The freehold will be capitalised and revalued yearly.
cost is charged against profit in respect of unwinding No depreciation will be charged.
the discount on the liability. The annual cash rental
payments are accounted for as a reduction in the The cash discount will not be deducted from cost of
liability. The asset is depreciated over the five years the plant as it resulted from a financing activity and
of the agreement. it is subjective. It will be treated as other income in
Currently there is a conflict between IAS 17 and the the P&L.
Framework. The IASB is currently reviewing IAS 17 The employee benefit will however be capitalised.
because the current accounting treatment that does The cost of repair will be excluded as it maintains
not require a lessee to recognise the future operating the expected economic benefit (not a value adding
lease rentals as liabilities is arguably an off balance cost).
sheet financing. Depreciation charged for the year is expensed and
deducted from the cost of the assets.
The revaluation gain of $26,968 will be recognised
Example 2 under other comprehensive income and credited to
other components of equity as revaluation surplus as
Computation of Initial cost at 31/03/2012. In the year ending 31/03/13, $26,968
Invoice Price before deduction of of the impairment loss will be recognised under
cash discount (350,000/0.98) 357,143 other comprehensive income and debited to other
Installation cost 3,900 components of equity to reduce the initial
revaluation gain. The difference of $6,365 will then
Cost of Test run 3,000 be debited to P&L. The plant’s carrying value of
364,043 $233,333 will be reduced by the full impairment loss
of $33,333 on 30/11/12.

Note: The employee benefit above does not include Example 5
training cost but could be wages and other employee
benefit paid to staff for the test run. Paragraph 19c of IAS 38 requires an entity to recognise an intangible
IAS 16 specifically disallows capitalisation of staff asset only if:
training cost. However if the staff trained will be (a) it is probable that the future economic benefits
maintained by a bond and the skill learned is only that are attributable to the asset will flow to the
useful to the entity staff cost can be capitalised. This enterprise; and
is rare; consequently, training cost for a new plant is (b) the cost of the asset can be measured reliably.
usually expensed.
This requirement applies whether an intangible asset
Example 3 is acquired externally or generated internally. The
The demolition of the building is an indicator of the probability of future economic benefits must be
impairment of the property under IAS36. based on reasonable and supportable assumptions
The building will not generate any future cash flows about conditions that will exist over the life of the
and its recoverable amount is zero. Therefore, the asset. The probability recognition criterion is always
carrying value of the building will be written down considered to be satisfied for intangible assets that
to zero and expensed to profit or loss in the year to are acquired separately or in a business combination.
31 May 2006 when the decision to demolish the IAS 36 also requires that at each balance sheet date,
building was made. an entity should review all assets to look for any
The land value will be in excess of its carrying indication that an asset may be impaired (its carrying
amount as the company uses the cost model and land amount may be in excess of the greater of its net
prices are rising. Thus no impairment charge is selling price and its value in use). According to IAS
recognised in respect of the land. 36, if there is an indication that an asset may be
The demolition costs will be expensed when incurred impaired, then the asset’s recoverable amount should
and a provision for environmental costs recognised be calculated. Thus the licence can be capitalised and
when an obligation arises, i.e. in the financial year to if the exploration of the area does not lead to the
31 May 2007. discovery of oil, and activities are discontinued in
The land will be treated as an investment property the area, then an impairment test will be performed.
and held at fair value.
The land will not meet the criteria set out in IFRS5 Example 6
Non-current Assets Held for Sale and Discontinued
Operations‘ as a noncurrent asset which is held for Impairment $m $m
sale because it is unavailable for immediate sale and 1.
the sale is not highly probable e.g. sale within a year. Carrying value as at 30/11/04 18
Example 4 Recoverable Amount 19

The customer list would be capitalised at cost and Fair value 9
amortised over management’s best estimate of its
useful life, say 18 months (average of expected Value in use 19
useful life). Although the direct-mail marketing Impairment loss Nil
company may intend to add customer names and 2.
other information to the list in the future, the Carrying value as at 30/11/04 18
expected benefits of the acquired customer list relate
only to the customers on that list at the date it was Recoverable Amount 15
acquired. 9
The customer list also would be reviewed for Fair value
impairment in accordance with IAS 36 Impairment Value in use 15
of Assets by assessing at each reporting date whether
there is any indication that the customer list may be Impairment loss 3
impaired.

The indicators of impairments are that there is Cate wishes to avoid an impairment charge on the
currently no use for the asset and the intended use of investment.
the asset has changed. The recoverable amount is the
higher of fair value and value in use. Example 8
1. The recoverable amount (value in use) of $19m is PK Ltd reduced the plant down wards on 30 June
higher than the carrying value does no impairment 20X6 to its recoverable amount indicating that the
existed as at 30/11/04 plant was impaired. On 30 June 20X7 the plant has
2. The recoverable amount (value in use) of $15m is been revalued upwards indicating that there is a
lower than carrying value. Thus an impairment loss reversal of impairment. A reversal of impairment is
of $3m will be debited to the P& L and deducted recognised if conditions that cause the earlier
from the carrying value of the plant. impairment have improved. A reversal of
impairment can be allowed up to the depreciated
Example 7 historical cost of the asset assuming no impairment
Cate’s position for an investment in an associate and occurred. From the computations above, only $3m
its method of calculating fair value can be can be reversed and credited to the P& L account.
challenged. The excess of $9m can be treated by PK Ltd as a
An asset’s recoverable amount represents its greatest revaluation gain as per IAS 16.
value to the business in terms of its cash flows that it Note that it will be presented under other
can generate i.e. the higher of fair value less costs to comprehensive income and not P& L account.
sell and value in use. The asset’s recoverable amount
is compared with its carrying value to indicate any
impairment. Both net selling price (NSP) and value Plant cost as at 01/07/05 20
in use can be difficult to determine. However it is not Depreciation (20*1/5) 4
always necessary to calculate both measures. NBV as at 30/06/06 16
For example, if the NSP or value in use is greater
Recoverable amount as at 30/06/06 12
than the carrying amount, there is no need to
estimate the other amount. It is possible for Cate to Impairment loss (4)
calculate the recoverable amount. Cate’s view that
market price cannot reflect the fair value of Recoverable amount 01/07/06 12
significant holdings of equity such as an investment Depreciation 3
in an associate is incorrect as IAS 36 prescribes the NBV as at 30/06/07 9
method of conducting the impairment test in such
Recoverable amount as at 30/06/07 21
circumstances by stating that if there is no binding
sale agreement but an asset is traded in an active Difference 12
market, fair value less costs to sell is the asset’s Breakdown of difference
market price less the costs of disposal. Further, the Reversal of impairment 3
appropriate market price is usually the current bid Excess on reversal of impairment 9
price.
Additionally the compliance with IAS 28, Carrying value of plant as at
Investments in associates does not state whether 20/06/07 assuming there no
value in use is applicable or not. impairment in 20X6 (20*3/5) 12
IAS 28 explains two approaches in determining
value in use. i.e. using share of PV of estimated cash Example 9
flows from operations or PV of estimated future cash M Ltd should recognise a provision in respect of
flows from dividends . Both approaches include the expected claims on the new model. The lack of
PV of proceeds from ultimate disposal of claims history in respect of the SM 300 does not
investment. change this, because the sale of the defective
Estimates of future cash flows should be produced. vehicles is the obligating event. M should consider
These cash flows are then discounted to present claims patterns in respect of comparable models to
value hence giving value in use. It seems as though

determine the expected number of claims and the Example 11
anticipated cost (best estimate). This agreement is a finance lease because the lease
term and the life of the asset are the equal and the
Example 10 plant cannot be return without cost. This indicates
IAS 37, states that an entity must recognise a that most of the risk and reward of the asset have
provision if, and only if: been transferred from the lessor to the lessee.
(i) a present obligation (legal or constructive) has
arisen as a result of a past event (the obligating W Ltd will recognise a lease asset and liability
event), representing the PV of minimum lease payment. The
(ii) payment to settle the obligation is probable asset will be depreciated over 3 years straight line
(‘more likely than not’), and whiles the liability will be recognised at amortised
(iii) the amount can be estimated reliably. cost.
An obligating event is an event that creates a legal or $20,000 is a contingent rent, thus it will only be
constructive obligation and, therefore, results in an recognised in the P&L when incurred, likewise the
enterprise having no realistic alternative but to settle termination penalty $10,000. Note that no provision
the obligation. will be made for the termination benefit as W Ltd
At the date of the financial statements, there was no controls the occurrence of the future event
current obligation for Greenie. In particular, no (cancelling the lease).
action had been brought in connection with the
accident. It was not yet probable that an outflow of W Ltd P&L Extract
resources would be required to settle the obligation. Depreciation 101,623
Thus no provision is required. Greenie may need to Finance cost 57,023
disclose a contingent liability.
IAS 37 defines a contingent liability as:
(a) a possible obligation that has arisen from past W Ltd SFP Extract
events and whose existence will be confirmed by the
occurrence or not of uncertain future events; or Non-current asset
(b) a present obligation that has arisen from past
events but is not recognised because: Lease Asset 304,870
(i) it is not probable that an outflow of resources will
Depreciation (305,000/3) 101,623
occur to settle the obligation; or
(ii) the amount of the obligation cannot be measured
NBV 203,247
with sufficient reliability.
IAS 37 requires that entities should not recognise

contingent liabilities but should disclose them, unless Current Liabilities
the possibility of an outflow of economic resources Finance lease obligation (current
is remote. It appears that Greenie should disclose a portion) = (265,500 -121,490) 143,867
contingent liability. The fact that the real nature and
extent of the damages, including whether they
qualify for compensation and details of any
compensation payments remained to be established Non-current asset
all indicated the level of uncertainty attaching to the
case. The degree of uncertainty is not such that the Finance lease obligation 121,490
possibility of an outflow of resource could be Opening Interest Closing
considered remote. Had this been the case, no Period Loan (10%) Instalment loan
disclosure under IAS 37 would have been required.
Thus the conditions for establishing a liability are 30/06/2012 304,870 30,487 (70,000) 265,357
not fulfilled. However, a contingent liability should
be disclosed as required by IAS 37. 31/12/2012 265,357 26,536 (70,000) 221,893
30/06/2013 (70,000)
221,893 22,189 174,082 PK Ltd P&L Extract
31/12/2013 174,082 17,408 (70,000) 121,490 Rental Income (57,023)
30/06/2014 121,490 12,149 (70,000) 63,639 15,130

Loss on finance lease (320,000-304,870)
31/12/2014 63,639 6,364 (70,000) 3
PK Ltd SFP Extract
Example 12
Non-current asset
The lease is an operating lease because the life of the
asset far exceed the duration of the lease. The risk Net investment 121,490
and reward of ownership has not been transferred to
M Ltd. Any rental expense should be accounted for Currrent asset
in the income statement on accrual basis. The excess Finance lease receivable 100,403
payment would be treated as a prepayment.
Example 14
M Ltd P&L Extract As explained in example 12, this is an operating
2006 2007 lease. The risks and rewards of the plant still lies
Rental Expense 85,000 85,000 with the lessor (PK Ltd) and hence the plant should
appear in the lessor book as part of the non-current
asset and any rental income should be accounted for
M Ltd SFP Extract
in the P&L on accrual basis.
Current Asset 2006 2007
Prepayment 90,000 75,000 PK Ltd - P&L Extract
2006 2007
Workings:
Period Amount - $ Rental Income (85,000) (85,000)
01/01/2006 175,000
01/01/07 - 01/01/12 420,000 Depreciation 35,200 35,200
Total Payment 595,000
Lease term 7 PK Ltd - SFP Extract
NCA 2006 2007
Annual Rent Expense 85,000
Plant 704,000 668,800
Opening Rental Prepaym
Period balance Payment Expense ent CL
31/12/200
6 175,000 (85,000) 90,000 Deferred Income 15,000 15,000
31/12/200
NCL
7 90,000 70,000 (85,000) 75,000
31/12/200
Deferred Income 75,000 60,000
8 75,000 70,000 (85,000) 60,000
Workings below & under E.g 12:
Plant 2006 2007
Example 13
As explained in example 11, this is a finance lease. Cost 880,000 880,000
PK Ltd will derecognise the Plant and recognise the
loss of $15,130 immediately in P&L. The lease Depn (880,000*5/25 & *6/25) 176,000 211,200
payment will be the Net investment in the statement
NBV
of financial position.
704,000 668,800
Example 15 Cost 15,000
The lease term and PV of minimum lease payment Depreciation
approximates the remaining useful life and fair value (15,000/20) 750
respectively. Thus the risk and the rewards
NBV 14,250
associated with the use of the stadium remains with
PK Ltd the lessee and have not been transferred. The
football stadium should be kept in the SFP as an Deferred gain computation
asset and an obligation of 15m. The excess of the Released
15m above the carrying value (profit) should be Period Opening Profit Closing
31/12/200
deferred and released into P&L over the lease term.
7 3,000 (150) 2,850
Any lease rental payment should be split between
31/12/200
interest and principal repayment.
8 2,850 (150) 2,700
PK Ltd - SFP Extract $ 000
Non-current asset
Plant 14,250 Example 16
Current liability (a) This is a not genuine sale but a secured loan; risk
Deferred Income 150 and reward of ownership has not been
Finance lease obligation 169 transferred. The gain of $7 will be deferred and
released to P&L over the lease term on a straight
line basis. Recognise finance lease asset and
Non-current liability
obligation for the sales proceed $10. The finance
Deferred Income 2,700
lease repayment will be split between finance
Finance lease obligation 14,671 cost element (recognised in P&L over the lease
term) and principal repayment (deducted from
PK Ltd - P&L Extract $ 000 the finance lease obligation).
Deferred income (150) (b) This is a genuine sale as the risk and reward of
Depreciation 750 ownership has been transferred. Since the sale is
Finance cost 840 at fair value, the profit ($8) is recognised
immediately in P&L and the asset derecognised.
Workings The operating lease rental is expensed as
working in thousands incurred.
Finance lease obligation computation
Period Opening Interest Payment Closing (c) As in (b) above the asset is derecognised and
operating lease rental expensed as incurred.
31/12/07 15,000 840 (1,000) 14,840 However, only the profit between the fair value
and book value ($8) is recognised immediately in
31/12/08 14,840 831 (1,000) 14,671 P&L. The profit between the sales proceeds and
the fair value ($2) is deferred and released over
Profit on Disposal the lease term. This treatment assumes that the
annual rental will be above the market rent.
Sale Proceed 15,000
(d) As in (b) above the asset is derecognised and
Carrying value 12,000 operating lease rental expensed as incurred. The
loss of $3 will be recognised immediately.
3,000 However, if the annual rent is below the market
rent deferred and released to P&L over the lease
term.

FV computation at measurement date 31/12/06
Example 17
Let’s consider if PK Ltd has an obligation to pay Disc
Cash factor Present
cash to the shareholders. Assuming PK Ltd makes
Period outflow Amount (6%) Value
profit the company must pay dividend without Interest
discretion. Thus although PK ltd is not required to 31/12/07 ($30k*5%) 1,500 0.890 1,335
repay the principal there is an obligation to pay Interest &
Principal
dividend. These shares will be treated as financial 31/12/08 ($30k*1.05) 31,500 0.840 26,448
liabilities as there exists obligation to pay dividends. 27,783
Example 18 Carrying Value @ 01/01/06 30,000

(a) The initial measurement will be the net proceeds.
This is the face value less the discount granted to the FV @ 31/12/06 27,738
holder.
Net Profit 2,217
$25m * 94% = $23.5
(b) Initial measurement at fair value will be the
DR Loan $2,217
present value of the expected cash receipt (i.e CR P&L $2,217
$16.2m) discounted using similar loan interest rates.
At reporting/ measurement date 31/12/08
Discount
Discount
Amoun factor Present
Period Receipt factor (9%) PV
Period Cash outflow t (7%) Value
1 5 0.917 4.59 31/12/200 Int & Princip
2 5 0.842 4.21 8 ($30k*1.05) 31,500 0.816 25,713
3 5 0.772 3.86
4 5 0.708 3.54 25,713
16.20
(c) Again, the net proceeds (cash received) is the fair Carrying Value @ 01/01/07 27,783
value on initial measurement. FV @ 31/12/07 25,713
Face Value 12m Net profit 2,070
Less Discount (10%*12) (1.2)
Less Issue Cost (0.4) Note that if future cash outflows are discounted at the
10.4 market interest rate at inception, it will be equal to the
amount received if there are no issue costs, discounts and
Example 19 premium.
The fair value on initial recognition is the cash
received from the issue. Example 20
This instrument may classified to be measured using
Thus B Lt will recognise a long term liability on amortised cost. Initial measurement will be the net
1 Jan 06 by: DR Cash $30,000 proceeds received from the issue.
CR loan $30,000 Face Value $20,000
The fair value of the loan at measurement date 31 Less Discount (10%*20k) ($2,000)
Dec 2006 is 27,783 as below. The Gain of $2,217 Less Issue Cost ($1,000)
will be recognised in P&L and deducted from the $17,000
loan.
Initial recognition on: DR Cash $17,000 DR Cash $100,000
CR Loan $17,000 CR Liability $89,692
CR Equity $10,308
On redemption, $25,815 (20,000+20,000*6%*4+ 1,015) Initial Recognition and measurement of convertible loan
will be paid. The total cost of the issue is $8,815 (25,815- on 01/01/06
17,000) will be spread over four years as finance cost by
applying the effective interest rate. Subsequent Measurement @ Amortised Cost
We recognise the finance cost of the convertible loan
Effective Payment using market rate of similar loans without conversion
Period Opening Int (12%) (6%*Par) Closing option (8% of the carrying value of liability) and reduce
31/12/04 17,000 2,040 (1,200) 17,840 the outstanding balance by the interest payment (4% of
31/12/05 17,840 2,141 (1,200) 18,781 the face value).
31/12/06 18,781 2,254 (1,200) 19,834
31/12/07 19,834 2,380 (1,200) 21,015 Effective payment
Period Opening Int (8%) 4% * Par Closing
Total 8,815 4,800
31/12/06 89,692 7,175 (4,000) 92,867
31/12/07 92,867 7,429 (4,000) 96,296
31/12/08 96,296 7,704 (4,000) 100,000
Total 22,308 (12,000)
At reporting date 31/12/04 the effective interest of $2,040
After year 1, at reporting date of 31/12/06
will be charged to P&L as finance cost.
DR P&L (finance cost) $7,175
DR P&L $2,040
CR Loan Notes $7,175
CR Bond $2,040
Interest Payment is also recorded by: DR Loan Notes $4,000
DR Bond 1,200
CR Cash $4,000
CR Cash 1,200
W must disclose the full amount payable of $25,815 and At Redemption date on 31/12/08:
date of redemption in the notes.
(a) If all convert (Conversion):
Example 22 Value of shares = ($100,000/$2)*1= 50,000 shares @ $1
each = $50,000
Initial measurement on date of issue (01/01/06) will be at
the carrying Amount of the instrument @ 31/12/08
Fair value. This is the present value of future cash
consists of equity and liability of $110,308
outflows at market rate of similar loan without conversion
rights i.e. 8%. C Ltd will deduct the PV (liability) from (10,308+100,000)
the face value to obtain Equity.
DR Equity $ 10,308
DR Loan $ 100,000
Disc fact
Period Cash outflow Amount (8%) PV CR Share Capital $ 50,000
Interest CR Share Premium (110,308-50,000) $ 60,308
31/12/06 (100k*4%) 4,000 0.9260 3,704
31/12/07 Interest 4,000 0.8570 3,429 (b) If none convert (Redemption):
31/12/08 Inter & Princ 104,000 0.7940 82,559 The instrument will have the same carrying amount as
Present Value (Liability component) 89,692 above on 31/12/08. The liability is paid off and
derecognised by:
Liability 89,692
DR Loan $100,000
Equity 10,308 CR Cash $100,000
The Equity of $10,308 remains in equity as non-
Face Value 100,000 distributable reserve.

Example 22 CR Investment 60
CR P&L 10
Under IFRS 9, debt instruments are subsequently Note that the gain on sale is computed by deducting the
measured at amortised cost if: carrying value of the investment from the proceeds.
(a) The asset is held within a business model whose (b) FVTPL
objective is to hold the assets to collect the contractual The main differences are the following:
cash flows; and i. Initial measurement at fair value will exclude
(b) The contractual terms of the financial asset give rise, transaction cost. Thus the Carrying value of the
on specified dates, to cash flows that are solely payments investment will be $40 and the transaction cost will be
of principal and interest on the principal outstanding. charged to P&L
DR Investment $40m DR P&L $1m
All other debt instruments are subsequently measured at
CR Cash $40m CR Cash $1m
fair value. The classification of an instrument is
determined on initial recognition and reclassifications are
ii. The gain on fair value will be $20 ($60-$40) at the
only permitted on the change of an entity’s business
reporting date. This will be recognised in P&L
model and are expected to occur only infrequently.
iii. The profit of 10$ will also be recognised in P&L as
Traveler cannot measure the instrument at fair value as
per (a) above.
the objective for holding the financial asset has not
changed. The impairment loss is calculated by Example 24
discounting the annual payments using the original A Ltd has entered into derivative contract to hedge a fall
effective interest rate of 6.7% as follows: in the fair value of its investment property. This indicates
that the contract have been entered into for trading
Carrying value 29·00
purpose. The hedge will qualify as a fair value hedge and
PV of future cash flows:
should initially be measured at its fair value i.e the cost of
Year 1 8m x 1/1·067 7·50
entering into the contract.
Year 2 8m x 1/1·0672 7·03
Year 3 8m x 1/1·0673 6.59 Subsequently, any change in fair value should be
21.12 recognized in the profit and loss account as a gain or loss.
Impairment to profit or loss 7.88 A gain in the open market value of the asset has resulted
in a loss in a fair value of the derivative by $0.1m. The
loss will be charged to the P&L.
Example 23
(a) FVTOCI Example 25
Initial measurement at fair value will be the amount paid
including transaction cost as this is a financial asset A Ltd is concern about a rise in the raw material used in
classified as FVTOCI. its production and has entered into futures contract for
DR Investment $41m trading purpose.
CR Cash $41m This represents a cash flow hedge because its objective it
The increase in fair value $19 ($60-$41) at the reporting to prevent the excess payment for raw material in future.
date will be recorded in equity and will not be recycled to It should initially be recognized at fair value which is the
P&L on disposal. initial cost of entering into the transaction with
DR Investment 19 subsequent changes in fair value being identified as either
CR Equity (OCI) 19 effective or ineffective. The effective portion of the hedge
On sale of the investment, the risk and reward of is recognised in other comprehensive income until the
ownership is transferred thus the investment must be transaction is settled where it is recycled back into the
derecognised. Any gain or loss will be recognised in P&L P&L account. The ineffective portion is recognised
but the previous gain ($19) will not be reclassified to immediately in the profit or loss account as a gain or loss
P&L. This can be transferred to retained earnings. in fair value.
DR Cash 70
Example 26 – Investment risk: the insurance company insures against
this risk for Alexandra. The insurance premium is
PK Ltd’s risk is restricted to its contribution. Thus this is determined every year; the insurance company can
a defined contribution plan. The total contribution by PK transfer part of this risk to Alexandra to cover shortfalls.
ltd is 10% *$6m = $0.6m Therefore, the risk is not wholly transferred to the
insurance company.
DR P&L (pension expenses) $0.60
– Individual transfer of funds: on transfer of funds, any
CR Cash (45*12) $0.54
surplus is refunded to Alexandra while unfunded amounts
CR Accrued Pension fund $0.06
have to be paid; a risk that can preclude defined
PK ltd will accrue for the unpaid contribution at the end contribution accounting.
of the period. – The agreement between Alexandra and the employees
does not include any indication that, in the case of a
Example 27 shortfall in the funding of the plan, the entitlement of the
employees may be reduced. Consequently, Alexandra has
This is a defined contribution plan. The company does
a legal obligation to pay further amounts if the insurer did
not recognise any assets or liabilities for the defined
not pay all future employee benefits relating to employee
contribution scheme but charges the contributions
service in the current and prior periods.
payable for the period ($10 million) to operating profit.
The contributions paid by the employees will be part of Therefore the plan is a defined benefit plan.
the wages and salaries cost and when paid will reduce
cash. Example 29
Example 28 A past service cost of $3 million should be recognised

immediately as those benefits have already vested and
Alexandra’s new pension arrangement does not meet the should be charged as an expense. The remaining $1
criteria as outlined in IAS 19 Employee Benefits for million should be recognised on a straight line basis over
defined contribution accounting as the risks remains with the two year period that it takes to vest. The pension
Alexandra. entitlement has not yet vested fully as it is given in return
The following should be taken into account: for services over the remaining two year period. Thus the
The insurance contract is between Alexandra and the following entries will be required to account for the past
insurance company, not between the employee and the service costs. $m
insurer; The insurance company determines the insurance
premium payable by Alexandra annually. DR P&L $(3 + 0·5) 3.5
The premium for the employee is fixed and the balance of CR defined benefit obligation (NCL) 3.5
the required premium rests with Alexandra, exposing the
entity to changes in premiums depending on the return on
the investments by the insurer. Example 30
The insurance contract states that when an employee
This is a defined benefit plan. Accounting for the plan
leaves Alexandra and transfers his pension to another results in a liability of $15 million as at 31 October 2007,
fund, Alexandra is liable for or is refunded the difference a charge in the other comprehensive income of $5·3
between the benefits the employee is entitled to based on million, and an expense in the profit and loss account of
the pension formula and the entitlement based on the $16·7 million for the year. i.e. Service cost of $20m and
insurance premiums paid. interest income of $3.3
Alexandra is exposed to actuarial risks, i.e. a shortfall or
over funding as a consequence of differences between 1. Reconciliation of plan asset and liability
returns compared to assumptions or other actuarial Plan Asset
differences. FV @ 01/11/06 190.0
There are the following risks associated with the pension Expected return 13.3
plan: Benefit paid (19.0)

Contribution 17.0
Actuarial gain (balancing figure) 23.7
FV @ 30/10/07 225.0
Plan Obligation
PV @ 01/11/06 200.0
Interest expense 10.0
Current service expense 20.0
Benefit paid (19.0)
Actuarial loss (balancing figure) 29.0
PV @ 30/10/07 240.0
2. Movement in net liability
Net liability 10.0
interest income (3.3)
current service cost 20.0
contribution (17.0)
Actuarial loss (balancing figure) 5.3
PV @ 30/10/07 15.0

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1 Professional and ethical behaviour of the

4. Provisions, contingencies and events after the

7 IAS 19 Employee Benefit

8 IFRS 2 Share based payment

IPE P2 ADOFO Page 1

The professional duty of the accountant is simply the

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PK Ltd also paid an insurance premium of $2,000

The company has adopted the revaluation model for

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Initial measurement A direct-mail marketing company acquires a

Subsequently an entity can measure an intangible Research and Development

IPE P2 ADOFO Page 7

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Discuss how the above event would be accounted for

IPE P2 ADOFO Page 9

Two main criteria: Current Assets

The board of the company approved the relocation of

IPE P2 ADOFO Page 10

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Only direct restructuring costs are accrued for. These

IPE P2 ADOFO Page 12

Note that if adjusting events occur after the financial

Adjusting events after the financial statement has

Recognition and measurement

Adjusting events: An entity shall adjust the amounts

Non adjusting events: An entity shall not adjust the

IPE P2 ADOFO Page 14

Operating Leases Operating Lease

IPE P2 ADOFO Page 15

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IPE P2 ADOFO Page 17

Subsequent measurement Example 18

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The terms of PK Ltd’s plan are as follows:

IPE P2 ADOFO Page 23

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Hybrid transactions Modification – Altering the terms of an arrangement

IPE P2 ADOFO Page 25

Explain with calculations how the above transaction will

Cancellation and settlement during vesting period

Upon cancellation (unless forfeiture by the counter party

Upon settlement, payment made is deducted from the

IPE P2 ADOFO Page 26

The framework however proposes a radically Revalued Amount 01/04/12 300,000

On signing of the lease agreement a liability is

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Example 4 Recoverable Amount 19

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IAS 37 requires that entities should not recognise

31/12/2013 174,082 17,408 (70,000) 121,490 Rental Income (57,023)

30/06/2014 121,490 12,149 (70,000) 63,639 15,130