Revenue From Contracts

Revenue from Contracts
IFRS 15
Level Tested on CPA PEP
Exam Level Tested Importance (low, medium, or high)
Core 1 Module Level A High
Assurance Elective Level A High
Scope
IFRS 15
Effective for annual periods beginning on or after January 1, 2018, the revenue recognition criteria for
IFRS financial statements will be under IFRS 15.
There is no change to revenue recognition criteria under ASPE 3400.
The IFRS 15 focuses on a contract-based approach. As the name implies, the contract-based approach
focuses on the contracts with customers.
It is important to note that this section (IFRS 15) does NOT apply to the following customer contracts:
 Financial instruments contracts
 Lease contracts
 Insurance contracts
 Non-Monetary contracts between entities in the same line of business
Definition
 IFRS 15 is called a contract-based (also known as the asset-liability) approach.
 Customer Contract: The IFRS 15 focuses on customer contracts. As such there has to be a
customer in the contract for the IFRS 15 to be applicable. To be considered a customer entity, it
has to obtain goods or services in exchange for consideration.
 Contract: Contracts can be written, oral, or implied by the company’s ordinary business

practices. The term contract here is for accounting purposes and doesn’t have to be same as in
the legal definition.
 A contract doesn’t exist if each of the parties in the contract has the right to terminate
an unperformed contract without an approval from another party and without the
compensation to the other party
Revenue Recognition criteria - Steps in Revenue Model

There are 5 steps in Revenue Model:
i) Identify the contract(s) with the customer
ii) Identify the performance obligations in the contract
iii) Determine the transaction price
iv) Allocate the transaction price to performance obligations
v) Recognize revenue when each performance obligation is satisfied
There are individual criteria’s in each of these steps above and discussed below.
Step #1 - Identify the contract(s) with the customer
A contract exists when all five of the following criteria are met:
i) The contract has been approved by all parties and parties are committed to perform their obligations
ii) The rights regarding goods or services to be transferred to buying party can be identified.
iii) Can identify payment terms
iv) The contract has commercial substance.
Commercial substance = means that the risk, timing, or amount of company’s current or future cash
flows is expected to change as a result of the contract. Commercial substance exists if the terms of the
contract is consistent with the selling parties line of business.
v) Collection is considered probable i.e. “More likely than not” the seller will get cash after assessing the
customers creditworthiness, financial resources and intentions to pay.
Key points:
a. If each party to the contract has the right to terminate an unperformed contract without paying any
compensation to the other party, then a contract does not exist.
b. If the criteria above is not met and there is no contract then you can still recognize revenue ONLY if
one of the following two things happen.
o All or substantially all of consideration is received from the customer and there is no further
obligation to perform services or deliver goods and it’s non-refundable; or
o Consideration is received from the customer that is non-refundable and the contract has been
terminated.
c. Modifications to the original contract: Treat the modified contract as a separate contract it the two
conditions are present:
o The change in the scope of the contract is due to the addition of distinct goods or services; and
o The price of the contract is increased by the amount of the seller’s stand-alone selling price of
the additional goods or services and any appropriate adjustments to price to reflect the
circumstances of the particular contract.
c.1 – If a contract modification is not considered to be a separate contract: In that case, the seller has
to account for additional goods or services as below:
o Termination approach i.e. replace the original contract with a new contract: Only if the
remaining goods or services are distinct from goods or services transferred on or before
modification.
o Continuation approach i.e. treat the modification as part of the original contract and adjust
revenue accordingly: Only if remaining foods or services are not distinct.
o Combination of the above two approaches.
d. Combining two or more contracts. A seller should combine two ore more contracts at or near the
same time with the same customer or someone related to the customer, if any of the following
criteria are met:
o The contracts are negotiated as a package with a single commercial objective; or
o Amount of consideration to be paid in one contract depends on the price or performance of the
other contract;
o The goods or services promised in the contracts (or some goods or services promised in each of
the contracts) are a single performance obligation.
Step#2 - Identify the performance obligations in the contract
A performance obligation is a promise to a customer to transfer one of the following:
1. a good or service (or a bundle of goods or services) that is distinct
2. a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer
Good or service is considered to be distinct if both of the following criteria’s are met.
i) The customer can benefit from the good or services on its own or with other readily available
resources (by using, consuming, or selling it); and
ii) The promise to transfer the good or service is separate from the other promised good or service
in the contract. That is this good or service is being purchased as separate item as opposed to be part
of a larger good or service. You need to consider the following factors in assessing this point:
o Good or service does not significantly modify another good or service promised in the contract
o Good or service is not highly dependent on, or interrelated with, other goods or services
promised in the contract
o The entity does not provide significant integration of the good or service with other goods or
services promised in the contract
If the two criteria are not met, then the goods or services are not considered to be distinct and are
bundled with other goods and services to be provided under a contract until a distinct performance
obligation is created.
Step#3 - Determine the transaction price
 The transaction price is the amount of consideration the company expects to receive in
exchange for providing the goods or services, excluding amounts collected on behalf of third
parties such as sales tax.
 The transaction price must reflect any variable consideration if it is “highly probable”

that it won’t be revised or reversed in the future.
 Variable consideration can result if there are discounts, refunds, rebates,

penalties or other similar items.
 2/10, n/30, means a customer will get a 2% discussion if they pay within 10 days
of purchase but the regular due date is 30 days
 Refunds or sale with a right of return: The expected amount is set up when sale is
recognized as a reduction in revenue with an offsetting liability and is reassessed at the
end of each year.
Other points:
 The non-cash consideration is measured at fair value and included in the transaction
price.
 If the payment and date of transfer of the goods or services is more than one year apart
then you should discount the payment and recognize interest revenue separately.
Step#4 - Allocate the transaction price to performance obligations
 If in step#2, only a single performance obligation was identified, then this step is not required.
 Otherwise the transaction price is allocated among multiple produces based on their relative
stand alone selling price.
 If a stand-alone selling price is not directly available from other sales, the seller will need to
estimate an appropriate allocation considering all available information that is available.
 The following methods can be used to estimate the stand-alone price:
 Adjusted market assessment approach: The seller will evaluate the same price
for similar good or service sold in the market. This may include referring to
competitor’s prices and adjusting as necessary.
 Expected cost + margin approach: The seller will estimate its costs and then ads
an appropriate margin.
 Residual approach: – total transaction price less the total of available

standalone selling prices. The approach can only be used if one of following
criteria is met:
 The entity sells the same good or service to different customers for a
wide range of amounts; or
 The entity has not yet established a price for that good or service and it
hasn’t previously been sold on a stand-alone basis
 Transaction price involves a discount:
The bundles are usually at a lower price that the individual standalone selling prices. The general rule is
to allocate the discount proportionately to all performance obligations unless the following criteria are
met, in which case the discount is allocated entirely to one or more, but not all, performance
obligations:
 Each good or service is distinct and sold regularly on a standalone basis;
 The seller also regularly sells some of those distinct goods or services at a discount;
 The discount being attributed to the goods or services is substantially the same as what
the seller regularly offers on the good or service.
 Treatment of variable consideration:
Allocate only to the performance obligation(s) to which the variable consideration is attributable i.e. it is
attributable to one or more, but not all, performance obligations.
 Changes in the transaction price:
 The change in the transaction price should be adjusted to the performance obligations
on the same basis as at contract inception. This means that the seller should not update
or reallocate the transaction price to reflect changes in standalone selling prices after
contract inception.
 If allocated to a performance obligation that is already completed, recognize in period in

which the transaction price change occurred and do not have to adjust retrospectively.
Step#5 - Recognize revenue when each performance obligation is satisfied
 The seller should recognize revenue when it has satisfied its performance obligation. This could
be satisfied over time or at a point in time.
 Performance obligation is satisfied when control of the goods or services are transferred to the
customer.
Performance obligation satisfied over time

Performance obligations are satisfied over time if the any one of the criteria is met:
 The customer receives or consumes the benefits provided by the seller simultaneously for e.g.
monthly subscription of netflix
 The sellers performance enhances or creates an asset that the customer controls as the asset is
created or enhanced for e.g. work-in-progress
 The sellers performance does not create an asset with an alternative use to the seller and the
seller has an enforceable right to payment for performance completed to date for e.g. a custom
equipment that is in work in progress and the seller cannot sell to a third party because it is
customized.
Once any of the criteria above is met, the revenue needs to be recognized over time.
The seller need to recognize revenue at the end of each period by comparing how much work has been
completed in relation to the total amount of work to be performed under the contract. The calculation is
is same as % of completion method in the old IAS11. Refer to our notes in IAS 11 for example on % of
completion.
IFRS 15 allows for the following two methods. Once the method is chosen then the seller must use the
same method of measuring progress consistently.
1. Output method:
 Recognize revenue by prorating the value of the goods or services transferred to date relative to
the remaining goods or services promised under the contract i.e. the proportion of the good or
service that has been delivered compared with the proportion that still has to be delivered.
1. Input method:
 Recognize revenue by prorating the total inputs used relative to the total expected input.
If the seller is unable to use one of the two methods because you can’t reasonably measure progress
to completion, then seller should only recognize revenue to the extent of costs incurred until you can
reasonably measure.
Performance obligation satisfied at a point in time
 If a performance obligation is not satisfied over time, then the seller satisfies the performance
obligation at a point in time.
 Indicators that performance obligation is satisfied at a point in time includes the customer
having:
o Physical possession of goods or
o Legal title or
o The risk and rewards of ownership or
o Accepted the goods or received the services

o Sellers right to payment
Other Issues under IFRS 15
The IFRS 15 also addresses the following topics
 Sale with a right of return
 Warranties
 Principal versus agent considerations
 Customer options for additional goods or services
 Customers’ unexercised rights
 Non-refundable upfront fees
 Licensing
 Repurchase arrangements
 Consignment arrangements
 Bill-and-hold arrangements
 Customer acceptance
Changes to ASPE
 There is no change to ASPE Section 3400.

Financial Instruments
IAS 39 and IAS 32
Definition
 Financial Instrument is a contract that creates a financial asset for one entity and a financial
liability or equity instrument of another
 Financial Asset
o cash
o an equity instrument of another entity;
o a contractual right to receive cash or another financial asset from another entity; or
o a contractual right to exchange financial assets or financial liabilities with another entity
under conditions that are potentially favourable to the entity
 Financial Liability
o a contractual obligation to deliver cash or another financial asset to another entity; or
o a contractual obligation to exchange financial assets or financial liabilities with another

entity under conditions that are potentially unfavourable to the entity; or
Measurement of Financial Instruments
Categories of financial instruments under IFRS
1. Fair value through profit or loss (FVTPL)
 Financial Assets and Financial Liabilities
 Either it was designated to be FVTPL or
 It meets the conditions of FVTPL:
o Acquired with the intention of selling (asset) or re-purchasing (a liability) in near-term
o Recent actual pattern of short-term profit-taking
 Usually, assets in this category are designated as such
Measurement = FV every balance sheet date (gains/losses to P&L)
o This category can be used with both financial assets and financial liabilities; therefore, under
IFRS you can have financial liabilities that are intended to be settled in the near term designated
to be FVTPL
2. Held-To-Maturity (HTM)
 Financial Assets
 Fixed maturity (i.e. cannot be shares)
 Fixed payments
 Intent and ability to hold till maturity
 Can be publically traded
Measurement = amortized cost using the effective interest method
3. Loans and Receivable (L&R)
 Financial Assets
 Fixed payments or determinable payments
 Not publically traded
 Can’t be shares
Measurement = amortized cost using the effective interest method
4. Available For Sale (AFS or FVTOCI)
 Designated as such
 It is catch-all category (You do not have the intention to sell – not FVTPL, but no intention to also
hold till maturity – not HTM or Loans/Receivable)
Measurement = FV at every B/S date (gains/losses through OCI); the cumulative gains/losses in AOCI
gets transferred to P&L when the instrument is sold or impaired.
5. Investment in non-publically traded shares where FV cannot be reliably measured
measure @ cost
Transaction costs
 Transaction costs = costs that are directly attributable to the acquisition, issue or disposal of a
financial asset or financial liability (i.e. legal fees, commission, transfer taxes)
 Only capitalize transaction costs and fees on investment purchases if they’re not going to be

revalued to FV @ the end of the period (i.e. active market does not exist or not designated to be
held at FV)
 In other words, If you’re buying an investment that’s carried at cost then capitalize transactions
costs
Reclassifications into and out of FVTPL, HTM, L&R
1. Into FVTPL
Not Allowed.
2. Out of FVTPL
Rare situation – ONLY allowed to reclassify to loans and receivable if when you purchased this
investment, it would have met the definition of loans and receivable, had you not designated it as a
FVTPL and entity has the intention and ability to hold the financial asset for the foreseeable future or
until maturity. The FV on date of reclassification becomes the new cost basis going forward.
3. Out of AFS (into loans and receivable only)
 Only to the loans or receivable if it met the definition of loans and receivable had it not been
designated as available for sale
 Ability and intent to hold it till maturity or the foreseeable future
 amortize any gains or losses in OCI to net income over the life of the asset using the effective
interest method
4. Out of HTM - allowed to reclassify to AFS
 Revalued to FV and gain or loss put to OCI – on date of reclassification
Impairment of financial assets carried as Available for Sale
 For financial assets, you need to assess at the end of every fiscal year if there are indications of
impairment
 If there are indications of impairment write down the financial asset to the:
o PV future expected CF (using original effective interest rate) by holding the asset
 What if the value of these financial assets subsequently increases?
o Assets carried at cost – cannot reverse
o Assets carried at amortized cost – can reverse to extent of previous losses but the asset
balance cannot be any higher than it would be had the impairment not taken
Impairment of financial assets carried as Available for Sale
1. Shares that are AFS
 Reclassify the accumulated gain or loss in AOCI to NI
 The impairment loss recognized in P&L
 Reversal is done through OCI
2. Bonds (debt instruments) that are AFS
 Reclassify cumulative loss in AOCI to Profit or Loss
 Impairment and reversal done through P&L
o Put the loss to AOCI and then just reclassify it to P&L or
o Reclassify the AOCI and show the impairment loss in P&L

Presentation of a Financial Instrument
 The issuer either records financial instruments as liabilities or equity
 The key takeaway here is substance over form – just because someone issues preferred shares;
in legal form it may be shares; but in substance, it may be a liability (so please consider the
definition of financial assets/liabilities before making the classification)
Compound Financial Instrument
 A compound financial instrument has both equity and liability components
Example: ABC Bank issues to me a convertible debt; the bank has the option to convert this debt into a
fixed number of shares (say 100 shares).
o This particular instrument has both a debt component – i.e. the loan
o It also has an equity component because the bank has the option to convert to a fixed number
of shares
o One other thing to take away is that because this is a convertible debt, it is less risky for the
lender and therefore it has a lower interest rate
Compound financial instruments under IFRS
 Measure the liability first (this is usually the PV of the liability using interest rate without the
conversion option) and allocate the remainder of the proceeds to the equity.
Mandatory Redemption/ Retractable Shares
 This is when either you must redeem your shares or the holder of the shares has the right to
force you to redeem
o Substance over form kicks in; it is a financial liability because it is a contractual

obligation to deliver cash
o Once these “shares” are presented as a financial liability any dividends you pay are
actually interest and shown as interest expense (rather than a dividend through R/E)
 If shares have mandatory redemption/retractable feature and they are like common shares (i.e.
the most subordinate) then it is treated as equity. These shares must have all the following
properties to be classified as equity:
o Most subordinate of all shares ( like common shares)
o Available to 100% of common shareholders
o The shares get a pro rata share of the residual equity
o No preferred rights to other share classes
o Redemption event same for all classes

 The reasoning behind this is that there needs to be at least one common share (i.e. the most
subordinate class of shares) issued for a company
Contingent settlement provisions
 Example: I issue shares for $5/share; if the share price in the future drops below $2/share I am
forced to redeem all the shares.
 Under IFRS the default is to measure this as a financial liability – since the issuer does not have
the right to avoid delivering cash
Perpetual Debt
 These are debt instruments where the principal is never due; you just continue to pay interest
 Is this a financial liability or equity?
o This is a financial liability because a contractual obligation to deliver cash (interest)
o The PV of the future interest cash flows is shown on the balance sheet as a financial
liability accounted for using amortized cost method!
Offsetting Financial Asset and Financial Liability
A financial asset and a financial liability shall be offset, and the net amount reported in the balance
sheet, only when an entity:
1. Currently has a legally enforceable right to set off the recognized amounts; and
 Therefore, there needs to be a contract in place that allows a borrower to offset the
amount owing to and owing from a creditor
 In rare cases, a debtor may have a legal right to apply an amount due from a third party
against the amount due to a creditor, provided that there is an agreement among the
three parties that clearly establishes the debtor’s right of set-off.
2. Intends either to settle on a net basis or to realize the asset and settle the liability
simultaneously.
Comparison to IFRS
 Compound financial instruments – IFRS does not give option to measure equity at zero
 The Impairment testing is different under IFRS (see above)
 Shares issued under tax planning arrangements under IFRS don’t have to be classified as equity
if they do not meet the definition
 ASPE doesn’t use the 4 categories to group the financial instruments

Inventory: IAS2
Exam Level Tested Importance (low, medium
What is included in inventory costs?
Inventory cost includes any cost to bring the inventories to their present location and condition. It is
made up of the following components:
 Purchase price (includes import duties, non-recoverable taxes, transport, handling costs)
 Conversion costs (direct labour, direct variable overhead, fixed overheads) – Only applicable if
you purchase inventories and further process them. Mostly applicable to manufacturing
companies.
 Any other costs spent to bring the inventory to the present condition and location (interest,
costs to design products)
 Inventory costs are record net of rebates and discounts
Other Inventory costs
(absorption costing = both fixed and variable costs included in inventory)
 Allocation of fixed and variable Overhead (amortization, maintaining factory building, utilities,
etc.) – Specific to manufacturing companies.
 Storage costs necessary to the production process(cheese, vine)
 Amortization of intangible assets – i.e. development costs (i.e. spent time developing a new
product that you are now selling)
 Borrowing costs if inventory takes time to get ready for use and sale (ASPE and IFRS)
o Remember under ASPE – capitalizing borrowing costs is optional
o The cost of inventories that are ready for their intended use or sale when acquired does
not include interest costs.
 Wasted materials, labour, or other production processes
o Normal waste – Included in inventory

o Abnormal Waste – Expensed i.e. it is not part of inventory costs
What’s NOT Included in Inventory Costs
 Inventory storage costs
 Abnormal Waste (Materials, labour or any other production costs)
 Administrative overheads
 Selling costs
Inventory Valuation Methods:
 Not determined based on actual physical flow b/c only (1) FIFO, (2) Weighted Average Cost
(WAC), or (3) Specific Identification (SI) are allowed
 FIFO – Oldest stuff sold first (COGS); new stuff remains in ending inventory
o FIFO will result in higher inventory balance on the B/S, lower COGS and higher
net income when prices are increasing.
 WAC = (Beg. Inventory cost + Purchases cost to date)/(quantity of inventory in Beg Inv. +
Quantity of purchases to date)
o You then allocate this average cost to the Ending Iventory and COGS
o Weighted average calculation is dependent on whether a periodic or perpetual

method is used. Both periodic and perpetual method is discussed below.
 Specific identification – COGS = actual inventory sold; Ending Inventory = actual

inventory remaining based on count
 LIFO is no longer allowed under ASPE and IFRS
 The cost of inventories of items that are not ordinarily interchangeable (i.e. the same)
and goods or services produced and segregated for specific projects are costed using specific
identification of their individual costs. SAME FOR IFRS.
o If you have inventory for specific projects or they are different from all others you need
to use specific identification
o Example: Custom-made goods, homes, etc…
 Interchangeable inventories are costed using FIFO or WAC

 Inventories with similar nature and use should use the same cost formula; this means that one
set of inventories can be costed using FIFO, while another set (with a different nature and use) is
costed using WAC (i.e. assuming that these inventories are interchangeable)
Periodic vs. perpetual inventory :
 These are the two type of inventory systems that a company can use to value their inventory.
 Periodic – The inventory valuation is dependent on the inventory count. Periodic inventory
systems update a company’s inventory information periodically (monthly, quarterly, or yearly)
when inventory is physically counted. The inventory count number becomes the ending
inventory. Until inventory is physically counted, a company using a periodic inventory system is
unable to calculate COGS or ending inventory and it is unaware of the number of units sold.
 Perpetual – inventory value is constantly updated with each transaction of purchase or sale of
inventory. The COGS and ending inventory can be calculated at any time if company is using
perpetual method. An inventory count is still required at least annually to verify the perpetual
system numbers and to identify shrinkage.
 Periodic vs. perpetual will calculate different COGS and ending inventory only under WAC. For
FIFO and SI the COGS and ending inventory are the same under both periodic and perpetual
method.
Example
Example – Calculation of ending inventory and cost of goods sold – perpetual and periodic systemsThe
following information relates to FIFI Ltd.’s inventory transactions during the month of June.
Units Cost/unit
June 1 Opening inventory 8,000 $15
June 6 Purchases 12,000 $16
June 10 Sale 12,000
June 12 Sale 3,000
June 24 Purchase 10,000 $17
June 29 Sale 7,000
Calculate COGS and ending inventory under the following:a. FIFOb. Weighted average,
perpetualc. Weighted average, periodicWhich of the methods in a or b/ a or c will yield higher profit?
Click here for solutions & more practice questions
Lower of cost and NRV - you can reverse under both IFRS and ASPE
 NRV = Net Realizable Value = amount you can sell the inventory for under normal course of
business, net of cost to sell
 NRV is an entity specific value, so for example if you entered into a forward contract to sell your
inventory below your current cost, you need to write down your inventory
 You should test inventory on an item-by-item basis rather than grouping everything; but there
are times when grouping is appropriate, for example, if you are testing the NRV for the exact
same products or if you have two inventories that are sold together.
Indications of impairment
o Obsolescence – this is especially true with high tech products (watch out for these on cases!)
o Damaged products (recalls, defects)
o Products sitting in inventory for too long (i.e. longer than normal inventory cycle)
o Perishable Items (food products)
o Economic factors (i.e. recession)
Inventory write-down reversal
 The amount of any reversal of any write-down of inventories, arising from an increase in net
realizable value, shall be recognized as a reduction in the amount of inventories recognized as
an expense (cost of sales) in the period in which the reversal occurs.
Writing down Raw Material Inventory
 Write down to NRV (usually the replacement cost) only If you can’t sell the finished goods at a
profit
By-products
 By-products = secondary products you get from producing a certain product
 Allocate costs to the main product and the by-product on a “rational and consistent basis”
 When the by-product is immaterial, you can measure the by-product at the NRV and subtract it
from the total product cost to value the main product.
 You can pool the entire costs to produce the main product and the by-product, and allocate the
entire cost to the main product and the by-product using the selling price of main and by-
products (most common way to handle by-product costing).
 Other basis: allowed as long as rational and consistent
 Weight – acceptable (careful not to overvalue inventory)

o Example: You produce chicken breasts; but in the process, you have by-products
like wings and legs.
o Step 1: You take the total costs to make the breasts and the by-products (wings
and legs)
o Step 2: Allocate this by the weight of the parts (breast, wings, and legs)
o Step 3: Remember once you allocate; you need to see if the cost < NRV; if not
you may have a write-down
Example
Example – Lower of cost and net realizable value
The following cost and NRV details are available for casual and formal wear of Mimi Ltd.
Product Units Unit Cost NRV
Casual wear – Product A 26 360 501
Casual wear – Product B 20 515 453
Formal wear – Product A 10 200 200
Formal wear – Product B 16 217 210
a. Calculate the ending inventory balance for casual wear and formal wear clothes using the lower of
cost and NRV.
b. Calculate the ending inventory balance for casual wear and formal wear clothes using historical value.
c. Compare the difference and comment on the faithful representation of the inventory value?
Allocating Fixed and Variable Production Overhead Costs to Inventory
Variable Production Overhead Costs:
 Variable production overheads are those indirect costs of production that vary directly, or nearly
directly, with the volume of production, such as indirect materials and indirect labour
 Allocate these to inventory on the basis of actual costs
Fixed Production Overhead Costs (see ASPE 3031:14)

 Fixed production overheads are indirect costs of production that remain relatively constant
regardless of the volume of production, such as:
o depreciation and maintenance of factory buildings and equipment, and
o the cost of factory management and administration.
 Fixed production overhead costs are allocated to inventory based on the normal operating
capacity of the production facilities
o You can use actual level of production only if it approximates the normal capacity
o So if you have a season where capacity is very low; you’d still use the cost per unit of
actual FC that corresponds to normal capacity
o Unallocated overheads are recognized as an expense in the period in which they are

incurred
o In periods of abnormally high production, the amount of fixed overhead allocated to

each unit of production is decreased so that inventories are not measured above cost.
o This happens when actual production > normal capacity
Example of Fixed Production Overhead Allocation:
In the current year…
Opening Inventory = 0 units

Ending Inventory= 5,000 units
Sales=2,000 units
Total production = 5,000 + 2,000 = 7,000 units
Suppose actual FC (fixed cost) = $40,000
Suppose normal operating capacity = 8,000 units
Total FC/Normal Capacity = $40,000/8000 units = $5 per Unit
EI = 5000*$5=25,000
COGS = 2000*$5=10,000
Total allocated FC = 25,000 + 10,000 = 35,000
Expense = unallocated fixed costs = 40,000-35,000=5,000
Comparison to ASPE
Comparison to ASPE
 IAS 2 Inventories is generally converged with ASPE 3031

 One difference is with borrowing costs – under ASPE can choose to capitalize borrowing costs
relating to inventory that takes substantial time to get it ready for sale; whereas under IFRS
borrowing costs for qualifying assets are capitalized.
Business Combinations, Consolidated and Separate Financial Statements
IFRS 7, IAS 27
General
 A business combination is a transaction or other event in which an acquirer obtains control of

one or more businesses
 All business combinations are accounted for using the acquisition method
 Some formulas you should remember:
o Acquisition cost + Non-controlling Interest – FV of the net identifiable assets = Goodwill
o Acquisition cost + NCI – BV of the net identifiable assets = Acquisition Differentials
o Acquisition differential +- FV increments of the net identifiable assets = Goodwill
Acquisition cost (or purchase price) includes the following:
 FV of asset transferred at the acquisition date (including cash)
 FV of the liabilities incurred
 Equity Issued by the acquirer
 FV of contingent considerations – we recognize it even if we think we will not end up paying
Contingent Considerations – is usually an obligation of the acquirer to transfer additional assets or

equity interests to the former owners of an acquiree as part of the exchange for control of the acquiree
if specified future events occur or conditions are met:
 If contingent consideration is to issue shares that are fixed in quantity – Equity (credit entry)
 If contingent consideration is to issue Shares that are fixed in $ (dollar) amount – Liability

(credit entry)
 If contingent consideration is to pay out cash – liability (credit entry)
Non-controlling Interest – two methods
1. FV of the Non-controlling Interest
2. NCI shareholders’ % of the Net Identifiable Assets
 When using this method; the NCI shareholders are not attributed any portion of the
goodwill for consolidation purposes
There are two ways of calculating the FV of the non-controlling interest (method 1):
1. [Acquisition Cost/ Controlling shareholders^’% of ownership] * NCI shareholders’ % of

ownership
2. Use valuation to calculate the FV of the NCI (price per share * # of shares held by NCI
shareholders
The identifiable assets are measured at the acquisition date fair values:

o An asset is identifiable if it either:
 is separable (i.e., capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged, either individually or together with a related
contract, identifiable asset or liability); or
 Arises from contractual or other legal rights
Bargain Purchases
Occurs when the acquisition cost + NCI is less than the FV of the net identifiable assets; there will be a
negative good will and will be recognized as a gain in P&L.
Contingent Liabilities
 Contingent Liabilities – special rule under Business Combinations
 Recognize a contingent liability that’s measurable at the date of a business combination
 EVEN IF NOT PROBABLE that future outflow of economic benefits will take place– this is because
under business combinations we value the net identifiable assets at the fair value.
Costs excluded from acquisition cost:
 The following are not part of acquisition cost:
o Non-compete clauses signed with previous shareholders – these are transactions

between shareholders and not an incremental cost of acquisition
o Transaction costs (commissions) – expensed
o Professional fees (legal, accounting, consulting) – these are also expensed
1-year measurement period rule
 You have one year from date of acquisition to revise (in light of new info) the acquisition cost,
fair values of the net identifiable assets, and therefore G/W – adjustments are made to goodwill
and acquisition differentials
 Anything after this period is treated as an error – and accounted for as a retrospective
adjustment
 1 year measurement period Applies for ASPE and IFRS
 Doesn’t apply to contingent consideration
o Changes in contingent consideration is not considered a measurement period

adjustment; so the one-year measurement rule doesn’t apply to contingent
considerations
 So don’t adjust goodwill
 Adjust it directly to NI if it’s a contingent consideration that is a liability

 Adjust it to SE if it’s a equity settled contingent consideration (RE or
c/surplus)
Accounting for Subsidiaries
 Must consolidate all subsidiaries (enterprise controlled by another enterprise)
Exception from the Equity Method; if ALL are met:
1. The investor (you) is also a subsidiary of another company (the parent.), and all of parent’s
shareholders agree to allow the subsidiary (you) to not consolidate your subs.
2. Investor’s debt or equity instruments are not publically traded, nor are they in the process of
getting their instruments publically traded.
3. Ultimate parent prepares consolidated F/S
If all these three criteria are met, you would then use the Financial Instruments section to account for
these investments (IAS 32/39)
The basics of consolidation
1. Balance sheet
 Identifiable assets and liabilities = BV of Parent + BV of Sub + Unamortized Acquisition

differential
 Goodwill = calculated amount (see above) less impairment to date
 NCI = (NCI ownership % ) * (Sub’s Net Assets+ unamortized acquisition differential)
 Eliminate intercompany payables/receivables
 Eliminate inter-company gains and losses on up-stream and down-stream transactions
 Consolidated R/E = Parent’s RE + change in Sub’s RE since acquisition +- amortization of

acquisition differential since acquisition.
2. Income Statement
 Revenues/Expenses = Revenue/Expenses of Parent + Revenues/Expenses of Sub
 Amortization of acquisition differential = expenses
 Adjust for intercompany transactions (gains/losses)
 NCI’s % of NI = (NI of Sub +- Acquisition differential amortization )*NCI %
Going from significant influence to control – very easy 3 step process
1. Revalue the equity investment to FV
2. (Step 1 + Cash Paid )/% invested total = Acquisition Cost
3. Everything else is the same (as the acquisition method above to calculate goodwill)
Loss of Control
 Under ASPE, you report a gain/loss on the income statement
 any investment retained in the former subsidiary is measured at the carrying amount at the date
when control is lost
Consolidating when the Year End of the Parent doesn’t match the YE of the Sub
 We consolidate using the closest F/S but subsidiary’s F/S and the Parent’s F/S cannot have a
difference of over 3 months
 As long as the F/S of the Sub and the Parent are less than 3 months apart, we can consolidate
using these F/S and then make adjustments for the effects of significant transactions or events
that occur between that date and the date of the parent’s financial statements
 If they are more than three months apart – no option but to update the sub’s F/S to make it less
than three months apart.
Assembled vs. Specialized Workforce
 Assembled workforce = existing collection of employees that permits the acquirer to continue
to operate an acquired business from the acquisition date
 Specialized workforce = represent the intellectual capital of the skilled workforce — the (often
specialized) knowledge and experience that employees of an acquiree bring to their jobs
 Assembled workforce is already part of goodwill
 However, if you can separately identify the specialized workforce from the assembled workforce
(i.e. does it meet the definition of net identifiable asset?), then you can capitalize it separate as
an intangible asset.
Investments in Associates
IAS 28
General
Associate = an entity, including an unincorporated entity such as a partnership, over which the investor
has significant influence and that is neither a subsidiary nor an interest in a joint venture.
Investment subject to significant influence
Investment subject to significant influence = able to exercise significant influence over the strategic
operating, investing and financing policies of an investee even when the investor does not control or
jointly control the investee.
1. The ability to exercise significant influence may be indicated by
 representation on the board of directors
 participation in policy-making processes
 material intercompany transactions
 interchange of managerial personnel or
 provision of technical information
2. Under IFRS, if an investor holds 20 per cent or more of the voting power of the investee, it is
presumed that the investor has significant influence, unless it can be clearly demonstrated that
this is not the case.
Accounting methods for Investment subject to significant influence under IFRS
Equity Method
 Investment balance on the B/S = Cost + Proportionate Share of Investor’s NI – Dividends from
Investee
 Proportionate Share of Investors NI = (NI of the investee – Acquisition differential

amortization ± upstream profits ± downstream profits ) * your share %
 Investment Income = proportionate share of investor’s NI
 Under IFRS the nature of the gains/losses stays the same; for example if you picked up gains in
OCI from the investee; you also need to show this income under OCI and not under NI.
Exception from the Equity Method; if ALL are met:
1. The investor is also a subsidiary of another company (the parent.), and all of the parent’s
shareholders agree to allow the subsidiary (you) to not use the equity method.
2. Investor’s debt or equity instruments are not publically traded, nor are they in the process of
getting their instruments publically traded.
3. Ultimate parent prepares consolidated F/S
o If all these three criteria are met, you would then use the Financial Instruments section
to account for these investments (IAS 32/39)
What happens if losses in the investee’s books grind down the investment account to below zero (i.e.
causes a negative investment account balance)?
 An investor’s share of losses in excess of the carrying amount of the investment shall be
recorded (as a liability) if:
o the investor has guaranteed the obligations of the investee; or
o investor is committed to provide further financial support to the investee; or
o The investee seems assured of imminently returning to profitability.
Impairment of an Investment
 Use IAS 39 (financial instruments: recognition and measurement) to determine whether it is

necessary to recognise any additional impairment loss. If so you need to write down the
investment to:
 The higher of
o Value in Use = PV of the future cash flows from holding this investment
o FV less cost to sell
Comparison to ASPE
 ASPE allows cost or equity method
 Impairment testing is different
Interests in Joint Ventures
IAS 31
Definitions
 Joint Venture = is a contractual arrangement where two or more parties take on an economic
activity that is subject to joint control
 Joint control = is the contractually agreed sharing of control over an economic activity, such that
the strategic financial and operating decisions relating to the activity require the unanimous
consent of the parties sharing control (the venturers)
Three types of Joint venture and Basis of Accounting
There are three different types of joint ventures:
1. Jointly controlled operations
• Each venturer uses its own assets, incurs its own expenses and liabilities, and raises its own financing
• The revenue from the sale of goods/services by the joint venture and expenses incurred in common
are shares among the venturers
• No corporation, partnership or other enterprise established
2. Jointly controlled assets
• The venturers jointly control one or more assets contributed or acquired for the joint venture and
used for joint venture’s business activities
• Each venturer gets a share of the output generated by the assets and share certain expenses (such as
equipment maintenance)
• No corporation, partnership or other enterprise established
3. Jointly controlled enterprise
• A joint venture that involves the establishment of a corporation, partnership or another enterprise;
each venturer has an interest in the enterprise
• There is joint control over the economic activity of the enterprise.
Basis of Accounting
 Under IFRS, the basis of accounting for a joint venture depends on the type of joint venture:
Type of Joint Venture Accounting Method Description
The venturer includes:
 On its balance sheet: the as

incurs; and
Proportionate consolidation
 On its income statement: it
Jointly controlled operations venture
 On its balance sheet: its sha

incurred jointly with the oth
Jointly controlled assets Proportionate consolidation
 On its income statement: an
output of the joint venture,
 On its balance sheet: its sha

enterprise
or
 On its income statement: it
Jointly controlled enterprise Equity method controlled enterprise
Equity method – see investments in
Transactions between a venturer and a joint venture
Sale of asset from venturer to joint venture (downstream):
 When a venturer contributes or sells assets to a joint venture, and has transferred the

significant risks and rewards of ownership, the venturer shall recognize only the portion of the
gain or loss that is attributable to the interests of the other venturers.
o But it needs to recognize the full amount of any loss when the contribution or sale
provides evidence of a reduction in the net realizable value of current assets or an
impairment loss
Example
 Venturer who owns 40% of the joint venture sells inventory with BV=1000 and FMV=2000
 Venturer can recognize gain = (2000-1000)*60% = $600
Sale of asset from venturer to joint venture (downstream):
 When a venturer purchases assets from a joint venture, it needs to wait until it resells the
assets to an independent party, before recognizing its share of the gains or losses
o But it needs to recognize its share of the losses immediately when it represents a

reduction in the net realisable value of current assets or an impairment loss
Example
 Venturer who owns 40% of the joint venture buys inventory with BV=1000 and FMV=2000
 Assume venturer has not sold this inventory to a third party
 Assume the JV has total profits of $5,000
 When venturer consolidates, it needs to remove the upstream gains such that consolidated NI =
(5,000-1,000)*40% = $1,600
 When venturer sells inventory to a third party, it can then recognize $1,000*40% = $400
Exemptions from Proportionate Consolidation and Equity Method
1. The Joint Venture is classified as held for sale (use IFRS 5 – non-current assets held for sale and
discontinued operations)
2. An entity will be exempt from JV accounting if all the following apply:
o Venturer is a wholly owned subsidiary or partially owned subsidiary whose owners do

not object to not using JV accounting; and
o Venturer’s debt or equity instruments are not traded publically not are they in the
process of doing so; and
o Ultimate parent prepared consolidated financial statements
An investor in a joint venture that does not have joint control:
 Account for the investment using with IAS 39 (financial instruments); or
 If it has significant influence in the joint venture use IAS 28.
SIC 13: jointly controlled entities — non-monetary contributions by venturers (advanced topic)
 Applies to situations where
o non-monetary assets are contributed to a jointly controlled entity (JCE) in exchange for
equity interest (shares); and
o the JCE is accounted for using the proportionate consolidation method
 when non-monetary assets are contributed to a JCE in exchange for equity interest, the venturer
recognises the portion of a gain or loss attributable to the equity interests of the other
venturers except when:
o the significant risks and rewards of ownership of the contributed non-monetary assets

have not been transferred to the JCE; or
o the gain or loss on the non-monetary contribution cannot be measured reliably; or
o the contribution transaction lacks commercial substance
b. If any of these 3 exceptions apply, the venturer cannot recognize any gain or loss;
o however, if the venturer receives monetary assets or other non-monetary
assets alongside the equity interest, it can recognize a portion of the gain or loss.
o SIC 13 doesn’t provide guidance on how this portion is to be calculated, but the
common approach (assuming cash is received alongside equity interests) is as follows:
o Other venturer’s share of gain (A)=(FMV – CV of assets contributed)* other

venturer’s interest
o Gain immediately recognized (B) = Cash – [(Cash/total FV)*BV]
o Deferred gain = A – B è this is amortized to income over the useful life of the
contributed asset (if asset is sold by the JV, take unamortized balance into
income)
o Venturer’s share of the gain = (FMV-CV of assets contributed)* venturer’s

interest è is deducted from the value of the contributed asset when
proportionate consolidating
Property, Plant and Equipment
IAS 16

Exam Level Tested Importance (low, medium
Definition
Property, plant and equipment (PPE) are tangible assets that:
a. are held for use to produce/supply goods and services, for rental to others, or for administrative
purposes; and
b. are expected to be used during more than one period.
The cost of PPE are recognized as PP&E asset only when:
o probable that future economic benefits* associated with the item will flow to the entity; and
o the cost of the item can be measured reliably
 *benefits can be direct or indirect
 spare parts/servicing equipment = PP&E if meets the criteria in 1 and 2 above. If not, then
classify as “inventory”
 major spare parts/stand-by equipment = PPE when expected to be used more than one period
or it can be used only in connection with an item of PPE
Measurement at recognition
 PPE is initially measured at cost
 Any costs directly attributable to bringing the asset to the location and condition necessary for
it to be capable of operating in the manner intended by management.
 Cost includes the following:
o Purchase price import duties and non-refundable taxes, net of discounts and rebates
o Estimate costs of dismantling, removing, or restring the site on which the PPE is located
(Asset Retirement Obligation)
 If land and building is acquired together. The cost should be prorated based on their relative fair
market values
Directly attributable costs
 Directly attributable costs include the following:

o costs of employee benefits arising directly from the construction or acquisition of the
item of property, plant and equipment;
o costs of site preparation;
o initial delivery and handling costs;
o installation and assembly costs;
o costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location and
condition (such as samples produced when testing equipment); and
o professional fees (legal, accounting)
Directly attributable costs
 the following are not capitalized:
o costs of opening a new facility;
o costs of introducing a new product or service (including costs of advertising and

promotional activities);
o costs of conducting business in a new location or with a new class of customer (including
costs of staff training); and
o administration and other general overhead costs.
Incidental Operations
 Incidental operations = not necessary to bring the item to the location and condition necessary
for it to be capable of operating in the manner intended by management
 The revenues and expenses incurred from incidental operations are recognized in the income
statement
 Example (car park until construction starts)
Borrowing Costs
 See borrowing costs notes
 Borrowing costs on qualifying assets are capitalized
Example
ABC Inc. made the following expenditures during the current fiscal year. Determine if it these
expenditures should be classified as PP&E or should be included in expense account. Explain your
conclusion.
1. Acquisition of a piece of land that has a small building to construct a new building – do we need to separa
2. Demolition of the small building on the land to make it available for constructing a new building
3. Purchase of building permit to construct
4. Paving a parking lot
5. Landscaping around the building
6. Purchase of new equipment
7. Sales tax on new equipment (refundable)
8. Installation of the new equipment
9. Minor repairs to the old equipment
Measurement after recognition
As discussed above, the initial recognition has to be at cost. After the initial recognition, there are two
methods of measuring PPE:
1. Cost Model
2. Revaluation Model – Only allowed under IFRS, not ASPE
1. Cost Model
Under the cost model, the assets are recorded at their carrying value calculated as below. Most
companies choose to use the cost model due to its simplicity.
 Carrying value = Historical cost less any accumulated depreciation and any accumulated
impairment losses
2. Revaluation Model
Under the revaluation model, assets are recorded at fair market value (FMV). There is still depreciation
each year. The method of depreciation is same for both the cost and revaluation model. The revaluation
method works as below:
 At each revaluation date, the PPE is revalued to fair value
 The revalued amount is still amortized over the remaining useful life of the PPE
 Revaluations should be done with sufficient regularity to ensure that the carrying amount does
not differ materially
o There is no requirement to do a revaluation every year
o Revaluations should be done at a minimum every 3 to 5 years
 Carrying value = Fair value @ date of revaluation less accumulated depreciation and any
accumulated impairment losses
 If an item of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs needs be revalued on the same date
o If one building is measured with the revaluation method; all other buildings must also
be revalued on the same date that the building is revalued at.
 The fair value must be reliably available. The FMV can be obtained through an independent
appraisal or an active market for such assets.
How to use the revaluation method
Initial Revaluation
 gains – goes to other comprehensive income – revaluation surplus (OCI)
 loss – goes to profit & loss (P&L)
Subsequent revaluation
 gains – goes to P&L to the extent of reversing previous losses; the remainder goes to OCI
 losses – goes to OCI to the extent of reversing gains in OCI; the remainder goes to P&L
Methods to recognize asset basis after revaluation
When assets are adjusted for revaluations, there are two methods that can be used.
1. Elimination method (also called gross carrying amount): In this method, the accumulated
depreciation is set to zero and the asset cost is matched with the fair market value.
2. Proportional method: In this method, both the accumulated depreciation and cost are adjusted
proportionately to achieve an overall asset carrying value to fair market value.
 The revaluation surplus included in accumulated other comprehensive income may be

transferred directly to retained earnings when the asset is derecognised.
o This may involve transferring the whole of the surplus when the asset is retired or
disposed of.
o However, some of the surplus may be transferred as the asset is used by an entity. In
such a case, the amount of the surplus transferred would be the difference
between depreciation based on the revalued carrying amount of the
asset and depreciation based on the asset’s original cost.
o Transfers from revaluation surplus to retained earnings are not made through profit or
loss
Advantages and disadvantages of using the revaluation method
Advantages Disadvantages
 Higher asset value = stronger  Higher amortization = lower net income

balance sheet
 Losses go through P&L
 Better debt to equity
 No benefit on ultimate sale since asset
 Better comprehensive income if already valued at FV; little or no gain on sale
asset increase in value of asset on P&L
Example
Example 1 – ABC Inc. management has decided to use the revaluation method under IFRS to value for
the only land it owns. The following data is available for the land.
Original cost – $1,000,000
FMV at the end of year 1 – $800,000
FMV at the end of year 2 – $1,200,000
Required: Prepare the journal entries to adjust the value of the land for Year 1 and Year 2.
Example 2 – Elimination method
ABC Inc. also has one building and the management has decided to use the revaluation method under
IFRS. The management has decided to account for using the elimination/gross carrying amount
method.
Cost – $1,000,000; Residual value – $0; Life – 10 years
Required: Prepare all the journal entries for Year 1 and Year 2.
Deprecation
 Depreciation methods
o depreciation method should reflect the pattern in which the asset’s future economic
benefits are expected to be consumed by the entity
o The depreciation method applied to an asset shall be reviewed at least at each financial
year-end and (changes are accounted for as a change in estimate)
o Examples of methods
 straight-line method,
 declining balance method
 units of production method/output method
 Depreciation of an asset begins when it is available for use; i.e. when it is in the location and
condition necessary for it to be capable of operating in the manner intended by management.
 Depreciation does not stop when the asset becomes idle or is retired from active use unless the
asset is (i) fully depreciated or (ii) in the case depreciation method used is output method. Also,
when the asset becomes held for sale or derecognized, depreciation stops
 Depreciation stops when Carrying Value≤ Residual Value
 Amortization expense under straight-line= (cost – residual value)/useful life
o Useful life = period asset will be available for use or units expected to be obtained from
the asset
o Residual value = amount asset is expected to be sold for @ end of useful life less the
cost of disposal
o The residual value and the useful life of an asset shall be reviewed at least at each
financial year-end (any changes accounted for as change in estimate)
 Amortization expense under declining balance method = (cost – accumulated

depreciation)*depreciation rate
o This depreciation continues until the carrying amount equals the salvage value, and
then depreciation stops.
 Amortization expense under output method = (Cost – residual value)/Estimated production in

lifetime * current period production
Example
Example 1 – Straight line method with change in estimate

ABC Inc. purchased equipment for $25,0000 on January 1, 2017. The estimated useful life was
determined to be 5 years. On Jan 1, 2018, the management revised the estimate of useful life to 10
years.
Salvage value = $2,500; Residual value = $5,000.
Compute depreciation expense for 2018.
Example 2 – output method with change in estimate
ABC Inc. purchased equipment for $25,000 on January 1, 2017. The estimated useful life is 150,000
units. On Jan 1, 2018, the management revised the estimate of useful life to 120,000 units. In 2017,
25000 units are produced and in 2018 30,000.
Salvage value = $2,500; Residual value = $5,000.
Compute depreciation expense for 2018.
Depreciation of significant components/parts
 Each part of an item of property, plant and equipment with a cost that is significant in relation to
the total cost of the item MUST be depreciated separately
o Compare cost of part to total cost of the PPE
o No choice but to amortize separately if it is a major component of the asset.
 An entity allocates the cost of a PPE to its significant parts and depreciates each significant part
separately
 Example: Airplane (separately depreciate engine, airframe, cabin); Building (roof, windows)
 Significant parts may have different useful lives than full asset and IFRS wants us to have a more
accurate amortization expense
Subsequent Costs
Major replacement
 Examples: replacing the interior wall of a building, engine of a plane
 The cost of the replacement is capitalized (as long as probable future economic benefits and
cost is measurable)
 The carrying amount of the parts that are replaced (the old parts) is derecognized
o even if the old part was not separately recognized and amortized, we will still need to
estimate an amount and derecognize it
Major Inspection
 Example: Air Canada performs major inspections on planes every 5 years
 Cost of major inspection is capitalized (as long as probable future economic benefits and cost is
measurable)
 Any remaining carrying amount of the cost of the previous inspection is derecognized
o even if the previous inspection was not separately recognized and amortized, we will
still need to estimate an amount and derecognize it
Comparison to ASPE
 incidental operations; under ASPE income from incidental operations are capitalized until
substantial completion
 only cost model is allowed under ASPE i.e. revaluation method is not allowed
 Straight line depreciation calculation is different under ASPE
 Under ASPE, significant components are separately amortized only when practicable and the
useful life of the significant component is estimable
 ASPE uses betterments vs. repairs in determining subsequent capitalization
 Under ASPE no requirement to derecognize the carrying value of the items replaced
Investment Property
IAS 40
Definition
Investment property is property (land or a building) held (by the owner or by the lessee under a finance
lease) to earn rentals or for capital appreciation or both, rather than for:
1. use in the production or supply of goods or services or for administrative purposes; or
2. sale in the ordinary course of business.
The following are examples of investment property:
 land held for long-term capital appreciation
 land held for a currently undetermined future use (If an entity has not determined that it will
use the land as owner-occupied property or for short-term sale in the ordinary course of
business, the land is regarded as held for capital appreciation.)
 a building owned by the entity (or held by the entity under a finance lease) and leased out under
one or more operating leases
 a building that is vacant but is held to be leased out under one or more operating leases
 property that is being constructed or developed for future use as investment property
Multipurpose properties
 Some properties comprise a portion that is investment property and owner occupied property
(example, rent out 9 floors, and use the 10th floor for office space)
 If these portions could be sold separately (or leased out separately under a finance lease), an
entity accounts for the portions separately
 If the portions could not be sold separately, the property is investment property only if an
insignificant portion is held for use in the production or supply of goods or services or for
administrative purposes.
Ancillary services to the occupants of a property it holds.
 If the services are insignificant to the arrangement as a whole, treat the property as an
investment property
o Example: owner of an office building provides security services to the lessees
 If the services are significant to the arrangement as a whole, treat the property as owner-
occupied property (IAS 16)
o Example: owner owns and manages a hotel, services provided to guests are significant
to the arrangement as a whole
A property that is held by a lessee under an operating lease
 A property that is held by a lessee under an operating lease may be classified and accounted for
as investment property if, and only if, the property would otherwise meet the definition of an
investment property and the lessee uses the fair value model for the asset recognised
Recognition
 Investment property shall be recognized as an asset when:

o it is probable that the future economic benefits that are associated with the investment
property will flow to the entity; and
o the cost of the investment property can be measured
Measurement at recognition
 An investment property shall be measured initially at its cost
 Cost = purchase price and any directly attributable expenditure (see IAS 16 notes)
 Directly attributable expenditure includes: professional fees for legal services, property transfer
taxes, and other transaction costs
 Two Methods to account for Investment Properties:
1. Fair value model; or
2. Cost model
 Regardless of the method chosen, IAS 40 requires you to determine the fair value (If you use the
cost method, you must disclose the fair value)
1. Therefore, the cost of doing a valuation is not a valid reason to not choose the fair value
model
o Note that when a property that is held by a lessee under an operating lease (see above)
is classified as an investment property, all investment properties must use the fair value
model
1. Fair Value Model
 Investment property is measured at fair value
 If you use the fair value model, you need to measure all investment properties using the fair
value model (if the fair value is not available for a certain investment property, you can use the
cost model for that investment property)
 The fair value of investment property shall reflect market conditions at the end of the reporting
period
 Gains and losses are recognized in the income statement (P&L)
 No amortization is taken if the fair value model is used
 The fair value of investment property is the price at which the property could be exchanged
between knowledgeable, willing parties in an arm’s length transaction
2. Cost Model
 Once you choose the cost model, must measure all investment properties using cost model
 Cost model = the use of IFRS for PPE (IAS 16)
 Therefore you can use the cost or revaluation method
Change in Use
Owner Occupied to investment property:
 If an owner-occupied property becomes an investment property that will be carried at fair

value, an entity shall apply IAS 16 up to the date of change in use.
 The entity shall treat any difference at that date between the carrying amount of the property
in accordance with IAS 16 and its fair value in the same way as a revaluation in accordance with
IAS 16 (initial revaluation gain go through OCI – see IAS 16 notes)
 If an investment property that will not be carried at fair value continue with IAS 16
measurement
Inventory to Investment Property:
 For a transfer from inventories to investment property that will be carried at fair value, any
difference between the fair value of the property at that date and its previous carrying amount
shall be recognised in profit or loss
Investment Property to Inventory
 For a transfer from investment property carried at fair value to inventories, the deemed cost
subsequent to change in use = fair value @ date of the change in use
 Gain or loss goes to P&L
 When an entity decides to dispose of an investment property without development, it

continues to treat the property as an investment property until it is derecognized
Investment Property to Owner Occupied
 For a transfer from investment property carried at fair value to owner-occupied property, the
deemed cost subsequent to change in use = fair value @ date of the change in use
 Gain/loss goes to P&L
Comparison to ASPE
 No separate criteria under ASPE for investment properties; investment properties are accounted
for as a property, plant and equipment (section 3061)
Intangible Assets
IAS 38
Definition
 An intangible asset is an identifiable non-monetary asset without physical substance that the
entity has control over
 identifiable
o The definition of an intangible asset requires an intangible asset to be identifiable

to distinguish it from goodwill.
o An asset is identifiable if it either:
1. is separable, is capable of being separated or divided from the entity and sold,
transferred, licensed, rented or exchanged; or
2. arises from contractual or other legal rights, regardless of whether those rights

are transferable or separable from the entity or from other rights and
obligations.
 Control= entity has the power to obtain the future economic benefits flowing from the asset
Recognition and measurement
 An item is recognized as an intangible asset if it meets the following :
o It meets the definition of an intangible asset (identifiable/control); and
o It meets the recognition criteria:
a. it is probable that the expected future economic benefits that are attributable

to the asset will flow to the entity; and
b. the cost of the asset can be measured
 An intangible asset is measured at cost
Separate acquisition
 The cost of a separately acquired intangible asset comprises:
o its purchase price, including import duties and non-refundable purchase taxes, after

deducting trade discounts and rebates; and
o any directly attributable cost of preparing the asset for its intended use
 Examples of directly attributable costs are:
o costs of employee benefits arising directly from bringing the asset to its working
condition;
o professional fees arising directly from bringing the asset to its working condition; and
o costs of testing whether the asset is functioning properly.
 Examples of expenditures that are not part of the cost of an intangible asset are:
o costs of introducing a new product or service (including costs of advertising and
promotional activities);
o costs of conducting business in a new location or with a new class of customer (including
costs of staff training); and
o administration and other general overhead costs
Incidental Operations
 the income and expenses of incidental operations are recognized immediately in profit or loss
Internally generated goodwill
 Goodwill is an asset representing the future economic benefits arising from other assets
acquired in a business combination that are not individually identified and separately recognized
 Internally generated goodwill shall not be recognized as an asset
Internally generated intangible assets
 To assess whether an internally generated intangible asset meets the criteria for recognition, an
entity classifies the generation of the asset into:
o a research phase; and
o a development phase
Research
 original and planned investigation undertaken to gain new scientific or technical knowledge and
understanding
 expenditure on research is expensed
 examples of research activities:
o activities aimed at obtaining new knowledge;
o the search for, evaluation and final selection of research findings/other knowledge;
o the search for alternatives for materials, devices, products, processes, systems or

services; and
o the formulation, design, evaluation and final selection of possible alternatives for new or
improved materials, devices, products, processes, systems or services.
Development
 the application of research findings or other knowledge to a plan or design for the production

of new or substantially improved materials, devices, products, processes, systems or services
before the start of commercial production or use
 An intangible asset arising from development is capitalized if all of the following are met:
1. the technical feasibility of completing the intangible asset so that it will be available for
use or sale.
2. its intention to complete the intangible asset and use or sell it.
3. its ability to use or sell the intangible asset.
4. how the intangible asset will generate probable future economic benefits.
 existence of a market for the output of the intangible asset or the intangible

asset itself or, if it is to be used internally, the usefulness of the intangible asset
5. the availability of adequate technical, financial and other resources to complete the
development and to use or sell the intangible asset.
6. its ability to measure reliably the expenditure attributable to the intangible asset during
its development.
 If an entity cannot distinguish the research phase from the development phase, the entity treats
the expenditure as if it were incurred in the research phase only
 Examples of development activities are:
o the design, construction and testing of prototypes and models;
o the design, construction and operation of a pilot plant that is not of a scale economically
feasible for commercial production; and
o the design, construction and testing of a chosen alternative for new or improved
materials, devices, products, processes, systems or services.
 Internally generated brands, mastheads, publishing titles, customer lists and items similar in

substance are not recognized as intangible assets (these are expensed)
What do you capitalize as development costs?
 costs of materials/services used to generate the intangible asset
 costs of employee salaries, wages and benefits to generate intangible asset
 fees to register a legal right
 amortization of patents and licenses used to generate the intangible asset
 interest costs
What not to capitalize as development costs?
 selling, administrative and other general overhead expenditure unless this expenditure can be

directly attributed to preparing the asset for use;
 cost of training staff to operate the asset
Recognition of an Expense
 Expenditures that are incurred that provide future economic benefits but for which no
intangible asset is set up are to be expensed
 Examples include:
o Research costs
o Start-up costs
 Establishment costs such as legal and secretarial costs incurred in establishing a

legal entity,
 expenditure to open a new facility or business (i.e. pre-opening costs)
 expenditures for starting new operations
 launching new products or processes (i.e. pre-operating costs)
o training costs
o advertising and promotional activities
o relocating costs
o reorganization costs
Intangible assets are measured using:
1. cost model; or
2. revaluation model
1. Cost model
 cost less any accumulated amortization and any accumulated impairment losses
2. Revaluation model (same as IAS 16)
 Carried at fair value at the date of revaluation less subsequent accumulated amortization and
impairment losses
 Revaluations should be done with sufficient regularity to ensure that the carrying amount does
not differ materially from the fair value
o There is no requirement to do a revaluation every year
 Initial Revaluation
o gains – goes to other comprehensive income – revaluation surplus (OCI)
o loss – goes to profit & loss (P&L)

 subsequent revaluation
o gains – goes to P&L to the extent of reversing losses; the remainder goes to OCI
o losses – goes to OCI to the extent of reversing gains in OCI; the remainder goes to P&L
 If an item of intangible asset is measured using the revaluation model, all other intangible assets
in that class needs to be revalued on the same date (unless if there is no active market)
o If one patent is measured with the revaluation method; all other patents must also be
revalued on the same date that the patent is revalued at
 Intangible assets with finite useful lives need to be amortized
 Amortization expense = (cost – residual value)/useful life
 Residual value
o The residual value is assumed to be $NIL unless, at the end of the useful life, the asset is
expected to have a useful life to another entity and;
 There is a commitment from a 3rd party to purchase it @ the end of useful life;

or
 Residual value can be determined by referring to transactions in an existing

market, and the market is expected to exist at the end of the useful life
 The method of amortization should reflect the pattern in which the economic benefits are
consumed form the intangible asset; if the pattern cannot be determined, use straight-line
method
o Must review amortization method and useful life at each year-end
Intangible assets with indefinite useful lives
 An intangible asset with an indefinite useful life is not amortized
 an entity is required to test an intangible asset with an indefinite useful life for impairment by
comparing its recoverable amount with its carrying amount:
o annually, and
o whenever there is an indication that the intangible asset may be impaired
 The useful life of an intangible asset that is not being amortized shall be reviewed each period
(any changes are handled as a change in estimate)
Comparison to ASPE
 No revaluation model under ASPE

 Under ASPE there is a policy choice to expense or capitalize development costs
 The impairment testing is to be done whenever events indicate (doesn’t have to be annually)
o Impairment losses are not reversed under ASPE
 ASPE Section 3064 includes goodwill impairment rules; the rules for goodwill impairment is
covered under IAS 36 (impairment of assets) and the calculation is different
Intangible Assets — Web Site Costs
SIC Interpretation 32
General
 A web site designed for external access may be used for various purposes such as to:
o advertise products and services,
o provide electronic services, and
o sell products and services
 A web site designed for internal access may be used to:
o store company policies/customer details, and
o search relevant information.
Stages of a web site's development
1. Planning – undertaking feasibility studies, defining objectives and specifications, evaluating

alternatives and selecting preferences.
2. Application and Infrastructure Development –obtaining a domain name, purchasing and

developing hardware and operating software, installing developed applications and stress
testing.
3. Graphical Design Development – includes designing the appearance of web pages.
4. Content Development –creating, purchasing, preparing and uploading information, either

textual or graphical in nature, on the web site before the completion of the web site’s
development
 Once website development is completed, the operating stage begins (in this stage the company
maintains the website)
 The cost of purchasing, developing, and operating hardware (e.g. servers and Internet
connections) of a web site are accounted for as property, plant and equipment (IAS 16)
 This section also doesn’t apply to situations where you are in the business of creating websites
for others
 Expenditure on an Internet service provider hosting the entity’s web site is expensed.
Criteria
To capitalize the costs of website development you need to meet the following criteria:
1. It is probable that the expected future economic benefits that are attributable to the asset will
flow to the entity
2. The cost of the asset can be measured reliably
3. Must meet criteria for capitalizing development phase costs:
a. the technical feasibility of completing the website
b. its intention to complete the website and use it
c. its ability to use website
d. how the website asset will generate probable future economic benefits
e. the availability of adequate technical, financial and other resources to complete the
development and to use the website
f. ability to measure the expenditure attributable to the website during its development
An entity is not able to demonstrate how a website developed primarily for promoting and advertising
its own products and services will generate probable future economic benefits; all expenditure on
developing such a website shall be recognized as an expense when incurred.
Stages of website development and accounting Treatment
Stage Accounting Treatment
 Treated like research costs
Planning Stage  Planning stage expenses are expensed
 Capitalized as an intangible asset long as the

expenditure is not for advertising entity’s
Application and Infrastructure products on the website (i.e. photographs of
Development stage, Graphical Design products) and can be directly attributed to the
stage, Content Development stage website development
Operating stage  Expensed
Subsequent Measurement
 Follow IAS 38 and use the cost model or the revaluation model (usually cost model is used)
 SIC 32 recommends that the best estimate of a web site’s useful life should be short
Impairment of Assets
IAS 36
Scope
IAS 36 applies to all assets except for:

 inventories (see IAS 2 Inventories);
 assets arising from construction contracts (see IAS 11 Construction Contracts);
 deferred tax assets (see IAS 12 Income Taxes);
 assets arising from employee benefits (see IAS 19 Employee Benefits);
 financial assets (see IAS 39 Financial Instruments: Recognition and Measurement);
 investment property that is measured at fair value (see IAS 40 Investment Property);
 biological assets measured at fair value less costs to sell (see IAS 41 Agriculture);
 non-current assets (or disposal groups) classified as held for sale
Identifying an asset that may be impaired
 At the end of each reporting period, you need to assess whether there is any indication that an
asset may be impaired. If any such indication exists, you need to estimate the recoverable
amount of the asset
 Regardless of if there are any indications of impairment, you must test the following for
impairment on an annual basis:
o Intangible assets with indefinite useful life; and
o Goodwill
 An asset is impaired when its carrying amount exceeds its recoverable amount
o Recoverable amount is the higher of:
 fair value less costs to sell; and
 it’s value in use = the present value of the future cash flows expected to be
derived from the asset in its present condition from continuing use and
ultimate disposal
 recoverable amount is calculated for each individual asset, but if an asset doesn’t generate cash
flows that are independent from other assets, we calculate recoverable amount for the cash
generating unit
o A cash-generating unit is the smallest identifiable group of assets that generates cash

inflows that are independent of the cash inflows from other assets or groups of assets
 impairment loss = carrying value – recoverable amount
Identifying an asset that may be impaired
 an asset’s market value has declined significantly more than expected
 significant adverse changes in the technological, market, economic or legal environment
 market interest rates have increased (increasing the value in use and recoverable amount)
 the carrying amount of the net assets of the entity is more than its market capitalization
 obsolescence or physical damage of an asset.
 asset becoming idle, plans to discontinue or restructure the operation to which an asset
belongs, plans to dispose of an asset before the previously expected date, and reassessing the
useful life of an asset as finite rather than indefinite
 economic performance of an asset is, or will be, worse than expected.
 For an investment in a subsidiary, jointly controlled entity, or associate, the investor recognizes
a dividends from the investment and evidence is available that:
1. the carrying amount of the investment in the separate F/S exceeds the carrying amounts
in the F/S of the investee’s net assets, including goodwill; or
2. the dividend exceeds the total income of the subsidiary, jointly controlled entity or
associate in the period the dividend is declared
Measuring the recoverable amount of an intangible asset with an indefinite useful life
For an intangible asset with an indefinite useful life, the most recent calculation of the recoverable
amount made in a preceding period may be used in the impairment test for that asset in the current
period, provided all of the following criteria are met:
1. the intangible asset is part of a cash-generating unit (see above), and the assets/liabilities
making up that unit have not changed significantly since the most recent recoverable amount
calculation; and
2. the most recent recoverable amount calculation resulted in an amount that exceeded the
asset’s carrying amount by a substantial margin; and
3. the likelihood that a current recoverable amount determination would be less than the asset’s
carrying amount is remote (very small)
Recognizing and measuring an impairment loss
 when the carrying value is greater than the recoverable amount there will be an impairment loss
 impairment loss = carrying value – recoverable amount
 impairment loss is recognized in profit or loss (unless you use the revaluation model, you treat it
as a revaluation loss in OCI to the extent of revaluation surplus, remainder is “impairment loss”)
 If the recoverable amount subsequently increases, you can reverse the impairment loss to the
extent previously recorded (except for goodwill)
Cash-generating units (CGU) and goodwill
 If it is not possible to estimate the recoverable amount of the individual asset, an entity shall
determine the recoverable amount of the cash-generating unit to which the asset belongs (the
asset’s cash-generating unit)
o This often happens when the asset does not generate cash inflows that are largely
independent of those from other assets
 Example provided in the Handbook:
o A bus company provides services under contract with a municipality that requires
minimum service on each of five separate routes. Assets devoted to each route and the
cash flows from each route can be identified separately. One of the routes operates at a
significant loss.
o Because the entity does not have the option to curtail any one bus route, the lowest
level of identifiable cash inflows that are largely independent of the cash inflows from
other assets or groups of assets is the cash inflows generated by the five routes
together. The cash-generating unit for each route is the bus company as a whole
 Cash-generating units shall be identified consistently from period to period for the same asset or
types of assets, unless a change is justified
 When the carrying value of the CGU> recoverable amount of the CGU, there will be an
impairment loss equal to the excess
 The CGU includes assets that can be attributed directly or allocated on a reasonable and
consistent basis to the CGU
 The CGU does not include liabilities, unless the recoverable amount of the cash-generating unit
cannot be determined without consideration of a liability
Goodwill
 Goodwill acquired in a business combination is allocated each of the acquirer’s CGU that is
expected to benefit from synergies
 Each unit or group of units to which the goodwill is so allocated shall:
a. represent the lowest level within the entity at which the goodwill is monitored for
internal management purposes; and
b. not be larger than an operating segment
 operating segment = component of an entity that does business, whose operating results are
reviewed by the entity’s top management, and for which separate financial information is
available
 A CGU to which goodwill has been allocated needs to be tested for impairment annually and
whenever events indicate there is an impairment
 If the carrying amount of the CGU exceeds the recoverable amount of the CGU, the entity shall
recognise the impairment loss
 The impairment loss shall be allocated to reduce the carrying amount of the assets of the CGU in
the following order:
a. first, to reduce the carrying amount of any goodwill allocated to the CGU; and
b. then, to the other assets of the CGU pro rata on the basis of the carrying amount of
each asset in the unit (group of units).
 No individual asset can be written down below its own recoverable amount (if
determinable)
 Also no individual asset can be written down below Zero
o The most recent detailed calculation made in a preceding period of the recoverable
amount of a CGU to which goodwill has been allocated may be used in the impairment
test of that unit in the current period provided all of the following criteria are met:
a. the assets and liabilities making up the unit have not changed significantly since the
most recent recoverable amount calculation;
b. the most recent recoverable amount calculation resulted in an amount that exceeded
the carrying amount of the unit by a substantial margin; and
c. the likelihood that a current recoverable amount determination would be less than the
current carrying amount of the unit is remote.
Reversal of Impairment Loss
 impairment losses recognized for goodwill is not reversed;
 at each reporting period, determine if previously recognized impairment still exists; If so, the
entity shall estimate the recoverable amount of that asset
 Previously recorded impairment losses (other than for goodwill) can be reversed to the lesser
of:
o The previously recorded impairment loss
o The new recoverable amount
o The would be carrying value (net of amortization) had no impairment loss recognized in
previous years
 A reversal of an impairment loss for a CGU shall be allocated to the assets of the unit, except for
goodwill, pro rata with the carrying amounts of those assets.
 Because the value in use calculation depends on the time value of money, the recoverable
amount (via value in use) may increase simply due to the passage of time; in this case the
impairment loss is not reversed
Comparison to ASPE
 ASPE Section 3063 impairment of long-lived assets doesn’t deal with goodwill and intangibles
with indefinite useful lives (it is covered in section 3064)
 Under ASPE, we compare undiscounted cash flows to the carrying value, and if the carrying
value exceeds the undiscounted cash flows, we write down the asset the fair value
 Under ASPE, impairment of goodwill is done differently (see section 3064)
 Grouping of assets
o Under ASPE, assets are grouped to “asset groups” for purposes of impairment
o Under IFRS, assets are tested individually, unless it doesn’t generate cash flows
independent of other assets (then it gets grouped into a cash-generating unit)
o Under ASPE, an asset group can include liabilities
o Under IFRS, only assets can be grouped to CGU (no liabilities)
 Under ASPE, reversal of impairment loss is not allowed
 Under IFRS, must test impairment annually and whenever events indicate for goodwill and
unlimited life intangible assets (under ASPE, test only when events indicate)
Provisions, Contingent Liabilities and Contingent Assets
IAS 37
Definitions
 A legal obligation is an obligation that derives from: a contract, legislation, or other operation of
law
 A constructive obligation is an obligation that derives from an entity’s actions where:
o by an established pattern of past practice, published policies, or a sufficiently specific

current statement, the entity has indicated to other parties that it will accept certain
responsibilities; and
o as a result, the entity has created a valid expectation on the part of those other parties
that it will discharge those responsibilities
Provisions
 Provision = a liability of uncertain timing or amount
 A provision shall be recognized when:
a. an entity has a present obligation (legal or constructive) as a result of a past event; and
b. it is probable that an outflow of resources will be required to settle the obligation; and
c. a reliable estimate can be made of the amount of the obligation
 probable = more likely than not (greater than 50% chance of happening)
 if any one of these criteria are not met, it is considered a “contingent liability” and is disclosed
Present obligation
 If it is not clear whether there is a present obligation:
o a past event is deemed to give rise to a present obligation if it is more likely than not
that a present obligation exists at the end of the reporting period
Past event
 A past event that leads to a present obligation is called an obligating event
 For an event to be an obligating event, it is necessary that the entity has no realistic
alternative to settling the obligation created by the event. This is the case only:
a. where the settlement of the obligation can be enforced by law; or
b. in the case of a constructive obligation, where the event creates valid expectations in
other parties that the entity will discharge the obligation.
Measurement
 A provision is recognized at the best estimate of the amount required to settle the present
obligation at the end of the reporting period
 Where the provision being measured involves a large population of outcomes, the obligation is
estimated by using expected value.
 Where there is a continuous range of possible outcomes, and each point in that range is as

likely as any other, the mid-point of the range is used
o If one point is more likely, then that point becomes the best estimate
 Provisions are measured before tax
Contingent liabilities
 A contingent liability is:
o a possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity; or
o a present obligation that arises from past events but is not recognized because:
a. it is not probable that an outflow of resources embodying economic benefits

will be required to settle the obligation; or
b. the amount of the obligation cannot be measured with sufficient reliability
 An entity shall not recognize a contingent liability
 a contingent liability is disclosed unless the possibility of an outflow of resources embodying

economic benefits is remote
Contingent assets
 contingent asset = possible asset that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity
 example is a claim that an entity is pursuing through legal processes, and the outcome is
uncertain
 contingent assets are not recognized
 A contingent asset is disclosed, if the inflow of economic benefits is probable
 Contingent assets are continually assessed, and if the inflow of economic benefits
become virtually certain, it is no longer considered a “contingent asset” and it is recognized as
an asset
Reimbursements
 Where the amount required to settle a provision is expected to be reimbursed by another party,
the reimbursement is recognized when it is virtually certain that reimbursement will be
received
 The reimbursement shall be treated as a separate asset on the balance sheet (cannot offset)
 The amount recognized for the reimbursement shall not exceed the amount of the provision
 the expense relating to a provision may be presented net of the amount recognized for a
reimbursement
Changes in provisions
 provisions need to be reviewed at the end of every reporting period, if needed, it should be
adjusted to reflect the current best estimate (done prospectively)
 if no longer a provision (per the definition), it should be reversed
Application of the recognition and measurement rules
Onerous contracts
 onerous contract = is a contract in which the unavoidable costs of meeting the

obligations under the contract exceed the economic benefits expected to be received under it
 i.e. you are going to lose money on this contract no matter what
 the present obligation under the contract shall be recognized and measured as a provision (the
debit entry is a loss)
 provision set up = net cost = unavoidable cost – economic benefits
 the unavoidable cost of meeting the obligation is the lesser of:
a. cost of fulfilling the contract
b. penalties from failing to fulfill the contract
Restructuring
 A restructuring is a program that is planned and controlled by management, and materially

changes either:
a. the scope of a business undertaken by an entity; or
b. the manner in which that business is conducted.
 The following are examples of restructuring:
a. sale or termination of a line of business;
b. closing or relocating business locations
c. changing management structure, for example, eliminating a layer of management
2. recognize a provision when the following two criteria are met:
a. the entity has a detailed formal plan for the restructuring identifying at least:
o the business or part of a business concerned;
o the principal locations affected;
o the location, function, and approximate number of employees who will be
compensated for terminating their services;
o the expenditures that will be undertaken; and
o when the plan will be implemented; and
b. has raised a valid expectation in those affected that it will carry out the restructuring
by:
o starting to implement that plan; or
o announcing its main features to those affected by it.
2. When both criteria are met, it is deemed to be a constructive obligation, and a provision is set
up
3. A restructuring provision shall include only the direct expenditures arising from the

restructuring, which are those that are both:
a. necessarily entailed by the restructuring; and
b. not associated with the ongoing activities of the entity.
Decommissioning or Restoration Liability (Asset Retirement Obligations)
 Similar to asset retirement obligation covered under ASPE 3110
 Decommissioning/restoration is recognized as a
o Liability (per IAS 37 – provisions); and
o As part of Property, Plant and Equipment (IAS 16)
 Reduction in liability due to passage of time (i.e. discounting) is recognized as “interest

expense”
 A liability can occur from legal obligations or constructive obligations
Comparison to ASPE
 contingencies is covered under ASPE section 3290 – Contingencies
 under ASPE, the term provision is not used; instead the term contingent liability is used, even
where an amount is recognized as a liability
 under ASPE, the concept of constructive obligation does not apply
 under ASPE a contingent liability is recognized when probability of loss is likely (rather than
probable); threshold for IFRS is lower
 under ASPE, when there is a range and no best estimate, take minimum amount
 under ASPE, no need to review contingent liability @ end of every period
 under ASPE, contingent assets are disclosed when likely to be realized
 under ASPE, no detailed guidance on Restructuring – since constructive obligation doesn’t

apply, we would likely recognize it when there is a legal obligation
 Under ASPE, onerous contracts and reimbursements are not covered
Agriculture
IAS 41
Scope
This standard applies to:
 Biological assets
 Agriculture produce at the point of harvest
 Government grants related to agriculture activities
Definitions
 Biological asset is a living animal or plant (i.e. sheep, trees, plants, cattle, pigs, bushes, vines)
 Agricultural produce is the harvested product of the entity’s biological assets (i.e. wool, fruits,
cotton, milk, carcass, leaf, grapes)
 Harvest is the detachment of produce from a biological asset (eggs) or the cessation of a
biological asset’s life processes (slaughter)
 Agricultural activity = managing biological transformation and harvest of biological assets for
sale or for conversion into agricultural produce or into additional biological assets
Recognition and measurement
 An entity should recognise a biological asset or agricultural produce only when:
1. the entity controls the asset as a result of past events;
2. it is probable that future economic benefits will flow to the entity; and
3. the fair value or cost of the asset can be measured reliably
Biological Asset
 A biological asset shall be measured on initial recognition and at the end of each reporting

period at its fair value less costs to sell, except where fair value cannot be measured reliably
 If fair value cannot be measured reliably, measure biological asset at cost less accumulated
amortization and accumulated impairment losses
 Once the fair value of such a biological asset becomes reliably measurable, measure it at its fair
value less costs to sell
Agricultural Produce
 Agricultural produce harvested from an entity’s biological assets shall be measured at its fair
value less costs to sell at the point of harvest
 After point of harvest, it is measured using IAS 2 Inventories (i.e. harvested cotton becomes raw
material for clothes) at the lower of cost or net realizable value
Fair Value
 Fair value reflects the current market in which a willing buyer and seller would enter into a
transaction (the quoted price in that market)
 the fair value of a biological asset or agricultural produce is not affected by forward
contracts the entity entered into (use the current market value)
 If an active market does not exist, an entity uses one of the following, in determining fair value:
o the most recent market transaction price
o market prices for similar assets with adjustment to reflect differences; and
o sector benchmarks such as the value of the value of cattle expressed per kilogram of

meat.
 If fair value cannot be determined using the above methods, uses the present value of expected
net cash flows from the asset discounted at a current market to estimate fair value
Gains and losses
 A gain or loss arising on initial recognition of a biological asset at fair value less costs to sell and
from a change in fair value less costs to sell of a biological asset shall be included in profit or
loss
 A gain or loss arising on initial recognition of agricultural produce at fair value less costs to sell
shall be included in profit or loss
Government grants related to biological assets measured at FV less cost to sell
 An unconditional government grant related to a biological asset measured at its fair value less
costs to sell
o recognised in profit or loss when, the government grant becomes receivable
 If a government grant related to a biological asset measured at its fair value less costs to
sell is conditional, including when a government grant requires an entity not to engage in
specified agricultural activity
o recognise the government grant in profit or loss when the conditions attaching to the

government grant are met
o if the terms of the grant allow part of it to be retained according to the time that has
elapsed, the entity recognises that part in profit or loss as time passes
 for biological assets measured @ cost use IAS 20
Comparison to ASPE
 No separate standard for biological assets (it will be handled under ASPE for inventory or PPE)
o Living plant/animals held for sale as crops/meat = inventory
o Living plant/animals held to produce fruit/milk = capital assets

Accounting For Government Grants And Disclosure Of Government Assistance
IAS 20
Definitions
 Government assistance is action by government designed to provide an economic benefit
specific to an entity qualifying under certain criteria
 Government grants are assistance by government in the form of transfers of resources to an

entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity
Government grants
 Government grants, including non-monetary grants at fair value, should not be recognized until

there is reasonable assurance that:
a. the entity will comply with the conditions attaching to them; and
b. the grants will be received
 note how the grants do not have to be received
 Receipt of a grant does not of itself provide evidence that the conditions of the grant have been
or will be fulfilled
 A forgivable loan from the government is treated like a government grant as long as there
is reasonable assurance that the entity will meet the terms for the forgiveness of the loan
 The benefit of a government loan at a below-market rate of interest is treated as a government

grant
a. The benefit = proceeds – carrying value using effective interest method
b. The benefit is accounted as a government grant
o Government grants are recognized in profit or loss on a systematic basis over the

periods in which the entity recognizes the expenses the related costs for which the
grants are intended to compensate
grants to compensate current Recognize in P&L immediately (the revenue can be netted
period expenses against the expense or shown as a separate revenue item)
 Defer and amortize to income as the related expenses

are incurred(the revenue can be netted against the
expense or shown as a separate revenue item)
Grants to compensate future
period expenses  Grant = deferred revenue
Grants to compensate for the  Defer and amortize to income as the related expenses
acquisition of property, plant are incurred;
and equipment
 the grant can be presented in 2 ways:
1. reduce PPE balance and amortize the balance

remaining (truer cost of asset on B/S); or
2. set up a deferred liability and amortize on the

same basis as PPE
Non-monetary government grants
 Both the asset and grant are measured at the fair value of the non-monetary asset
Repayment of grants related to income
 Repayment of government grants are handled prospectively (i.e. a change in estimate)
 Grants usually become repayable when a condition is broken
Repayment of government grants
 Repayment of a grant related to income shall be applied first to unamortized deferred credit. To

the extent that the repayment exceeds any deferred credit, the repayment is
recognized immediately in profit or loss.
 Suppose the deferred government balance =$900 and I need to pay back the full $1,000 in grant.
 grant for 900; cr. Cash for 1,000, dr. a loss of $100 immediately
Repayment of a grant related to PPE
 Keep in mind that because we amortize a liability to income, the “amortization expense”
becomes lower (this gets reversed whenever a grant becomes repayable)
 Repayment of a grant related to an asset shall be recognised by increasing the carrying amount
of the asset or reducing the deferred income balance by the amount repayable.
 The cumulative additional depreciation that would have been recognized in profit or loss to
date in the absence of the grant shall be recognized immediately in profit or loss
Example
 Suppose you get a $1000 government forgivable loan. In January 2010 to buy a PPE with a UL of
10 years. Now it is December 2011. You broke the terms of the loan, and the entire $1000 is
now payable. You set up a deferred revenue account.
Dr. Deferred Revenue $ 800
Dr. Loss due to lower prior year amort 200
Cr. Cash $(1,000)
 If you used the net PPE method

Dr. Equipment $800
Dr. Loss due to lower prior year amort 200
Cr. Accumulated Amortization $(200)
Cr. Cash (1,000)
Biological Assets
 Grants related to biological assets measured at fair value less cost to sell are covered under IAS
41 Agriculture
Comparison to ASPE
 Under ASPE, when there is a repayment of a government grant, it does not require you to
recognize the cumulative additional depreciation that would have been recognised in profit or
loss to date in the absence of the grant
ANNOUNCEMENT: IFRS 15 has replaced IAS 11, IAS 18, IFRIC 13, IFRIC 15, IFRIC 18 and SIC-31 for
annual period beginning on or after January 1, 2018
The Notes Below are only applicable for annual periods ending before or on Dec 31, 2017.
Revenue
IAS 18
Presenting Revenue: Gross vs. Net Revenue

 The amounts collected on behalf of the principal by an agent are not revenue. Instead, revenue
is the amount of commission
 The principal is the person who:
o sets the prices
o owns the inventory
o is responsible for inventory risk after the sale
o bears the ultimate credit risk of the customer not paying
 The agent is the person who:
o Earns a fixed fee per transaction
o Earns a percentage of the sales
 Example:
o An agent makes a sale of $1,000 on behalf of a principal and remits $950
o The agent will report revenues of $50 (rather than revenues of $1,000 and COGS of
$950)
o The principal will report revenues of $1,000 and show COGS of $50
 Reporting revenue gross vs. net has no effect on the overall net income
Measurement of revenue
 Revenue is measured at the fair value of the consideration received or receivable
 Revenue is recorded net of discounts and rebates
 When the cash flows from the sale is deferred (i.e. a financing transaction) the fair value of the
consideration receivable is the discounted cash flows
 When the fair value of the goods or services received cannot be measured reliably, the revenue
is measured at the fair value of the goods or services given up
 When goods or services are exchanged for goods or services which are of a similar nature and
value, the exchange is not regarded as a transaction which generates revenue.
o Commodities like oil or milk where suppliers exchange or swap inventories in various
locations to fulfill demand on a timely basis in a particular location
o These are treated as a reduction in costs rather than revenue items
Identification of the transaction (Multiple Deliverables)
 it is necessary to apply the recognition criteria to the separately identifiable components of a

single transaction in order to reflect the substance of the transaction
o when a component of a sale
 has stand-alone value (i.e. it may be sold separately alone); and
 the fair value of that component can be objectively measured
o the revenue recognition criteria (below) are assessed for each of the above mentioned
component separately
o revenue for the components can be accounted for using the:
 residual value method – whereby the fair value of one component is measured, and the other
component is measured at the residual amount of the proceeds
o use this method when FV for one component is not determinable
 relative value method – the proceeds is allocated to the components based on their relative fair
value
o use this method when FV for all components are determinable
 Example: A fitness club sells a $1,000 annual gym membership. In addition to annual usage of
the gym, the $1,000 also entitles the user 10 hours with a fitness trainer.
o Stand-alone value ; The monthly usage and the fitness trainer time both have stand-
alone value because a person can buy it separately
o Fair Value; can be objectively because, they are also separately sold
o $1,000 will be allocated to the components using either the relative value or the
residual value method
o The rev rec criteria will be assessed separately for the annual membership and the
fitness trainer time
o The annual membership will be recognized on a straight line basis over monthly
o The fitness trainer time will be recognized as the trainer spends the time with the user
Identification of the transaction (Multiple Deliverables)
Sale of Goods (remember acronym RIMEM)
Revenue from the sale of goods is recognised when all the following conditions are met:
1. the entity has transferred significant risks and rewards of ownership of the goods to the buyer;
2. the entity retains neither continuing managerial involvement to the degree usually associated
with ownership nor effective control over the goods sold;
3. the amount of revenue can be measured reliably;
4. it is probable that the economic benefits associated with the transaction will flow to the entity;
and
5. the costs incurred or to be incurred in respect of the transaction can be measured reliably
 Significant Risks
 In most cases, the transfer of the risks and rewards of ownership coincides with the
transfer of the legal title or the passing of possession to the buyer
 Examples of situations in which the entity has not transferred risks and rewards of
ownership are:
o when the entity retains an obligation for unsatisfactory performance not

covered by normal warranty provisions;
o when the receipt of the revenue from a particular sale is contingent on

whether the buyer sells the goods (consignment arrangements);
o when the goods are shipped subject to installation and the installation is a

significant part of the contract which has not yet been completed by the entity;
and
o when the buyer has the right to return the good and the entity is uncertain
about the probability of return.
 When refunds are offered, as long as the future returns can be reasonably estimated
based on past track record or other relevant factors, a revenue can be recognized (net
of the provision for the return)
 Probable Future Economic Benefits
o If uncertainties exist about the collectability of the amounts due from a sale, this criteria
may not be met (unless you can reliably measure the amount that is uncollectable)
Rendering of services (remember acronym MPSC)
 revenue associated with the transaction is recognized by reference to the stage of completion

of the transaction (percentage of completion method) at the end of the reporting period
when all the following are met:
1. the amount of revenue can be measured reliably;
2. it is probable that the economic benefits from the transaction will flow to the entity;
3. the stage of completion of the transaction can be measured reliably; and
4. the costs incurred for the transaction and the costs to complete the transaction can be
measured reliably
 If any of the 4 criteria above are not met, revenue shall be recognized only to the extent of the
expenses recognized that are recoverable (revenues = expenses, we call this the cost recovery
method)
 Completed contract method is not allowed under IFRS

 Different ways to come up with “stage of completion”
1. surveys of work performed;
2. services performed to date as a percentage of total services to be performed; or
3. the proportion that costs incurred to date relative to the estimated total costs of the
transaction
o When a specific act is much more significant than any other acts, the recognition of
revenue is postponed until the significant act is executed
o When several acts are performed over time, and when no single act is more significant
than the other, revenue is recognized on a straight line basis
Interest, royalties and dividends
 Revenue arising from the use by others of entity assets yielding interest, royalties and dividends
shall be recognized when:
o it is probable that the economic benefits from the transaction will flow to the entity;
and
o the amount of the revenue can be measured reliably.
 Revenue shall be recognized on the following bases:
o interest shall be recognized using the effective interest method
o royalties shall be recognized on an accrual basis
o dividends shall be recognized when the shareholder’s right to receive payment is

established
Comparison to ASPE
 under ASPE, the revenue recognition criteria are slightly different
 under ASPE, the completed contract method is allowed
The Notes Below are only applicable for annual periods ending on or before Dec 31, 2017.
Customer Loyalty Programmes
IFRIC 13
Definition
Customer loyalty programs are used by entities to provide customers with incentives to buy their goods
or services. If a customer buys goods or services, the entity grants the customer award credits (i.e.
points). The customer can redeem the points for awards such as free or discounted goods or services
Scope
This Interpretation applies to customer loyalty award credits (points) that:
 an entity grants to its customers as part of a sales transaction, i.e. a sale of goods, rendering of
services or use by a customer of entity assets; and
 the customers can redeem in the future for free or discounted goods or services
Accounting for customer loyalty programs
 An entity applies the concept of multiple deliverables (from IAS 18) and accounts for the
customer loyalty points as a separately identifiable component of the sale
 The fair value of the consideration received or receivable from the sale is allocated between:
o the award credits (points) and
o the other components of the sale
 The consideration allocated to the award credits (points) shall be measured by reference to
their fair value, i.e. the amount for which the award credits could be sold separately
 recognize the consideration allocated to award credits as revenue when award credits (points)
are redeemed and it fulfils its obligations to supply awards
 The amount of revenue recognized shall be based on the number of award credits (points) that
have been redeemed in exchange for awards, relative to the total number expected to be
redeemed
Comparison to ASPE
 Under ASPE no specific guidance on customer loyalty program; however, based on the concept
of multiple deliverables, it will likely be accounted for similarly
The Notes Below are only applicable for annual periods ending on or before Dec 31, 2017.
Revenue — Barter Transactions Involving Advertising Services

SIC 31
The Issue
 An entity (Seller) may enter into a barter transaction to provide advertising services in exchange
for receiving advertising services from its customer (Customer).
 Advertisements may be displayed on the Internet or poster sites, broadcast on the television or
radio, published in magazines or journals, or presented in another medium.
Accounting for barter transactions involving advertising services
 A Seller that provides advertising services in the course of its ordinary activities recognises
revenue from a barter transaction involving advertising when
o the services exchanged are dissimilar; and
o the amount of revenue can be measured reliably
 An exchange of similar advertising services is not a transaction that generates revenue (a debit
and credit entry is made to expenses)
Comparison to ASPE
 No specific guidance provided under ASPE for the above topic
Non-Current Assets Held for Sale And Discontinued Operations
IFRS 5
Scope
 This section doesn’t apply to the following assets:
o deferred tax assets (IAS 12 Income Taxes)
o assets arising from employee benefits (IAS 19 Employee Benefits)
o financial assets within the scope of IAS 39

o Investment Properties measured using fair value model (IAS 40)
o Biological assets measured at fair value less cost to sell (IAS 41)
 Disposal group = a group of assets to be disposed, possibly with some directly associated
liabilities, together in a single transaction
o The group may include any assets and any liabilities of the entity, including current
assets, current liabilities and assets excluded above.
o If a non-current asset within the scope of this IFRS is part of a disposal group, the
measurement requirements of this IFRS apply to the group as a whole, so that
the group is measured at the lower of its carrying amount and fair value less costs to
sell
 This section also covers disposal groups in addition to individual assets
Classification of non-current assets (or disposal groups) held for sale
 classify a non-current asset (or disposal group) as held for sale if its carrying amount will be
recovered principally through a sale transaction rather than through continuing use
 conditions for classifying a non-current asset as “held for sale”
o the asset (or disposal group) must be available for immediate sale
o in its present condition subject only to terms that are usual and customary for sales of
such assets (or disposal groups); and
o its sale must be highly probable
 For the sale to be highly probable; the following must be met
1. management must be committed to a plan to sell the asset (or disposal

group)
2. an active program to locate a buyer and complete the plan must have

been initiated
3. asset (or disposal group) must be actively marketed for sale at a price
that is reasonable in relation to its current fair value.
4. completed sale within one year from the date of classification
5. actions required to complete the plan should indicate that it is unlikely

that significant changes to the plan will be made or that the plan will be
withdrawn
Measurement of “held for distribution” assets
 measure a non-current asset (or disposal group) classified as held for sale at the lower of its:
o carrying amount; and

o fair value less costs to sell
 amortization would no longer be taken
 a loss is recognized on the write-down
 if the fair value less cost to sell subsequently increases, you are allowed to write up the asset
and recognize a gain to the extent of past impairment losses taken under this IFRS (while asset
was held for sale) and IAS 36 – Impairment of Assets (while asset was held for use)
Classification of non-current assets (or disposal groups) held for distribution to owners
 A non-current asset (or disposal group) is classified as held for distribution to owners when:
o the entity is committed to distributing the asset (or disposal group) to the owners. For
this to be the case,
 the assets must be available for immediate distribution in their present

condition; and
 the distribution must be highly probable. For the distribution to be highly

probable,
o actions to complete the distribution must have been initiated and
o should be expected to be completed within one year from the date of

classification.
o Actions required to complete the distribution should indicate that it

is unlikely that significant changes to the distribution will be made or
that the distribution will be withdrawn
Measurement of “held for distribution” assets
 measure a non-current asset (or disposal group) classified as held for distribution to owners at
the lower of its:
o carrying amount; and
o fair value less costs to distribute
 amortization would no longer be taken
 a loss is recognized on the write-down
 if the fair value less cost to sell subsequently increases, you are allowed to write up the
asset and recognize a gain to the extent of past impairment losses taken under this IFRS (while
asset was held for sale) and IAS 36 – Impairment of Assets (while asset was held for use)
Non-current assets that are to be abandoned
 Non-current assets that are to be abandoned are not considered “held for sale”
 Non-current assets to be abandoned include non-current assets that are to be used to the end
of their economic life and non-current assets that are to be closed rather than sold
Changes to a plan of sale
 If the above-mentioned criteria to classify an asset as held for sale are no longer met (this
usually happens due to changes to the plan), the asset is no longer considered “held for sale”
 The entity should measure a non-current asset that ceases to be classified as held for sale at
the lower of:
a. its carrying amount before the asset was classified as held for sale, adjusted for
any amortization or revaluations that would have been recognized had the asset not
been classified as held for sale, and
b. its recoverable amount at the date of the subsequent decision not to sell
Presentation and disclosure
 present non-current assets classified as held for sale separately from other assets on the
balance sheet
 The liabilities of a disposal group classified as held for sale shall be presented separately from
other liabilities
Discontinued Operations
 A Discontinued operation is when a “component” has been disposed or classified as held for
sale
 A component of an entity includes operations and cash flows that can be clearly distinguished,

operationally and for financial reporting purposes, from the rest of the entity.
o In other words, a component of an entity will have been a cash-generating unit or a

group of cash-generating units while being held for use
 The loss due to measuring a non-current asset held for sale at the fair value less cost to sell is
classified under discontinued operations if the following are met:
o The loss relates to a component;
o The component has either been disposed or classified as held for sale; and
o One of the following must be met; the component:
i. represents a separate major line of business or geographical area of

operations,
ii. is part of a single co-ordinated plan to dispose of a separate major line of

business or geographical area of operations or
iii. is a subsidiary acquired exclusively with a view to resale

b. loss from discontinued operations is shown after tax
Comparison to ASPE
 This topic is covered under ASPE 3475
 ASPE does not cover assets held for distribution to owners
 Under ASPE, you are allowed to write up the asset if the fair value less cost to sell subsequently
increases; however the reversal is limited to the losses taken under ASPE section 3475 (losses
incurred since the asset was classified as held for sale only)
 When the asset no longer qualifies as held for sale, under ASPE, asset is re-measured at the
lower of “carrying value had the asset not been classified as held for sale” and the “fair value”
(rather than recoverable amount)
 Under ASPE, “non-current assets held for sale” are shown as current assets if the assets are sold
before the completion of the F/S; IFRS makes no mention of this – however, if a similar situation
occurs, we would likely show “non-current assets held for sale” as current assets
 Under ASPE the criteria for classifying the loss due to re-measuring an asset held for sale under
discontinued operations is different
Related Party Disclosures
IAS 24
Definition
 A person or a close member of that person’s family is related to a reporting entity if that
person:
o has control or joint control over the reporting entity;
o has significant influence over the reporting entity; or

o is a member of the key management personnel of the reporting entity or of a parent of
the reporting entity.
 An entity is related to a reporting entity if any of the following conditions applies:
o The entity and the reporting entity are members of the same group (which means that
each parent, subsidiary and fellow subsidiary is related to the others).
o One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group)
o Both entities are joint ventures of the same third party (common venturer)
o One entity is a joint venture of a third entity and the other entity is an associate of the
third entity
o The entity is controlled or jointly controlled by a person related to the reporting entity

(see above)
o A person who controls or joint controls the reporting entity has significant

influence over the entity or is a member of the key management personnel of the entity
(or of a parent of the entity)
 Close members of the family of a person include = children, spouse, and dependents
 the following are not related parties:
o two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one
entity has significant influence over the other entity.
o two venturer’s simply because they share joint control over a joint venture.
o a customer, supplier, franchisor, distributor or general agent with whom an entity

transacts a significant volume of business, simply by virtue of the resulting economic
dependence.
 Key management
personnel have authority and responsibility for planning, directing and controlling the activities
of the entity
Disclosures
 Relationships between a parent and its subsidiaries shall be disclosed regardless of whether

there have been transactions between them
 An entity shall disclose key management personnel compensation in total and for each of the

following categories:
o short-term employee benefits;
o post-employment benefits;
o other long-term benefits;
o termination benefits; and
o share-based payment
 if there are related party transactions, must disclose the following
o nature of the related party relationship
o amount of the transactions
o the amount of outstanding balances and commitments
 terms and conditions
 guarantees given and received
o provision for doubtful debt related to the outstanding balances from related parties
o expense recognized in the period due to bad debt from related parties
Comparison to ASPE
 Related party transactions are covered under ASPE 3840
 Under IFRS, related party transactions are measured just like any other transaction; however,
you need to disclose the details of the related party transaction
 Under ASPE, there are measurement rules for related party transactions; at either the exchange
amount or carrying value
Leases
IAS 17
Exam Level Tested Importance (low, medium, or high)

Scope
Amendments to IAS 17 – Starting January 1, 2019
The current IAS 17 will be replaced with IFRS 16 for the accounting of leases effective for calendars years
beginning on or after January 1, 2019.
IAS 17 is still relevant until January 1, 2019 for the CPA exams.
This section (IAS 17) does NOT apply to the following:
 Investment properties held by lessees (finance or operating) that are accounted for as an
investment property (see IAS 40)
 Investment propertied provided by lessors under operating leases
 Biological assets held by lessees under a finance lease
 Biological assets provided by lessors under an operating lease
 Licencing agreements (motion pictures, plays, manuscripts, patents, copyrights)
Definition
 Lessee = party that has gained access to the asset
 Lessor = the party that provided the asset
 A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an asset. Title may or may not eventually be transferred. If a lease is a finance
lease then you will record an asset and liability on the balance sheet as you have purchased the
asset
 An operating lease is a lease other than a finance lease
 interest rate implicit in the lease is such that the Fair Value of leased asset + initial direct costs =
Present Value of (Minimum Lease Payments + unguaranteed Residual value)
Classification of leases - from lessee's perspective
 The classification of lease (as finance or operating) is determined on the date of inception
 Date of inception = earlier of date of lease agreement and the date of commitment by the

parties to the lease
 The lease is recognized in the books on the commencement of the lease term
 Commencement of the lease term = the date when the lessee has the right to use the asset
A lease with both land and buildings elements

 When a lease includes both land and a building together, you need to assess each element
separately using the criteria below to determine if it is a finance lease or operating lease
 An important thing to consider is that land has an indefinite life (this may lead to the conclusion
that land element is an operating lease)
 The minimum lease payments are allocated between the land and the building in proportion to
the relative fair value of the lease attributable to the land and building
o If the lease payments cannot be allocated reliably between the land and the building,
the entire lease is classified as a finance lease, unless it is clear that both elements are
operating leases
o Note that the relative fair value of the lease attributable to land and building is not the
same as the relative fair value of the physical land and building
o Fair value of the lease is the present value of the benefits we are expecting to get from
the leased land and building
 If the amount recognized for the land (lower of FV or the present value of MLP) is immaterial,
the land and the building may be treated as a single unit
Finance Lease (under ASPE it is called capital lease)
 A lease is classified as a finance lease if it transfers substantially all the risks and
rewards incidental to ownership
 A lease is a finance lease if any one of the following conditions are met:
1. the lease transfers ownership of the asset to the lessee by the end of the lease term
2. the lessee has the option to purchase the asset at a price that is expected to be

sufficiently lower than the fair value at the date the option becomes exercisable
(bargain purchase option)
3. the lease term is for the major part of the economic life of the asset even if title is not
transferred (It requires a judgement under IFRS as no quantitative criteria like ASPE
available)
4. at the inception of the lease the present value of the minimum lease

payments amounts to at least substantially all of the fair value of the leased asset(It
requires a judgement under IFRS as no quantitative criteria like ASPE available)
o Calculation of PV of minimum lease payments is discussed later in the notes.
5. the leased assets are of such a specialized nature that only the lessee can use
them without major modifications
 secondary factors that could also lead to a lease being classified as a finance lease are:
1. if the lessee can cancel the lease, the lessor’s losses associated with the cancellation
are borne by the lessee;
2. gains or losses from the fluctuation in the fair value of the residual accrue to the lessee
(for example, in the form of a rent rebate equalling most of the sales proceeds at the
end of the lease); and
3. the lessee has the ability to continue the lease for a secondary period at a rent that is
substantially lower than market rent
 under IFRS, judgement is required to determine what constitutes a major part of the economic
life and what constitutes substantially all of the fair market value
 these above 8 criteria are not conclusive; if other factors indicate that substantially all the risks
and rewards have not been transferred, the lease will not be classified as a finance lease
 The criteria above is used by both lessor and lessee but they could come with the different
classification i.e. no consistency required
Classification of leases
Finance Lease
 At the commencement of the lease term, the lessee should recognize a finance lease as an asset
and a liability on the balance sheet at the lower of:
a. Fair value of the leased property; or
b. The present value of the minimum lease payments (MLP)
o The discount rate to use in the present value = interest implicit in the lease
o If the interest implicit in the lease is not determinable use the

lessee’s incremental borrowing rate
o ASPE has different criteria – refer to ASPE notes
 Initial direct costs of the lease (i.e. cost of negotiating/arranging lease) are added to the amount
of asset recognized
Minimum lease payments (MLP) of the Lessee
 Minimum lease payments for lessee include the following:
o Minimum lease payments = the payments over the lease term that the lessee is
required to make + amounts guaranteed by the lessee or by a party related to the
lessee + bargain purchase options (or guaranteed residual value)
o If there is both bargain purchase option and a guaranteed residual value, the BPO is
used.
o Lease incentives are also included in the MLP

 Minimum lease payments exclude the following:
o contingent rent + costs for services and taxes to be paid by and reimbursed to the lessor
Subsequent Measurement
 the minimum lease payments are allocated between principal (reduction to the lease liability)
and interest
 contingent rent is expensed when it is incurred
 the asset recorded under a finance lease by the lessee must be amortized
o if the lessee is not reasonably certain that he/she will obtain ownership @ the end of
the lease – amortize over the shorter of lease term and useful life
o if the lessee is reasonably certain that he/she will obtain ownership @ the end of the
lease – amortize over the useful life
o note you can obtain ownership via a bargain purchase option also
Operating leases
 lease payments for an operating lease is expensed on a straight line basis
 lease expense per term = net lease payments over lease ÷ lease terms
Depreciation - Finance lease
 If the asset is recorded because the lease is considered a finance lease the amortization period
will depend on bargain purchase option (BPO) as below.
 Amortize over useful life of the asset If BPO or transfer of ownership is present. Otherwise,
amortize it over lease term.
Example
M&M Inc. requires a non-specialized equipment to manufacture a candy. The purchase price of the
asset is $800,000. Due to cash difficulties, management has decided to lease the asset instead. The
following information is available.
Lease term – 8 years; Useful life – 10 years; Implicit interest rate – 8%; Incremental borrowing rate –
10%.
The unguaranteed residual value of the equipment is $200,000. The annual payment is $100,000 and is
payable at the beginning of each year. At the end of the lease, M&M has the option to purchase the
asset for $50,000, which is the estimated fair value at that time.
Required:
Determine whether this lease should be recorded as a finance or an operating lease.
Prepare the journal entries for the first year for the lessee (including depreciation).
Leases in the financial statements of lessors
Classification of leases - from lessors's perspective
 Accounting for leases from the lessor’s perspective involves similar analysis as of the lessees. All
of the criteria above to determine finance vs. operating lease is same under IFRS.
 Generally, a lease that is considered a finance lease from the point of view of the lessee will also
be a finance lease from the point of view of the lessor.
Finance Lease
 For a finance lease, lessors recognize an asset and present this as a receivable equal to the net
investment in the lease
 Net investment in the lease = present value of the gross investment in the lease discounted @
the interest rate implicit in the lease
 Gross investment in the lease = total minimum lease payments receivable by the lessor over
the lease + and unguaranteed residual value
 Deferred finance income (this represents the interest) = gross investment – net investment
 Please see below for sample journal entry
 Initial direct costs are often incurred by lessors and include amounts such as commissions, legal
fees and internal costs to negotiate and arrange a lease
 For finance leases other than those involving manufacturer or dealer lessors, initial direct costs
are included in the initial measurement of the finance lease receivable
 For a manufacturer/dealer lessor, initial direct costs are expensed
Minimum lease payments for lessors
 Minimum lease payments for lessors = the payments over the lease term that the lessee is
required to make + residual value guaranteed by the lessee or by a party related to the lessee
or a third party unrelated to the lessee + bargain purchase options
 Minimum lease payments exclude the following:
o contingent rent + costs for services and taxes to be paid by and reimbursed to the lessor
Special Rule for Manufacturer and dealer lessors
 Manufacturers or dealers often offer to customers the choice of either buying or leasing an

asset
 The manufacturer/dealer lessors will recognize 2 types of income
o “sales revenue” and “cost of goods sold” initially; and

o Interest income over the lease term
 Sales revenue = lower of (a) fair value of the asset and (b) the present value of the minimum
lease payments computed at the market interest rate
o The reason why IFRS does this is because it doesn’t want lessors to quote artificially low
implicit rates in the lease to overstate sales revenue
o Remember PV of the MLP using rate implicit in the lease = Fair Value
 Cost of goods sold = carrying amount of the leased property (i.e. the inventory) less the PV
of unguaranteed residual value
 To understand this better please see the journal entries below
Sample journal entries for lessor
 Financing Type Lease vs. Manufacturer/Dealer Lease
o Annual payment = 10,000 per year for 10 yrs.
o RV=5,000
o PV (annual PMT) = 80,000
o PV (RV) =1,000
o BV of leased PPE = 50,000
o FV of the leased asset = 81,000
Case 1: If residual value is unguaranteed
Direct Financing Lease manufacturer/dealer lease
Gross receivable 10,000*10 +

(dr.) 5,000=105,000 10,000*10 + 5,000=105,000
Deferred Finance = 105,000-

Income (cr.) 81,000=24,000 = 105,000-81,000=24,000
Sales = lower of:

FV of Asset Leased =
PV (annual pmt, RV) = 1. PV (MLP) = 80,000; 2. FV of
Credit entry 81,000 leased Asset = 81,000
COGS=BV of leased asset –

PV(ungur. RV)= 50,000-
Debit entry
1,000=49,000
Direct Financing Lease Sales Type Lease
Dr. Gross investment……….105KDr. Cost of goods

sold……..…49K
Dr. Gross investment……….….105K Cr. Deferred finance income…………….24K
Cr. Deferred finance income……………..24K Cr. Inventory………………………………..50K
Cr. Leased asset……………………………81K Cr. Sales……………………..…..….…….…80K
Case 2: If residual value is guaranteed
10,000*10 +
Gross receivable (dr.) 5,000=105,000 10,000*10 + 5,000=105,000
Deferred Finance Income (cr.) = 105,000-81,000=24,000 = 105,000-81,000=24,000
Sales = lower of:
 PV (MLP)= 81,000
FV of Asset Leased = PV  FV of leased Asset =

Credit entry (annual pmt, RV) = 81,000 81,000
COGS=BV of leased asset –

PV(Ungur. RV)= 50,000-
Debit entry 0=50,000
Dr. Gross
investment……….105KCr. Dr. Gross investment……….105KDr. Cost of goods sold……..…
Deferred finance income………… 50KCr. Deferred finance income………………24KCr.
24KCr. Leased Inventory………………………………….50KCr. Sales……………………..
asset……………………….81K …………….…81K
Operating leases
 Income from operating leases are recognized in income over a straight lines basis
o Income recognized per term= net lease payments over the lease term ÷ lease term
 Initial direct costs on an operating lease are added to the carrying value of the leased asset and
amortized to expense over the lease term
Leases in the financial statements of lessors
A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset
Sale-Leaseback: Operating Lease
If the transaction is established at fair value any profit or loss shall be recogniz
any profit or loss shall be recogniz
except if the loss is compensated

price, it is deferred and amortized
If the sale price is below fair value to be used
the excess over fair value is defer

the asset is expected to be used
If the sale price is above fair value
the fair value less carrying value i
if the fair value at the time of a sale and leaseback is less than the carrying amount
of the asset loss = carrying amount less fair val
Sale-Leaseback: Finance Lease
 If a sale and leaseback transaction results in a finance lease, any excess of sales proceeds over
the carrying amount is not immediately recognised as income by a seller-lessee.
 Instead, it is deferred and amortised over the lease term
Advanced topic: Investment property held under an operating lease by lessee
 under IAS 40, the lessee has the option to treat an investment property held under an operating
lease as an investment property (i.e. say it subleases the property)
 when this is done, the lease is automatically treated as a finance lease, and per IAS 40, the fair
value model MUST be used
 this classification/measurement is held intact, even if the property ceases to be an investment

property in the future
Click here for practice questions on lessor's accounting
Comparison to ASPE
 Leases are covered under ASPE 3065

 The terminology is different; a finance lease is called a capital lease
 Under ASPE, the criteria to classify a lease as a capital lease is more defined (for instance the
present value of the minimum lease payments must be ≥90% of the fair market value). Also, the
useful life must be ≥75% of the economic life
 Under ASPE, the secondary conditions to determine whether a lease is finance lease mentioned
in IFRS are not mentioned
 Under ASPE, for a lease with a land and building –
o Under ASPE, you do not need to split the land and the building unless
 Ownership transfers @ the end of the lease or there is a bargain purchase

option; or
 The fair value of the land is major in relation to the fair value of the leased
property
o the land will be considered a capital lease only if the title passes at the end of the lease
or if there is a bargain purchase option
o the minimum lease payments are allocated based on the relative fair values of the
physical land and building as opposed to the relative fair values of the lease attributable
to the land/building
 under ASPE, the minimum lease payments are discounted at the lower of the borrowing rate or
the rate implicit in the lease
 under ASPE, initial direct costs are only mentioned for lessors; initial direct costs are expensed
and an equal amount will be charged to revenue (therefore no impact on net income)
 under ASPE, costs for services and taxes to be paid by and reimbursed to the lessor is
called executor costs and are also excluded from the MLP
 under ASPE, manufacturer/dealer leases are called a sales-type lease
 under ASPE, initial direct costs from an operating lease are recognized as a separate asset and
amortized to expense over the lease term
 under ASPE, accounting sales and leaseback transactions is different
 Under ASPE, the criteria to determine whether it is a finance lease for lessor and lessee is not
exactly the same as it is in the IFRS
Operating Leases — Incentives
SIC 15
General
In a lease arrangement a lessor can provide the following incentives:
 up-front cash payment to the lessee
 the reimbursement or assumption by the lessor of costs of the lessee (such as relocation costs,

leasehold improvements and costs associated with a pre-existing lease commitment of the
lessee)
 Free rent for a certain period (i.e. first month free)
 Reduced rent
Accounting for lease incentives in an operating lease
In the lessor’s books
 The lessor recognises the total cost of incentives as a reduction of rental income over the lease
term, on a straight-line basis
In the lessee’s books
 The lessee recognizes the total benefit of incentives as a reduction of rental expense over the
lease term, on a straight-line basis
Example
 Bob leases office space from Tom for 5 years at $12,000 per year; Tom provides the first year
rent free
 Rent expense/income per year = (4*12,000)/5 = $9,600
 In the books of the lessee (Bob):
o Year 1:
Dr. Rent Expense 9,600
Cr. Rent Liability (9,600)
o Years 2 – Year 5:
Dr. Rent Expense 9,600
Dr. Rent Liability 2,400
Cr. Cash (12,000)
 In the books of the lessor (Tom):
o Year 1:
Dr. Rent Asset 9,600
Cr. Rent Revenue (9,600)
o Years 2 – Year 5:
Dr. Cash 12,000
Cr. Rent Asset (2,400)
Cr. Rent Revenue (9,600)

Determining Whether an Arrangement Contains a Lease
IFRIC 4
The Issue
 Sometimes a company enters into an arrangement that does not taken the legal form of a lease
but in substance the company has a right to use an asset in return for a payment
Determining whether an arrangement contains a lease
 An arrangement contains a lease when the following two are met:
1. fulfilment of the arrangement is dependent on the use of a specific asset
o in fulfilling the arrangement, the supplier, must the asset explicitly identified in the
arrangement;
o if the supplier has the right and ability to fulfill the arrangement using other assets, the
arrangement does not contain a lease
o if not explicitly identified, it should be implicitly specified, for example the supplier only
owns one asset that can be used to fulfill the arrangement
2. the arrangement conveys a right to use the asset
o an arrangement conveys a right to use the asset, when one of the following is met:
1. The purchaser has the ability or right to operate the asset or direct others to
operate the asset in a manner it determines while obtaining or
controlling more than an insignificant amount of the output or other utility of
the asset
2. The purchaser has the ability or right to control physical access to the
underlying asset while obtaining or controlling more than an insignificant
amount of the output or other utility of the asset
3. it is remote that parties other than the purchaser will take more than an
insignificant amount of the output that will be produced or generated by the
asset, and the price that the purchaser pays for output is not contractually fixed
per unit of output nor equal to the market price per unit of output
o this implies that the purchaser is paying an amount to use the asset (in
addition to the output)
Income Taxes
IAS 12
Definition
 Deferred tax liabilities are the amounts of income taxes payable in future periods due to
taxable temporary differences
 Deferred tax assets are the amounts of income taxes recoverable in future periods due to
deductible temporary difference, unused credit/loss carry forwards
 Temporary difference is the difference between the book value and the tax base of an asset or
liability
o Taxable temporary difference = temporary differences that will result in future taxable
income when the asset is recovered or the liability is settled
o Deductible temporary = temporary difference that will result in future tax deductions
when the asset is recovered or the liability is settled
Tax Base
 The tax base of an asset = amount that will be deductible for tax purposes; if the recovery of the
asset will not have any tax consequences, the tax base is the carrying amount
o For Depreciable Capital Property; tax base = Undepreciated Cost of Capital (UCC)
o For Inventory; tax base = carrying amount
o For Accounts Receivables; tax base = Carrying Amount
o For Loan Receivable; tax base = Carrying amount
o For Dividends Receivable by a Canadian resident corporation; tax base = Carrying Value

(since a dividend is deducted under Division C in arriving at taxable income)
 The tax base of a liability = carrying amount of the liability less amount deductible for tax
purposes in future periods
o For current liabilities with accrued expenses deducted on an accrual basis for tax
purpose; tax base = carrying amount
o For current liabilities with accrued expenses deducted on a cash basis for tax purpose;
tax base = NIL
o For Fines/penalty liability; tax base = carrying amount (since fines/penalties are not
deductible)
o For loan payable; tax base = carrying amount
Recognition of current tax liabilities and current tax assets
 current tax payable (receivable) for the current and prior periods is recognized as a current
liability (asset) at the amount expected to be paid (recovered) to (from) the tax authorities
 tax loss that are carried back to recover past taxes are recognized as a current asset
Recognition of deferred tax liabilities and deferred tax assets
 If the carrying value of asset > tax base of asset; there will be a taxable temporary difference
 If the CV of asset/liability = tax base of asset/liability; there will be no temporary diff.
 If the CV of the asset < tax base of asset; there will be a deductible temporary diff.
 If the tax base of the liability = NIL; there will be a deductible temporary diff.
Taxable Temporary Difference
 A deferred tax liability is recognized for all taxable temporary difference
 Deferred tax liability = taxable temporary difference * tax rate expected to apply to the period
when the asset is realised or the liability is settled
 Use the tax rates that have been enacted
 When different tax rates apply to different levels of taxable income (i.e. small business rate and
general rate) , deferred tax assets and liabilities are measured using the average rates that are
expected to apply
 Deferred tax liabilities shall not be discounted
Deductible Temporary Differences
 A deferred tax asset is recognized for all deductible temporary differences to the extent that it
is probable that taxable income will be available so that you can deduct future amounts
 Deferred tax asset = deductible temporary difference * tax rate expected to apply to the period
when the asset is realised or the liability is settled
 Use the tax rates that have been enacted

 When different tax rates apply to different levels of taxable income (i.e. small business rate and
general rate) , deferred tax assets and liabilities are measured using the average rates that are
expected to apply
 Deferred tax assets shall not be discounted
Unused tax losses and unused tax credits
 A deferred tax asset is recognized for unused tax loss carryforwards and unused tax credit
carryforward as long as it is probable that there will be sufficient future taxable income to use
these carryforward balances
 Keep in mind that the existence of unused tax losses may be strong evidence that future taxable
profit may not be available
 When an entity has a history of recent losses, the entity recognises a deferred tax asset arising
from unused tax losses or tax credits only to the extent of temporary differences or there is
convincing other evidence that sufficient taxable profit will be available
 At the end of each reporting period, an entity reassesses unrecognised deferred tax assets
Recognition of current and deferred tax
 Current and deferred tax is recognised as income or an expense and included in profit or loss
 Current tax and deferred tax shall be recognised outside profit or loss (i.e. in other
comprehensive income) if the tax relates to items that are recognised outside profit or loss (i.e.
depreciable capital assets measured using the revaluation model)
Presentation
 You can offset current tax asset and current tax liabilities only if:
a. You have legal right to offset; and
b. You intend to settle on a net basis
 An entity will normally have a legally enforceable right to set off a current tax asset against a
current tax liability when they relate to income taxes levied by the same taxation authority and
the taxation authority permits the entity to make or receive a single net payment
 You can offset deferred tax assets and deferred tax liabilities only if:
a. the entity has a legally enforceable right to offset; and
b. the deferred tax assets and the deferred tax liabilities relate to income taxes levied by
the same taxation authority
Comparison to ASPE
 Income Taxes is covered under ASPE 3465
 under ASPE, the taxes payable method is allowed

 under ASPE, deferred income tax is called future income tax
 under ASPE, the future income tax asset/liabilities can be current or long-term depending on the
asset which the temporary difference relates to
o under IFRS, all deferred tax asset/liability are always non-current

Revenue From Contracts

Uploaded by

Copyright:

Available Formats

You might also like

Revenue From Contracts

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Revenue From Contracts

Uploaded by

Copyright:

Available Formats

Revenue from Contracts

Level Tested on CPA PEP

Exam Level Tested Importance (low, medium, or high)

Core 1 Module Level A High

Assurance Elective Level A High

There is no change to revenue recognition criteria under ASPE 3400.

 Financial instruments contracts

 Non-Monetary contracts between entities in the same line of business

 IFRS 15 is called a contract-based (also known as the asset-liability) approach.

 Contract: Contracts can be written, oral, or implied by the company’s ordinary business

Revenue Recognition criteria - Steps in Revenue Model

i) Identify the contract(s) with the customer

ii) Identify the performance obligations in the contract

iii) Determine the transaction price

iv) Allocate the transaction price to performance obligations

v) Recognize revenue when each performance obligation is satisfied

Step #1 - Identify the contract(s) with the customer

A contract exists when all five of the following criteria are met:

iii) Can identify payment terms

iv) The contract has commercial substance.

o Combination of the above two approaches.

o The contracts are negotiated as a package with a single commercial objective; or

Step#2 - Identify the performance obligations in the contract

A performance obligation is a promise to a customer to transfer one of the following:

1. a good or service (or a bundle of goods or services) that is distinct

Step#3 - Determine the transaction price

 The transaction price must reflect any variable consideration if it is “highly probable”

 Variable consideration can result if there are discounts, refunds, rebates,

Step#4 - Allocate the transaction price to performance obligations

 The following methods can be used to estimate the stand-alone price:

 Residual approach: – total transaction price less the total of available

 Transaction price involves a discount:

 Each good or service is distinct and sold regularly on a standalone basis;

 Treatment of variable consideration:

 Changes in the transaction price:

 If allocated to a performance obligation that is already completed, recognize in period in

Step#5 - Recognize revenue when each performance obligation is satisfied

Performance obligation satisfied over time

Performance obligation satisfied at a point in time

o Physical possession of goods or

o The risk and rewards of ownership or

o Accepted the goods or received the services

Other Issues under IFRS 15

The IFRS 15 also addresses the following topics

 Sale with a right of return

 Principal versus agent considerations

 Customer options for additional goods or services

 Customers’ unexercised rights

 Non-refundable upfront fees

 There is no change to ASPE Section 3400.

IAS 39 and IAS 32

o an equity instrument of another entity;

o a contractual obligation to deliver cash or another financial asset to another entity; or

o a contractual obligation to exchange financial assets or financial liabilities with another

Measurement of Financial Instruments

Categories of financial instruments under IFRS

1. Fair value through profit or loss (FVTPL)

 Financial Assets and Financial Liabilities