LEARNING UNIT 1

INTRODUCTION TO COMPANY FINANCIAL STATEMENTS

INTRODUCTION
International Financial Reporting Standards (hereafter called IFRS). IFRS are being developed by the International
Accountants Standards Board (IASB)

WHAT IS IFRS?
IFRS is a set of international accounting standards stating how particular types of transactions and other events
should be recognized, measured and reported in annual financial statements.

G OAL OF IFRS?
Goal of IFRS is to provide a global framework for how public companies prepare and disclose their annual financial
statements. IFRS provides general guidance for the preparation of annual financial statements, rather than setting
rules for industry-specific reporting.

Having international accounting standards is especially important for large companies that have subsidiaries in
different countries. Adopting a single set of world-wide standards will simplify accounting procedures by allowing a
company to use one reporting language throughout. A single standard will also provide investors and auditors with
a cohesive view of finances.

COMPANY BACKGROUND
In general a company can be described as an association between persons that work together with the aim to
make a profit.

A company as an entity is a legal person which is incorporated in terms of the Companies Act 71 of 2008. The
entity exists independently from its owners, the shareholders.

Companies as a form of entity were established in order to provide the following needs:
 the acquisition of more capital, as it is normally not possible in a sole entity
 ensure the continued existence of the company
 easy way to exchange owners
 procedure to limit the financial liability of the owners.

A company can have a multitude of shareholders (eg. Listed company) and it is impractical to open a capital
account for each shareholder. To solve this problem, the capital of a company is divided into small units, called
shares.

Each shareholder shares in the profits of the entity in relation to the value of his or her shares. In view of the fact
that the shares of a company are transferable, it happens that the shareholders continually change without
threatening the company's continuance.

A share certificate serves as evidence of a person's interest in a company.

Share certificates are negotiable documents and the shareholder has the power to sell all his or her shares or to
purchase additional shares. Each shareholder's interest and rights to vote are determined by the number of shares
he or she owns. The right to vote gives the shareholder the voice to appoint directors and determines the
objectives of the company.

A company is formed by its founders. The establishment of a company is regulated by the provisions of the
Companies Act 71 of 2008.

A company is incorporated by the lodging of the following main forms:

 Notice of incorporation
 Memorandum of incorporation (MOI)

The MOI is the most important document governing the company. The Act imposes certain specific requirements on
the content of a Memorandum of incorporation (MOI) to protect the interest of shareholders in the company, and
provides for a number of default company rules, which companies may accept or alter as they wish as long as it’s
in line with the Companies Act.

A company is deemed to be a juristic person from the date and time that its incorporation is registered.

Two types of companies may be formed in South Africa:

1. a profit company:
Is incorporated in order to provide financial gain for its shareholders.

Four (4) Types of profit companies:

  State-owned company – either listed as a public entity in Schedule 2 / 3 of the Public Finance Management
Act 1999 or owned by a municipality
 Private company – a profit company that is not a public, personal liability or state-owned company an its
memorandum of incorporation:
o Prohibits it from offering any of its securities to the public
o Retricts the transferability of its securities
 Personal Liability Company – is a company that meets the criteria for a private company and its
memorandum of incorporation specifically states that it is a personal liability company
 Public Company – not state-owned, private company or a personal liability company

2. a non-profit company:
Purpose related to a public benefit or purpose relating to cultural or social activities or interest of groups. Section 1
of the Companies Act defines a company as a company:
 that is incorporated for a public benefit or other object as required by item 1(1) of Schedule 1
 whose income and property are not distributable to its incorporators, members, directors, officers or any
persons related to them (except to the extent permitted by item 1(3) of Schedule 1)

Incorporating a company requires costs such as registration fees and related legal costs.
All these costs are described collectively as "preliminary expenses". Preliminary expenses are debited to the
'preliminary expenses' account.

The name of the public company ends with the word 'Limited', whereas the private company ends with the words
'(Proprietary) Limited'. The minimum number of directors of a public company is three. The minimum number of
directors of a private company is one. Public companies may be listed on the Johannesburg Securities Exchange
which will promote the marketability of the shares.

HISTORY OF THE COMPANIES ACT (NOT EXAMINABLE)

The Companies Act 61 of 1973 as amended, came into being after the Commission of Inquiry into the Companies
Act tabled the Supplementary Report and Draft Bill in Parliament on 1 June 1972.

The commission, which was appointed on 14 October 1963 under the chairmanship of Mr Justice J van Wyk de
Vries, operated chiefly on a temporary basis.

The principal report of the commission, dated 15 April 1970, which deals with principles, new concepts and
important amendments, was tabled in Parliament on 17 September 1970 and formed the basis for the draft
Companies bill and eventually for the Companies Act of 1973.

The terms of reference of the Commission of Inquiry into the Companies Act were not only to report on the various
aspects of company law, but also "to submit a draft bill in order to implement any recommendations made for the
amendment of the present Act" (our translation).

During the sixty years that intervened since the Transvaal Companies Act was passed in 1909 – an act which was
largely ratified as the Companies Act of 1926 – numerous amendments were made without the Act ever having
been consolidated. The members of the commission decided that the Act simply did not lend itself to further
amendment and set themselves the task of drafting the draft consolidated companies bill.

The Consolidated Companies Act was finally approved by Parliament in 1973 and was given the title of the
Companies Act 61 of 1973. This act was replaced by new Companies Act 71 of 2008.

The Companies Amendment Bill (B40--2010) was tabled in Parliament on 9 November 2010. The Bill was published
in the Government Gazette for public comment and public hearings were held on 30 November and 1 December
2010. The Bill proposed the amendment of the Companies Act, No 71 of 2008 to correct errors, legal-technical and
grammatical issues.

The Companies Amendment Bill was approved by the Portfolio Committee on Trade and Industry on 10 March 2011.
The new Companies Act was signed by the President on the 8th April 2009 and tabled in Gazette No. 32121 (Notice
No 421). This Act is called the Companies Act, Act no. 71 of 2008.

ANNUAL FINANCIAL STATEMENTS

Companies are obliged to draw up annual financial statements, using ledger accounts, cash receipts and payment
journals.

Annual financial statements are a structured representation of the financial position and financial performance of
an entity. The objective of annual financial statements is to provide information about the financial position,
financial performance and cash flows of an entity that is useful to a wide range of users.

Annual financial statements provide information about an entity’s assets, liabilities, equity, income and expenses,
including gains and losses, contributions by and distributions to owners and cash flows. Users use this information
to base realistic business and economic decisions. The numerous groups of users who rely for information on these
statements of financial reporting include:
  owners (shareholders)
 potential investors
 management
 borrowers
 suppliers
 creditors
 tax authorities
 bankers
 employers

For users the annual financial statements of a company form the basis for conclusions and eventual decision
making. In order to help the user to draw sensible conclusions from his or her investigation and analysis of the
annual financial statements of the company, the Companies Act 71 of 2008 contains certain specific requirements
regarding the disclosure of information in the annual financial statements of companies.

According to the Companies Act 71 of 2008 a company's annual financial statements have to be drawn up in
accordance with International Financial Reporting Standards (IFRS) or IFRS for SME, depending on the category of
the company.

Company annual financial statements are drafted, published and submitted to the annual general meeting of
shareholders. These statements are therefore drafted mainly for and directed to the shareholders.

The annual financial statements must reflect the state of affairs of the company and its business at the end of the
financial year in question as well as the profit or loss for that financial year.

Annual financial statements must comply with four qualitative requirements.

It is clear that annual financial statements have to be drafted in accordance with pre-existing guidelines and
legislation.

SHARE TRANSACTIONS

SHARE CAPITAL STRUCTURES

Capital contributed by the shareholders of a company is known as share capital. The maximum number of shares
and the classes of shares a company is authorized to issue, as set out in the memorandum of incorporation, is
known as the authorised share capital.

A company is not obliged to issue all the authorised share capital. The share capital that the company does issue is
known as the issued share capital.

TYPES OF SHARES

ORDINARY SHARES (E QUITY SHAREHOLDERS)

Ordinary shares are the most common type of shares. Ordinary shares represents equity ownership in a company
and give you full voting rights at annual general meetings, dividends (should the company pay these) and allow
you to benefit from capital growth should the company do well.

Ordinary shares do not bear a fixed dividend and the payment of dividends on ordinary shares is considered only
after provision has been made for preference dividends. Depending on the availability of profits, there is no limit to
the share of the profits of a company that can be apportioned to ordinary shares. This is, however, subject to the
dividend that is recommended and approved for payment.

PREFERENCE SHARES
Preference shares are instruments that have debt (fixed dividends) and equity (capital appreciation)
characteristics. Preference shareholders have a higher claim on assets (repayment of capital if company is wound
up) and earnings (dividends) than ordinary shareholders. Preference shareholders are paid fixed-rate dividends
before dividends are paid to ordinary shareholders.

In the event of a company bankruptcy, preference share shareholders have a right to be paid company assets first.
Preference shares typically pay a fixed dividend, whereas ordinary shares do not. Unlike ordinary shareholders,
preference share shareholders usually do not have voting rights.

Preference shares may be issued with various rights. In classifying a preferred share as a liability or equity, an
entity assesses the particular rights attaching to the share to determine whether or not it exhibits the fundamental
characteristic of a financial liability.

There are four types of preference shares:

1. Cumulative preferred, for which dividends must be paid including skipped dividends
2. Non-cumulative preferred, for which skipped dividends are not included
3. Participating preferred, which give the holder dividends plus extra earnings based on certain conditions
4. Convertible, which can be exchanged for a specified number of shares of ordinary shares

When preference shares are non-redeemable, the appropriate classification is determined by the other rights that
may attach to them. When distributions to holders of the preference shares are at the discretion of the issuer, the
shares are equity instruments.

C UMULATIVE PREFERENCE SHARES

This class of preference shares differs slightly from ordinary preference shares in that the fixed preferential
dividend accumulates if it is not paid out annually. A company is therefore obliged to pay all cumulative preference
shares that are in arrears as soon as sufficient funds become available.

Cumulative preference dividends not declared or paid should be disclosed. A cumulative preference shareholder
retains his or her right to dividends from year to year even if no dividends are declared.

Therefore, when the company has sufficient distributable reserves and cash flow available to declare a dividend,
arrear and current cumulative preference dividends have first to be paid in full before ordinary preference
dividends and then dividends on ordinary share capital can be paid.

REDEEMABLE PREFERENCE SHARES

A preference share that provides for redemption on a specific date or at the option of the holder meets the
definition of a financial liability if the issuer has an obligation to transfer financial assets to the holder of the share.
An option of the issuer to redeem the share does not satisfy the definition of a financial liability because the issuer
does not have a present obligation to transfer financial assets to the shareholders. Redemption of the shares is
solely at the discretion of the issuer.

Preference shares with other rights might include (Does not form part of this module):
 Convertible preference shares.
 Participating preference shares.

ISSUE OF CAPITALISATION SHARES

Occasionally companies build up large reserves from profits. For one reason or another it may not be desirable to
distribute these reserves in the form of dividends, since this could adversely affect the cash position of the
company. To enable the shareholders to derive some tangible benefits from these reserves, the company may
decide to capitalise these reserves and distribute them among the shareholders in the form of capitalisation
shares.

No cash is paid out, but each shareholder receives his or her rightful share of the reserves in the form of
capitalisation shares.

A capitalisation issue is frequently also referred to as a bonus issue since no payment is received from
shareholders for an issue of this kind. The shares are issued in the same proportion as the existing shareholding
and are merely a book entry which converts the reserves into share capital.
The number of shares held will increase, but the total value of the share portfolio will remain the same. In other
words, the value per share declines, whilst the total value of the share portfolio remains constant.
The only entry that the investor will make in its accounting records is to increase the number shares held and to
reduce the value per share.

In issuing these shares, the issuer will convert reserves into share capital.

The journal entries when capitalisation shares are issued:

Debit the retained earnings account with the amount of the capitalisation.
Credit the share capital account.

RIGHTS ISSUES AND OPTIONS

One of the ways in which a company can raise cash funds is to have a rights issue. In terms of this rights issue,
rights/options to new shares are offered to existing shareholders based on their existing shareholdings.

In order to ensure that the options/rights to acquire new shares are exercised by existing shareholders, the issue
price of the new shares is usually set at a price below the current market price. New shares obtained at the lower
price can normally be sold at a higher price just after they have been acquired, and the existing shareholder can
thus make a quick profit.

Alternatively, existing shareholders acquiring these “rights”, can, should they not wish to acquire additional shares
in the issuing company, sell these rights to other investors and may thus also make a further profit. By doing this,
the issuing company also expands its shareholder base.

The issue price of new shares in respect of a rights issue should be carefully determined. It should be set as high as
possible so that the minimum number of shares will be required to be issued to raise the cash needed, but
nonetheless it should be as low as possible to ensure that the shareholders will exercise their rights acquired and
convert these rights/options into new shares.

Since new shares are offered to existing shareholders based on existing shareholdings, these shareholders obtain
the right to subscribe for a certain number of shares. When these new shares are subscribed for, this right is
exercised – hence the description given to this type of share issue, a rights issue.

The procedure in respect of a rights issue is as follows:

 the company announces that it intends to have a rights issue,
 the rights issue then takes place which means that the rights certificates are issued to existing
shareholders,
 following the issue of the rights certificates, a right with a value separated from the shares which produced
that right usually exists and it is traded separately on the securities exchange, the shareholder can then do
the following,
o exercise the right by paying the rights issue price and acquire new shares at the lower than market
price as stipulated in the rights issue, or
o sell the right to a member of the public, who can then acquire shares in the company by converting
the rights into shares subject to the conditions of this rights issue.

Before the rights certificates are issued, shares are traded cum rights (that means that the share and the right are
inseparable). This cum rights value of the shares that the shareholder held on the date of the announcement is
divided into a rights (option) value and on ex-rights share value on the date on which the "Rights certificates" are
issued.

The "right" obtained can be traded on its own and the share will then trade without the right, i.e. ex rights. The
value of an ex-rights share is therefore lower than the value (cum rights value) of the share on the date on which
the rights are announced. The right to buy new shares at the rights issue price applies only for a certain period of
time as was determined by the company, following which the rights expire and cannot be exercised.

UNDERWRITING OF SHARE ISSUES

As already explained, when a company requires funds from the public, such funds are obtained by means of a
shares issue. The company would normally avail themselves of the services of a financial institution to handle the
issue. Financial institutions frequently underwrite such issues.

This means that the underwriter guarantees that if the whole issue of shares is not taken up by the public the
financial institution will itself take up the remainder.

The underwriter's commission is the commission the underwriter receives in return for furnishing a guarantee that
the whole issue will be taken up. This commission is stipulated in the underwriting agreement and is payable in the
form of either cash or paid-up shares in the company concerned. The commission is calculated on the portion being
underwritten, irrespective of whether the entire issue is taken up or not.

According to the Companies Act 71 of 2008 a company may pay remuneration to the underwriter for his or her
underwriting or his or her undertaking to subscribe for shares in the company provided that the commission does
not exceed 10% of the price at which the shares are issued, or a lower rate provided in the articles of association.

Underwriter's commission is calculated as follows:

Broker Ltd underwrites an issue of 50 000 ordinary shares at R2 each in Shortage Ltd. The underwriting
commission is 7%. The public takes up 45 000 shares.

The commission is calculated as follows:

50 000 x R2 x 7% = R7 000

The commission is therefore not affected by the number of shares the public took up.
If the full issue is underwritten, the underwriter is liable for the difference between the
value of the full issue and the amount for which the public subscribed.

In the example above the public subscribed for 45 000 shares and Broker Ltd is therefore liable for 5 000 shares x
R2 = R10 000.

If the issue is partly underwritten, the underwriter has a pro rata liability. Suppose that in the example above
Broker Ltd underwrites only 50% of the issue, his or her liability is as follows:

50% of the shortfall = 50% x 5 000 x R2 = R5 000.

The commission will be adjusted accordingly: (50% 6 50 000) x R2 x 7% = R3 500.

An issue may also be underwritten by joint underwriters, that are a single issue is underwritten by more than
one body. If there is an under subscription each of the underwriters is responsible for taking up that portion of the
shares that corresponds to his or her portion of the underwriter's obligation.

DIVIDENDS
The profit of a company is divided among the shareholders of the company in the form of dividends. A dividend can
therefore be defined as that portion of the profit of a company which is divided among the shareholders (paid out
to them). In other words it indicates the pro rata portion which each shareholder receives on his or her shares –
say, for example,
10% or 5c per share.

LEARNING UNIT 2
THE FRAMEWORK OF ACCOUNTING
SCOPE OF THE CONCEPTUAL FRAMEWORK

Read Chapter 1 par. 1 to 4 of the prescribed textbook.

The Conceptual Framework deals with the following four chapters:
Chapter 1 - The objective of general purpose financial reporting.
Chapter 2 - The reporting entity. This chapter has not been included in this learning unit as
Chapter 2 has not been finalised by the IASB.
Chapter 3 - Qualitative characteristics of useful financial information.
Chapter 4 - The Framework (1989): The Remaining Text.

THE OBJECTIVE OF GENERAL PURPOSE FINANCIAL REPORTING

Prescribed Book Chapter 1 paragraph 5:

The main purpose of the Conceptual Framework is to establish certain concepts that underlie those estimates, judgements
and models. Compliance with these concepts is the goal of the IASB as well as the preparers of financial reports.

Changes in economic resources and claims not resulting from financial performance
A reporting entity's economic resources and claims may also change for reasons other than financial performance, such as
issuing additional ownership shares. Information about this type of change is necessary to give users a complete
understanding of why the reporting entity's economic resources and claims changed and the implications of those changes for
its future financial performance. The above information will be provided in the following annual financial statements:

1. Balance Sheets (Statement of financial position)

Reflects the economic resources, claims against these resources and impact of transactions on these resources and claims, as
well as the liquidity and solvency of entity.

2. Income Statement (Statement of profit or loss and other comprehensive income)

Contains information with regards to the financial performance of the entity, during a specific period. The Conceptual
Framework requires that the concept of accrual accounting is applied, whereby transactions are recorded when they occur and
not when the cash is received or paid.

3. Cash Flow Statement (Statement of cash flows)

Reflects the changes in financial position to assess investing, financing and operating activities of entity and to show the ability
to generate cash or need to utilise cash.
Please note that this annual financial statement fall outside the scope of this module.

4. Statement of changes in equity

Reflects changes in equity of entity as a result of capital transactions and distributions to owners.

5. Notes and supplementary schedules

Provides more detailed information to assist with the better understanding of the annual financial statements.

6. Interrelationship of Component Parts

A close relationship exists between the various component parts of financial statements. The financial performance of an entity
should be reflected by the concept of accrual accounting.
Accrual accounting requires:
 Transactions are recorded for accounting purposes when they occur, and not when the cash is received or paid.

Stewardship concept : Wheter the reporting entity has made efficient or effective use of the resources provided to the entity
via the respective equity and/or debt investments.

The IASB, in developing financial reporting standards, has as its objectives the provision of informatin that will meet the need
of the maximum number of users.

OBJECTIVE , USEFULNESS AND LIMITATIONS OF GENERAL PURPOSE FINANCIAL REPORTING

The objective of general purpose financial reporting is to provide financial information about the reporting
entity that is useful to existing and potential investors, lenders and other creditors in making decisions about
providing resources to the entity. Those decisions involve buying, selling or holding equity and debt instruments,
and providing or settling loans and other forms of credit.

To assess an entity's prospects for future net cash inflows, existing and potential investors, lenders and other
creditors need information about the resources of the entity, claims against the entity, and how efficiently and
effectively the entity's management and governing board have discharged their responsibilities to use the entity's
resources.

Examples of such responsibilities include:

  protecting the entity's resources from unfavourable effects of economic factors such as price and
technological changes
 ensuring that the entity complies with applicable laws, regulations and contractual provisions.

Information about management's discharge of its responsibilities is also useful for decisions by existing investors,
lenders and other creditors who have the right to vote on or otherwise influence management's actions.

However, general purpose financial reports do not and cannot provide all of the information that existing and
potential investors, lenders and other creditors need. Those users need to consider pertinent information from
other sources, for example, general economic conditions and expectations, political events and political climate,
and industry and company outlooks.

INFORMATION ABOUT A REPORTING ENTITY 'S ECONOMIC RESOURCES , CLAIMS , AND CHANGES IN RESOURCES AND CLAIMS

General purpose financial reports provide information about the financial position of a reporting entity which is
information about the entity's economic resources
Prescribed andChapter
Book the claims against the
1 paragraph 7: reporting entity. Financial reports
also provide information about the effects of transactions and other events that change a reporting entity's
economic resources and claims. Both types of information provide useful input for decisions about providing
1. Relevance
resources :
to an entity.
Relevant information is information that is useful and has the ability to influence the economic descisions of users by helping
them to evaluate
E CONOMIC past,AND
RESOURCES present or future events.
CLAIMS

Relevant information
Information hasnature
about the one of both
and of the charateristics
amounts of predictave
of a reporting value or confirmatory
entity's economic value.
resources and claims can help users to
identify the reporting entity's financial strengths and weaknesses. That information can help users to assess the
reporting
The entity's
relevance liquidity is
of information and solvency,
established byits needs for
reference additional
to the financing
nature (is sufficientand their chances
to determine of obtaining
the relevance of thethem
successfully.and
information) Information aboutof
the materiality priorities and payment
the information requirements of existing claims helps users to predict how
concerned.
future cash flows will be distributed among those with a claim against the reporting entity.
Information is considered to be material it its omission or misstatement could influence the decisions of users based on this
C HANGES IN ECONOMIC RESOURCES AND CLAIMS
information. If information is not material, it relevance diminishes. The materiality of an item is measured in terms of its
importance in relation to the overall assessment of the financial statements.
Changes in a reporting entity's economic resources and claims result from that entity's financial performance and
from other events or transactions such as issuing debt or equity instruments. To properly assess the prospects for
Materiality
future cash refers
flowstofrom
individual items. entity, users need to be able to distinguish between both of these changes.
the reporting

The following
F INANCIAL should be considered
PERFORMANCE REFLECTED BYinACCRUAL
the assessment of the materiality of an element in the financial statements:
ACCOUNTING
 Material items affect the evaluation of, or decisions made about, the financial statements
 The
Accrual disclosuredepicts
accounting of material items increases
the effects the usefulness
of transactions of the events
and other financialand
statements
circumstances on a reporting entity's
economic
 Theresources
materialityand claims
of an inassessed
item is the periods in which
in terms of thethose effects
financial occur,as
statements even if the resulting cash receipts and
a whole
payments occur in a different period. This is important because information about a reporting entity's economic
resources and claims and changes in its economic resources and claims during a period provides a better basis for
2. Faithful Representation:
assessing the entity's past and future performance than information solely about cash
All items that impact on the financial positions and/or results of an entity should be represented in the financial statements in a
appropriate manner. REFLECTED BY PAST CASH FLOWS
F INANCIAL PERFORMANCE
Three characteristics
Information about aensures faithfull
reporting representations:
entity's cash flows during a period also helps users to assess the entity's ability to
1. Completeness
generate future net cash inflows. It indicates how the reporting entity obtains and spends cash, including
informationa.about
Information included
its borrowing andinrepayment
the financialofreports is complete
debt, cash whenorit other
dividends includes all the
cash information
distributions tothat a user and
investors,
other factors that mayneed
would affect the
to be entity's
able liquiditythe
to understand or economic
solvency.events
Information about cash
or transactions beingflows helps users understand
presented.
a reporting entity's operations, evaluate its financing and investing activities, assess its liquidity or solvency and
2. Neutrality
interpret other
a. information
Reliable information should be neautral in that it should not present information in a manner that will
achieve a predetermined result.
3. Free from error
a. The description if the event and/or transaction (economic phenomena) is free from error and that the process
followed to provide the reported information was also without error.

Applying the fundamental qualitative characteristics

For information to be useful, it must be both relevant and faitfully representated.
The following steps
QUALITATIVE is the most efficient
CHARACTERISTICS and effective
OF USEFUL process
FINANCIAL when applying the fundamental qualitative characteristics:
INFORMATION

The qualitative characteristics of useful financial information discussed identify the types of information that are
likely to be most useful to the existing and potential investors, lenders and other creditors for making decisions
about the reporting entity on the basis of information in its financial report (financial information).

The fundamental qualitative characteristics are relevance and faithful representation.

The qualitative characteristics of the Conceptual Framework can be summarized as follows:

 Prescribed Book Chapter 1 paragraph 7 (Continued):

Step 1 : Indentify the economic phenomenon that has the potential to be useful to users
Step 2 : Indentify the type of information about the phenomenon that would be most relevant, if it is available
and can be faitfully represented.
Step 3 : Determine whether that information is available and can be faithfully represented.

Enhancing Qualitative Characteristics

Enchancing qualitatice characteristics:

1. Comparability
Users should be given compatable information that enables them to indentify trend over time between similar companies.

Note: Comparability in the accounting treatment should be consistent for:

 The same items over time
 The same items in the same period
 Similar items of different but similar companies over time and in the same period

2. Verifiability
Enables users to confirm that the presented information does in fact faithfully represent the events of transactions it purports
to present.

Direct verifiability: Counting of cash to verify a cash balance

Indirect verifiability: Conformation of inputs used to calculate the closing balance of inventories by physically
counting the quantities and recalculating the value using the same valuation methods used
by the reporting entity

3. Timeliness
Older information is less usefull although some information could still be usefull over a longer period of time when it is used for
purposes of identifying ans assessing certain trends.

4. Understandability
Financial statements sould be understanable to the average user who has a reasonable knowledge of business and a
willingness to study the information with necessary deligence.

The cost constraint on useful financial reporting:

A pervasive constraint on the presentation of financial information is the cost involved in supplying the information. Where
the cost of preparing the information exceed the benefits to be delivered from the supply of information, the information will
not be reported, even though it may meet all the qualitative characteristics of useful information.
THE FRAMEWORK (1989): THE REMAINING TEXT

UNDERLYING ASSUMPTION

Going concern – an assumption that the entity will continue to operate in the foreseeable future.

The annual financial statements are normally prepared on the assumption that an entity is a going concern and will
continue in operation for the foreseeable future. Hence, it is assumed that the entity has neither the intention nor
the need to liquidate or curtail materially the scale of its operations. If such an intention or need exists, the annual
financial statements may have to be prepared on a different basis and, if so, the basis used is disclosed.

THE ELEMENTS OF ANNUAL FINANCIAL STATEMENTS:

The qualitative characteristics are applicable to all information contained in the financial statements. The following
elements of the financial statements will be considered seperately:
1. assets
2. Liabilities Financial position as reflected in statement of financial position and includes
these
3. Equity
4. income Financial performance as reflected in statement of profit or loss and other
comprehensive income and includes these
5. expenses

THE DEFINITIONS OF THE FOLLOWING ELEMENTS ARE DISCUSSED IN THE C ONCEPTUAL FRAMEWORK:

ASSETS
The future economic benefit embodied in an asset is the potential to contribute, directly or indirectly to the flow of
cash and cash equivalents to the entity. An asset is a resource controlled by the entity as a result of past events
and from which future economic benefits are expected to flow to the enterprise. Many assets, for example,
property, plant and equipment, have a physical form. However, physical form is not essential to the existence of an
asset; hence patents and copyrights, for example, are assets if future economic benefits are expected to flow from
them to the entity and if they are controlled by the entity.

Assets may be:

1. used singly or in combination with other assets in the production of goods or services to be sold by the
entity
2. exchanged for other assets
3. used to settle a liability
 4. distributed to the owners of the entity

Note: An asset of an entity is:

 a resource
 that is under the control of the entity
 that is expected to result in future economic benefits flowing to the entity
 that is originated as a result of past events

LIABILITIES
A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result
in an outflow from the entity of resource embodying economic benefits.

The sacrifice of resources with economic benefits can take place in a number of ways, such as:
1. payment of cash
2. transfer of other assets
3. provision of services
4. replacement of one obligation with another
5. conversion of an obligation into equity

Note: A liability of an entity is:

 a present obligation
 arising from past events
 the settlement of which is expected to result in an outflow from the entity of resources
embodying economic benefits

INCOME
The definition of income encompasses both revenue and gains. Revenue arises in the course of the ordinary
activities of an entity and is referred to by a variety of different names including sales, fees, interest, dividends,
royalties and rent. (Refer to learning unit 9.)

Note: Income is described as:

 increases in economic benefits during the accounting period
 in the form of inflows or enhancements of assets (normally debtors / cash)
 or decreases of liabillities
 that result in increases in equity other than those relating to contribution from equity
participants

E XPENSES
The definition of expenses encompasses losses as well as those expenses that arise in the course of the ordinary
activities of the entity. Expenses that arise in the course of the ordinary activities of the entity include, for example,
cost of sales, wages and depreciation. They usually take the form of an outflow or depletion of assets such as cash
and cash equivalents, inventory, property, plant and equipment.

Note: Expenses are defined as:

 decreases in economic benefits during the accounting period
 in the form of outflows or depletion of assets
 or incurrences of liabilities (normally trade creditors)
 that result in decreases in equity other than those relating to distrubutions to equity
participants

RECOGNITION OF THE ELEMENTS OF ANNUAL FINANCIAL STATEMENTS

For an item to be recognised in the statement of financial position or statement of profit or loss and other
comprehensive income, the item must fall within the definition of an element and satisfy the criteria for
recognition.

The criteria for recognition are as follows:

 it is probable that future economic benefits will flow to or from the entity and
 the item has a cost or value that can be measured with reliability.
The decision regarding the probable future economic benefit of an item is taken at the time of finalising the annual
financial statements e.g. if there is a possibility that a debtor will not be collected it is prudent to make a provision
for credit losses. A reduction in economic benefit in respect of that item is recognised.

Note: To be recognised as an element in the financial statements:

 an item must meet the definition of an element of financial statements
 it should be probable that future economic benefits associated with the item will flow to or
from the entity
 it must have a cost or value that can be measured reliably

MEASUREMENT OF THE ELEMENTS OF ANNUAL FINANCIAL STATEMENTS

THE PROBABILITY OF FUTURE BENEFITS

Refers to the degree of uncertainty surrounding the likelihood that the future economic benefits associated with
the item will flow to or from the entity.

RELIABILITY OF MEASUREMENT
Measurement is the process whereby a monetary value is allocated to the elements of annual financial statements.
A number of different measurement bases exist for the determination of the carrying value of an element.

These bases are:

1. Historical cost
Assets should be recorded at the amount paid, or the fair value of the consideration given, to acquire the assets at
the time of their acquisition.
Liabilities should be recorded at the amount of proceed received in exchange for the obligation, or in some
circumstances, at the amount of cash or cash equivalents expected to be paid to satisfy the liability in the normal
course of business.

2. Current cost
Assets carried at the amount of cash or cash equivalents that would have to be paid if the same or an equivalent
asset was acquired currently.
Liabilities are carried at the undiscounted amount og cash or cash equivalent that would be required to settle the
obligation currently.

3. Realisable (settlement) value

Assets are carried at the amount of cash or cash equivalent that could currently be obtained by selling the asset
in an orderly disposal.
Liabilities are carried at their settlement values, that is, the undiscounted amounts of cash of cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.

4. Present value
Assets are carried at the present discounted value of the future net cash inflows that the item is expected to
generate in the normal course of business.
Liabilities are carried at the present discounted value of the future net cash outflows that are expected to be
required to settle the liabilities in the normal course of business..

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

In terms of the financial concept of capital, reference is made to invested money or invested purchasing power.
Under the financial concept, capital is synonymous with the net assets or equity of the entity. In terms of the
physical concept of capital, reference is made to operating capability. The capital is regarded as the productive
capacity of the entity.

The two concepts of capital give rise to the following concepts of capital maintenance:

F INANCIAL CAPITAL MAINTENANCE

Under this concept, profit will be recognised if the financial amount of net assets at the end of the financial period
is greater than the financial amount of net assets at the beginning of the financial period.

PHYSICAL CAPITAL MAINTENANCE

Under this concept, profit will be recognised if the physical productive capacity of the entity at the end of the
financial period exceeds the physical productive capacity at the beginning of the period.

USERS OF ANNUAL FINANCIAL STATEMENTS

The financial reports are used by a wide range of users, each with specific needs, and these users are identified in
the above paragraphs. The Framework follows the approach of satisfying the needs of other users, by providing
information that investors require.

The following users can be identified:

1. Investors
2. Employees
3. Lenders
4. Suppliers and other trade creditors
5. Customers
6. Government and its agencies
7. The public

THE FRAMEWORK FOR THE PREPARATION AND PRESENTATION OF ANNUAL FINANCIAL STATEMENTS

Read par. 11 to 20 of the prescribed textbook.

It was issued in 1989 by the International Accounting Standards Committee and adopted in 2001 by the
International Accounting Standards Board, as a common framework that can be used for the development of new
standards and to revise existing ones. The Framework has already partially been replaced by chapters in the
Conceptual Framework in an attempt to assist standard-setters to harmonise accounting practises, standards and
procedures and therefore you can only take note of the old Framework.
APPLYING THE THEORY

The following approach is recommended in the answering of theory/discussion questions:

 Indentify the relevant theory in the Conceptual Framework / Framework / IRFS
 Apply the information given n the question to each component of the theory
 Draw a conclusion based on the discussion

Prescribed Book Chapter 1 paragraph 22 :

The Conceptual Framework:

 Is aimed at the preparation of general-purpose financial reports

 Has as specific objective the rendering of support to:

o The IASB
o Other standard-setters
o Preparers
o Auditors
o Users

 Sets the following as the objective of finacial reporting:

o The provision of financial information about the reporting entity
o That is useful to existing and potential investors, lenders and other creditors

 Identifies the following underlying assumption in the preparation of finacial statements:

o Going concern

 Identifies the following fundamental qualitative characteristics of financial statements:

o Relevance
o Faithful representation

 Indentifies the following enhancing qualitative characteristics of financial statements:

o Comparability
o Verifiability
o Timeliness
o Understandability

 Discusses the definitions of the following elements of financial statements:

o Assets
o Liabilities
o Equity
o Income
o Expense

 Identifies the recognition criteria of the above mentioned elements

 Discusses the concepts of capital and capital maintenance

LEARNING UNIT 3
PRESENTATION OF ANNUAL FINANCIAL STATEMENTS – IAS 1
C ATEGORIES OF COMPANIES

Study par. 2 and 3 of chapter 19 of the prescribed textbook

Section 8 of the Companies Act 2008 states that two types of companies may be formed and incorporated under
the Act, namely profit companies and non-profit companies.

Two types of companies may be formed in South Africa:

3. a profit company:
Is incorporated in order to provide financial gain for its shareholders.
Four (4) Types of profit companies:
 State-owned company – either listed as a public entity in Schedule 2 / 3 of the Public Finance Management
Act 1999 or owned by a municipality
 Private company – a profit company that is not a public, personal liability or state-owned company an its
memorandum of incorporation:
o Prohibits it from offering any of its securities to the public
o Retricts the transferability of its securities
 Personal Liability Company – is a company that meets the criteria for a private company and its
memorandum of incorporation specifically states that it is a personal liability company
 Public Company – not state-owned, private company or a personal liability company

4. a non-profit company:
Purpose related to a public benefit or purpose relating to cultural or social activities or interest of groups. Section 1
of the Companies Act defines a company as a company:
 that is incorporated for a public benefit or other object as required by item 1(1) of Schedule 1
 whose income and property are not distributable to its incorporators, members, directors, officers or any
persons related to them (except to the extent permitted by item 1(3) of Schedule 1)

PURPOSE OF ANNUAL FINANCIAL STATEMENTS

Note: The aim of IAS 1 is to set out the following:

 structure and content of financial statements
 overall requirements for presentation
 underlying assumptions

This standard provides huidance on the overall presentation by setting out the basic requirements for general
purpose financial statements.

The annual financial statements are a structured representation of the financial position of the entity and the
results of the operations undertaken by the entity. The objective of preparing annual financial statements is to
provide information about the financial position (assets, liabilities and equity), performance (income and expenses,
including gains and losses), and cash flows of an entity in order to provide useful
information to the users of the annual financial statements in making economic decisions. It also serves as proof of
the results of management's stewardship of the resources of the entity.

The new terminology van also differ from the terms that are still widely being used in practice:

Old Terminology Revised Terminology (IAS 1)

Balance Sheet Statement of Financial Position
Income Statement Statement of Profit or Loss and other Comprehensive
Income
Statement of Changes in Equity Statement of Changes in Equity
Cash Flow Statement Statement of Cash Flows
Note: General purpose of financial statements are those statements that are intended to satisfy the
needs of the group of interested parties who are not in a position to demand that financial
statements should be specifically compiled for their purposes.

Note: The objective of financial statements is to provide information about the:

 Financial position
 Financial performance
 Cash flows
Of an entity that is useful to a wide range of users when making economic decisions

A complete set of annual financial statements consists of the following:

 a statement of financial position;
 a statement of profit or loss and other comprehensive income;
 a statement of changes in equity;
 a statement of cash flows;
 accounting policies and explanatory notes; and
 a statement of financial position at the beginning of the earliest comparative period when an entity applies
an accounting policy retrospectively or makes a retrospective restatement of items in its annual financial
statements or when it reclassifies items in its annual financial statements.
 Comparative information in respect of the preceding periods.

GENERAL FEATURES (CHAPTER 2 PARAGRAPH 5)

The following general features for the presentation of financial statements are identified in IAS 1.15 to 46:
 Fair presentation and compliance with IRFSs
 Going concern
 Accrual basis of accounting
 Materiality and aggregation
 Offsetting
 Frequency reporting
 Comparative information
 Consistent presentation

F AIR PRESENTATION AND COMPLIANCE WITH IFRS S

The annual financial statements should fairly present the financial position (referring to the Statement of financial
position), financial performance (referring to the Statement of profit or loss and other comprehensive income) and
cash flows (referring to the Statement of cash flows) of an entity.

If the IFRS are properly applied, and when in certain circumstances additional disclosure is necessary and
presented, the annual financial statements will achieve fair presentation.

Note: Fair Presentation is usually accomplished with the Standards and Interpretations of the IASB,
and when in accordance with the definitions and recognition criteria for assets, liabilities, equity,
income and expenses as set out in the Conceptual Framework. Each set of financial statements
should state that it complies with IFRS, unless compliance with all applicable IRFSs as well as each
applicable approved interpretation has not been achieved.

If management should conclude that the compliance with a requirement in an IFRS statement conflict with the
objective of the annual financial statements set out in the Framework (rare circumstance) then management would
adopt requirements that would ensure fair presentation and would disclose the following:
 that management has concluded that the annual financial statements present fairly the entity’s financial
position, financial performance and cash flows;
 that it has complied with applicable IFRSs, except that it has departed from a particular requirement to
achieve a fair presentation;
 the title of the IFRS from which the entity has departed, the nature of the departure, including the
treatment the IFRS would require, the reason why that treatment would be so misleading in the
circumstances that it would conflict with the objective of annual financial statements set out in the
Framework and the treatment adopted; and
 for each period presented, the financial effect of the departure on each item in the annual financial
statements that would have been reported in complying with the requirement.

G OING CONCERN
This consideration is based on the fundamental accounting concept that the entity will continue to exist in the
foreseeable future. When management assesses whether the going concern assumption is appropriate, it takes all
the relevant information for at least twelve months from the date of the Statement of financial position reporting
period, into account. When annual financial statements are not prepared on a going concern basis, that fact should
be disclosed together with the basis on which the annual financial statements are prepared and the reason why the
entity is not considered to be a going concern.

ACCRUAL BASIS OF ACCOUNTING

Annual financial statements, except for cash flow information, are prepared using the accrual basis of accounting.
When the accrual basis of accounting is used, an entity recognizes the elements of the annual financial statements
when they satisfy the definitions and recognition criteria.

Note: This implies that the transactions are accounted for when they occur, not when cash is received
or paid.

Example 1.1: Accrual Accounting

During March 20.11 a company purchased inventory on credit. The company has a policy of settling creditors
after 60 days. According to the accrual basis of accounting, the company must account for the purchase
transaction in March 20.11, not when the actual cash flow occur when settling the creditors 60 days later.

C ONSISTENCY OF PRESENTATION
The presentation and classification of items in the annual financial statements should be retained within each
accounting period, and from one accounting period to the next. Consistency consists of two important aspects:
 Consistency over time; and
 Consistency of disclosure of similar items.
 Materiality and aggregation
Each material class of similar items should be presented separately in the annual financial statements. Items of a
dissimilar nature or function should be presented separately unless they are immaterial. If a line item is not
individually material, it is aggregated with other items either in those statements or in the notes.

OFFSETTING
This consideration refers to the netting off of assets and liabilities, and income and expenses. This is not allowed
unless specifically required in terms of a Standard or an Interpretation.

C OMPARATIVE FINANCIAL INFORMATION

Numerical information in the annual financial statements should be disclosed with the comparative figures for the
previous period. Comparative information in respect of the previous accounting period should also be disclosed for
all narrative and descriptive information. If either the presentation or classification of items in the annual financial
statements is amended, then the comparative amounts should be reclassified unless the reclassification is
impracticable.

STRUCTURE AND CONTENT

Study par.2 & 6 of the prescribed textbook.

IAS 1 outlines the broad disclosure requirements for preparing annual financial statements. It is left to the specific
International Financial Reporting Standards to prescribe the specific disclosure requirements of items in the annual
financial statements. This accounting standard requires particular disclosures to be made in the annual financial
statements.

IDENTIFICATION OF ANNUAL FINANCIAL STATEMENTS

The annual financial statements should be clearly identified. This includes information concerning the name of the
reporting entity, whether the annual financial statements are for the individual entity or for a group of entities, the
reporting date and currency, as well as the level of rounding of the figures (for example R'000).

The following information should be included, preferably on each page, in the financial statements:
 The name of the reporting entity
 Individual or group of entities
 Date of the end of the reporting period
 Relevant component of financial statements
 Currency
 Level of precision of the amounts presented

F REQUENCY OF REPORTING
It is a requirement that annual financial statements should be presented at least annually.
In exceptional cases, in which an entity's reporting date changes, with the result that the annual financial
statements are presented for a period shorter or longer than one year,
 the reason for using the longer or shorter period; and
 the fact that the comparative amounts of the annual financial statements are not entirely comparable.
The annual financial statements must also be presented within a reasonable time from the end of the financial year
otherwise the information will be of little or no use to the users of the annual financial statements.

STRUCTURE AND CONTENT: STATEMENT OF FINANCIAL POSITION

SHARE CAPITAL

Needs specific disclosure, in the notes to the annual financial statements, for each class –
please refer to par. 6.2.3 of the prescribed textbook.

Prescribed Book Chapter 2 paragraph 6.2.3 :

Items presented on the statement of financial position, statement of changes in equity or in the notes
Sub-classifications of items presented (see above), appropriately classified are provided in
either the statement of financial position or in the notes.
For share capital, in particular, the following are disclosed for each class (IAS 1.79):
 the number of shares authorised;
 the number of shares issued and fully paid;
 the number of shares issued but not fully paid;
 the par value per share, or that the shares have no par value;
 a reconciliation of the number of shares outstanding at both the beginning and the end of the period;
 the rights, preferences and restrictions applicable to each category, including restrictions on the distribution of dividends
and the repayment of capital;
 the shares in the entity held by the entity or its subsidiaries or associates; and
 the shares reserved for issuance under options and sales contracts, including the terms and amounts thereof.

Furthermore, a description of the nature and purpose of each reserve that forms part of equity. Entities without share capital,
for example partnerships and trusts, should disclose, to the extent applicable, information equivalent to the above. Movements
during the accounting period in each category of equity interest and the rights, preferences and restrictions attached to each
category of equity interest should be duly disclosed.

ISSUE OF CAPITALISATION SHARES

Study par. 8.1.1. in chapter 18 of the prescribed textbook and also refer to par. 1.5.4 of Learning unit
1.
Prescribed Book Chapter 18 paragraph 8.1.1 :
Shares are issued to existing shareholders proportionally to their shares as a percentage of the total shares in issue prior to the
capitalisation issue, without the issuer receiving any consideration.
Implications for the investor:
 Additional shares are received for no additional consideration.
 The number of shares held increases, but the total Rand value of the investment in the shares remains constant.
 Therefore, the value per share decreases (more shares for the same Rand value).
 Effect on disclosure:
o the number of shares held increases; and the amount per share decreases.
Implications for the issuer of the capitalisation shares:
 Reserves are converted into share capital.
C URRENT /NON-is
 There CURRENT DISTINCTION
no inflow of capital/resources into the entity.
An important classification in terms of the statement of financial position is whether an item should be disclosed as
 Entry: Dr Reserve (equity)/ Cr Share capital (equity)
current or non-current.

C URRENT ASSETS
An asset is classified as current when it satisfies any of the following:
 it is expected to be realised in, or is intended for sale or consumption in, the entity's normal operating
cycle;
 it is held primarily for the purpose of being traded;
 it is expected to be realised within twelve months after the year end date; or
 it is cash or cash equivalent.

All other assets are classified as non-current.

The operating cycle of an entity is the time between the acquisition for processing and the realisation of its assets
for cash or cash equivalents.

C URRENT LIABILITIES
A liability is classified as current when it satisfies any of the following:
 it is expected to be settled in the entity's normal operating cycle;
 it is held primarily for the purpose of being traded;
  it is due to be settled within twelve months after the reporting period; or
 the entity does not have an unconditional right to defer settlement of the liability for at least twelve
months after the year end date.

All other liabilities are classified as non-current.

INFORMATION TO BE PRESENTED ON THE STATEMENT OF FINANCIAL POSITION

Study par. 6.2.2 of the prescribed textbook.

Prescribed Book Chapter 2 paragraph 6.2.2 :

IAS 1 does not prescribe the format or order of items to be presented on the statement of financial position. The statement of
financial position should however, present at least the following items:
a) property, plant and equipment;
b) investment property;
c) intangible assets;
d) financial assets (excluding investments accounted for using the equity method, trade and other receivables and cash and
cash equivalents);
e) investments accounted for using the equity method;
f) biological assets;
g) inventories; a)
h) trade and other receivables;
i)b) cash and cash equivalents;
j)c) total assets classified as held for sale and assets included in disposal groups in accordance with IFRS 5, Non-current Assets
d) Held for Sale and Discontinued Operations
k)
e) trade and other payables;
l)f) liabilities and assets for current tax;
g) deferred
m) A financial instrument
tax liabilities is defined
and deferred as "any contract that gives rise to both a financial asset of one entity and a
tax assets;
financial
n) provisions; liability or equity instrument of another entity".
h)
o) financial liabilities (excluding trade and other payables and provisions);
i) A financial asset is defined as any asset that is:
p) liabilities
cash;included in disposal groups classified as held for sale in accordance with IFRS 5;
q) issuedanycapital andinstrument
equity reserves attributable
of anothertoentity;
the owners of the parent; and
r) non-controlling
a contractual interests,
right:presented within equity.
o to receive cash or another financial asset from another financial entity; or
Line items areoincluded if the size,
to exchange natureassets
financial or function of an item
or financial or the composition
liabilities with another of similar items isconditions
entity under such that separate
that are
disclosure is appropriate to the understanding of the
potentially favourable to the entity; or financial position of the entity and to supplying information necessary to
understand
 the financial
a contract thatposition. The descriptions
will or may be settled inand theorder of the
entity's ownitems or aggregation
equity instruments of separate
and is: items are adapted in
accordance witho the nature of the entity
a non-derivative and itsthe
for which transactions.
entity is or may be obliged to receive a variable number of the
entity's
The following criteria own equity
are applied instruments;
in deciding whetheror an item should be disclosed separately:
 o a derivative
the nature and liquiditythat willassets,
of the or may be settled
leading other than
to a distinction by the exchange of a fixed amount of cash or
between
 another financial asset for a fixed number of
the function of the relevant items, leading to a distinction between the entity's own equity instruments. For this purpose
the entity's own equity instruments do not include instruments that are themselves contracts for
 the amount,thenature
futureand settlement
receipt date ofofliabilities,
or delivery leading
the entity's owntoequity
a distinction between
instruments
j)
 k)

l) Examples of financial assets are:

m) Cash;
n) Deposits at financial institutions;
o) Promissory notes receivable;
p) Loans receivable;
q) Bonds receivable;
r) Investments in listed companies;
s) Investments in unlisted companies; and
t) Investments in associates.
u)
v) In terms of paragraph .54 of IAS 1 financial assets other than "investments accounted for using the equity
method, trade and other receivables, and cash and cash equivalents" are grouped together under the heading
"Financial assets". A financial asset shall be measured at fair value unless it is measured at amortised cost in
accordance with paragraph 4.1.2 of IFRS 9.
w)
x) An equity instrument is defined as any contract that evidences a residual interest in the assets of an entity
after deducting all of its liabilities. (This refers to an entity's investment in the equity shares of another entity.)
y)
z) The following are not examples of financial assets:
 Property, plant and equipment;
 Leased assets;
 Inventories;
 Goodwill, patents and trademarks;
 Prepaid expenses (i.e. an insurance premium paid in advance. This is not the right to receive cash or
another financial asset but the right to the receipt of goods or services in the future); and
 Income taxes that are created as a result of statutory requirements imposed by government.
aa)
ab) A financial liability is defined as any liability that is:
ac) a contractual obligation:
 to deliver cash or another financial asset to another entity, or
 to exchange financial assets or financial liabilities with another entity under conditions that are potentially
unfavourable to the entity; or a contract that will or may be settled in the entity's own equity instruments
and is:
 a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity's own
equity instruments; or
 a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another
financial asset for a fixed number of the entity's own equity instruments. For this purpose the entity's own
equity instruments do not include instruments that are themselves contracts for the future receipt or
delivery of the entity's own equity instruments. Please remember, however, that derivatives are not
covered on 2nd year Accounting.
ad)
ae) In the case of preference shares they can be classified as either financial liabilities or
af) equity.

ag) Where the rights of a preference share:

 provides for mandatory redemption by the issuer for a fixed or determinable amount at a fixed or
determinable future date, or
 gives the holder the right to require redemption at or after a particular date for a fixed or determinable
amount then it meets the definition of a financial liability and should be disclosed (classified) as such.
ah)
ai) If the above does not apply then issued preference shares will be classified as part of equity.
aj)
ak) A preference share that provides for redemption at the option of the issuer (i.e. the company's discretion) is not
a financial liability because the issuer does not have a present obligation to transfer financial assets to the
shareholders.
al)
am)Examples of financial liabilities are:
an) _ Trade and other creditors;
ao) _ Promissory notes payable;
ap) _ Loans payable; and
aq) _ Bonds payable.
ar)
as) In the case of financial assets and financial liabilities, one party's contractual right to receive cash (or
obligation to pay) is matched by the other party's corresponding obligation to pay (or right to receive).
at)
au) INFORMATION TO BE PRESENTED EITHER ON THE STATEMENT OF FINANCIAL POSITION OR IN THE NOTES
av)
aw) Study par.6.2.2 & 6.2.3 of the prescribed textbook. (See Above)
ax)
ay) Further sub classifications of line items presented should be disclosed either on the face of the statement of
financial position or in the notes. The disclosures vary for each item, for example:

Prescribed Book Chapter 2 paragraph 6.3 :
property, plant and equipment are disaggregated into classes according to IAS 16;
 receivables are disaggregated into amounts receivable from trade customers, receivables from related
All incomeparties,
and expense items recognised
prepayments in a amounts;
and other period should be presented in either a single statement of profit or loss and other
comprehensive
 income or in two separate statements,
inventories are sub classified according to where one statement displays the items of profit or loss (statement of
IAS 2;
profitor loss) and the other displays the items of other comprehensive
provisions are disaggregated into provisions for employee income together
benefits andwith
othertheitems;
total profit
and or loss as an
opening
 amount.
equity capital and reserves are disaggregated into various classes, such as paid-up capital, share premium
and reserves.
The
az) statement of profit or loss and other comprehensive income therefore consists of the following two sections:
_ba) STRUCTURE
profit ANDyear;
or loss for the CONTENT:
and STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
_bb) Study
other par. 6.3 income
comprehensive of the for
prescribed
the year. textbook.
bc)
Inbd)
addition to the above, the statement of profit or loss and other comprehensive income should also present:
_be)
profit or loss;
bf)
_bg)
total other comprehensive income; and
_bh)
comprehensive income for the period, being the total of profit or loss and other comprehensive income.
bi)
Onbj)the face of the statement of profit or loss and other comprehensive income (or on the statement of profit or loss) profit or
loss
bk)for the year should be allocated as follows:
_bl)
attributable to owners of the parent; and
_bm)
attributable to non-controlling interests.
bn)
bo)
On the face of the statement presenting comprehensive income total comprehensive income for the year should be allocated
bp)
as follows:
bq)
_br)
attributable to owners of the parent; and
_bs)
attributable to non-controlling interests.
bt)
All
bu)income and expense items are recognised in profit or loss for a specific accounting period, unless a standard requires or
bv)
permits otherwise. This implies that the effect of changes in accounting estimates is also included in the determination of profit
orbw)
loss.
bx)
by)
Only in a limited number of circumstances may particular items be excluded from profit or loss for the period: these
bz)
circumstances
ca) include the correction of errors and the effect of changes in accounting policies in terms of IAS 8, Accounting
Policies,
cb) Changes in Accounting Estimates and Errors (IAS 8.14 to .31 and .41 to .48).
cc)
There
cd) are a number of items (including reclassification adjustments) that meet the Conceptual Framework’s definitions of
income
ce) or expense but are excluded from the determination of profit or loss and presented separately as items of other
cf)
comprehensive income. Examples of items of other comprehensive income include the following:
_cg)
revaluation surpluses and deficits against existing revaluation surpluses;
_ch)
remeasurements of defined benefit plans;
ci)
_cj)
gains and losses arising from the translation of the financial statements of a foreign entity;
_ck)
gains or losses on remeasuring equity instruments classified as financial assets at fair value through other comprehensive
income;
cl)
_cm)
gains and losses on cash flow hedges;
_cn)
changes in credit risk based on changes in fair value for liabilities held at fair value through profit or loss; and
_co)
share of other comprehensive income of associates or joint ventures.
cp)
cq)profit or loss section of the statement of profit or loss and other comprehensive income may be presented in two ways:
The
cr)
either by classifying income and expenditure in terms of the functions that give rise to them or by classifying income and
cs)
expenditure
ct) in terms of their nature (IAS 1.99). Note that expenses are sub-classified in terms of frequency, potential for gain or
loss
cu) and predictability.
cv)
When
cw) income and expenditure are classified in terms of the functions that give rise to them, additional information of the
nature
cx) of the expenditure should be provided in the notes to the statement of profit or loss and other comprehensive income,
cy)
including
_cz)
depreciation;
_da)
amortisation; and
db)
_ employee benefit expense.
dc)
The reason why the above additional disclosure is required in the case of a presentation of income and expenditure in terms of
their function is that the nature of expenses is useful in predicting future cash flows. The method selected should be the one most
suitable to the entity, depends on historical and industry factors, and should be consistently applied.
dd)
de)
df)
dg)
dh)
di)
dj)
dk)
dl)
dm)
dn)
do)
dp)
dq)
dr)
ds)
dt)
du)
dv)
dw)
dx)
dy)
dz)
ea)
eb)
ec)
ed)
ee)
ef)
eg)
eh)
ei)
ej)
ek)
el)
em)
en)
eo)
ep)
eq)
er)
es)
et)
eu)
ev)
ew)
ex)
ey)
ez)
fa) The statement of profit or loss and other comprehensive income shall present, in addition to profit or loss and
other comprehensive income sections:
 profit or loss;
 total comprehensive income;
 comprehensive income for the period, being the total of profit or loss and other comprehensive income.
fb)
fc) If an entity presents a separate statement of profit or loss it does not present the profit or loss section in the
statement of profit or loss and other comprehensive income.
fd)
fe) In addition to the mentioned items an entity shall present the following items as allocation of profit or loss and
other comprehensive income for the period:
 profit or loss for the period attributable to:
o non-controlling interests, and
o owners of the parent.
 comprehensive income for the period attributable to:
o non-controlling interests, and
o owners of the parent.
ff)
fg) If an entity presents profit or loss in a separate statement it shall present profit or loss attributable to non-
controlling interests and owners of the parent in that statement.
fh)
fi) INFORMATION TO BE PRESENTED IN THE PROFIT OR LOSS SECTION OR THE STATEMENT OF PROFIT OR LOSS
fj) Study par. 6.3 and 6.3.1 of the prescribed textbook
 fk)
fl)
fm) Prescribed Book Chapter 2 paragraph 6.3.1:
fn)
fo)
In addition to items required by other IFRSs, the profit or loss section or the statement of profit or loss should include the
fp)
following line items (IAS 1.82):
fq) revenue;
fr)
fs) gains and losses arising from the derecognition of financial assets measured at amortised cost;
ft) finance cost;
fu) share of after-tax profits or losses of associates and joint ventures accounted for using the equity method;
fv) when a financial asset is reclassified so that it is measured at fair value, any gain or loss arising from a difference between
fw)
the previous carrying amount and its fair value at the reclassification date;
fx)
fy) a single amount for the total of discontinued operations (see IFRS 5, Non-current Assets Held for Sale and Discontinued
fz) Operations); and
ga)income tax expense.
gb)
gc)
Additional line items, headings and subtotals should be added where it is required by a Standard or where it is in the interest of
gd)presentation, for example in the case of a material item or when such presentation is relevant to an understanding of the
fair
ge)
entity’s financial performance. Factors considered include materiality and the nature of the components of income and
gf)
expenses.
gg) Descriptions are adapted to suit the activities of the reporting entity. It is important to note that the notion of
extraordinary
gh) items has been abandoned and no disclosure whatsoever of such an item is allowed.
gi) In addition to items required by other IFRSs the profit or loss section or the statement of profit or loss shall
include line items that present the following amounts for the period:
 revenue;
 gains and losses arising from the derecognition of financial assets measured at amortised cost;
 finance costs;
 share of the profit or loss of associates and joint ventures accounted for using the equity method;
 if a financial asset is reclassified so that it is measured at fair value, any gain or loss arising from a
difference between the previous
Prescribedcarrying amount2and
Book Chapter its fair value
paragraph 6.3.2 at the reclassification
& 6.3.3 : date;
 tax expense;

Informationa single
to beamount for in
presented the total
the of discontinued
other comprehensive operations
section (Not covered on 2nd year Accounting)
gj)
gk) other
The INFORMATION TO BE PRESENTED
comprehensive IN THE
section shall OTHER line
present COMPREHENSIVE
items for allINCOME SECTION
other comprehensive income items, classified by nature,
gl)
grouped into the following categories, in accordance with other IFRSs:
gm) Study par. 6.3, 6.3.1 to 6.3.3 of the prescribed textbook
 items that will not subsequently be reclassified to profit or loss; and
gn)items that will subsequently be reclassified to profit or loss when specific conditions are met.

An entity should also disclose the amount of income tax relating to each item of other
go)
comprehensive income, including reclassification adjustments, in the statement of profit or
loss
gp)and other comprehensive income or in the notes.

gq) item of other comprehensive income is shown:

Each
 net of the related tax effects; or
gr) before the related tax effect with a separate line item for the aggregate amount of income tax relating to those items.
gs)
When an entity presents an amount showing the aggregate tax amount, this tax amount should also be grouped into items that
will
gt)
subsequently not be reclassified to profit or loss and those that will subsequently be reclassified to profit or loss.

Reclassification
gu) adjustments are amounts that are reclassified to profit or loss in the current period that were previously
recognised in other comprehensive income (in the current or previous periods). These adjustments may be presented in the
statement
gv) of profit or loss and other comprehensive income or in the notes. When presented in the notes, the items of other
comprehensive income are presented after any related reclassification adjustments
gw)
Information to be presented in the statement(s) of profit or loss and other comprehensive income or in the notes
gx)
Items of such material size, nature or incidence that the users of financial statements
gy) be specifically referred to them to ensure that they are able to assess the
should
performance of the entity should be disclosed separately. The following are examples of
gz) that will probably require specific separate disclosure in particular circumstances
items
IAS 1.98:
ha)the write-down of inventories to net realisable value (or of property, plant and equipment to the recoverable amount) as
hb)well as the reversal of such write-downs;
 the restructuring of the activities of an entity, and the reversal of any provisions for the cost of restructuring;
hc) the disposal of property, plant and equipment;
 the disposal of investments;
 discontinued operations;
 the settlement of litigation; and
 other reversals of provisions
hd)

he)

hf)

hg)

hh)

hi)

hj)

hk)

hl)

hm) The other comprehensive income section shall present line items for amounts of other comprehensive
income in the period, classified by nature (including share of the other comprehensive income of associates
and joint ventures accounted for using the equity method) and grouped into those that, in accordance with
other IFRSs:
hn) (a) will not be reclassified subsequently to profit or loss; and
ho) (b) will be reclassified subsequently to profit or loss when specific conditions are met.
hp)
hq) For 2nd year Accounting we will only deal with the following two other comprehensive income
items:
hr)
hs) - Revaluation surpluses and deficits against existing revaluation surpluses, and
ht) - Gains or losses on remeasuring equity instruments classified as financial assets at fair value through other
comprehensive income.
hu)
hv) PROFIT OR LOSS FOR THE PERIOD
hw)
hx) An entity shall recognise all items of income and expense in a period in profit or loss unless an IFRS requires or
permits otherwise.
hy)
hz) INFORMATION TO BE PRESENTED EITHER IN THE STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME OR IN THE NOTES
ia)
ib) The nature and amount of all income and expense items shall be disclosed separately if they are material.
ic)
id) The following circumstances give rise to separate disclosure of income and expense items:
 inventories written down to net realisable value and reversals of these write-downs;
 property, plant and equipment written down to recoverable amount and reversals of these write-downs;
 disposal of property, plant and equipment;
 disposal of investments;

ie)

if) When income and expenditure is classified in terms of the functions which give rise to them, additional
information of the nature of the expenditure should be provided in the notes to the statement of profit or loss
and other comprehensive income, including:
 depreciation;
 amortisation; and
 employee benefit expense. (Not covered on 2nd year Accounting)
 ig)

ih) STRUCTURE AND CONTENT: STATEMENT OF CHANGES IN EQUITY

ii)
ij) Study par. 6.4 of the prescribed textbook.
ik)
il) Prescribed Book Chapter 2 paragraph 6.4 :
im)
6.4
in) Statement of changes in equity
io)
Aip)
statement of changes in equity forms part of the financial statements. Essentially, what is
iq)
required is a reconciliation of equity at the beginning of the reporting period with equity
ir)
at
is)
the end of the reporting period.
it)
6.4.1
iu) Information to be presented in the statement of changes in equity
iv)
The
iw) statement should include the following:
ix) total comprehensive income for the period, showing separately the total amounts attributable to owners of the parent and
iy) to non-controlling interests;
iz) the effect of retrospective application or restatement as a result of changes in accounting policy and the correction of
ja)
jb) errors for each component of equity (refer to IAS 8, Accounting Policies, Changes in Accounting Estimates and Errors); and
jc) for each component of equity, a reconciliation between the carrying amount at the beginning and the end of the period,
jd) separately disclosing movements resulting from:
je) o profit or loss;
jf) o other comprehensive income; and
jg)
o transactions with owners in their capacity as owners, showing contributions by and distributions to owners
jh)
ji) separately, and including the following:
jj)  issue of shares;
jk)  buy back of shares;
jl)  dividends paid; and
jm)  transfers between reserves.
jn)
jo)
6.4.2
jp) Information to be presented in the statement of changes in equity or in the notes
jq)
An
jr) entity shall present:
•js) an analysis of each item of other comprehensive income
•jt) dividends paid for the period; and
•ju) dividends per share (IAS 1.106A and 107).
jv) A statement of changes in equity forms part of the annual financial statements. What is essentially required is
a reconciliation of equity at the beginning of the financial year with equity at the end of the financial year.
jw)
jx)
jy) The statement should include the following:
• Total comprehensive income for the period, showing separately the total amounts attributable to owners of the
parent and non-controlling interest. (Not covered on 2nd year Accounting)
• The effects of retrospective application or retrospective restatement recognised in accordance with IAS 8 for
each component of equity. (Not covered PrescribedonBook
2ndChapter 2 paragraph 6.5 :
year Accounting)
The
• notes to the
For each financial statements
component of equity,provide additionalbetween
a reconciliation information on items amount
the carrying that appear in the
at the financial and
beginning statements inof
the end
orderthe period.fair presentation. The notes are presented systematically with cross-references to the financial statements.
to ensure
jz)
ka) following
The Dividends is paid for the
the usual periodinand
sequence related
which dividend
the notes per share can be disclosed either in the statement of
are presented:
changes in equity or in the notes.
• a statement that the financial statements comply with International Financial Reporting Standards;
kb)
•kc) aSTRUCTURE
statement inAND
which the basisNOTES
of preparation and accounting policies are set out; supporting information on items that
CONTENT: TO THE ANNUAL FINANCIAL STATEMENTS
kd) appear in the statement of financial position, statement of profit or loss and other comprehensive income, statement of
changes in equity or statement of cash flows;
ke) Study par. 6.5 of the prescribed textbook.
•kf) additional information on items that do not appear in the statement of financial position, statement of profit or loss and
kg)other comprehensive income, statement of changes in equity or statement of cash flows; and
•kh)other disclosures, such as contingencies, commitments and disclosures of a financial and a non-financial nature, for
ki) example, financial risk management target.

The sequence may vary according to circumstances. In some cases, for instance, the notes on accounting policies are presented
as a separate component of financial statements.
kj)
kk)
kl)
km)
kn)
ko)
kp)
kq)
kr)
ks)
kt)
ku)
kv)
kw)
kx)
ky) The notes to the annual financial statements should:
kz) _ present information about the basis of preparation of the annual financial statements;
la) _ present the specific accounting policies selected and applied for significant transactions and events;
lb) _ disclose information required not presented elsewhere in the annual financial statements; and
lc) _ provide additional information not presented elsewhere in the annual financial statements, but that is
relevant to an understanding of any of them, for example contingent liabilities.
ld)
le) Notes to the annual financial statements should be:
lf) _ presented in a systematic manner; and
lg) _ each item on the statements cross-referenced to the notes.
lh)
li) An entity should disclose in the summary of significant accounting policies:
lj) _ the measurement basis (or bases) used in preparing the annual financial statements, for example, historical
costs, net realisable value, fair value; and
lk) _ the other accounting policies used that are relevant to an understanding of the annual financial statements.
ll)
lm) DIVIDENDS
ln)
lo) As we mentioned previously in Learning unit 1 , the profit of a company is divided among the shareholders of
the company in the form of dividends. A dividend can therefore be defined as that portion of the profit of a
company which is divided among the shareholders (paid out to them). In other words it indicates the pro rata
portion which each shareholder receives on his or her shares – say, for example, 10% or 5c per share.
lp)
lq) When dividends are declared, the rights of minority shareholders should always be taken into account. If
preference shares were issued at a fixed percentage of future income – for example 8% preference shares –
dividends for these shareholders should always be declared at the fixed percentage. There are no restrictions
on the profit share of ordinary shareholders and the declaration of dividends will depend on the available profit.
If the profit is large, a large dividend can be declared, but if the profit is small the dividend will naturally also be
small. Note that the preference shareholders have preference over the ordinary shareholders as far as
dividends are concerned. If an ordinary dividend is declared or paid, the board of directors is obliged to
recommend a preference dividend and the shareholders are obliged to approve it.
lr) It should also be noted that any dividends declared must be proportionate, in other words all the shareholders
holding the same class of shares must receive the same dividend amount or percentage. The size of the
dividend could naturally be different for the holders of different classes of shares, but within each class the
amount of the dividends will be in the ratio of shares held. Dividends need not necessarily be paid out in cash;
they can be in the form of capitalisation shares (bonus shares).
ls) If there is profit available for distribution and sufficient cash flow, the dividends still have to be declared at the
annual general meeting. Thereafter the dividends become a liability in the company's books in that they have
not yet been paid over to the shareholders and the shareholders have the right to demand payment. The
general procedure when dividends are declared is that the directors recommend a percentage or an amount as
a basis for declaring dividends. The shareholders have the final say in this matter, however, and they are quite
free to declare a lower dividend than the directors recommended.
lt)
lu) It should be mentioned that the dividends need not be declared solely from the profit of the current year. The
profit made during previous trading periods and not yet paid out (retained earnings) may be added to the profit
of the current year to arrive at a sum on which the dividends can be based as long as the entity have sufficient
cash flow available to pay the declared dividend.
lv)
lw) For this reason it is always necessary to bear the cash reserves of the company in mind when determining the
amount of the dividends, because if all the available cash is absorbed by this item it means that the company
might experience a shortage of operating capital during the next financial period and consequently be unable
to realise the same high profit.
lx)
ly) You should bear in mind that dividends may not be paid from capital, but only fromrealised profit and only after
all expenses and losses that may have arisen in the past have been redeemed. The availability of profit for
dividends has been the subject of many court cases. In many cases it is not easy to determine the available
profit, but at present we can mainly assume that the profit is that amount that remains of the operating result
 after provision has been made for all expenses and for the depreciation of assets. Provision has to be made for
all losses or possible losses so that the amount which is eventually shown as profit is pure
lz) and accurate and does not include a portion of the capital or capital profits.
ma)
mb) Preference shareholders have a preferential right to dividends. This means that before an ordinary dividend
can be declared preference shareholders have to receive their dividend, which represents a fixed percentage of
the nominal value of preference share capital. If no distributable reserves are available in the particular year to
declare a dividend, both ordinary and preference shareholders forego their right to dividends unless the
preference shares are cumulative. A cumulative preference shareholder retains his or her right to dividends
from year to year even if no dividends are declared. Therefore, when the company
mc)has sufficient distributable reserves and cash flows available to declare a dividend, arrear and current
cumulative preference dividends have first to be paid in full before ordinary preference dividends and then
dividends on ordinary share capital can be paid.
md)
me)Since preference dividends make up a fixed percentage of preference share capital, the calculation of the
dividends is done on the same basis as the calculation of interest – in other words for the period for which the
shares were in issue. For the calculation of an ordinary dividend it makes no difference how long the holder of a
share certificate has held the shares. As soon as a dividend is declared to all registered shareholders, a
shareholder is entitled to the full ordinary dividend even if he or she only became a registered shareholder the
previous day.
mf)
mg) There are two kinds of dividends:
mh)
mi) INTERIM DIVIDENDS
mj) An interim dividend is one which is declared before the end of the year from either (a) profit carried over from
the previous year, or (b) profit which accumulated during the current period. The declaration of interim
dividends is subject to the same requirements regarding available profit as is the declaration of annual
dividends. The right to declare interim dividends is usually reserved for the directors of the company, but any
such declaration must be ratified at the annual general meeting by the shareholders of the company.
mk)
ml) No interim dividends can be paid by a company before all outstanding declared dividends from
previous years have been paid.
mm)
mn) ANNUAL FINAL DIVIDENDS
mo)Dividends of this kind are declared at the end of the year from available profit, and are therefore the kind of
dividends we have been discussing so far. When the amount of the annual (final) dividends is determined, the
amount of the interim dividend which has already been taken from the profit should be duly taken into account.
Dividends should be declared before they become a liability for the company in favour of the shareholders.
mp)
mq)

mr)
 ms)

mt)
mu)
mv)
mw)
mx)
my)

mz) LEARNING UNIT 4

na) INVENTORY – IAS 2
nb) The valuation and disclosure of inventories is important in the determination and presentation of financial
position and results. The objective of IAS 2 is to prescribe:
nc) - How to determine the cost and net realisable value of inventories; and
nd) - Which useful and understandable information needs to be provided in annual financial statements.
ne) Study par. 1 and 2 of the prescribed textbook.
 nf)

ng) NATURE OF INVENTORIES

nh) Study par. 4 of the prescribed textbook.
ni)
 nj)
nk) The decision whether a certain item is classified as inventories or not, relates to its purpose to the entity.
nl)
nm) Includes both tangible and intangible assets that are:
• Held for sale in the ordinary course of business;
• In process of production for sale;
• Consumed during the production of saleable goods or services IAS 2 does not apply to certain categories of
inventories and also applies only partially to certain inventories – work through par. 3 of prescribed
textbook.
nn)
no) The purpose to the entity, will determine whether an item is classified as inventories or not – work through
example 3.1. of the prescribed textbook.
np)

nq)
nr)
ns) MEASUREMENT OF INVENTORIES
nt) Study par. 5 of the prescribed textbook.
nu)

nv)
nw)
nx) Prescribed Book Chapter 3 paragraph 5 :
The
ny) measurement of inventories for financial reporting entails the following steps:
_nz)
determining of the cost;
_oa)
applying a cost allocation technique to measure the cost of inventories;
_ob)
determining the net realisable value; and
_oc)
recording the lower of cost and net realisable value in the financial statements.
od)
oe)
Each
of)
of these aspects is now discussed.
og) Inventories are always measured at the lower of cost and net realisable value. The steps to determine this, will
now be addressed in 4.3 – 4.6.
oh)
oi) COST OF INVENTORIES
oj) Study par. 6 of the prescribed Prescribed
textbook.Book Chapter 3 paragraph 6 :
ok)
The cost of inventories excludes:
•ol)abnormal spillage of raw materials, labour and other production costs during the production process in bringing the
inventories to their present location and condition*;
• fixed production overhead costs that are not allocated to production on the grounds that normal capacity (instead of
actual capacity) was used as the basis of allocation. The portion not allocated is written off as an expense*;
• storage costs, unless such costs are necessary in the production process prior to a further production stage;
• administrative expenses not related to the location and condition of the inventories; and
• selling expenses (IAS 2.16).
* Note that while these items are excluded from measuring the cost of inventories, they are included in cost of sales.
om)
on)
oo)
op)
oq)
or)
os)
ot)
ou)
ov)
ow)
ox)
oy)
oz)
pa)
pb)
pc)
pd)
pe)
pf)
pg)
ph)
pi)
pj) Historical cost includes:
• Purchasing costs
• Conversion costs
pk)
pl) PURCHASING COSTS
pm) - Purchase price;
pn) - Import duties and other appropriate taxes;
po) - Transport costs;
pp) - Handling costs; and
pq) - Any other costs directly attributable to the acquisition of the inventories.

pr) Prescribed Book Chapter 3 paragraph 6.1.1 :

These costs include the following:
•ps) purchase price of finished goods or raw materials;
• import duties and other taxes, other than those subsequently recoverable from the taxing authorities, such as VAT if the
pt) buyer is registered for VAT purposes;
• transport costs;
•pu) handling costs; and
• other costs directly attributable to the acquisition of the inventories.
pv)
From these costs the following are deducted if included:
•pw)trade discounts;
• cash and settlement discounts; and
•px) rebates and other similar items such as subsidies on purchases.

py)

pz) CONVERSION COSTS

qa) Incurred in the conversion of raw materials into finished products and include the following:
• Direct labour;
• Variable production overhead costs;
• Fixed production overhead costs based on normal capacity;
• Other costs
 qb) The correct allocation of overhead costs is essential to ensure that the cost of inventories is accurate. The
following distinction is therefore very important:
qc)
qd) PRODUCTION OVERHEAD COSTS :
qe) Incurred in the manufacturing process, but do not form part of direct material or direct labour costs, for
example depreciation of production machinery.
qf) Prescribed Book Chapter 3 paragraph 7 :
qg) Variable overhead costs can be allocated with ease by using the number of units manufactured, but fixed
qh) production costs should use normal capacity as basis.
qi)
qj) Seeing that the production overhead costs are incurred in the process to their present location and condition, it
should be included in the costs.
qk)
ql) OTHER OVERHEAD COSTS :
qm) Normally incurred in running the operations of an entity that don’t relate to the production process, for
example office rental and salaries of administrative personnel.
7.1 Standard cost
qn)
This
qo)method involves working
Other overhead withtherefore
costs are expected costs, based ontonormal
not incurred bring levels of operations
inventories to theirand
present location and condition and
operating efficiency measures and entails the application of predetermined
should not be included in the cost of inventories, but recognised as expenses.information. This
method
qp) allows management to monitor and control costs. Standard costs can be used for
convenience as long ashowever,
qq) The following, the inventories values determined
are exceptions in this way itapproximate
and if applicable, actual in the cost of inventories:
should be included
cost.
• ADesign
regularcosts,
review,research
and change
andwhere necessary,that
development is required
clearly of the standard
relate costsinventories
to bringing where conditions change,
to their for example
present location in
and
times condition;
of rising costs.
• Borrowing costs that have been capitalised in respect of inventory where long ageing processes are required;
• Retail
7.2 Storage costs that are necessary in the production process prior to the further production stage.
method
qr)
This method is particularly suitable for trading entities that do not maintain complete records of purchases and inventories.
qs) The general principle is that only those costs involved in bringing the inventories to their present location and
Inventories values
condition are determined
should be included at the end cost
in the of theofreporting period by determining the selling price of the inventories, which is
inventories.
reduced
qt) by the average profit margin, to determine the approximate cost of the trading inventory.
This
qu)method can be applied
Work through only if 3.4
example the profit
– 3.9margins
of the of homogenoustextbook
prescribed groups of products are known.
to illustrate If certain inventories items
the above.
are
qv)marked at reduced selling prices as a result of special offers, the profit margins on these items are determined individually. As
with
qw)standard costs, this basis may be applied only if the results obtained approximate cost.
qx)
qy)
7.3 Cost formulas
qz)
According to IAS 2.23 to .27, the number of items left in closing inventories and their unit cost, therefore the cost of inventories, is
ra)
determined
rb)
by using one of the following cost formulas:
_ rc)
first-in, first-out (FIFO);
_ rd)
weighted average costs; or
_ re)
specific identification.
rf)
rg) First-in, first-out (FIFO)
7.3.1
rh) values inventories in accordance with the assumption that the entity will sell the items of inventories in the order in which
FIFO
ri) were purchased; i.e. first the old inventories items and then the new items. The “oldest” prices are debited first to cost of
they
rj)
sales in the statement of profit or loss and other comprehensive income. This method is normally appropriate to interchangeable
rk)
items
rl) of large volumes and is currently the most popular method used by listed companies in South Africa.
rm)
7.3.2
rn) Weighted average method
The
ro)word “weighted” refers to the fact that the number of items is taken into account when calculating cost. The weighted
average
rp) is calculated either after each purchase or periodically, depending on the circumstances. This basis, just as in the case of
rq) is appropriate to interchangeable inventories usually of large volumes.
FIFO,
rr)
rs) Specific identification
7.3.3
rt)
According to IAS 2, this method allocates costs to separately identified items of inventories. It is particularly appropriate for
ru)
items
rv) acquired or manufactured for a specific project, and for items that are normally not interchangeable. This basis, generally
not
rw)suitable for large volumes of interchangeable items, should not be used as a means of manipulating profits. From the above-
mentioned
rx) discussion it is clear that a variety of valuation bases exist to determine the costs of inventories. These valuation bases
necessarily
ry) result in different operating results and different statement of financial position amounts. IAS 2.25 requires that the
same
rz) cost formula be used for inventories having the same nature and use to the entity. Where the nature or use of groups of
sa) differs from others, the application of different formulas is allowed. This means that if a group of companies owns
items
sb)
materials with different uses, they may be measured by using different cost formulas. Where inventories are similar in nature
sc)use and held in different geographical locations, different cost formulas may not be applied. Where different metals are, for
and
sd)
example, fused in a production process, the average method is appropriate. However, where inventories are used on an item-for-
se)
item basis in the production process, the FIFO formula is more appropriate.
sf) COST ALLOCATION TECHNIQUES AND COST FORMULAS
sg) Study par. 7 of the prescribed textbook.
sh)
si)
sj)
sk)
 sl)
sm)
sn)
so)
sp)
sq)
sr)
ss)
st)
su)
sv)
sw)
sx)
sy)
sz)
ta)
tb)
tc)
td)
te)
tf)
tg)
th)
ti)
tj)
tk) Up until this point we have discussed the calculation of the actual cost of inventories, but seeing that this is
now always possible, the following options are alternatives:
tl)
tm) Standard cost: Based on normal levels of operations, the expected costs are estimated, by using
predetermined information.
tn)
to) Retail method: Used when complete records of purchases and inventories are not kept. Determine the values
of inventories by using the selling price and then reducing it by average profit margin, to get the cost.
tp)
tq) Work through example 3.10 of the prescribed textbook.
tr)
ts) The value of inventories on hand at the end of a financial period, should be determined by using one of the
following cost formulas:
tt)
tu) FIRST-IN, FIRST-OUT
tv) Values on assumption that that items will be sold in the order that they were purchased.
tw) Work through example 3.11 of the prescribed textbook.
tx)
ty) WEIGHTED AVERAGE METHOD
tz) Weighted average is calculated after each purchase or periodically, by taking price and number of items into
consideration.
ua) Work through example 3.12 ofPrescribed the prescribed textbook.
Book Chapter 3 paragraph 8:
ub)
uc) SPECIFIC IDENTIFICATION
ud) Allocate costs to separately identified items that were acquired or manufactured for a specific project.
ue) The determination of cost can be subject to manipulation in practice, especially with regards to the allocation
of overhead costs and application of cost formulas, as they choose of cost formula can significantly impact on
the profit for the year. The same cost formula should thus be used for inventories with the same nature and
use.
uf) Work through example 3.13 of the prescribed textbook.
Such
ug)estimates will take account of changes in prices and cost changes after the period under review, in accordance with the
requirements of IAS 10 to
uh) DETERMINING the REALISABLE
NET extent that events confirm conditions existing at the end of the reporting period. As the
VALUE
ui)
determination of this value entails the use of estimates, an element of judgement is involved, and caution should be exercised
uj) making use of estimates. It may often be difficult to determine the net realisable value of a product due to a lack of
when
uk)
information regarding the costs necessary to make the sale. In such cases, the current replacement value can be used as a
ul)
possible solution (especially for raw materials) (refer to IAS 2.32). After having taken everything into consideration, estimates of
um)
the
un)NRV should be based on the most reliable information available at the time of making the estimate. The diagram below
illustrates
uo) net realisable value.
up)
uq)
ur)
us)
ut)
uu)
uv)
uw)
ux)
uy)
uz)
va)
vb)
vc)
vd)
ve)
vf)
vg)
vh)
vi)
vj)
vk)
vl)
vm)
vn)
vo)
vp)
vq)
vr)
vs) It is the estimated selling price in normal course of business, less:
• Costs to complete the inventories
• Trade and other discounts allowed
• Advertising
• Sales commission
• Packaging costs
• Transport costs
vt)
vu) Inventories are therefore valued at cost at the end of a reporting period, which should not exceed the net
amount expected to be realised from sales. Should the cost exceed this this estimated amount, it implies that
inventories are expected to be sold at a loss, and this estimated loss should be recognised in accordance with
the prudence concept as it is probable and can be measured. The cost is then reduced to net realisable value
and the write-off is immediately shown in the statement of profit or loss and other comprehensive income.
vv)
vw) The write-off is normally done on an item-by-item basis, but if the following is applicable, it can be done on a
group-by-group basis:
• Items that relate to the same product range; and
• Have similar purpose;
• That is marketed in the same geographical area.
vx)
vy) A new assessment of net realisable value is made each financial year-end and adjustments might be as a result
of:
• Damaged inventories,
• Obsolete inventories,
• Decline in selling prices,
• Increases in costs to complete products, and
• Increases in selling costs

vz)

wa) Work through example 3.14 – 3.16 of the prescribed textbook.

wb)
wc) The following are exceptions to this general rule:
wd)
we) FIRM SALES CONTRACTS
wf) The net realisable value of these inventories should be based on contract price and not on the normal sales
price – work through example 3.17 of the prescribed textbook.
wg) RAW MATERIALS
wh) If it will be incorporated in the finished product and the finished product is expected to sell at more than
the original cost, the raw material is not written down below their cost. If the finished product however, is
expected to sell at less than cost it should be written down to net realisable value – work through example
Prescribed Book Chapter 3 paragraph 10 :
3.18 of the prescribed textbook.
The carrying amount of the inventories is recognised as an expense when the inventories are sold and the revenue is recognised. The sales
wi)
and corresponding expenses may be recognised throughout the period if the entity uses a perpetual inventories system. The expense is
wj) RECOGNITION
recognised OF EXPENSE
only at the end of the period if a periodic inventories system is used. Any write-down of inventories to NRV for damages,
wk)
obsolescence or fluctuations in costs or selling prices forms part of the cost of sales expense and is written off directly to the statement of
wl) or loss and other comprehensive income. These write-downs are, however, disclosed separately in the notes that form part of the
profit
wm) statements. It is important to distinguish between write-downs that should be disclosed and inventories losses that do not have to
financial
be disclosed separately. Inventories losses arise typically when the physical inventories on hand differs from the inventories records. Where
write-downs of inventories are reversed due to subsequent increases in NRV, the amount is recognised as a reduction in the cost of sales
expense in the statement of profit or loss and other comprehensive income. The reversal of any write-downs should also be disclosed
wn)
wo)
wp)
wq)
wr)
ws)
wt)
wu)
wv)
ww) Recognise carrying amount of inventories as an expense when sold and revenue is recognised.
wx)
wy) Perpetual inventories system: recognise sales and corresponding expenses throughout the financial period.
wz) Periodic inventories system: only recognise sales and corresponding expenses at the end of the financial
period.
xa)
xb) Write-down to net realisable value:
xc) Included in cost of sales expense and recognised in statement of profit or loss and other comprehensive
income and disclosed separately in the notes to the annual financial statements.
xd)
xe) Write-down due to inventory losses as a result of the difference between physical inventories on hand and the
inventories records:
xf) Included in cost of sales expense and recognised in statement of profit or loss and other comprehensive
income, but not necessary to disclose separately in the notes to the annual financial statements.
xg)
xh) Reversal of net realisable write-downs:
xi) Reduce the cost of sales expense and recognised in statement of profit or loss and other comprehensive
income with separate disclosure.
xj)
xk) Work through example 3.19 of the prescribed textbook.
xl)
xm) DISCLOSURE REQUIREMENTS
xn)
xo) Prescribed Book Chapter 3 paragraph 11 :
The
xp) disclosure requirements regarding inventories are prescribed as follows by IAS 2 paragraphs 36 to 39:
•xq)accounting policy pertaining to the measurement and cost formula used.
•xr) the total carrying amount of inventories in classifications suitable for the entity, for example:
xs)  materials (materials and spares included); finished goods; merchandise shown under appropriate subheadings;
xt) consumable goods (including maintenance spares); work in progress (including the inventories of a service provider);
xu) and work in progress – construction work.
xv)
•xw)the carrying amount of inventories carried at fair value less costs to sell, as provided by commodity broker-traders;
•xx) the amount of inventories recognised as cost of sales during the period;
•xy) the amount of any write-down of inventories recognised as an expense in cost of sales;
•xz) if such a write-down is reversed in a subsequent period, the amount reversed and the circumstances which resulted in the
ya)reversal; and
•yb)the carrying amount of any inventories pledged as security.
yc)
yd) that the disclosure of the carrying amount of inventories carried at net realisable value is not required, but that the
Note
ye)
amount of any write-down of inventories should be disclosed, typically in the note on profit before tax. Note also that the
yf)
disclosure
yg) of the carrying amount of inventories carried at fair value less costs to sell is required, for instance in the case of
commodity
yh) broker-traders.
In
yi)terms of IAS 1, the profit or loss section of the statement of profit or loss and other comprehensive income may be drafted
according
yj) to the nature or the function of expenses.
In
yk)accordance with the functional approach, the cost of sales will be disclosed as a line item. The disclosure requirements of IAS
2yl)
will be met, provided that separate disclosure of write-downs and the reversals of write-downs and their circumstances are
ym)
provided.
yn)
Entities using the nature of expenses approach will disclose operating costs such as raw materials, labour costs, other
yo)
operating
yp)
costs, and the net movement in finished goods and work in progress, where applicable. To comply with IAS 2, the cost
of such expenses will have to be disclosed elsewhere in the financial statements. The disclosure of the cost of sales expense does
yq)
allow
yr) Infor the calculation
short, disclosureofentails
the gross
theprofit margin, but the calculation may not support comparison to other entities as the
following:
composition of the amounts may differ.
• Accounting policy with regards to measurement and cost formula used;
• Total carrying amount of inventories, with applicable classification;
• Amount recognised as cost of sales in current financial year;
• Amount of any write-downs recognised as an expense;
• The reversal of any subsequent write-downs in previous financial period;
• Amount of any inventories pledged as security.
ys)
yt) Please note: It is not required to disclose the fact that carrying amount of inventories is at net realisable
value.
yu)
yv) Seeing that we prefer to prepare the profit or loss section of the statement of profit or loss and other
comprehensive income according to the functions of income and expenditure rather than according to the
nature of income and expenditure, the cost of sales will be disclosed as a separate line item.
yw)
yx) Work through example 3.20 of the prescribed textbook.

yy)

yz)

za)
zb)
zc)
zd)
ze)
zf)
zg)
zh)
zi)
zj)
zk)
zl)
zm)
zn)
zo)
zp)
zq)
zr)
zs)
zt)
zu)

zv) LEARNING UNIT 5

zw) PROPERTY, PLANT AND EQUIPMENT – IAS 16
zx) OBJECTIVE
zy)
zz)
aaa)
aab)
aac)
aad)
aae)
aaf)
aag)
aah)
aai)
aaj)
aak)
aal)
aam)
aan)
aao)
aap)
aaq)
aar)
aas)
aat)
aau)
aav)
aaw)
aax)
aay)
aaz)
aba)
abb)
abc)
abd)
abe)
abf)
abg)
abh)
abi)
abj)
abk)
abl)
abm)
 abn)
abo)

abp)
abq)
abr) Prescribed Book Chapter 18 paragraph 3 :
In order
abs) to be recognised as an asset, PPE must, in terms of the The Conceptual Framework for Financial Reporting
(Conceptual
abt) Framework), be a resource controlled by the entity as a result of past events from which future economic benefits
are
abu)expected to flow to the entity. When an entity controls an asset, it has the power to obtain the future economic benefits of
abv)
the underlying resource and can restrict the access of others to the asset.
abw)
The past event normally refers to the date of acquisition or the date of completion on which the asset becomes ready for its
abx)
intended use. The future economic benefits that are expected to flow to the entity include the revenue from the goods sold or
aby)
services rendered, as well as cost savings and other benefits resulting from the use of the asset.
abz)
aca)
A class of property, plant and equipment is a grouping of assets of a similar nature and
acb)
use
acc)in an entity’s operations. IAS 16 paragraph 37 lists the following examples of separate
classes:
acd)
_ace)
land;
_acf)
land and buildings;
_acg)
machinery;
_ach)
ships;
aci)
_ aircraft;
acj)
_ack)
motor vehicles;
_acl)
furniture and fixtures;
_acm)
office equipment.
acn)
Land
aco) and buildings are normally purchased as a unit but recorded separately because
acp)
of their difference in nature, i.e.:
_acq)
Land normally does not have a limited life and is, therefore, not depreciated.
_acr)
Buildings, by contrast, have a limited life and are, therefore, depreciated.
acs)
Plant typically refers to the machinery and production line of a manufacturing concern. This
asset has a limited life and is depreciated, often using depreciation methods such as the unit of production method.
 act)IAS 16 contains prescriptions for the accounting treatment for property, plant and equipment (PPE) so that
users of the annual financial statements can discern information about an entity's investment in its PPE and
the changes in such investment. The principal issues in accounting for PPE are the following:
acu) _ the recognition of PPE as assets, and
acv) _ the determination of their carrying amounts, and
acw) _ the related depreciation charges and impairment losses.
acx)
acy) BACKGROUND
acz)
ada) Prescribed Book Chapter 18 paragraph 4:
PPE is normally a large proportion of the assets of an entity in the statement of financial position. IAS 16 deals with tangible
adb)
long-term
adc) assets. IAS 16 excludes from its scope:
biological assets related to agricultural activity other than bearer plants;
•add)
•ade)
mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources (IAS 41, Agriculture);
•adf)
property, plant and equipment classified as held for sale in accordance with IFRS 5, noncurrent Assets Held for Sale and
adg)
Discontinued Operations; and
adh)
investment property (IAS 40, Investment Property).
•adi)
adj)
IAS 16 includes in its scope:
adk)
Bearer plants in agricultural activities;
•adl)
PPE used in maintaining biological assets and mineral resources;
•adm)
•adn)
PPE acquired through finance lease agreements; and
•ado)
investment property carried in terms of the cost model.
adp)
adq)
adr)
ads)
adt)
adu)
adv)
adw) The standard shall be applied to PPE except when another standard requires or permits a different
accounting treatment.
adx)
ady) The standard does not apply to (this does not form part of this module):
a) PPE items classified as held for sale in accordance with IFRS 5 Non-current assets held for sale and
discontinued operations (done in later studies);
b) biological assets related to agricultural activity;
c) the recognition and measurement of exploration and evaluation assets; or
d) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources.
adz)
aea) The standard also applies to the following:
a) where other standards may require recognition of an PPE item based on a approach different from that in
the standard (eg Leases under IAS 17), other aspects of the accounting treatment for these assets,
including depreciation, are prescribed by this standard;
b) investment property that is being accounted for in accordance with the cost model (see learning unit 6 for
investment properties).
aeb)
aec)DEFINITIONS
aed) Study the following terms used in the standard with the meanings specified:
aee)
aef) Carrying amount
aeg) The carrying amount is the amount at which an asset is recognised in the statement of financial position
after deducting any accumulated depreciation and accumulated impairment losses (Impairment does not form
part of this module).
aeh)
aei) Cost
aej) Cost is the amount of cash or cash equivalents paid and the fair value of the other consideration given to
acquire an asset at the time of its acquisition or construction or, where applicable, the amount attributed to
that asset when initially recognised in accordance with the specific requirements of other IFRSs.
aek)
ael) Depreciable amount
aem) The cost of an asset, or other amount substituted for cost, less its residual value.
aen)
aeo) Depreciation
aep) The systematic allocation of the depreciable amount of an asset over its useful life.
aeq)
aer) Fair value
aes) The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.
aet) Property, plant and equipment
aeu) PPE are tangible assets that:
 a) are held for use in the production or supply of goods or services, for rental to others, or for administrative
purposes; and
b) are expected to be used during more than one period.
aev)
aew) Residual value
aex) The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the
estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its
useful life.
aey)
aez) Useful life
afa)It is either:
a) the period over which an asset is expected to be available for use by an entity; or
b) the number of production orPrescribed similar units
Bookexpected
Chapterto 18be obtained from
paragraph the&asset
5.1, 5.2 5.4 : by an entity.
afb)
afc) RECOGNITION
afd)
afe)
aff)
afg)
IAS 16 uses the general recognition principle contained in the Conceptual Framework for both initial and subsequent
afh)
recognition of an item of property, plant and equipment. The identification of components forms the basis for the recognition
afi)derecognition of PPE.
and
afj)
afk)
afl)
afm)
afn)
afo)
The
afp)same recognition rule is applied in determining both the costs that will initially be capitalised as part of the cost of the PPE
item
afq)and the costs that are capitalised subsequently. As far as subsequent costs are concerned, the costs may result from
additions
afr) to assets, replacement of a part thereof, or the maintenance or service thereof.
Inafs)
terms of the general recognition principle as described in IAS 16.7, the normal day-to-day maintenance cost of an item is,
aft)
however, recognised as an expense and is not capitalised to the asset. This expense is described as repairs and maintenance and
afu) mainly of the cost of labour, consumables and small spares.
consists
afv)
afw)
5.2
afx)Spare parts and servicing equipment
The
afy)accounting treatments for spare parts and servicing equipment are described in IAS 16.8 as follows:
Items
afz) such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this IFRS when they
meet
aga)the definition of PPE. Otherwise, such items are classified as inventories.
agb)
agc)
5.4 Replacement of components at regular intervals
agd) components of PPE items are replaced frequently. Examples of these types of components are:
Certain
•age) the relining of a furnace;
agf)
• the seats and galleys in an aircraft; and
agg)
•agh) the interior walls of a building such as an office block.
Note
agi)that the main asset (like the furnace, aircraft and building) has a much longer useful life than the lining, seats, galleys and
interior
agj) walls respectively.
agk)
agl)
agm)
agn)
ago)
The
agp)remaining part of the item of PPE, consisting of all the items that are not individually significant, represents a separate
component.
agq)
agr)
ags)
agt)
agu)
agv)
Ifagw)
it is not possible to determine the carrying amount of the replaced component, (for instance where the part has not been
depreciated
agx) separately), the cost of the new component may be used as an indication of what the original cost of the part would
have
agy) been (IAS 16.70). If the component will be used until the end of the useful life of the asset, it is depreciated over the
remaining
agz) useful life of the asset, or otherwise over the useful life of the component. It is therefore possible for a component of an
aha)to be recognised only subsequent to initial recognition once the replacement expenditure has been incurred.
asset
ahb)
ahc)
ahd)
ahe) INTRODUCTION
ahf)The first step to take in accounting for an item of expenditure, is to decide whether the item should be
recognised and accounted for as an asset or as an expense, based on the recognition criteria set out in the
Framework for the Preparation and Presentation of annual financial statements. These criteria also apply to
subsequent recognition.
 ahg)
ahh) The cost of an PPE item shall be recognised as an asset if, and only if:
a) it is probable that future economic benefits associated with the item will flow to the entity (this will usually be
the case where the risks and rewards of ownership have passed to the entity); and
b) the cost of the item can be measured reliably.

ahi)An entity evaluates under this recognition principle all its PPE costs at the time they are incurred. These costs
include costs incurred initially to acquire or construct a PPE item and costs incurred subsequently to add to,
replace part of, or service it (under certain circumstances).
ahj)
ahk)COMPONENTS AND SPARE PARTS
ahl) Study par 5.1 and 5.2 in the textbook
ahm)
ahn) Prescribed
Spare parts and servicing equipment doBook Chapter 18
not normally paragraph
meet 6.1 : of PPE as they are used in one
the definition
accounting period. They are normally carried in inventory and recognised in profit and loss as and when it is
used. However, major spare parts, significant components and stand-by equipment qualify as PPE when an
entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment
can be used only in connection with a certain PPE item, they are accounted for as PPE.
aho)
ahp) Servicing cost
ahq) In terms of the general recognition principle described above, the normal day-to-day servicing
(maintenance) costs of a PPE item are not recognised in the carrying amount of the item, but in profit or loss
(an expense) as incurred. The expense is described as “repairs and maintenance” and consists mainly of the
cost of labour, consumables and small (low value) spares.
Items
ahr) to be included in cost are the following:
The purchase
•ahs) price, including
Work through exampleimport
8.1duties
and and non-refundable
example purchase
8.2 of the taxes, after
prescribed the deduction of trade discounts and
textbook
aht)
rebates. VAT paid on qualifying assets by a registered vendor is refundable and is therefore excluded. VAT forms part of the
ahu)cost ifREPLACEMENT
the buyer is notAT REGULAR
registered forINTERVALS
VAT or no input VAT can be claimed on the asset.
•ahv) Studyattributable
Any directly par 5.4 ofcosts
the of
prescribed
bringing thetextbook
asset to the location and condition necessary for it to operate in the way
ahw)
management intended. Examples of such directly attributable costs are:
ahx) Parts of some PPE items may require replacement at regular intervals. For example:
 the cost of employee benefits arising directly from the construction or acquisition of the item of PPE;
a) the relining of a furnace
 the
b) the seats costand
of site preparation;
galleys in an aircraft
c) theinitial delivery
interior walls and
of ahandling
buildingcosts;
such as an office block.
 installation and assembly costs;
ahy)
ahz)
 the The principle
cost (main)
of testing asset
whether the(like
assetthe furnace, aircraft
is functioning and
properly, building)
after hasthe
deducting a much longerfrom
net proceeds useful life than
selling the
any items
respective components (like the relining, seats and interior walls). An entity recognises in the carrying amount
produced while bringing the asset to that location and condition (such as samples produced when testing equipment).
of a PPE item the cost of replacing part of such an item when that cost is incurred if the recognition criteria are
met.However, a clear distinction
The remaining carrying must
amountbe made
of thebetween
replacedtesting
part costs andderecognised.
is then initial operating losses (the latter may not be
aia) capitalised); and Work through example 8.4 of the prescribed textbook
 professional fees.
The initial estimate of the cost of dismantling, removing and restoring the site on which the asset is located. A related
•aib)
obligation would arise in this context when the item is acquired, or as a result of the use of the item for purposes other than
aic)
aid)
the manufacturing of inventories during that period.
aie)
aif)following items must not be capitalised:
The
aig)
• costs of opening a new facility;
aih)
•aii)costs of introducing a new product or service (including costs of advertising and promotional activities);
•aij)costs of conducting business in a new location, or with a new class of customer (including costs of staff training);
•aik) administration and other general overhead costs;
•ail)costs incurred while an item capable of operating in the manner intended by management has yet to be brought into use or
aim)is operated at less than full capacity;
•ain) initial operating losses, such as those incurred while demand for the item’s output grows; and
•aio) costs of relocating or reorganising part or all of an entity’s operations.
aip)
aiq)
Operations
air) that relate to the construction or development of a PPE item, but that are not necessary to bring the item to the
condition
ais) and location necessary for operation in the manner intended by management, are dealt with in IAS 16.21. Neither
income
ait) nor expenditure that results from such incidental operations is capitalised to the asset; they are included in the profit
oraiu)
loss section of the statement of profit or loss and other comprehensive income under the appropriate classifications of income
and
aiv)expenses. If a building site is, for example, rented out as a parking area before commencement of construction on the site,
aiw)
the rental income (and related costs) will not be taken into account in determining the cost of the property, but will be included
inaix)
relevant line items in the profit or loss section of the statement of profit or loss and other comprehensive income. IAS 16.22
aiy) with self-constructed assets and states inter alia that internal profits are eliminated in arriving at costs. Furthermore,
deals
aiz) MEASUREMENT
abnormal wastage of materials, labour and other resources do not form part of the cost price of an asset. The principles of IAS 2
aja)
regarding the capitalisation of manufacturing costs must be followed.
ajb)
ajc)
ajd)
aje)
ajf)
ajg)
ajh)
aji)
ajj)
ajk)
ajl)
ajm)
ajn)
ajo)
ajp)
ajq)
ajr)
ajs)
ajt)
aju)
ajv)
ajw)
ajx)
ajy)
ajz)
aka)
akb)
akc)
akd)
ake)
akf)
akg)
akh)
aki)
akj)
akk)
akl)
akm)
akn)
ako)
akp)
akq)
akr)
aks)
akt)
aku)
akv)
akw)
akx)
aky)
akz)
ala)
alb)
alc)
ald) MEASUREMENT AT RECOGNITION
ale) A PPE item that qualifies for recognition as an asset shall be measured at its cost.
alf)
alg) ELEMENTS OF COST
alh)The cost of an PPE item comprises:
a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts,
b) 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,
c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is
located. This obligation can arise either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories during that period (dismantling cost
does not form part of this module).
ali)
alj) Examples of directly attributable costs are:
a) costs of employee benefits arising directly from the construction or acquisition of the PPE item;
b) costs of site preparation;
c) initial delivery and handling costs;
d) installation and assembly costs;
e) 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
f) professional fees.
g) Depreciation capitalised (refer to example 3 in this learning unit)
alk)
 all) An entity applies IAS 2 Inventory to the costs of obligations for dismantling, removing and restoring the site on
which an item is located that are incurred during a particular period as a consequence of having used the asset
to produce inventories during that period. (This implies that these costs will be capitalised to inventory and not
to the PPE item.)
alm)
aln)Examples of costs that are not costs of a PPE item are:
a) costs of opening a new facility;
b) costs of introducing a new product or service (including costs of advertising and promotional activities);
c) costs of conducting business in a new location or with a new class of customer (including costs of staff
training); and
d) administration and other general overhead costs.

alo) Recognition of costs in the carrying amount of a PPE item ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner intended by management. Therefore, costs incurred
in using or redeploying an item are not included in the carrying amount of that item.
alp)For example:
a) costs incurred while an item capable of operating in the manner intended by management has yet to be
brought into use or is operated at less than full capacity;
b) initial operating losses, such as those incurred while demand for the item's output builds up; and
c) costs of relocating or reorganising part or all of an entity's operations.
alq)
alr) Some operations occur in connection with the construction or development of a PPE item, but are 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. For example, income may be earned through using a building site as a car
park until construction starts. Income and related expenses of such incidental operations are not included in
the carrying amount of that item, but are recognised in profit or loss and included in their respective
classifications.
als)
alt) The cost of a self-constructed asset is determined using the same principles as for an acquired asset. Any
internal profits are eliminated in arriving at such costs. Similarly, the cost of abnormal amounts of wasted
material, labour, or other resources incurred in self-constructing an asset is not included in the cost of the
asset.
alu) Work through example 8.6 of the prescribed text book

alv)

alw)SUBSEQUENT MEASUREMENT
alx)
aly) Prescribed Book Chapter 18 paragraph 6.5 :
alz)
ama)
amb)
amc)
amd)
ame)
amf)
Inamg)
terms of the cost model, an item of PPE will, after initial recognition as an asset, be carried at its cost less any accumulated
amh)
depreciation
ami)
and accumulated impairment losses.
amj)
Inamk)
terms of the revaluation model an item of PPE will, after initial recognition, be carried at the revalued amount, provided its
fair value can be measured reliably. The revalued amount referred to is the fair value on the date of revaluation less any
aml)
accumulated
amm) depreciation and accumulated impairment losses since the revaluation date. Revaluations must be done on a
amn) basis to ensure that the carrying amount of the asset at the end of the reporting period does not differ substantially from
regular
amo)
the fair value at the end of the reporting period. If an item of property, plant and equipment is revalued, the entire class to which
amp)
that asset belongs shall be revalued.
amq)
amr)
Items
ams)of PPE are, therefore, disclosed at cost/revalued amount less accumulated depreciation and impairment losses. The same
model
amt)must be used for all items of PPE in a specific category.
amu)
Irrespective
amv) of whether the cost model or the revaluation model is used, aspects such as depreciation, depreciable and residual
amounts,
amw) impairment, andchoose,
An entity shall useful lifeafter
are important
the initial in the measurement
recognition process.
of a PPE item, either
a) the cost model or
b) the revaluation model
amx) as its accounting policy and shall apply that policy to an entire class of property, plant and equipment.
amy)
amz) C OST MODEL
ana) After recognition as an asset, a PPE item shall be carried at its cost less any accumulated depreciation and
any accumulated impairment losses.
anb) Revaluation model (refer to par 5.7 (revaluation) of this learning unit)
anc)
 Prescribed Book Chapter 18 paragraph 7:

and) DEPRECIATION
ane)
anf)
ang)
anh) Prescribed Book Chapter 18 paragraph 7 (Continued) :
ani)
Depreciation may be provided for on land if it is subject to the exploration of minerals or a decrease in value due to other
anj)
circumstances. For example, a dumping site that can only be utilised for a limited number of years will be subject to depreciation.
Ifank)
the cost of land includes restoration costs, a portion of the cost will have to be depreciated over the period of expected benefits.
anl)
The aim
The valueofofdepreciation
land may also is to
beallocate
affectedthe depreciable
adversely amount (original
by considerations
anm) less the residual value) of an asset over its useful life (the period during which the
such cost
as itsorlocation.
revaluedIn the latter circumstances, it may be
amount
necessary to write the value of the land down to recognise the decline in value. This would represent an impairment loss.
ann)
depreciable asset will be used) in relation to income generated by the asset. Consequently,
ano)
the
7.4 depreciable
Residual value amount is recovered through use and the residual value is recovered
anp)
through
anq) sale.
Inanr)
order to decide on the amount of depreciation allocated, three aspects should be
considered,
ans) i.e.:
_ ant)
useful life;
_ anu)
expected residual value; and
_ anv)
method of depreciation.
anw)
anx)
7.2 Useful lifemust be provided for on any asset with a limited useful life, even if the fair value of such an asset exceeds its
Depreciation
any)
The following
carrying amount, factors are considered
provided the residual when determining
value does not the useful
exceed thelife of an asset:
carrying amount. However, if the residual value of an asset is
anz)
•
equal
aoa) thetoexpected
or exceeds useitsofcarrying
the assetamount
by the entity
at anydetermined by referring
time, no depreciation to be
will theprovided
asset’s expected capacity
for on that or physical
asset unless production;
and until the
the expected
residual
•aob) value declines physical belowwear theand tear, dependent
carrying amount ofon theoperating
asset. In factors
practice, such
the as the number
residual value of shifts andnot
is normally thesignificant,
repairs andand
will,
aoc) maintenance
therefore, notprogramme,be material as in the
wellcalculation
as repairs and of the
maintenance
depreciablewhileamount.not in use;
In terms
•aod) the technical
of IAS 16.51, or commercial
the residualobsolescence
value of anyresulting
asset must frombe reviewed
changes and annually
improvements
(at year in end).
production,
The change or ainchange
the residual
in the value
aoe)
will be accounted
demand for the forproduct
as a normal change
or service in theofaccounting
output the asset; andestimate,
legal andandsimilar
consequently,
limitationsdepreciation
on the usefor ofthe
thecurrent andas
asset, such future
aof)
years will be recalculated.
maturity dates of related In view
leasesof (normally
this, depreciation
finance amounts
leases). may vary on an annual basis. This rule applies to both the cost
aog)and the revaluation model.
model
aoh)
aoi)
7.5
aoj)Depreciation methods
aok)
aol)
aom)
The
aon) asset management policy of an entity may involve the disposal of assets:
a)aoo) after a specified period; or
b)aop) after the consumption of a certain portion of the economic benefits embodied in the asset prior to the asset reaching the end
Itaoq)
is, of
therefore,
its economic possiblelife. that depreciation on an asset could commence before it is physically brought into use, because it was
aor)
available for use before the date on which it was commissioned.
aos)
Depreciation
The
aot) useful lifeon of an
theasset
assetmustmay cease onlybewhen
therefore the than
shorter assetits
is derecognised
economic life. The in terms
estimateof IASof 16,
the or when
useful it of
life is classified as available
PPE is a matter of
for sale in terms
judgement based ofonIFRS
the 5. An asset is
experience ofonly
the derecognised
entity with whenassets.
similar it is disposed
IAS 16.51 of, requires
or when that no further
the economic
useful life benefits
must be are expected
reviewed
aou)
from
annually.
aov) the asset – either
If, prior to thefrom its use
expiry or its
of the disposal.
useful life ofDepreciation does notapparent
an asset, it becomes cease when thatan asset
the becomes
original temporarily
estimate idle or in
was incorrect even
thatif
it
theis useful
aow)retiredlife from active or
is longer use, unlessthan
shorter the depreciable amount has
originally estimated, an been writtentooffthe
adjustment in incorrect
total or the asset will
estimate must notbedeliver
made.future
This
economic
adjustment
aox) benefits.
is not a correction of an error, as estimates are an integral part of accrual accounting, and may, by their very nature,
However,
aoy)
be inaccurate. if theAdjustments
unit-of-production to suchmethod
estimates (a form
usagepartmethod)
of theisnormal
used tooperating
determineexpensedepreciation, depreciation
items, and may, at most,may besometimes
disclosedbe
zero.
aoz) In addition, an interruption in the use of an asset will lead to a lower depreciation
separately in terms of IAS 8 if size or nature warrants such treatment. Changes in accounting estimates are not adjusted charge, as no units will be produced
apa) the period
during
retrospectively; theythat it only
are is idle.
adjusted prospectively in the current year and future periods.
apb) of the view that depreciation is the allocation of the depreciable amount of an asset or component over its useful life, it
Because
apc) that the allocation must reflect the pattern in which the asset’s future economic benefits are expected to be consumed by
follows
7.3
apd)Useful life of land and buildings
the
Land entity. For example, if the asset will generate more units at the beginning of its useful life than at the end thereof, a
ape)and buildings are divisible assets that must be treated separately for accounting purposes, even if they were acquired as a
depreciation
unit.
apf)These items method must be selected
are separated because that
landwill resulthas
usually in larger write-downs
an infinite useful lifeatand
the beginning,
is, therefore,andnotsmaller write-downs
depreciated, at the
while buildings
end
have
apg)ofa its useful
finite usefullife.life and are, therefore, depreciable assets. An increase in the value of the land on which a building was
erected
aph) does not affect the useful life of the building.
Depreciation
api) may be calculated using a variety of methods, such as:
_ apj)
the straight-line method;
_ apk)
the diminishing balance method; or
_ apl)
the units of production method.
apm)
apn)
7.5.1
apo)
Straight-line method
The
app) allocation of depreciation in fixed instalments is usually adopted when the income produced by the asset (or part of the
asset)
apq) is a function of time rather than of usage, and where the repair and maintenance charges as well as the benefits are fairly
constant.
apr)
aps)
apt)Diminishing balance method
7.5.2
apu)
This method of depreciation, where the amount allocated declines on an annual basis, is used when there is uncertainty about
apv)
the amount of income that will be derived from the asset. They are also appropriate when the effectiveness of the asset is
apw)
expected to decline gradually. It is often argued that the cost related to repairs and maintenance increases as an asset ages, and
apx)
that depreciation in declining instalments results in the total debit for the cost of using the asset remaining fairly constant.
The sum-of-the-digits method is also a diminishing balance method.
 apy)
apz)
aqa)
aqb)
aqc)
aqd)
aqe)
aqf)
aqg)
aqh)
aqi)
aqj)
aqk)
aql)
aqm)
aqn)
aqo)
aqp)
aqq)
aqr)
aqs)
aqt)
aqu)
aqv)
aqw)
aqx)
aqy)
aqz)
ara)
arb)
arc)
ard)
are)
arf)
arg)
arh)
ari)
arj)
ark)
arl)
arm)
arn)
aro)
arp)
arq)
arr)
ars)
art)
aru)
arv)
arw)
arx)
ary)
arz)
asa)
asb) Prescribed Book Chapter 18 paragraph 7 (Continued) :
asc)
7.5.3
asd)Units of production method
The
ase)units of production method results in a charge based on the expected use or output of the assets, called production units.
The
asf)units of production method probably provides the best approximation of the consumption of economic benefits contained in
asg)
an asset. It has the added advantage of preventing the depreciation of assets while they have not been brought into use, as the
ash)
depreciation charge will only arise when the asset is used to produce units. Because the asset has not yet been used, the
asi)
production units are nil. It is, therefore, not an exception to the normal depreciation rules. Depreciation is still calculated from
asj)
the date on which the asset is ready for its intended use; the result of the depreciation calculation is, however, nil.
ask)
asl)
asm) ALLOCATION OF COST
asn) IAS 16 follows the point of view that depreciation is a process of cost allocation. Depreciation is the
systematic allocation of the depreciable amount of an asset over its useful life. The standard also allows a
revaluation amount to be the depreciable amount (see par 5.7 in this learning unit for revaluations).
aso)
asp)D EPRECIABLE ITEMS OF PROPERTY , PLANT AND EQUIPMENT
asq) Each part of a PPE item with a cost that is significant in relation to the total cost of the item shall be
depreciated separately. An entity allocates the amount initially recognised in respect of a PPE item to its
significant parts and depreciates separately each such part. For example, it may be appropriate to
asr)depreciate separately the airframe and engines of an aircraft (Refer to example 8.1 of the prescribed
textbook).
ass)
ast)A significant part of a PPE item may have a useful life and a depreciation method that are the same as the
useful life and the depreciation method of another significant part of that same item. Such parts may be
grouped in determining the depreciation charge.
asu)
asv) To the extent that an entity depreciates separately some parts of a PPE item, it also depreciates separately
the remainder of the item. The remainder consists of the parts of the item that are individually not significant.
If an entity has varying expectations for these parts, approximation techniques may be necessary to depreciate
the remainder in a manner that faithfully represents the consumption pattern and/or useful life of its parts. An
entity may choose to depreciate separately the parts of an item that do not have a cost
asw) that is significant in relation to the total cost of the item. (Refer to par 5.1 and 5.2 of the prescribed
textbook)
asx)
asy) D EPRECIABLE AMOUNT
asz) Work through example 8.11 of the prescribed textbook
ata) The depreciable amount of an asset shall be allocated on a systematic basis over its useful life.
atb) The residual value and the useful life of an asset shall be reviewed at least at each financial year-end and,
if expectations differ from previous estimates, the change(s) shall be accounted for as a change in an
accounting estimate in accordance with IAS 8 (Ignore example 8.12 and 8.13 of the prescribed
textbook).
atc)
atd) Depreciation is recognised even if the fair value of the asset exceeds its carrying amount, as long as the
asset's residual value does not exceed its carrying amount. Repair and maintenance of an asset do not negate
the need to depreciate it. The depreciable amount of an asset is determined after deducting its residual value.
In practice, the residual value of an asset is often insignificant and therefore immaterial in the
ate) calculation of the depreciable amount.
atf) The residual value of an asset may increase to an amount equal to or greater than the asset's carrying amount.
If it does, the asset's depreciation charge is zero unless and until its residual value subsequently decreases to
an amount below the asset's carrying amount.
atg)
ath) PERIOD OF DEPRECIATION
ati) Depreciation of an asset begins when it is available for use, that is, when it is in the location and condition
necessary for it to be capable of operating in the manner intended by management. Depreciation of an asset
ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is
derecognised. Therefore, depreciation does not cease when the asset becomes idle or is retired from active use
unless the asset is fully depreciated. However, under usage methods of depreciation the depreciation charge
can be zero while there is no production.
atj)
atk) USEFUL LIFE
atl)Study par 7.2 of the prescribed textbook
atm) The future economic benefits embodied in an asset are consumed by an entity principally through its use.
Consequently, all the following factors are considered in determining the useful life of an asset:
a) expected usage of the asset. Usage is assessed by reference to the asset's expected capacity or physical
output.
b) expected physical wear an tear. This depends on (i) operational factors such as the number of shifts for which
the asset is to be used and the repair and maintenance program, and (ii) the care and maintenance of the
asset while idle.
c) technical or commercial obsolescence. This arises (i) from changes or improvements in production, (ii) or from
a change in the market demand for the product or service output of the asset.
d) legal or similar limits on the use of the asset, such as the expiry dates of related leases.
atn)
ato) The useful life of an asset is defined in terms of the asset's expected utility to the entity. The asset
management policy of the entity may involve the disposal of assets after a specified time or after consumption
of a specified portion of the future economic benefits embodied in the asset. Therefore, the useful life of an
asset may be shorter than its economic life. The estimation of the useful life of the asset is a matter of
judgement based on the experience of the enity with similar assets.
atp)
atq) Take note: Change in estimate useful life does not form part of this module.
atr)
ats) USEFUL LIFE OF LAND AND BUILDINGS
att) Study par 7.3 of the prescribed textbook
atu)
atv)Land and buildings are separable assets and are accounted for separately, even when they are acquired
together. With some exceptions, such as quarries and sites used for landfill, land has an unlimited useful life
and therefore is not depreciated. Buildings have a limited useful life and therefore are depreciable assets. An
increase in the value of the land on which a building stands does not affect the determination of the
depreciable amount of the building.
 Prescribed Book Chapter 18 paragraph 8 :
All property, plant and equipment items are initially measured at cost. On subsequent measurement, the entity may, however,
choose to use either the cost model or the revaluation model. The revaluation model may, however, only be chosen for subsequent
atw) In some cases, the land itself may have a limited useful life, in which case it is depreciated in a manner
measurement of anthe
that reflects itembenefits
of PPE ifto
thebefair value of
derived the asset
from it. can be measured reliably. If the
fair
atx)value of the item under review cannot be measured reliably, the asset will be measured
using the cost model.
aty) DEPRECIATION METHODS
atz) Study par 7.5 in text book
Itaua)
is clear that
The PPE, especiallymethod
depreciation those items
usedwith a very
shall longthe
reflect useful life, will
pattern be significantly
in which the asset's undervalued if only thebenefits
future economic cost model
areis
used. expected
If, for example,
to beanconsumed
asset’s pricebyincreases by 15%
the entity. per annum,
A variety the price will
of depreciation double in
methods canfive
beyears.
usedUsing the costthe
to allocate model will
resultdepreciable
in the originalamount of an
cost price asset
being on a systematic
depreciated. basisrecommended
It is therefore over its useful life,
that namely:
entities with such assets should revalue their
aub)
assets periodically in order to:
a)a) ensure
The straight-line
that the equitymethod: depreciation
in the statement results
of financial in a constant
position charge over
is not understated the useful
(limiting life ifto
their ability the asset's
obtain residual
loans);
value does not change. This allocation of depreciation in fixed instalments is usually adopted where the income
b) align the amount of depreciation written off on the asset to a greater extent with the real loss in value during a particular
produced by the asset or part of it is a function of time rather than usage and where the repair and
financial period,charges
maintenance and, in doing so, facilitate
are fairly constant. the replacement of the asset without further debt; and
c)auc)prevent the take-over of the entity. For instance, if the shareholders are not aware of the real value of the assets in an entity,
b) they
Themay more readily
diminishing agree tomethod:
balance the take-over of the entity
depreciation at a lower
results in a price than if they
decreasing have
charge information
over the usefulon life
the of
real value of
the
the assets
asset. and,
The therefore,amount
allocated on the real value of theirdeclines
of depreciation shares atontheantime of thebasis.
annual offer. The method is usually used where
there is uncertainty as to the amount of income that will be derived from the asset, especially in subsequent
years, and
The frequency where the effectiveness
of revaluations depends on theofchange
the asset is value
in fair expected
of thetoitems
gradually
of PPE.decline. The repair
Revaluations shouldand maintenance
be made with
costs
sufficient will usually
regularity increase
to ensure thatas
thean asset ages.
carrying amountThe total
does notdebit
differ for the cost
materially of the
from the asset will at
fair value therefore remain
the end of fairly
the reporting
constant.
period.
aud)
c) The units of production method (or: sum of the units method): depreciation is a charge based on the
The following
expected should beoutput
use or considered when
of the a revaluation
asset. is selects
The entity performed:
the method that most closely reflects the expected
pattern of consumption of the future economic benefits embodied in the asset. That method is applied
consistently from period to period unless there is a change in the expected pattern of consumption of those
future economic benefits.
aue) Work through example 8.14 of the prescribed textbook

auf) ACCOUNTING TREATMENT

aug)
auh) Prescribed Book Chapter 18 paragraph 7.6 :
Although
aui) depreciation is normally recognised as an expense in the profit or loss section of the statement of profit or loss and
other
auj) comprehensive income, it may be capitalised as part of the cost of another asset. Examples of this treatment can be found
8.1 Fair
auk)
in IAS value inventories are manufactured, IAS 16 where assets are self-constructed and IAS 38 where intangible assets are
2 where
The fair
aul) value
developed. In the of items
latteroftwo
PPEexamples,
subsequently measured under the revaluation
the depreciation/amortisation model should
is capitalised be determined
to self-constructed according to the
assets.
aum)
requirements
In all the above cases, amounts used for the useful life, the residual value and the depreciation method must befair
of IFRS 13. According to IFRS 13, there are three widely used valuation techniques to determine value. The
reviewed at
aun)valuation techniques are as follows:
three
least
auo)
annually at each financial year end. If expectations differ from previous estimates, the changes shall be accounted for
1.
as athe market
change approach; estimate. A change in the useful life, the depreciation method or the residual value will thus result in
in accounting
aup)
2. the cost
aauq)
change approach;
in the and charge for the current year and future periods. Disclosure of the nature and amount of the change
depreciation
3.
in the income
estimate
aur) (if approach.
material), as well as the effect on the current and future periods, is required in terms of IAS 8.39 and .40.
aus)
The fair value
aut) The of property is usually
depreciation chargetheformarket
each period value,shall
if it isbe
assumed
recognisedthat the same type
in profit or of business
loss unlesswill beincluded
it is continuedinonthe
the
premises. These values are usually obtained from independent
carrying amount of another asset (Refer to example 3 below). professional valuators.
auu)
auv)
The same The
appliesdepreciation
to plant andcharge for a except
equipment, periodthat is usually recognised
in this case in profitreplacement
the depreciated or loss. However, sometimes,
cost rather the future
than the market value
economic
is generally used.benefits embodied in
Gross replacement an isasset
cost are absorbed
the replacement costinofproducing other
a similar new assets.
unused In this
asset, case,
whereas the
net depreciation
replacement cost
is the charge
cost of aconstitutes
similar assetpart of same
of the the costageofand/or
the other assetNet
condition. andreplacement
is includedcost
in its carrying
reflects amount
the service (depreciation
capacity of the asset in
capitalized).
its current condition.
auw)
aux) The following serves as an example of what would happen if depreciation is capitalised to the cost price of
8.2 Treatment
another asset of accumulated depreciation
at initial recognition.
IAS 16.35 allows alternative accounting treatments with regard to accumulated depreciation
auy)
that
auz)may be used when recording the revaluation of an asset. The alternative accounting
treatments
ava) of accumulated depreciation are:
1.avb)
restate with reference to observable market data;
2.avc)
proportionately restate the accumulated depreciation; and
3.avd)REVALUATION
eliminate the accumulated depreciation against the gross carrying amount of the asset.
ave)
avf)
With the proportionately restate treatment the gross replacement cost is regarded as the gross carrying amount while the net
avg)
carrying
avh) amount of the asset is equal to the net replacement cost. With the elimination treatment the net replacement cost of the
asset
avi)becomes the gross carrying amount, while the accumulated depreciation only include depreciation charges recognised after
the date of revaluation.
avj)
For the purposes of this chapter, only the elimination method will be considered.
avk)
avl)
avm)
avn)
avo)
avp)
avq)
avr)
 Prescribed Book Chapter 18 paragraph 8 (Continued) :

8.3 Realisation of revaluation surplus

avs)
Upon
avt)revaluation, the difference between the revalued amount and the carrying amount is recognised in the revaluation surplus
via other comprehensive income, if an upwards revaluation occurred. The revaluation surplus is never subsequently reclassified
avu)
toavv)
profit or loss, but an entity may realise the revaluation surplus by making a direct transfer to retained earnings through the
statement
avw) of changes in equity.
avx)
avy)
The revaluation surplus may either be realised:
_ avz)
when the asset is retired or disposed of; or
_ awa)
as the asset is used.
awb)
awc)
Ifawd)
the revaluation surplus is realised through use, the amount of the surplus transferred would be the difference between the
depreciation
awe) based on the revalued carrying amount and the depreciation based on the asset’s original cost.
awf)
awg)
awh)
awi)
awj)
awk)
awl)
awm)
awn)
awo)
awp)
awq)
8.4 Subsequent revaluations and devaluations
Ifawr)
a specific asset’s carrying amount decreases as a result of a revaluation, this decrease must first be debited against a credit in
aws)
the revaluation surplus related to that specific asset through other comprehensive income in the statement of profit or loss and
awt)
other comprehensive income. Any excess of the write-down over the existing revaluation credit must be written off immediately
awu)
toawv)
the profit or loss section of the statement of profit or loss and other comprehensive income. With a subsequent increase in the
value
aww) of the specific asset, the profit or loss section of the statement of profit or loss and other comprehensive income must first
be credited, but the amount credited to the profit or loss section must be limited to the amount of a previous write-down debited
awx)
toawy)
this section.
awz)
axa)
Thereafter, the remaining amount is credited to the revaluation surplus through other
axb)
comprehensive income in the statement of profit or loss and other comprehensive income.
axc) of one item cannot be set off against surpluses of another, even if such items are from
Deficits
axd)
the same category.
axe)
axf)
The
axg) revaluation surplus is unrealised, and must, therefore, be viewed and disclosed as part of equity, usually as a non-
distributable
axh) reserve, in the statement of changes in equity. Thereafter, it may only be used to absorb subsequent revaluation
deficits
axi) or impairment losses or for capitalisation issues.
axj)
axk)
8.5 Timing of revaluation
Anaxl)
aspect not considered in IAS 16 is the actual date of the revaluation within the accounting period. If the revaluation takes
axm)
place during an accounting period, depreciation for the full period will be based on two different carrying amounts (the
axn)
carrying
axo)
amount before revaluation and the revalued amount). The disadvantage of such a practice is that the user of the
financial
axp) statements cannot compare the depreciation with the carrying amount in the statement of financial position. It is
therefore
axq) preferable that the revaluation takes place and be recorded at the beginning or at the end of the specific accounting
period,
axr) or as close to either as possible.
axs)
Ifaxt)
a revaluation takes place at the beginning of the period, the depreciation for the period, as well as the carrying amount in the
axu)
statement of financial position will be at price levels ruling at the beginning of the year. These amounts will therefore not be
axv)on the most recent figures. If the revaluation takes place at the end of the period, the statement of financial position
based
axw)
amount will be based on the most recent figures, but the depreciation for the full period will then be at the price level at the end
axx)
ofaxy)
the period (the revaluation is accounted for as though it took place at the beginning of the year).
axz)
All other expenses, by contrast, will be presented at price levels ruling during the whole reporting period. A revaluation at the
aya)
end
ayb) of the accounting period appears to be the better alternative from a statement of financial position perspective, but the
disadvantage
ayc) is that it increases the administrative responsibilities which are already aggravated by annual financial activities.
ayd)
For the purposes of this chapter, only revaluations at the beginning of the period will be considered. In terms of IAS 8.17, the
aye) adoption of a policy to carry assets at revalued amounts represents a change in accounting policy, but is dealt with as a
initial
ayf) revaluation in accordance with IAS 16, rather than as a change in accounting policy in terms of IAS 8. The requirements
normal
ayg)
of IAS 8 regarding changes in accounting policies are thus not applicable when the accounting policy for PPE is changed from the
ayh)
cost
ayi)model to the revaluation model.
ayj)
ayk)
ayl)
aym)
 ayn)
ayo)
ayp)
ayq)
ayr)
ays)
ayt)
ayu)
ayv)
ayw)
ayx)
ayy)
ayz)
aza)
azb)
azc)
azd)
aze)
azf)
azg)
azh)
azi)
azj)
azk)
azl)
azm)
azn)
azo)
azp)
azq)
azr)
azs)
azt)
azu)
azv)
azw)
azx)
azy)
azz)
baa)
bab)
bac)
bad)
bae)
baf)
bag)
bah)
bai)
baj)
bak)
bal)
Prescribed Book Chapter 18 paragraph 8 (Continued) :
bam)
8.6
ban) Depreciation and profits and losses
The
bao) revaluation of an asset is required before increased depreciation can be written off. The carrying amount is the basis for
the
bap) writing off of depreciation, and depreciation is, therefore, calculated on the revalued amount (less any residual value).
baq) and/or losses on disposal are calculated with reference to the revalued amount or the written-down valuation and the
Gains
bar)
net proceeds on disposal. An asset should not be revalued shortly before disposal in order to manipulate the gain or loss from
bas)
the sale, unless the revaluation forms part of a systematic revaluation programme.
bat)
PPE items must be revalued as a class (group) – for example, land, buildings or machinery – bearing in mind, however, the
bau)
requirement
bav) that the financial statements should not be misleading. If, for example, it is not possible to revalue all items within
abaw)
group simultaneously, internal valuations should, from time to time, be supported by independent valuations. However, it is
still
bax) important to keep a record of the historical cost in order to comply with disclosure requirements.
bay)
baz)INTRODUCTION
bba) In terms of the alternative accounting treatment provided for in IAS 16, PPE may be revalued. The
revaluation of PPE is widely used in practice due to the limitation of the historical cost basis to present a true
and fair reflection of the results and position of the entity. PPE that has a long useful life will be significantly
undervalued if only the historical cost basis is used.
bbb)
bbc) After recognition as an asset, a PPE item whose fair value can be measured reliably shall be carried at a
revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated
depreciation and subsequent accumulated impairment losses (Impairment losses are dealt with in later
 studies). Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not
differ materially from that which would be determined using fair value at the end of the reporting period.
bbd)
bbe) The fair value of land and buildings is usually determined from market-based evidence by appraisal that is
normally undertaken by professional qualified valuers. The fair value of plant and equipment is usually their
market value determined by appraisal. If there is no market-based evidence of fair value because of the
specialised nature of the PPE item and the item is rarely sold (except as part of a continuing business), an
entity may need to estimate fair value using an income or a depreciated replacement cost approach.
bbf)
bbg) MARKET VALUE
bbh) Study par 8.1 of the prescribed textbook
bbi)
bbj)The revalued amount of property is usually the market value and is usually obtained from independent
valuators. With plant and equipment the depreciated replacement cost is generally used.
bbk) Assets can be revalued according to the net replacement value or the gross replacement value.
bbl)
bbm) Gross replacement value is the replacement cost (market value) of a similar, new asset.
bbn) Net replacement value is the equivalent fair market value of a similar asset of the same age and/or
condition.
bbo) Work through example 8.16 of the prescribed textbook

bbp) ELIMINATION AND RESTATEMENT METHODS

bbq) Study par 8.2 of the prescribed textbook
bbr)
bbs) 2 Alternative accounting treatments:
bbt) - Proportionately restate accumulated depreciation (Gross replacement value basis)
bbu) - Eliminate accumulated depreciation against the gross carrying amount and the net amount restated to
the revalued amount of the asset (Net replacement value basis)
bbv) Work through example 8.17 of the prescribed textbook

bbw)

bbx)REVALUATION SURPLUS
bby) If an asset's carrying amount is increased as a result of a revaluation, the increase shall be recognised in
other comprehensive income accumulated in equity under the heading of revaluation surplus. However,
the increase shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the
same asset previously recognised in profit or loss.
bbz)
bca) If an asset's carrying amount is decreased as a result of a revaluation, the decrease shall be recognised in
profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any
credit balance existing in the revaluation surplus in respect of that asset. The decrease recognised in other
comprehensive income reduces the amount accumulated in equity under the heading of revaluation surplus.
bcb)
bcc) The revaluation surplus is unrealised and should be disclosed as part of equity. It should be considered to
be a non-distributable reserve. The reserve should only be used for subsequent write-downs of revaluations or
it may be used for a capitalisation share issue. The revaluation surplus included in equity in respect of a PPE
item may be transferred directly to retained earnings when the asset is derecognised. This may involve
transferring the whole of the surplus when the asset is retired or disposed of. 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.
bcd)
bce) Transfers from revaluation surplus to retained earnings are not made through profit or loss, ie not through
the statement of profit or loss and other comprehensive income, but directly on the face of the statement of
changes in equity
bcf)
bcg) The revaluation surplus is disclosed in the statement of changes in equity and indicates
• the change for the period (surplus created on a revaluation during the current period and realisations due to
disposals or through the gradual use of the valued asset), and
• any restrictions on the distribution of the balance of the revaluation surplus to shareholders (for example, when
it is the policy of the entity to keep the surplus intact as a capital maintenance reserve or to transfer it to an
asset replacement reserve).
bch) Work through example 8.18 of the prescribed textbook

bci) DEPRECIATION AND PROFIT AND LOSSES

bcj) Study par 8.4 of the prescribed textbook
bck)
 bcl) The revaluation of an asset is required before the increased depreciation can be written off.
bcm) Any gains or losses is calculated with reference to the new revalued amount and the net proceeds of the
disposal.
bcn) If a PPE item is revalued, the entire class of PPE to which that asset belongs shall be revalued.
bco) A class of PPE is a grouping of assets of a similar nature and use in an entity's operations.
bcp)
bcq) The following are examples of separate classes:
a) land
b) land and buildings
c) machinery
d) ships
e) aircraft
f) motor vehicles
g) furniture and fixtures
h) office equipment
bcr)
bcs) The items within a class of PPE are revalued simultaneously to avoid selective revaluation of assets and the
reporting of amounts in the annual financial statements that are a mixture of costs and values as at different
dates. However, a class of assets may be revalued on a rolling basis provided revaluation of the class of assets
is completed within a short period and provided the revaluations are kept up to date
bct)
bcu)DATE OF REVALUATION
bcv) Study par 8.5 of the prescribed textbook
bcw)
bcx) IAS 16 does not specify the date that the revaluation of the asset should take place. If the asset should be
revalued in the middle of the financial year, it implies that the depreciation for the current year will be based
on different amounts: an amount before the revaluation and then a different amount after the revaluation has
taken place. As this is not a desirable practice, it is recommended that the revaluation should be performed
either at the beginning or at the end of the financial year. If the revaluation is performed at the end of the
financial year, the revalued amount is worked back to the beginning of the year and the depreciation for the
current year is based on the recalculated, revalued amount. This practice must be stipulated in the
accountingpolicy of the company. Prescribed Book Chapter 18 paragraph 10 :
bcy)
bcz) Work through example 8.20 of the prescribed textbook

bda)

The above two criteria preclude the derecognition of an asset by mere withdrawal from use,
unless the withdrawn asset can no longer be used or sold to produce any further economic
benefits.

The gain or loss arising from the derecognition of an item of PPE will be determined as the difference between the net disposal
proceeds (if any), and the carrying amount of the item on the date of disposal. This gain or loss shall be recognised in the profit or
loss section of the statement of profit or loss and other comprehensive income (unless IAS 17 requires otherwise on a sale and
bdb)
leaseback
bdc) transaction where it is deferred). A gain is not revenue from the sale of goods and services (or assets) as outlined by
IAS 18.
bdd)
bde)
The disposal of an item of property, plant and equipment may occur in a variety of ways (for example by sale, by entering into a
bdf) lease, or by donation). In determining the date of disposal of an item, the following criteria should be considered:
finance
obdg) DERECOGNITION
the entity has transferred the significant risks and rewards of ownership of the goods to the buyer;
bdh)
o the entity retains neither continuing managerial involvement to the degree usually associated with ownership, nor effective
bdi)
control over the goods sold;
bdj)
obdk)the amount of revenue can be measured reliably;
obdl)it is probable that the economic benefits associated with the transaction will flow to the entity; and
obdm)the costs incurred or to be incurred in respect of the transaction can be measured reliably.
bdn)
bdo)
All the above conditions must be met before a disposal may be recognised. The consideration receivable on disposal of an item of
bdp)
property, plant and equipment is recognised initially at its fair value. If payment for the item is deferred, the consideration
bdq)
received
bdr) is recognised initially at the cash price equivalent on the transaction date (being the present value of the right to receive
cash
bds)in the future). The difference between the actual amount received and the cash price equivalent is recognised as interest
income
bdt) using the effective interest rate method, reflecting the effective yield on the asset. This principle is the reverse side of
deferred
bdu) settlement terms as discussed in section 6.3 above. Depreciation on an item of PPE ceases at the earlier of the date that
the asset is classified as held for sale (or included in a disposal group that is classified as held for sale), and the date that the asset
bdv)
isbdw)
derecognised.
bdx)
bdy)
bdz)
bea)
 beb)
bec)
bed)
bee)
bef)
beg)
beh)
bei) Prescribed Book Chapter 18 paragraph 11:
In terms
bej) of IAS 16, the following information on PPE must be disclosed:
obek)accounting policy:
bel) o for each class of property, plant and equipment, the measurement basis used in establishing the gross carrying
bem) amount;
ben)
o depreciation methods for each class of PPE;
beo)
bep) o useful lives or depreciation rates for each class of PPE; and
beq) o information regarding revaluations (for example whether the revaluation surplus realises through use).
ober)Statement of profit or loss and other comprehensive income and notes for each class of asset:
bes) o Depreciation recognised as an expense or shown as a part of the cost of other assets during a period must be
bet) Thedisclosed
carryinginamount
terms ofofIASan1.PPE item shall between
A breakdown be derecognised:
the different classes of assets is not required. The depreciation
a) on disposal; or
charge need not be split between amounts related to historical cost and revaluation amounts.
b) when no future economic benefits are expected from its use or disposal.
beu) o The effect of material changes on the estimate (IAS 8) of:
bev) The gain  oruseful lives; from the derecognition of a PPE item shall be included in profit or loss when the
loss arising
 residualGains
item is derecognised. values;
shall not be classified as revenue from the sale of goods and services.
bew)  dismantling, removal or restoration costs; and
bex) The disposal of a PPE item may occur in a variety of ways (eg by sale, by entering into a finance lease or by
 depreciation method.
donation). If, under the recognition principle, an entity recognises in the carrying amount of a PPE item the cost
The amountfor
of aoreplacement of part
compensation received
of the item, then from third partiesthe
it derecognises for the impairment,
carrying amount giving
of theup,replaced
or loss ofpart
itemsregardless
of PPE
mustthe
of whether be disclosed
replacedin a note
part hadif been
not presented on theseparately.
depreciated face of the statement
If it is not of profit or loss
practicable forand
an other
entitycomprehensive
to determine
income.
the carrying amount of the replaced part, it may use the cost of the replacement as an indication of what the
o Statement
cost of the of replaced
financial position
part was and
at notes:
the time it was acquired or constructed.
bey) oThefor gain or loss arising from
each class of asset, the grossthe carrying
derecognition
amountofand
a PPE item shalldepreciation
accumulated be determined as theimpairment
(including difference losses)
betweenat
the net disposal proceeds, if any, and the carrying amount of the item. The consideration receivable on
the beginning and end of the period;
disposal of a PPE item is recognised initially at its fair value.
bez)
o for each class of asset, a detailed reconciliation (see # below) of movements in the carrying amount (see $
bfa) immediately below) at the beginning and end of the period (layout illustrated below);
bfb)
$bfc)
The carrying amount is the amount at which an asset is recognised in the statement of financial position after deducting the
accumulated
bfd) depreciation and impairment losses. This implies that accumulated depreciation and impairment losses must be
bfe)
combined when disclosing the opening and closing carrying amounts.
bff)
#bfg)
The abovementioned reconciliation must contain the following:
bfh)
obfi)the carrying amount at the beginning and end of the period;
obfj)additions;
obfk)acquisitions through business combinations;
obfl)increases or decreases in value arising from revaluations;
obfm)impairments, as well as reversals of impairment losses;
obfn)depreciation;
DISCLOSURE
bfo) Study par 11 of the prescribed textbook.
obfp)net exchange differences due to the translation of the financial statements of a foreign operation from functional to
bfq)presentation currency (if different), including translation of a foreign operation into the presentation currency of the
bfr)reporting entity; and
obfs)other changes.
bft)
bfu)
Comparative amounts in respect of the reconciliation are required.
obfv)
amount incurred on PPE still under construction on which no depreciation has yet been provided;
bfw)
statement that PPE serves as security for liabilities:
obfx)
bfy) o existence and amount of restrictions on title; and
bfz) o existence and amount of PPE pledged as security.
obga)
the following carrying amounts of PPE can also be disclosed voluntarily:
bgb) o temporarily idle; and
bgc)
o retired from active use and not classified as held for sale in terms of IFRS 5.
bgd)
where the cost model is used, the fair value of each class of PPE if it differs materially from the carrying amount.
obge)
bgf)
The
bgg)following additional information regarding assets that have been revalued must be
bgh) in terms of IAS 16:
disclosed
bgi)
obgj)statement of financial position, statement of profit or loss and other comprehensive income and notes:
bgk)
o the effective date of the last revaluation;
bgl)
o whether the revaluation was done independently;
o the carrying amount of each class of revalued PPE, had the cost model was used; and
o the revaluation surplus, including the movement, limitations on distributions to shareholders (in other words,
bgm)
bgn)
bgo)
bgp)
bgq)
bgr)
bgs)
bgt)
bgu)
bgv)
bgw)
bgx)
bgy)
bgz)
bha)
bhb)
bhc)
bhd)
bhe)
bhf)
bhg)
bhh)
bhi)
bhj)
bhk)
bhl)
bhm)
bhn)
bho)
bhp)
bhq)
bhr)
bhs)
bht)
bhu)
bhv)
bhw)
bhx)
bhy)
bhz)
bia)
bib)
bic)
bid)
bie) DISCLOSURE REQUIREMENTS FOR THE COST AND REVALUATION MODEL
bif)
The annual financial statements shall disclose, for each class of PPE:
a) the measurement bases used for determining the gross carrying amount;
b) the depreciation methods used;
c) the useful lives or the depreciation rates used;
d) the gross carrying amount and the accumulated depreciation (aggregated with accumulated impairment
losses) at the beginning and end of the period; and
e) a reconciliation of the carrying amount at the beginning and end of the period showing:
a. additions;
b. increases resulting from revaluations
c. depreciation;
d. other changes.
big)
bih) FURTHER DISCLOSURE REQUIREMENTS
bii) The annual financial statements shall also disclose:
a) the existence and amounts of
a. restrictions on title, and
b. PPE pledged as security for liabilities;
b) the amount of expenditures recognised in the carrying amounts of a PPE item in the course of its construction;
c) the amount of contractual commitments for the acquisition of PPE; and
bij)
bik) Selection of the depreciation method and estimation of the useful life of assets are matters of judgement.
Therefore, disclosure of the methods adopted and the estimated useful lives or depreciation rates provides
users of annual financial statements with information that allows them to review the policies selected by
management and enables comparisons to be made with other entities.
bil)
bim) For similar reasons, it is necessary to disclose:
a) depreciation, whether recognised in profit or loss or as a part of the cost of other assets, during a period; and
b) accumulated depreciation at the end of the period.
bin)
bio) SPECIFIC DISCLOSURE REQUIREMENTS FOR THE REVALUATION MODEL
bip)If PPE items are stated at revalued amounts, the following shall be disclosed:
a) the effective date of the revaluation;
b) whether an independent valuer was involved;
c) for each revalued class of PPE, the carrying amount that would have been recognised had the assets been
carried under the cost model (cost price minus accumulated depreciation and impairment losses); and
d) the revaluation surplus, indicating the change for the period and any restrictions on the distribution of the
balance to shareholders (ie whether it is considered non-distributable or not).
biq)
bir)
bis)
bit)
biu)
biv)
biw)
bix)
biy)
biz)
bja)
bjb)
bjc)
bjd)
bje)
bjf)
bjg)
bjh)
bji)
bjj)
bjk)
bjl)
bjm)
bjn)
bjo)
bjp)
bjq)
bjr)
bjs)
bjt)
bju)

bjv) LEARNING UNIT 6

bjw) INVESTMENT PROPERTY – IAS 40
bjx)
bjy)

bjz) OBJECTIVE
 Prescribed Book Chapter 17 paragraph 4 :

bka) IAS 40 prescribes the accounting treatment (recognition and measurement) for investment
bkb) property and related disclosure requirements.
bkc)
bkd) BACKGROUND
bke) Study par 3 of the prescribed textbook
bkf)
Investment
bkg) property is therefore not property held forBook
Prescribed use inChapter
the production or supply
17 paragraph 3 :of goods or services or for administrative
purposes,
bkh)
IAS nor isto
40 applies it property
investmentheldproperty,
for sale inincluding:
the ordinary course of business. Owner-occupied property does not qualify as
investment
bki)investmentproperty.
property held under a finance lease in the financial statements of a lessee; and
bkj)
In practice, the classification of property
 investment property leased out underinto either owner-occupied
an operating property
lease in the financial or investment
statements property may be problematic. A
of a lessor.
bkk) may, for example, be used for dual purposes, i.e. to earn rentals, and to serve as an administrative head office.
property
bkl)
IAS
bkm)40 does not deal with matters covered in IAS 17 Leases, including:
bkn) classification of leases as finance leases or operating leases;
bko) recognition of lease income earned on investment property;
bkp) measurement in a lessee’s financial statements of property held under an operating lease;
bkq)
bkr) measurement in a lessor’s financial statements of property leased out under a finance lease;
bks) accounting for sale and leaseback transactions; and
bkt) disclosure about finance leases and operating leases.
bku)
The intention is that the asset must only be split into two classification categories if the portions of the asset can be sold or leased
bkv)
IAS 40 alsoIfdoes not deal cannot
with: be sold separately, it is only classified as an investment property if an insignificant portion is
separately.
bkw)
the property
used forests and similar regenerative natural resources (biological assets); and
bkx)for production or supply of goods or services or for administrative purposes, either by the owner or the lessee. What
mineral“an
constitutes
bky) rights, the exploration
insignificant portion”forisand
left extraction of minerals,
to the discretion oil, natural gas and similar non-regenerative natural
of management.
bkz)resources.
IAS 40.14 notes
bla)This standardthat deals,
judgement
interisalia,
required
withto determine
the whetherina aproperty
measurement lessee'squalifies
annualas investment
financial property. of
statements It isinvestment
suggested that
property
entities interests
must develop held
their ownunder a finance
criteria to ensurelease andexercise
that the with the measurement
of judgement in a lessor's
in classifying annualand
investment financial
owner-occupied
statements
properties of investment
is consistent. property leased
Where classification out to adifficult,
is particularly lessee disclosure
under an operating lease.
of the criteria This standard does not
is required.
deal with other matters covered in IAS 17 Leases.
blb)This standard does not apply to (does not form part of this module):
In some instances, the classification of property as either investment property or owneroccupied property is further complicated
blc) a) biological assets related to agricultural activity, and
in lease agreements
bld)b) mineral by ancillary
rights and mineralservices that the
reserves lessor
such ascompany maygas
oil, natural provide to the lessee
and similar or occupants. The
non-regenerative significance of such
resources.
ancillary
ble)
services to the arrangement determines whether the property qualifies as an investment property or not. If the lessor provides
blf) DEFINITIONS
security
blg)Theand maintenance
following termsservices,
are usedforinexample, it may with
the standard be insignificant
the meaningsto thespecified:
lease arrangement as a whole, and the property
would
blh) qualify as an investment property. If the services comprise a more significant component, such as where the company
manages a hotelamount
bli) Carrying and provides extensive services to guests, the property qualifies as owner-occupied property.
blj) It is the amount at which an asset is recognised in the statement of financial position.
Ifblk)
a company in a group owns a property that is leased to or occupied by a parent or a subsidiary, the property may qualify as an
bll) Cost property from the perspective of the reporting company. However, from the perspective of the group as a whole, the
investment
blm) It is the amount of cash or cash equivalents paid or the fair value of other consideration given to acquire an
property will be owner-occupied. Appropriate consolidation journals will then be required to reflect the economic reality of the
asset at the time of its acquisition or construction or, where applicable, the amount attributed to that asset
different reporting entities.
when initially recognized in accordance with the specific requirements of other IFRSs.
bln)
IAS 40 provides
blo) Fair valuea number of examples of investment property, namely:
land held
blp)The pricefor long-term
that capital
would be appreciation;
received to sell an asset or paid to transfer a liability in an orderly transaction between
 land heldparticipants
market for a currently
atundetermined
the measurementfuturedate.
use;
blq)
 a building let under operating leases;
blr) Investment property
bls)aIsbuilding that is vacant but is held with the intention of letting it under an operating lease; and
property (land or a building – or part of a building – or both held (by the owner or by the lessee under a
 property that
finance lease) is being constructed
to earn rentals ororfor
developed for future use as
capital appreciation or investment property.
both, rather than for:
blt) a) use in the production or supply of goods or services or for administrative purposes; or
The following
blu)b) sale in are
the examples of itemsofthat
ordinary course are not investment property:
business.
blv)property held for sale in the ordinary course of business or in the construction or development for such sale (IAS 2);
blw) Owner-occupied
property property
being constructed or developed on behalf of third parties (IAS 11);
blx) Property held (by the owner or by the lessee under a finance lease) for use in the production or supply of goods
 owner-occupied property, including property held for future use or held for future development and subsequent use as
or services or for administrative purposes.
bly)owner-occupied property;
blz) property
NATURE occupied by employees
OF INVESTMENT (regardless of whether the employees pay rent at market rates);
PROPERTY
bma) owner-occupied
Study parproperty
4 of theawaiting disposal
prescribed (IAS 16); and
textbook
bmb) property leased out to another entity in terms of a finance lease agreement.
bmc)
bmd)
bme)
bmf)
bmg)
bmh)
bmi)
bmj)
bmk)
bml)
bmm)
bmn)
bmo)
bmp)
bmq)
bmr)
bms)
bmt)
bmu)
bmv)
bmw)
bmx)
bmy)
bmz)
bna)
bnb)
bnc)
bnd)
bne)
bnf)
bng)
bnh)
bni)
bnj)
bnk)
bnl)
bnm)
bnn)
bno)
bnp)
bnq)
bnr)
bns)
bnt)
bnu)
bnv)
bnw)
bnx)
bny)
bnz)
boa)
bob)
boc)
bod)
boe)
bof)
bog)
boh)
boi)
boj)
bok)
bol)
bom)
bon)
boo)
bop)
boq)
bor)
bos)
bot)
bou)
bov)
bow)
box)
boy) Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment
property generates cash flows largely independently of the other assets held by an entity. This distinguishes
investment property from owner-occupied property. The production or supply of goods or services (or the use
of property for administrative purposes) generates cash flows that are attributable not only to property, but
also to other assets used in the production or supply process. IAS 16 Property, plant and equipment (see
learning unit 5) applies to owner-occupied property.
boz)E XAMPLES OF INVESTMENT PROPERTIES :
a) land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business.
 b) 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.)
c) a building owned by the entity (or held by the entity under a finance lease) and leased out under one or more
operating leases.
d) a building that is vacant but is held to be leased out under one or more operating leases.
e) property that is being constructed or developed for future use as investment property.
bpa)
bpb)
bpc)E XAMPLES OF ITEMS THAT ARE NOT INVESTMENT PROPERTY AND THEREFORE NOT IN THE SCOPE OF THIS STANDARD :
a) property intended for sale in the ordinary course of business or in the process of construction or development
for such sale (see IAS 2 Inventories), for example, property acquired exclusively with a view to subsequent
disposal in the near future or for development and resale.
b) property being constructed or developed on behalf of third parties (not covered on second year level).
c) owner-occupied property (IAS 16), including:
a. property held for future use as owner-occupied property,
b. property held for future development and subsequent use as owner-occupied property,
c. property occupied by employees (whether or not the employees pay rent at market rates), and
d. owner-occupied property awaiting disposal.
d) property that is leased to another entity under a finance lease.
bpd)
Prescribed Book Chapter 17 paragraph 5 :
bpe) Some properties comprise a portion that is held as investment property and another portion that is held as
owner-occupied property. 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 production or supply of goods or
services or for administrative purposes.
bpf)
bpg) In some cases, an entity provides ancillary services to the occupants of a property it holds, for example
security and maintenance services. An entity treats such a property as investment property if the services are
insignificant
It is usually the firstto the arrangement
criterion as athe
that may delay whole. In other
recognition cases,
of the the services
investment provided
property, namelyare significant.
where For
the level of example,
certainty
if an entity owns and manages a hotel, services provided to guests are significant to the arrangement
regarding the flow of future benefits is too low to meet the “probable” requirement. The measurement is usually determined as a by
whole. Therefore, an owner-managed hotel is owner-occupied property, rather than
means of a purchase agreement, or (if the property was constructed by the entity) by the record of accumulated costs.
bph) investment property.
bpi)
bpj)Judgement is needed to determine whether a property qualifies as investment property. An entity develops
criteria by which it can consistently judge in accordance with this standard whether a property is investment
property. These criteria must be disclosed when classification is difficult.
bpk)
bpl)In some cases, an entity owns property that is leased to, and occupied by, its parent or another subsidiary. The
property
If an entity does
cannot not qualify
reliably as investment
determine property
the fair value in the consolidated
of this investment annual
property under financial but
construction, statements,
expects tobecause
be able toit is
determine the fair value reliably once construction is complete, it shall measure that property at cost until either itsitfair
owner-occupied from the perspective of the group, but in its individual annual financial statements would
valuebe
shown as investment property.
becomes reliably determinable or construction is complete (whichever comes first).
bpm)
bpn) RECOGNITION AND INITIAL MEASUREMENT
5.2 InitialStudy
bpo) measurement
par 5 of the prescribed textbook
bpp)
bpq)
bpr)
bps)
bpt)
bpu)
bpv)
Cost comprises the purchase price and any directly attributable expenditure such as legal services, property transfer taxes and
bpw)
other transaction costs. Costs such as start-up costs, initial operating losses, wasted material or unproductive labour costs are
bpx)
not included in the cost of investment property. Start-up costs may only be capitalised if they are necessary to bring the property
bpy)
tobpz)
its working condition in order to be operated in the manner intended by management. The cost of self-constructed investment
property
bqa) is the cost incurred by the company to the date the construction or development is substantially completed as intended
bybqb)
management.
Ifbqc)
payment for an investment property is deferred, its cost is the cash price equivalent. This is determined in exactly the same way
asbqd)
for property, plant and equipment (PPE). The difference between cost and the proceeds is recognised as interest over the
bqe) of credit. The initial measurement of investment properties acquired in terms of an exchange transaction is also exactly
period
bqf)
the same as that used for PPE.
bqg)
bqh)
bqi)
bqj)
bqk)
bql)
bqm)
bqn)
bqo)
bqp)
bqq)
bqr)
bqs)
bqt)
bqu)
bqv)
bqw)
bqx)
bqy)
bqz)
bra)
brb)
brc)
brd)
bre)
brf)
brg)
brh)
bri)
brj)
brk)
brl)
brm)
brn)
bro)
brp)
brq)
brr)
brs)
brt)
bru)
brv)
brw)
brx)
bry)
brz)
bsa)
bsb)
bsc) Investment property shall be recognised as an asset when, and only when:
a) it is probable that the future economic benefits that are associated with the investment property will flow to
the entity; and
b) the cost of the investment property can be measured reliably.
bsd)
bse) An entity evaluates all its investment property costs at the time they are incurred. These costs include:
 costs incurred initially to acquire an investment property and
 costs incurred subsequently to add to, replace part of, or service a property.

bsf) Under this recognition principle, an entity does not recognise in the carrying amount of an investment property
the costs of the day-to-day servicing of such a property. Rather, these costs are recognised in profit or loss as
incurred. Examples of such costs include cost of labour and consumables, and may include the cost of minor
parts. The purpose of these expenditures is often described as for the repairs and maintenance of the property.
bsg)
bsh) Parts of investment properties may have been acquired through replacement. For example, the interior
walls may be replacements of original walls. Under the recognition principle, an entity recognises in the
carrying amount of an investment property the cost of replacing part of an existing investment property at the
time that cost is incurred if the recognition criteria are met.
bsi)
bsj) An investment property shall be measured initially at its cost. Transaction costs should be included in the initial
measurement. The cost of a purchased investment property comprises its purchase price and any directly
attributable expenditure such as professional fees for legal services, property transfer taxes (duties) and other
transaction costs.
bsk)
bsl) The transfer duties or Value Added Tax (VAT) implications of the purchase of a property can be one of the
following:
 The property is bought from an entity that is registered for VAT. The purchase price will include VAT and if the
company is registered for VAT, then the VAT can be claimed back from the SA Revenue Service.
 The property is bought from an entity that is not registered for VAT. It will have to pay transfer duty at
prescribed rate on the property value. If it is registered for VAT, then it will be able to claim the transfer duty
back as VAT from the SA Revenue Service.
bsm)
bsn) The cost of a self-constructed investment property is its cost at the date when the construction or
development is complete.
bso)
 Prescribed Book Chapter 17 paragraph 6 (Continued) :
Fair value must not reflect:
 additional value derived from the creation of a portfolio of properties in different locations;
bsp) The cost of investment property is not increased by:
 a) synergies
start-up between investment
costs (unless they property and other
are necessary assets;the property to the condition necessary for it to be capable
to bring
 legal rights or restrictions
of operating in the mannerspecific to the owner;
intended or
by management),
 b) tax
operating losses
benefits or incurred
burdens before
specific to thethe investment property achieves the planned level of occupancy, or
owner,
asc)these
abnormal amounts
aspects form of awasted
part of value inmaterial, labour
use valuation, as or otherinresources
defined incurred
IAS 36. Fair in constructing
value reflects factors thatorare
developing
relevant tothe
market
property.
participants in general, while value in use reflects factors that may be specific to the entity.
bsq)
bsr) Work through example 17.1(a) of the prescribed textbook

bss) SUBSEQUENT MEASUREMENT

bst) Study par 6 of the prescribed textbook
bsu)
bsv) Prescribed Book Chapter 17 paragraph 6 :
bsw)
IAS 40.78 requires extensive and separate disclosure of investment properties that cannot be valued at fair value due to
bsx)
6exceptional
Subsequent
bsy)
circumstances.
measurement IAS 40 suggests that exceptional circumstances are only likely to arise when comparable market
transactions
bsz) are infrequent, and when alternative estimates of fair values, such as discounted cash flow projections, are not
available.
bta)
btb)
btc)
A btd)
change from the cost model to the fair value model constitutes a change in accounting
policy
bte)in terms of IAS 8 (see also the transitional provisions in IAS 40.80 to .82). IAS 40 mentions, however, that it is unlikely that
a btf)
change from the fair value model to the cost model will result in a more appropriate presentation of events (a specific
btg)
requirement in IAS 8). Such a change in accounting policy is, in effect, discouraged, if not prohibited.
bth)
6.2
bti)
Cost model
6.1 Fair value model
btj)
btk)
btl)
btm)
Ifbtn)
investment property is classified as held for sale, it is measured in terms of IFRS 5, and is outside the scope of this chapter.
bto)
Fair value is defined as the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s-
btp) transaction, and does not take transaction
length
6.3
btq)Subsequent expenditure
costs into account. This implies that fair value is the best price obtainable by a seller and the most advantageous price obtainable
btr)
bybts)
a buyer, both of whom are informed about the nature and uses of the investment property as well as the state of the market at
the end of the reporting period. The fair value of investment property is based on a hypothetical sale. The reference to an arm’s-
btt)
length
btu) transaction implies that the parties to the transaction are unrelated, with each party acting independently.
Ifbtv)
subsequent expenditure does not meet these criteria, these expenses are recognised as repairs and maintenance in the profit or
Thebtw)
loss fair value
section of shall exclude special
the statement terms
of profit or circumstances
or loss such as special
and other comprehensive financing
income. arrangements
This treatment or concessions
is similar that may
to that followed for
btx)in an increased or decreased market value. The fair value shall reflect the actual market condition and circumstances as at
result
property,
bty)
plant and equipment in IAS 16 – refer to chapter 3. Subsequent expenditure that is incurred to bring the asset to its
the end ofcondition
working the reporting
after period, notsuch
purchase, at either
as a renovation
the past or future
of adate.
building, is also capitalised, provided it meets the recognition
btz)
criteria
bua) of the Framework.
Where
bub)
an active market for similar property exists, this may be a reliable indicator of fair value, provided that the differences in
the
6.4 nature,
buc) condition and location of the property are considered and amended, where necessary. If a suitable current price in an
Derecognition
active
bud) market is not available, the valuer/entity may consider the following valuation approaches:
 bue) Current prices in an active market for properties of a different nature, condition and location, adjusted to reflect differences.
 buf) Recent prices on less active markets, adjusted to reflect changes in economic conditions since the date of the transaction.
bug)
 Discounted cash flow projections based on reliable estimates of future cash flows (based on existing lease and other
buh)
contracts and (where possible) external evidence) and using a discount rate that reflects market assessments of the
bui)
buj)uncertainty in the amount and timing of cash flows.
buk)
Although
bul) the above approaches may result in different fair values, a reliable estimate of the fair value can still be determined by
studying
bum) the differences in fair value. If the differences are within a relatively narrow range, a fair value can usually be
determined
bun) within an acceptable range. If there is great variability in the above fair values, it may not be appropriate to value
thebuo)
investment property at fair value when the fair value cannot be determined within an acceptable range.
bup)
buq)
bur)
bus)
but)
buu)
buv)
buw)
bux)
buy)
buz)
bva)
bvb)
bvc)
bvd)
bve)
bvf)
bvg)
bvh)
bvi)
bvj)
bvk)
bvl)
bvm)
bvn)
bvo)
bvp)
bvq)
bvr)
bvs)
bvt)
bvu)
bvv)
bvw)
bvx)
bvy)
bvz)
bwa)
bwb)
bwc)
bwd)
bwe)
bwf)
bwg)
bwh)
bwi)
bwj)
bwk)
bwl)
bwm)
bwn)
bwo)
bwp)
bwq)
bwr)
bws)
bwt)
bwu)
bwv)
bww)
bwx)
bwy)
bwz)
bxa)
bxb)
bxc)
bxd)
bxe)
bxf)
bxg)
bxh)
bxi)
bxj)
bxk) INTRODUCTION
bxl) An entity shall choose either
 the fair value model or
 the cost model
bxm) as its accounting policy and shall apply that policy to all of its investment property. IAS 8 Accounting
policies, changes in accounting estimates and errors states that a voluntary change in accounting policy shall
be made only if the change will result in a more appropriate presentation of transactions, other events or
conditions in the entity's annual financial statements. It is highly unlikely that a change from the fair value
model to the cost model will result in a more appropriate presentation. IAS 8 will be dealt with in later studies.
bxn)
bxo)FAIR VALUE MODEL
bxp) Study par 6.1 of the prescribed textbook
bxq) 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. An entity determines fair value without any
deduction for transaction costs it may incur on sale or other disposal.
bxr)
bxs) The fair value of investment property must be determined, whether the fair value model or the cost model
is used. The standard requires all entities to determine the fair value of investment property, for the purpose
of either measurement (if the entity uses the fair value model) or disclosure (if it uses the cost model). An
entity is encouraged, but not required, to determine the fair value of investment property on the basis of a
valuation by an independent valuer who holds a recognised and relevant professional qualification and
bxt) has recent experience in the location and category of the investment property being valued.
bxu)
bxv) After initial recognition, an entity that chooses the fair value model shall measure all of its investment
property at fair value, except when there is clear evidence when an entity first acquires an investment
property that the entity will not be able to determine the fair value of the investment property reliably on a
continuing basis.
bxw)
bxx) A gain or loss arising from a change in the fair value of investment property shall be recognised in profit
or loss for the period in which it arises. Fair value reflects market conditions at reporting date The fair value
of investment property shall reflect market conditions at the end of the reporting period.
bxy)
bxz) TIME -SPECIFIC
bya) Fair value is time-specific at a given date. Because market conditions may change, the amount reported as
fair value may be incorrect or inappropriate if estimated as of another time. The definition of fair value also
assumes simultaneous exchange and completion of the contract for sale without any variation in price that
might be made in an arm's length transaction between knowledgeable, willing parties if exchange and
completion are not simultaneous.
byb)
byc) The fair value reflects:
 the rental income from current leases,
 reasonable and supportable assumptions that represent what knowledgeable, willing parties would assume
about rental income from future leases in the light of current market conditions, and
 any cash outflows (including rental payments and other outflows) that could be expected in respect of the
property.
byd)
bye)KNOWLEDGEABLE , WILLING PARTIES IN AN ARM 'S LENGTH TRANSACTION
byf)The definition of fair value refers to knowledgeable, willing parties in an arm's length transaction. The term
knowledgeable means that both the willing buyer and the willing seller are reasonably informed about the
nature and characteristics of the investment property, its actual and potential uses, and market conditions at
the end of the reporting period.
byg)
byh) A willing buyer is motivated, but not compelled, to buy. This buyer is neither over-eager nor determined
to buy at any price. The assumed buyer would not pay a higher price than a market comprising knowledgeable,
willing buyers and sellers would require.
byi)
byj) A willing seller is neither an over-eager nor a forced seller, prepared to sell at any price, nor one prepared to
hold out for a price not considered reasonable in current market conditions. The willing seller is motivated to
sell the investment property at market terms for the best price obtainable.
byk)
byl) The term arm's length transaction means that the transaction is one between parties that do not have a
particular or special relationship that makes prices of transactions uncharacteristic of market conditions. The
transaction is presumed to be between unrelated parties, each acting independently
bym)
byn) C URRENT PRICES IN AN ACTIVE MARKET
byo) The best evidence of fair value is given by current prices in an active market for similar property in the
same location and condition and subject to similar lease and other contracts. An entity takes care to identify
any differences in the nature, location or condition of the property, or in the contractual terms of the leases
and other contracts relating to the property.
byp)
byq) In the absence of current prices in an active market other sources need to be considered.
byr)
bys) Work through example 17.1(b) and 17.1(c) of the prescribed textbook
byt)
byu) COST MODEL
byv) Study par 6.2 of the prescribed textbook
byw) After initial recognition, an entity that chooses the cost model shall measure all of its investment property
at cost less accumulated depreciation and accumulated impairment losses, according to IAS 16 Property, plant
and equipment.
byx) Work through example 17.2(a) of the prescribed textbook

byy)DERECOGNITION
byz) Study par 6.4 of the prescribed textbook
 bza) An investment property shall be derecognised (eliminated from the statement of financial position) on
disposal or when the investment property is permanently withdrawn from use and no future economic benefits
are expected from its disposal. The disposal of an investment property may be achieved by sale or by entering
into a finance lease.
bzb) If, in accordance with the recognition principle (refer to 2.5 above), an entity recognises in the carrying
amount of an asset the cost of a replacement for part of an investment property, it derecognises the carrying
amount of the replaced part.
bzc) Gains or losses arising from the retirement or disposal of investment property shall be determined as the
difference between the net disposal proceeds and the carrying amount of the asset and shall be recognised in
profit or loss in the period of the retirement or disposal.
bzd) The consideration receivable on disposal of an investment property is recognised initially at fair value.
bze) Work through example 17.2(b) of the prescribed textbook
bzf)
bzg) DISCLOSURE
bzh) Study par 7 of the prescribed textbook
bzi)
bzj) Prescribed Book Chapter 17 paragraph 7 :
Inbzk)
terms of IAS 40.74 to .79, the following information on investment property shall be disclosed:
bzl) whether the entity applies the fair value or cost model;
bzm) criteria developed to distinguish investment property from other asset-classes when classification is difficult;
bzn)
bzo) methods and significant assumptions used in determining the fair value of property and whether it is supported by market
bzp)evidence or other factors;
bzq) the extent to which fair value of investment property has been determined by an independent valuer with the necessary
bzr)qualifications and recent experience and where no such valuation was done, a statement to that effect;
bzs) the existence and amounts of restrictions on the realisability of investment property or the remittance of income and
bzt)proceeds of disposal;
bzu)
bzv) material contractual obligations to purchase, construct or develop investment property or for repairs or enhancement to
bzw)the property; and
bzx) investment property pledged as security for liabilities.
bzy)
Inbzz)
the profit or loss section of the statement of profit or loss and other comprehensive income, the following amounts must be
caa)
disclosed:
cab) rental income;
cac)
cad) direct operating expenses applicable to investment property that generated rental income;
cae) direct operating expenses applicable to investment property that did not generate rental income; and
caf) the cumulative change in fair value that results when an investment property is sold from a portfolio where the cost model
cag)is used to a portfolio where the fair value model is used.
cah)
cai)
Where an entity adopts the fair value model, a reconciliation of the carrying amount of investment property at the beginning
caj)
and
cak)
end of the period is required, showing the following:
cal)additions resulting from acquisitions or from capitalised subsequent expenditure;
cam) additions resulting from acquisitions through business combinations;
can) disposals and assets classified as Prescribed Book
held for sale Chapter
in terms 17 paragraph
of IFRS 5; 7 (Continued) :
cao)
 net gains or losses from fair value adjustments;
Where
cap) a company adopts the cost model, the following information similar to that required
the net exchange differences arising on the translation of foreign entities;
caq)
in IAS 16, shall be disclosed:
car) transfers to and from inventories and owner-occupied property; and
 the depreciation methods;
cas) other movements.
 the useful lives or depreciation rates;
cat)
 the gross carrying amount and accumulated depreciation at the beginning and end of the period;
If,cau)
in exceptional circumstances, the entity is unable to establish a reliable fair value for an investment property, a separate
cav) a reconciliation
reconciliation of that of the carrying
investment amountcarrying
property’s of investment
amountproperty
shall beatprepared,
the beginning and end
in addition to disclosing the following:
 aofdescription
caw) the period,ofshowing:
the investment property;
cax) o additions resulting from acquisitions and from capitalised subsequent expenditure;
cay) an explanation why the fair value cannot be measured reliably;
caz) o depreciation;
if possible, the range of estimates of the fair value;
cba) and on the amount
o disposal of investment
of such impairmentproperty:
losses recognised or reversed;
cbb) o the net exchange differences arising
the fact that the asset that was not carried at from the translation
fair value was disposedof foreign
of; entities; and
cbc) o other movements.
 the carrying amount at time of sale; and
cbd)
cbe) the gain or loss recognised.
Over and above the disclosures required for investment property purchased by an owner or held in terms of a finance lease, the
cbf)
following additional disclosures are required for a property interest held under an operating lease and classified as an
cbg)
investment
cbh) property:
cbi)  whether, and in what circumstances, property interests held under operating leases are classified and accounted for as
cbj) investment property;
cbk)  when a valuation obtained for investment property is adjusted significantly in order to avoid double counting of assets
cbl) and liabilities already recognised separately, a reconciliation must be provided between the valuation obtained and
cbm) the adjusted valuation included in the financial statements, showing separately the aggregate amount of any
cbn)
recognised lease obligation that has been added to the valuation obtained to arrive at the fair value of the asset, as
well as any other significant adjustments.

The disclosure requirements in IAS 17 regarding operating or finance leases must also be met.
cbo)
cbp)
cbq)
cbr)
cbs)
cbt)
cbu)
cbv)
cbw)
cbx)
cby)
cbz)
cca)
ccb)
ccc)
ccd)
cce) An entity shall disclose:
 whether it applies the fair value model or the cost model.
 if it applies the fair value model, whether, and in what circumstances, property interests held under operating
leases are classified and accounted for as investment property.
 when classification is difficult, the criteria it uses to distinguish investment property from owner-occupied
property and from property held for sale in the ordinary course of business.
 the extent to which the fair value of investment property (as measured or disclosed in the annual financial
statements) is based on a valuation by an independent qualified valuer who holds a recognised and relevant
professional qualification and has recent experience in the location and category of the investment property
being valued. If there has been no such valuation, that fact shall be disclosed.
 the amounts recognised in profit or loss (statement of profit or loss and other comprehensive income) for:
o rental income from investment property;
o direct operating expenses (including repairs and maintenance) arising from investment property that
generated rental income during the period; and
o direct operating expenses (including repairs and maintenance) arising from investment property that
did not generate rental income during the period.
o the cumulative change in fair value recognized in profit/loss on a sale of investment property from a
pool of assets in which the cost model is used into a pool in which the fair value model is used.
 contractual obligations to purchase, construct or develop investment property or for repairs, maintenance or
enhancements.
ccf)
ccg) F AIR VALUE MODEL
cch) In addition to the disclosures required above, an entity that applies the fair value model shall disclose a
reconciliation between the carrying amounts of investment property at the beginning and end of the period,
showing the following:
a) additions, disclosing separately those additions resulting from acquisitions and those resulting from
subsequent expenditure recognised in the carrying amount of an asset;
b) additions resulting from acquisitions through business combinations (not applicable to this module);
c) net gains or losses from fair value adjustments;
d) other changes.
cci)
ccj) In the exceptional cases when an entity measures investment property using the cost model in IAS 16 Property,
plant and equipment (because of the lack of a reliable fair value), the reconciliation required above shall
disclose amounts relating to that investment property separately from amounts relating to other investment
property. In addition, an entity shall disclose:
 a description of the investment property;
 an explanation of why fair value cannot be determined reliably;
 if possible, the range of estimates within which fair value is highly likely to lie; and
 on disposal of investment property not carried at fair value:
o the fact that the entity has disposed of investment property not carried at fair value;
o the carrying amount of that investment property at the time of sale; and
o the amount of gain or loss recognised.

cck) C OST MODEL

ccl) In addition to the disclosures required for the fair value model and the cost model (as described above), an
entity that applies the cost model shall disclose:
 the depreciation methods used;
 the useful lives or the depreciation rates used;
 the gross carrying amount and the accumulated depreciation at the beginning and end of the period;
 a reconciliation of the carrying amount of investment property at the beginning and end of the period, showing
the following:
o additions, disclosing separately those additions resulting from acquisitions and those resulting from
subsequent expenditure recognised as an asset;
o depreciation;
 o the amount of impairment losses recognised, and the amount of impairment losses reversed, during
the period in accordance with IAS 36 Impairment of assets (Impairment is done in later studies);
o the net exchange differences arising on the translation of the annual financial statements into a
different presentation currency, and on translation of a foreign operation into the presentation currency
of the reporting entity (not applicable to this module);
o other changes; and

ccm)

ccn)

cco)

ccp)

ccq)

ccr)

ccs)

cct)

ccu)

ccv)

ccw)

ccx)

ccy)

ccz)

cda)

cdb)

cdc)

cdd)

cde)

cdf)

cdg)

cdh)

cdi)

cdj)

cdk)LEARNING UNIT 7
cdl) LEASES – IAS 17
cdm) For purposes of this module, however, we will only be looking at lessees.
cdn) The objective of IAS 17 is then to prescribe the accounting treatment in respect of finance leases and
operating leases:
 A lease is an agreement in which the lessor transfers the right of use of an asset for a predetermined period to
the lessee, in exchange for a series of payments.
 Indicators that lead to classification of a finance lease are provided.
 If these indicators are not applicable, it must be classified as an operating lease.
cdo)
 Prescribed Book Chapter 9 paragraph 1-3 :

cdp) Please note: For the purpose of this module all the implications of normal tax and capital gains tax can be
ignored.
cdq)
cdr) DEFINITIONS
cds)
cdt) Study par. 1 to 3 of the prescribed textbook
cdu)
cdv)
cdw)
Prescribed Book Chapter 9 paragraph 1-3 (Continued) :
cdx)
cdy)
3cdz)
Classification of leases and related definitions
cea)
ceb)
cec)
ced)
cee)
cef)
ceg)
ceh)
IAS 17 recognises a lease as an agreement conveying the right to use assets for an agreed period in exchange for a payment, or
cei) of payments, by the lessee to the lessor. There are two categories of leases, namely a finance lease and an operating lease.
series
cej)
cek)
cel)
cem)
cen)
ceo)
cep)
ceq)
cer)
ces)
cet)
ceu)
The inception of the lease is the earlier of the date of the lease agreement and the date of
cev)
commitment
cew) by parties to the principal provisions of the lease. At the inception date, the following are done:
 cex)The lease is classified as being either a finance or an operating lease.
 cey)In the case of a finance lease, the amounts to be recognised at the commencement of the lease term are determined.
cez)
The commencement of the lease term is the date from which the lessee is entitled to exercise its right to use the asset and is
cfa)
also
cfb)the date of initial recognition of the lease. The lease period is the period, which cannot be cancelled, during which the
lessee
cfc) agreed to lease the asset, as well as further periods for which the lessee has an option to continue to lease the asset, with or
without
cfd) further payments.
cfe)
cff)economic life of the asset thus refers to either the period over which an asset is expected to be economically usable by one or
The
cfg)users, or the number of production or similar units expected to be obtained from the asset by one or more users.
more
cfh)
cfi)
Useful life refers to the estimated period over which economic benefits will be consumed by the entity. This period is determined
cfj)
bycfk)
the lessee’s use of the asset for the period of the lease, or longer, depending on the conditions of the lease agreement.
cfl)
The most important differences between operating leases and finance leases are summarised as follows:
cfm)
cfn)
cfo)
cfp)
cfq)
cfr)
cfs)
cft)
cfu)
cfv)
cfw)
cfx)
cfy)
cfz)
cga)
cgb)
The following are examples of situations which would normally lead to a lease being classified as a finance lease:
cgc)
 cgd)The lease provides for the transfer of ownership of the asset to the lessee at the end of the lease term.
 cge)The lease contains an option for the lessee to purchase the leased asset at a price which is sufficiently lower than the fair
cgf)value of the leased asset at the date the purchase option becomes exercisable. At the inception of the lease, the exercising of
cgg)the option is therefore reasonably certain.
 cgh)The lease term is for the major part of the economic life of the leased asset, even if title is not transferred.
cgi)
 At the inception of the lease, the present value of the minimum lease payments amounts to (at least) substantially the fair
value of the leased asset.
 The leased assets are of such a specialised nature that only the lessee can use them without major modifications being made.
 cgj)
cgk)
cgl)
cgm)
cgn)
cgo)
cgp)
cgq)
cgr)
cgs)
cgt)
cgu)
cgv)
cgw)
cgx)
cgy)
cgz)
cha)
chb)
chc)
chd)
che)
chf)
chg)
chh)
chi)
chj)
chk)
chl)
chm)
chn)
cho)
chp)
chq)
chr)
chs)
cht)
chu)
chv)
chw)
chx)
chy)
chz)
cia)
cib)
cic)
cid)
cie)
cif)
cig) Prescribed Book Chapter 9 paragraph 1-3 (Continued) :
cih)
cii)
cij)
cik)
cil)
cim)
cin)
cio)
cip)
Inciq)
terms of IAS 17.7, risks include the possibilities of losses from idle capacity or technological obsolescence, as well as of
variations
cir) in return as a result of economic conditions. Rewards may be in the form of income generated by the asset and/or the
appreciation
cis) in value or realisation of residual value.
cit)
Because circumstances may differ between lessor and lessee, it is possible for a lease agreement to be classified as a finance lease
byciu)
one party and as an operating lease by the other.
civ)
ciw)
cix)
ciy)
ciz)
cja)
cjb)
cjc)
The
cjd)classification of a lease as an operating or a finance lease is made at the inception of the lease and is adhered to, even if
changes in estimates or changes in circumstances occur. However, if the parties agree to changes that would initially have
resulted in a different classification, the revised agreement is considered to be a new agreement. The initial agreement is
regarded as being cancelled, and a new agreement has been entered into.
cje)
cjf)
cjg)
cjh)
cji)
cjj)
cjk)
cjl)
cjm) Study these definitions:
cjn)
cjo) A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time.
cjp)
cjq) A finance lease is a lease that transfers substantially all risks and rewards incidental to ownership of an asset.
Title may or may not eventually be transferred.
cjr)
cjs) An operating lease is a lease where the lessee is hiring the use of an asset for the specified period, while
substantially all of the risks and rewards incidental to ownership of the asset remain with the lessor.
cjt)
cju) A non-cancellable lease is a lease that is cancellable only:
 upon the occurrence of some remote contingency;
 with the permission of the lessor;
 if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
 upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is
reasonably certain.
cjv)
cjw) The inception of the lease is the earlier of the date of the lease agreement or of a commitment by the
parties to the principal provisions of the lease. As at this date:
 a lease is classified as either an operating or a finance lease; and
 in the case of a finance lease, the amounts to be recognised at the commencement of the lease term are
determined.
cjx)
cjy) The commencement of the lease term is the date from which the lessee is entitled to exercise its right to
use the leased asset. It is the date of initial recognition of the lease (i.e. the recognition of the assets, liabilities,
income or expenses resulting from the lease, as appropriate).
cjz)
cka) The lease term is the non-cancellable period for which the lessee has contracted to lease the asset
together with any further terms for which the lessee has the option to continue to lease the asset, with or
without further payment, which option at the inception of the lease it is reasonably certain that the lessee will
exercise.
ckb)
ckc) Minimum lease payments are the payments over the lease term that the lessee is, or can be required, to
make excluding contingent rent, costs for services and taxes to be paid by and reimbursed to the lessor,
together with in the case of a lessee, any amounts guaranteed by the lessee or by a third party related to the
lessee.
ckd)
cke) However, if the lessee has an option to purchase the asset at a price which is expected to be sufficiently
lower than the fair value at the date the option becomes exercisable that, at the inception of the lease, is
reasonably certain to be exercised, the minimum lease payments comprise of the minimum payments payable
over the lease term and the payment required to exercise this purchase option.
ckf)
ckg) Fair value is the amount for which an asset could be exchanged or a liability settled, between
knowledgeable, willing parties in an arm's length transaction.
ckh)
cki) Economic life is either:
 the period over which an asset is expected to be economically usable by one or more users, or
 the number of production or similar units expected to be obtained from the asset by one or more users.
ckj)
ckk) Useful life is the estimated remaining period, from the beginning of the lease term, without limitation by
the lease term, over which the economic benefits embodied in the asset are expected to be consumed by the
enterprise.
ckl)
ckm) Guaranteed residual value is, in the case of the lessee, that part of the residual value which is
guaranteed by the lessee or by a party related to the lessee (the amount of the guarantee being the maximum
amount that could, in any event, become payable).
ckn)
cko) Unguaranteed residual value is that portion of the residual value of the leased asset, the realisation of
which by the lessor is not assured or is guaranteed solely by a party related to the lessor.
ckp)
ckq) The interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the
aggregate present value of the minimum lease payments and the unguaranteed residual value to be equal to
the fair value of the leased asset plus any initial direct costs.
ckr)
cks) The lessee's incremental borrowing rate of interest is the rate of interest the lessee would have to
pay on a similar lease, or, if that is not determinable, the rate that, at the inception of the lease, the lessee
would incur to borrow over a similar term, and with a similar security, the funds necessary to purchase the
asset.
ckt)
cku) Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a factor
other than just the passage of time (e.g. percentage of sales, amount of usage, price indices, market rates of
interest).
ckv)
ckw) Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a
lease, except for such costs incurred by manufacturer or dealer lessors. The definition of a lease includes
contracts for the hire of an asset which contain a provision giving the hirer an option to acquire title to the
asset upon the fulfilment of agreed conditions. These contracts are sometimes known as hire purchase
contracts.
ckx)
cky) Normally when an entity purchases an asset for use in its business, it acquires both the legal title to the
asset and the risks and rewards of ownership. The entity therefore raises an asset in the statement of financial
position and depending on how the purchase was financed, records a liability or reduces the cash resources of
the company.
ckz)
cla) The accounting implications are not so straight forward when the right to use an asset but not the legal title of
the asset is acquired. Lease agreements and instalment sale agreements (please refer to par. 6 of
prescribed textbook for explanation) often split the benefits of ownership from the legal title of an asset.
The problem then arises which party should be recording the asset in its statement of financial position.
clb)
clc) IAS 17 should be applied in accounting for all leases other than:
 lease agreements to explore for or use natural resources, such as oil, gas, timber, metals and other mineral
rights, and
 licensing agreements for such items as motion picture rights, video recordings, plays, manuscripts, patents and
copyrights.
cld)
cle) IAS 17 shall not be applied as the basis of measurement for:
 property held by lessees that is accounted for as investment property;
 investment property provided by lessors under operating leases;
 biological assets held by lessees under finance leases; or
 biological assets provided by lessors under operating leases.
clf)
clg) SCHEMATIC REPRESENTATION
clh) Study par. 2 of prescribed textbook concentrating only on the sections concerning the lessee.
cli)
clj) CLASSIFICATION OF LEASES AND RELATED DEFINITIONS
clk) Study par. 3 of prescribed textbook.
cll)
clm) Work thoroughly through Example 9.1 and 9.2. of prescribed textbook.
cln)
clo) Finance charges
clp) Lease payments should be apportioned between the finance charge and the reduction of the outstanding
liability. The finance charge should be allocated to periods during the lease term so as to produce a constant
periodic rate of interest on the remaining balance of the liability for each period.
clq)
clr) An amortisation table is prepared to calculate this split. The method used to calculate the apportionment is the
effective interest rate method.
cls) When calculating the interest, the following must be taken into account:
 The nominal interest rate is used to calculate the finance charges included in the lease payment, if the lease
payments are payable more than once a year.
 If the lease payments are payable annually, the nominal interest rate equals the effective interest rate.
 The effective interest rate is disclosed in the note in respect of liabilities relating to capitalised leased assets.
 The flat rate is the interest rate that is calculated every year of the repayment term, on the full original
outstanding capital amount before taking into account any interim repayments and added to the capital
amount, in order to determine the total amount to be repaid.
clt)
clu) In leasing transactions, it is often practice to quote a flat rate of interest per annum based
clv) on the cash price of the asset in question.

clw) The following details are relevant to the lease of a motor vehicle:
clx)
 cly)
clz)
cma) The following two examples illustrate the application of the effective interest rate method in the calculation
of the interest portion of the lease payment.
cmb)
cmc) Take note of the difference in calculating the interest if the payment is made in advance or in
arrears.
cmd)
cme) Depreciation Prescribed Book Chapter 9 paragraph 5 :
cmf) A finance lease gives rise to a depreciation expense for the asset as well as a finance expense for each
accounting
5 Finance leases inperiod. The depreciation
the financial statements policy for leased assets should be consistent with that for depreciable
of lessees
assets which are owned, and the depreciation recognised should be calculated on the basis set out in the
statement on property, plant and equipment. If there is no reasonable certainty that the lessee will obtain
ownership by the end of the lease term, the asset should be fully depreciated over the shorter of the
cmg) lease term or its useful life.
cmh)
cmi) The depreciable amount of a leased asset is allocated to each accounting period during the period of
expected use on a systematic basis consistent with the depreciation policy the lessee adopts for depreciable
assets that are owned. If there is reasonable certainty that the lessee will obtain ownership by the end of the
lease term, the period of expected use is the useful life of the asset; otherwise the asset is depreciated over
the shorter of the lease term or its useful life.
cmj)
cmk) Please note: The initial direct costs will be added to the cash price of the asset and will therefore be
The accounting
depreciated treatment
over theof finance leases as
same period represents
the cash anprice
application
of the of the accounting
asset The sum ofconcept of substanceexpense
the depreciation over form,
fori.e.the
the
leasedasset
asset and
is accounted for asexpense
the finance if the asset
forwere
the period is rarely the same as the lease payments payable for the period,
and on
acquired it is,
thetherefore,
signing of inappropriate
the finance lease simply to recognise
agreement, the lease payments
and a corresponding liability ispayable as an
recognised for expense in that
the amount the is being
statement of comprehensive income. Accordingly, the asset and the related liability are unlikely
financed. The legal form (a lease) would (for accounting purposes) be irrelevant in this decision. In capitalising the asset, to be equalwhat in is
amount after the inception of the lease.
thus being accounted for is the lessee’s rights to the asset, together with the lessee’s liability to make lease payments.
cml)
cmm) LAND AND BUILDINGS
5.1 Accounting treatment
cmn) Study par. 4 of prescribed textbook.
cmo) Work thoroughly through Example 9.3 of prescribed textbook.

cmp) Prescribed Book Chapter 9 paragraph 4 :

4cmq)
Land and buildings
Leases of land and buildings are classified as operating or finance leases by considering the factors discussed in section 3.
cmr)
However, land normally has an indefinite economic life, and title would generally not pass to the lessee, while buildings do not
have an unlimited economic life, and title may pass to the lessee. Consequently the land and building elements are considered
cms)
separately for the purposes of lease classification
cmt)
The minimum lease payments (including lump sum up-front payments) at the inception of the lease are allocated between the
land and the building elements in proportion to their relative fair values at the inception of the lease.
cmu)
Initial direct costs are the incremental costs that can be directly attributable to the arrangement and negotiations of a lease,
In
and, isolated
cmv)
instances,
if incurred directlysuch a reliable
by the lessee, proportionate
are added to theallocation of capitalised
cost of the fair value may not be
amount ofpossible.
the asset.If the value of the land element
is immaterial, the lease on land and buildings may be treated as a single unit that is classified according to the economic
Insubstance of the building
most instances element
the fair value of the
of the lease.
asset is the cash price as determined in the lease agreement. This is the amount that the
asset would be transferred for between knowledgeable and willing parties under normal trading conditions. IAS 17 uses the term
fair value in a way that differs in some respects from the definition of fair value in IFRS 13, Fair Value Measurement. Therefore,
when applying IAS 17 an entity measures fair value in accordance with IAS 17, not IFRS 13.

The capitalised value of the leased asset must be depreciated in accordance with IAS 16. If there is no certainty that the lessee
cmw)
will acquire ownership of the leased asset by the end of the lease term, the asset must be fully depreciated over the shorter of the
cmx)
lease term and its useful life, since the lessee will use the asset only for the period of the lease – refer to the definition of “useful
cmy) FINANCE LEASES IN THE ANNUAL FINANCIAL STATEMENTS OF LESSEES
life”
cmz)in section
Study3. The related
par. leaseprescribed
5 of the liability is initially recognised as an amount equivalent to that of the capitalised value of the
textbook.
leased
cna) asset.
cnb)
Three
cnc)aspects are therefore crucial when determining the amount at which the asset must be capitalised:
 the lease term and commencement date;
 the minimum lease payments; and
 the interest rate.
 Prescribed Book Chapter 9 paragraph 5 (Continued) :

5.1.1 Lease term and commencement of the lease

cnd)
cne)
cnf)
cng)
cnh)
cni)
cnj)
Acnk)
non-cancellable lease is a lease that is cancellable only:
cnl)upon the occurrence of some remote contingency;
cnm) with the permission of the lessor;
cnn) if the lessee enters into a new lease for the same or an equivalent asset with the same lessor; or
cno) upon payment by the lessee of an additional amount such that, at inception, continuation of the lease is reasonably certain.
cnp)
cnq)
cnr)
cns)
cnt)
cnu)
5.1.2
cnv)Minimum lease payments
cnw)
cnx)
cny)
cnz)
coa)
Where
cob) the lease agreement makes provision for a “bargain purchase option”, that is, an option to purchase the asset at a price
which
coc) is expected to be sufficiently lower than the fair value at the date the option becomes exercisable so that, at the inception
ofcod)
the lease it is reasonably certain that the option will be exercised, the amount of the bargain purchase option also forms part
ofcoe)
the minimum lease payments. Minimum lease payments exclude contingent rent, cost for services and taxes to be paid by the
cof) or reimbursed to him.
lessor
cog)
coh)
These
coi) items are reflected separately in the statement of profit or loss and other comprehensive income according to their nature.
coj)
Contingent
cok) rent is the portion of the lease payment that is not fixed in amount, but is based on the future amount of something
(such
col) as sales or future market interest rates) that changes other than with the passage of time.
The
com) guaranteed residual value is merely a deferred lease payment which is payable together with the final “normal” payment,
con)
thus the accounting treatment is the same as for a lease payment. A guaranteed residual value will cause the “normal” lease
coo)
payments to be less, resulting in the finance charges over the lease term being higher, since payment of a part of the liability is
cop) These residual value/”balloon payment” finance leases are well known in practice. Certain lessors of motor vehicles will
deferred.
coq)
even accept a residual value of up to 60%. The theory is that the residual value will be equal to (or less than) the estimated
cor)
market
cos) value of the asset at the end of the lease term. This will enable the lessee or the lessor to sell the asset for that amount,
(i.e.
cot) recover the residual value), and settle the balance of the liability using these proceeds.
cou)
5.1.3
cov)Interest rate
cow)
cox)
coy)
coz)
cpa)
cpb)
cpc)
cpd)
cpe)
Whenever it is impracticable to determine this rate, the lessee’s incremental borrowing rate of interest is used. This is the rate
atcpf)
which the lessee could borrow the required funds to purchase the asset at the commencement of the lease if the same term and
cpg)
similar securities are assumed, or the rate of interest that the lessee would have to pay on a similar lease.
cph)
cpi)
cpj)
cpk)
cpl)
cpm)
cpn)
cpo)
cpp)
The
cpq)
allocation of the instalment between the capital and interest components is made using a discount factor, which is used in
the
cpr) determination of the capitalised value of the asset (the “effective interest rate method”).
cps)
cpt)
cpu)
cpv)
cpw)
cpx)
 cpy)
cpz)
cqa)
cqb)
cqc)
cqd)
cqe)
cqf)
cqg)
cqh)
cqi)
cqj)
cqk)
cql)
cqm)
cqn)
cqo)
cqp)
cqq)
cqr)
cqs)
cqt)
cqu)
cqv)
cqw)
cqx)
cqy)
cqz)
cra)
crb)
crc)
crd)
cre)
crf)
crg)
crh)
cri)
crj)
crk)
crl)
crm)
crn)
cro)
crp)
crq)
crr)
crs)
crt)
cru)
crv)
crw)
crx)
cry) Prescribed Book Chapter 9 paragraph 5 (Continued) :
crz)
The
csa) cost of lease financing must be reflected in the statement of profit or loss and other comprehensive income in the accounting
csb) in which the lease financing is used.
period
csc)
Contingent rents shall be charged as expenses in the period they are incurred and do not impact on finance costs and other
csd) and taxes paid as part of the lease payments.
services
cse)
csf)
Finance
csg) lease instalments need not necessarily be equal and the instalments may vary annually. A company may negotiate
variable
csh) finance lease instalments for cash flow reasons. For instance, if an entity is experiencing cash flow problems, it would
initially
csi) prefer to pay lower finance lease instalments and pay higher instalments in the future when the cash flow of the
company
csj) has improved.
csk)
csl)
5.2 Initial direct costs
csm)
csn)
cso)
csp)
csq)
csr)
For
css)instance, the lessee sends the draft lease agreement to his legal adviser to ensure that the contract is properly drawn up. The
legal adviser charges the lessee R1 000, which constitutes initial direct costs. For accounting purposes, this amount will be
capitalised against the asset.
 cst)
csu)
csv)
csw) An asset and a liability are recognized in the Statement of Financial Position and subsequent payments are
apportioned between finance costs and capital.
csx)
csy) ACCOUNTING TREATMENT
csz)The amount at which the leased asset is capitalized is the lowest of:
 the fair value of the asset at the inception of the lease term; or
 the present value of the minimum Prescribed Book Chapter
lease payments 9 paragraph
at the same date 15 :
cta)
15 Use of
ctb)It isaimportant
calculator before working through the examples that you first study par 15 of chapter 9
concerning
The following theillustrate
examples use of pocket
the basiccalculators.
operation of a financial calculator for the purposes of lease calculations. Solutions are
ctc)
calculated using one of the following calculators:
ctd)
_ Hewlett Packard 10B II;
cte)
_ Sharp
ctf)
EL-733A;
_ Sharp
ctg) EL-738.
cth)
cti)
ctj)
ctk)
ctl)
ctm)
ctn)
cto)
ctp)
ctq)
ctr)
cts)
ctt)
ctu)
ctv)
ctw)
ctx)
cty)
ctz)
cua)
cub)
cuc)
cud)
cue)
cuf)
cug)
cuh)
cui)
cuj)
cuk)
cul)
cum)
cun)
cuo)
cup)
cuq)
cur)
cus)
cut)
cuu)
cuv)
cuw)
cux)
cuy)
cuz)
cva)
cvb)
cvc)
cvd)
cve)
cvf)
cvg)
cvh)
cvi)
cvj)
cvk)
cvl)
cvm)
cvn)
cvo)
cvp)
cvq) Prescribed Book Chapter 9 paragraph 15 (Continued) :
cvr)
cvs)
cvt)
cvu)
cvv)
cvw)
cvx)
cvy)
cvz)
cwa)
cwb)
cwc)
cwd)
cwe)
cwf)
cwg)
cwh)
cwi)
cwj)
cwk)
cwl)
cwm)
cwn)
cwo)
cwp)
cwq)
cwr)
cws)
cwt)
cwu)
cwv)
cww)
cwx)
cwy)
cwz)
cxa)
cxb)
cxc)
cxd)
cxe)
cxf)
cxg)
cxh)
cxi)
cxj)
cxk)
cxl)
cxm)
cxn)
cxo)
cxp)
cxq)
cxr)
cxs)
cxt)
cxu)
cxv)
cxw)
cxx)
cxy)
cxz)
cya)
cyb)
cyc)
cyd)
cye)
cyf)
cyg)
cyh)
cyi)
cyj)
cyk)
cyl)
cym)
cyn)
cyo)
cyp)
cyq)
cyr)
cys) Prescribed Book Chapter 9 paragraph 15 (Continued) :
cyt)
cyu)
cyv)
cyw)
cyx)
cyy)
cyz)
cza)
czb)
czc)
czd)
cze)
czf)
czg)
czh)
czi)
czj)
czk)
czl)
czm)
czn)
czo)
czp)
czq)
czr)
czs)
czt)
czu)
czv)
czw)
czx)
czy)
czz)
daa)
dab)
dac)
dad)
dae)
daf)
dag)
dah)
dai)
daj)
dak)
dal)
dam)
dan)
dao)
dap)
daq)
dar)
das)
dat)
dau)
dav)
daw)
dax)
day)
daz)
 dba)
dbb)
dbc)
dbd)
dbe)
dbf)
dbg)
dbh)
dbi)
dbj)
dbk)
dbl)
dbm)
dbn)
dbo)
dbp)
dbq)
dbr)
dbs)
dbt)
dbu)
dbv)
dbw)
dbx)
dby)
dbz)
dca)
dcb)
dcc)
dcd)
dce) Note that reference is made to three different pocket calculators that can be used.
dcf)
dcg) Work thoroughly through Examples 9.4, 9.5 and 9.6 of prescribed textbook.
dch)
dci) INITIAL DIRECT COSTS
dcj) Any costs incurred by the lessee to secure the lease agreement, needs to be added to the amount recognized
as an asset in terms of the finance lease.
dck) Work thoroughly through Example 9.7 of the prescribed textbook.
dcl)
dcm) INSTALMENT SALE AGREEMENTS: THE PURCHASERS PERSPECTIVE
dcn) Study par.6 of prescribed textbook.
dco)
dcp) Prescribed Book Chapter 9 paragraph 6 :
dcq)
dcr)
6 dcs)
Instalment sale agreements: The purchaser’s perspective
dct)
dcu)
dcv)
dcw)
dcx)
dcy)
dcz) Prescribed Book Chapter 9 paragraph 7 :
dda)
7ddb)
Disclosure: The lessee (finance leases) and the buyer (instalment sale agreements)
ddc)
The following disclosure requirements apply to finance leases in terms of IAS 17.31:
ddd)
dde)for each class of asset, the net carrying amount at the end of the reporting period;
ddf)a reconciliation between the total future minimum lease payments at the end of the reporting period and their present
The accounting
ddg)value; treatment for instalment sales is similar to that for finance leases.
ddh) Alsoofknown
the total as hire purchase
future minimum contracts,
lease payments whereby
at the the
end of the ownership
reporting of an
period, asset
and theirispresent
transferred
value, by
for the
eachseller
of theto
the purchaser
following periods:on payment of the last instalment, but a maximum repayment period is specified.
ddi)The accounting treatment is similar as that for finance leases.
ddj)not later than one year;
ddk)later Work
than one year but notthrough
thoroughly later thanExample
five years; 9.8
and of the prescribed textbook.
ddl)later than five years;
ddm) DISCLOSURE:
contingent THE LESSEE
rents recognised (FINANCE
as an expense inLEASES) AND THE BUYER (INSTALMENT SALE AGREEMENT)
the period;
ddn) Study
the total par. minimum
of future 7 of prescribed textbook.
sublease payments expected to be received under non-cancellable subleases at the end of the
ddo)
reporting period;
ddp)
a general description of the lessee’s significant leasing arrangements including, but not limited to, the following:
ddq)
the basis on which contingent rent payments are determined;
ddr)
 the existence and terms of renewal or purchase options and escalation clauses; and
 restrictions imposed by lease arrangements; such as those concerning dividends, additional debt and further leasing.
Furthermore, the disclosure requirements in IAS 16; IAS 36; IAS 38 and IAS 40 for the respective classes of assets must also be
observed.
 dds)
ddt)
ddu)
ddv)
ddw)
ddx)
ddy)
ddz)
dea)
deb)
dec)
ded)
dee)
def)
deg)
deh)
dei)
dej) Prescribed Book Chapter 9 paragraph 12 :
dek)
12 Operating leases in the financial statements of lessees
del)
dem) Work thoroughly through Example 9.9 of prescribed textbook.
12.1
den)Accounting treatment
RESIDUAL VALUES
deo) Study par 10 of prescribed textbook.
dep)
deq) Prescribed Book Chapter 9 paragraph 10 :
der)
10des)
Residual values
det)
deu)
dev)
dew)
Index)
Circular 12/2006, it is stated that some South African companies erroneously assumed that accounting for rental expenses
The unguaranteed residual value can be compared to the residual value in the case of determining the depreciable amount of an
and income on the basis of cash flows related to the lease agreement represented “another systematic basis” that was “more
dey)
asset: it is the estimated selling price of the asset at the end of its useful life. In other words, the unguaranteed residual value is
representative
dez) of the time pattern of the user’s benefit”. These cash flows were therefore considered to be an appropriate basis
the return
dfa)Two the lessor
types expects to recoverareatthe
the end of the lease term if he sells the asset, either to the current lessee or to a third
for recognition asofitresidual values
was considered that identified:
increased cash flows were in
party. The
a) with important
Guaranteed: aspect to
same asfrom remember
a last is that the lessor has no guarantee that the amount will be received – it is merely an
line increased benefits thelease
use ofpayment
the leased asset. For this reason, many companies chose a method other than the
estimate.
b) Unguaranteed:
straight-line method toestimated
account forselling price oforasset
lease income at end
expenses. of its
As the useful
focus life
of IAS 17 is on the time pattern of benefits, cash
dfb)
flows are rarely an appropriate basis for recognising lease payments and receipts.
dfc) Work thoroughly through Example 9.14 and 9.15 of the prescribed textbook (Focus on the
accounting treatment in the records of the lessee)
Where
dfd) the straight-line basis is used and cash flows are not equal, the difference between the cash flows and the expense in the
statement of profitLEASES
dfe) OPERATING or loss and other
IN THE comprehensive
ANNUAL income
FINANCIAL will end upOFinLESSEES
STATEMENTS the statement of financial position as an accrued or
prepaid
dff) expense.
Study par. 12 of the prescribed textbook.
dfg)
This
dfh) could arise where:
dfi)the lease payments are not spread evenly over the lease term;
dfj)the lessee is required to make payments prior to bringing the leased asset into use (upfront payments);
dfk)
dfl)the lease shows the following characteristics:
dfm) o it involves an initial term which is significantly less than the period over which benefit is to be derived from the
dfn) leased asset; and
dfo) o there is an option to renew the lease at lease payments which are either significantly less or more than the
dfp) payments during the initial lease term; and
dfq) o renewal of the lease is reasonably assured.
dfr)
dfs)
As far as the straight-line accounting treatment is concerned, it must be borne in mind that a normal accounting average is used,
dft)
i.e.
dfu)lease payments are not discounted to reflect the time value of money.
Ifdfv)
the cash amount paid exceeds the equalised amount, we propose that the item be included in current assets in the statement of
financial
dfw) position, where it must be described as “prepaid lease payments”. If the cash amount paid is exceeded by the equalised
dfx) it is proposed that it be included under current liabilities and described as “accrued lease expense”.
expense,
dfy)
dfz)
dga)
dgb)
dgc)
dgd)
dge)
dgf)
dgg)
dgh)
dgi)
dgj)
Although IAS 17 does not specifically address initial direct costs, it appears logical to expense these amounts immediately, as
operating lease payments are expensed by a lessee.
 dgk)
dgl)
dgm)
dgn)
dgo)
dgp)
dgq)
dgr)
dgs)
dgt)
dgu)
dgv)
dgw)
dgx)
dgy)
dgz)
dha)
dhb)
dhc)
dhd)
dhe)
dhf)
dhg)
dhh)
dhi)
dhj)
dhk)
dhl)
dhm)
dhn)
dho)
Prescribed Book Chapter 9 paragraph 12 (Continued) :
dhp)
12.2
dhq)Disclosure
In terms of IAS 17.35, the following shall be disclosed in addition to the disclosure requirements of IFRS 7:
dhr)
dhs)the total of future minimum lease payments under non-cancellable operating leases for each of the following periods:
dht) o not later than one year;
dhu) o later than one year but not later than five years; and
dhv)
dhw) o later than five years;
dhx)the total of future minimum sublease payments expected to be received under non-cancellable subleases at the end of the
dhy)reporting period;
dhz)lease and sublease payments recognised as an expense for the period, with separate amounts for minimum lease payments,
dia)contingent rents and sublease payments;
dib)a general description of the lessee’s significant leasing arrangements including, but not limited to, the following:
dic)
did) o the basis on which contingent rent payments are determined;
die) o the existence and terms of renewal or purchase options and escalation clauses; and
dif) o restrictions imposed by lease arrangements; such as those concerning dividends, additional debt and further
dig) leasing.
dih) ACCOUNTING TREATMENT
dii) A lease expense is recognized in the accounting records of the lessee and a lease income in the accounting
records of the lessor on a straight-line basis, unless another method can more accurately reflect the pattern of
the benefit expected from the leased asset.
dij) Work thoroughly through Examples 9.17, 9.18 and 9.19 of the prescribed textbook
dik)
dil) DISCLOSURE
dim) Lessees should make the following disclosures for finance leases:
 For each class of asset, the net carrying amount at the statement of financial position date.
 A reconciliation between the total of future minimum lease payments at the end of the reporting period and
their present value. In addition, an entity should disclose the total of future minimum lease payments at the
end of the reporting period, and their present value, for each of the following periods:
o Not later than one year.
o Later than one year and not later than five years.
o Later than five years.
 Contingent rents recognised as an expense for the period.
 The total of future minimum sublease payments expected to be received under noncancellable subleases at
the statement of financial position date.
 A general description of the lessee's significant leasing arrangement including, but not limited to, the following:
o The basis on which contingent rent payments are determined.
o The existence and terms of renewal or purchase options and escalation clauses.
o Restrictions imposed by lease arrangements, such as those concerning dividends, additional debt, and
further leasing.
din)
dio)In addition, the disclosure requirements of the standard on Property, Plant and Equipment IAS 16 and
Investment Property IAS 40 apply to finance lease assets.
dip)
diq) OPERATING LEASES IN THE ANNUAL FINANCIAL STATEMENTS OF LESSEES
dir) An operating lease is a lease whereby the risks and rewards of ownership are not transferred to the lessee but
stays with the lessor. To determine whether or not a lease constitutes an operating lease, one has to subject a
specific lease to the classification criteria set out in section 7.3. Only if it is evident that none of the criteria or
set of conditions mentioned above are applicable to the specific lease agreement, can it be
dis) classified as an operating lease.
dit)
diu)The liability of the lessee is limited to the lease payment. The lease payments and initial direct costs (e.g. legal
fees and commission) under an operating lease should be recognised as an expense in the statement of
comprehensive income on a straight-line basis over the lease term unless another systematic basis is
representative of the time pattern of the user's benefit. This is normally achieved by charging lease payments,
as they occur. If lease payments are not directly related to the period over which the benefit is
div) derived, the lease payments need to be deferred or provision must be made for future lease payments.
diw)
dix) The following conditions may require lease payments to be deferred or provision made for future payments in
order to relate the charge of the lease payments against income to the benefits derived:
 lease payments not spread equally over the lease term;
 lease payments made prior to bringing the leased asset into use;
 the initial term of the lease is significantly less than the period over which benefit is to be derived and the
lease is likely to be renewed at lease payments significantly less or more than the initial lease payments.
diy)
diz) Work thoroughly through Example 9.20 of the prescribed textbook.
dja)
djb) USE OF A CALCULATOR Prescribed Book Chapter 18 paragraph1 & 2:
1djc)
Background
djd) Study par 15 of prescribed textbook thoroughly.
Global
dje)Notefinancial markets
the three worldwide
different typeshave in recent
of pocket times changed
calculators thatdramatically and even now
are available.
experience rapid change. A range of larger and more sophisticated financial instruments, used by all types of business entities,
exists. The wide use of these instruments is facilitated
by enhanced information technology.
Banks and other financial institutions are no longer the sole participants in active trading of financial instruments. Businesses
are forced more and more to compete in international market places, not only in respect of their primary operating activities,
but also in terms of their capital financing, investment and risk management activities. Consequently, a large number of
corporations
djf) are forming treasury divisions whose primary responsibility is the management of these activities.
The successful management of financial risks in a global environment has become a highly
dynamic activity, requiring careful and continuous monitoring. An entity can substantially
djg) LEARNING UNIT 8
change its financial risk profile virtually instantaneously, by entering into certain financial
djh) FINANCIAL INSTRUMENTS – IFRS 7, 9 & IAS 32
arrangements.
The potential for large losses resulting from the use of financial instruments has been well demonstrated in the highly
publicised financial disasters of some prominent organisations.
These disasters
dji) The have
syllabus ofheightened public concern only
FAC2601 encompasses aboutthe
accounting and disclosure,
basic elements as wellinstruments
of financial as as indicated in this
management
learningcontrols
unit. You over
willfinancial instruments.
be examined on these principles only.
Trading
djj) in financial instruments can broadly be divided in two categories, namely exchange
trading, and
djk) BACKGROUND over-the-counter
AND CURRENT (OTC) ACCOUNTING
trading. POSITION
Exchange
djl) Study trading
par 1 refers
and 2toof thethe
trading of instruments
prescribed that are listed on a formal exchange, such as the South African Futures
textbook
djm)
Exchange (SAFEX). These instruments are usually standardised in respect of transaction values, maturity dates and other
djn)
contracted terms.
djo)
By contrast, transactions taking place in instruments that are not listed on an exchange are highly customised in accordance
djp)
with the individual’s needs. These transactions are typically concluded with banks and are referred to as over-the-counter
djq)
trading,
djr) or OTC trading. As there is no single institution guaranteeing the settlement of transactions in the over-counter-
market,
djs) the credit risk of such transactions is significantly higher than in exchange-traded markets.
djt)
2dju)
Accounting standards
2.1 Applicable accounting standards
djv)
djw) accounting standards govern the accounting treatment and disclosure in respect of
Three
djx)
financial instruments, namely IAS 32, IFRS 7 and IFRS 9.
djy)IAS 32 addresses the classification of financial instruments as assets, liabilities or equity and the classification of the
djz)
dka)related interest, dividends, gains and losses (thus presentation).
dkb)IFRS 7 deals only with disclosures of financial instruments.
dkc)IFRS 9 addresses the classification, measurement and impairment methodology of financial instruments. IFRS 9 also
dkd)addresses hedge accounting but hedge accounting falls outside the scope of this chapter.
dke)
dkf)
dkg)
dkh)
 dki)
dkj)
dkk)
dkl)
dkm)
dkn) Prescribed Book Chapter 18 paragraph1 & 2 (Continued):
dko)
dkp)
2.2 Scope exclusions
dkq)
All
dkr) standards should be applied by all entities to all financial instruments except for:
three
interests
dks) in subsidiaries, associates and jointly controlled entities that are consolidated or equity accounted;
rights and obligations under leases in terms of IAS 17, except with regard to:
 dkt)
lease receivables (in the lessor’s financial statements) that are subject to impairment provisions of IFRS 9;
 dku)
dkv)
 lease payables and receivables that are subject to derecognition provisions of IFRS 9; and
dkw)
derivatives that are embedded in leases;*
 dkx)
employers’ rights and obligations under employee benefit plans in terms of IAS 19; and
 dky)
equity instruments that are classified as shareholders’ equity by the issuer in terms of IAS 32.*
 dkz)
dla) * In the scope of IAS 32 and IFRS 7 but excluded from the scope of IFRS 9.
dlb)
dlc)
2.3 Structure of chapter
dld)
Financial instruments are discussed in this chapter in the following sequence:
dle)
dlf)
dlg)
dlh)
dli)
dlj)
dlk)
dll)
dlm)
dln)
dlo)
dlp)
dlq)
dlr)
dls)
dlt)
dlu)
dlv)
dlw)
dlx)
dly)
dlz)
dma)
dmb)
dmc)
dmd)
dme)
dmf)
dmg)
dmh)
dmi)
dmj)
dmk)
dml)
dmm)
dmn)
dmo)
dmp)
dmq)
dmr)
dms)
dmt)
dmu)
dmv)
dmw)
dmx)
dmy)
dmz)
dna)
dnb)
dnc)
 dnd)
dne)
dnf)
dng)
dnh)
dni)
dnj)
dnk)
dnl)
dnm)
dnn)
dno)
dnp)
dnq)
dnr)
dns)
dnt)
dnu)
dnv)
dnw)
dnx) Financial markets use a variety of financial instruments ranging from traditional primary instruments (ie
debtors, creditors, equity) to derivative instruments (ie financial options, futures and forwards, interest rate
swaps and currency swaps).
dny)
dnz) The standards IFRS 9, IAS 32, IAS 39 (relevant sections) and IFRS 7 deal with the disclosure, presentation,
recognition and measurement of financial instruments. IFRS 9 was issued in November 2009 and replaces
certain sections of IAS 39. IFRS 9 currently does not deal with impairment of financial assets and hedge
accounting which is still included in IAS 39.
doa)
dob) The objective of IAS 32 Financial Instruments: Presentation is to establish principles for presenting financial
instruments as liabilities or equity and for offsetting financial assets and financial liabilities.
doc)
dod) IAS 32 prescribes requirements for:
 presentation of financial instruments as liabilities or equity
 offsetting financial assets and liabilities
 classification of financial instruments into financial assets, financial liabilities and equity instruments;
 classification of related interest, dividends, losses and gains; and
 circumstances in which financial assets and financial liabilities should be offset.
doe)
dof)The objective of IFRS 7 is to require entities to provide disclosures in their annual financial statements that
enable users to evaluate:
 the significance of financial instruments for the entity's financial position and performance; and
 the nature and extent of risks arising from financial
Prescribed instruments
Book Chapter to which3:the entity is exposed during the
18 paragraph
period and at the reporting date, and how the entity manages those risks.
3dog)
Definitions related to the background of financial instruments
doh) The objective of IFRS 9 is to establish principles for the financial reporting of financial assets and financial
3.1 Terminology
liabilities that will present relevant and useful information to users of annual financial statements for their
An understanding
assessment of of the
thefollowing
amounts, types of instruments
timing and related
and uncertainty of theterms is necessary
entity’s before
future cash the definitions in the accounting
flows.
standards
doi) are explored:
doj)Large parts of IAS 39 will no longer be relevant as a result of the issue of IFRS 9. IFRS 9 will eventually replace
Types IASof 39
financial instruments:
in total. Impairment and hedge accounting are still dealt with in IAS 39 (not dealt with in this module).
Bond/Debenture:
dok)
A certificate of debt issued by the government or a company in order to raise funds. It carries a fixed rate of interest and is
repayable with or without security at a specified future date (maturity date). Bonds can be listed. In South Africa listed bonds
are traded on the Bond Exchange of South Africa (BESA).

Clearing house:
A characteristic of most exchanges is the existence of a clearing house, which provides clearing and settlement facilities to
participants in the market. All contracts on the exchange are guaranteed by the clearing house, resulting in a low risk of default
dol) DEFINITIONS
(credit risk) on a transaction. Fees are levied from participants for each transaction cleared by the clearing house.
dom) Study par 3 of the prescribed textbook
Loan:
don)
doo)
A grant of the temporary use of a sum of money on condition that the principal amount will be repaid with interest. The issuer
dop)
of the loan might require security.
doq)
dor)
Ordinary
dos) share:
Adot)
share that receives dividends after the dividends on preference shares are paid out. In the event of liquidation of the company,
ordinary
dou) shareholders receive their claim on the assets after the preference shareholders have been paid. It also entitles the
dov) to vote at all meetings of members. Ordinary shares carry the highest risk of ownership but also have the potential for
holder
dow)
the highest return.
 dox)
doy)
doz) Prescribed Book Chapter 18 paragraph 3 (Continued):
dpa)
dpb)
dpc)
Share/Equity:
Adpd)
proportionate claim against the capital and reserves (i.e. the net assets) of a company. It entitles the holder to receive
dpe)
dividends.
dpf) The terms and conditions associated with the share are generally contained within the company's articles of
association.
dpg) In the past the holder received a physical paper share certificate that indicated the number of shares held. Today,
electronic
dph) records of ownership are held. The term equity is also used to refer to shares as it means "ownership". Shares can be
listed
dpi) or unlisted instruments. In South Africa, listed shares are traded on the Johannesburg Stock Exchange (JSE Ltd.). Visit the
JSE
dpj) on www.jse.co.za.
dpk)
dpl)
Preference share:
Adpm)
share that receives dividends before dividends on ordinary shares are paid out. In the event of liquidation of the company,
dpn)
preference shareholders receive their claim on the assets before the ordinary shareholders receive their share. There are many
dpo)
types
dpp)of preference shares: cumulative, for which undeclared dividends for a particular year accumulate to the following year;
non-cumulative,
dpq) for which undeclared dividends are not accumulated and therefore lost; participating, which give the holder
fixed
dpr)dividends plus extra earnings based on certain conditions; convertible, which can be exchanged for a number of ordinary
shares
dps) based on certain conditions; redeemable, for which the capital is repayable to the shareholder at a specified time; and
non-redeemable,
dpt) for which the capital is only repayable on liquidation (also referred to as a "perpetual preference share").
dpu)
dpv) terms:
Related
dpw)
Corporate actions:
dpx)
An event initiated by a public company that affects the instruments (equity or debt) issued by the company, for example,
dpy)
dividend
dpz) declarations (shares), coupon payments (bonds), share splits, and mergers and acquisitions. Corporate actions are
typically
dqa) agreed upon by a company's board of directors and authorised by the shareholders.
dqb)
Cum
dqc)dividend (or cum div)/ex dividend (ex div):
When
dqd)a share is said to be “cum dividend”, it means that it is offered for sale with an entitlement to the next dividend payment.
dqe)if the shares are held on the last day to register (LDR) then the holder is entitled to receive a dividend, but if the shares are
Thus,
dqf)
sold after the declaration date but before the LDR, the new holder will be entitled to the dividend. The new holder will acquire
dqg)
the shares cum div. After the LDR, the shares will be offered for sale “ex dividend” (or ex div).
dqh)
dqi)
Cum
dqj)interest/ex interest:
Adqk)
bond will trade “cum interest” if the trade settlement date occurs before the LDR and before the next coupon payment date
(i.e.
dql) the buyer will receive the next coupon payment). It means that the all-in price paid by the buyer for the bond will equal the
clean
dqm) price plus the accrued interest between the previous coupon payment date and the trade settlement date. The purpose is
dqn)
to compensate the seller for the interest accrued before the trade settlement date that will be received by the buyer as part of
dqo)
the next coupon payment. A bond will trade “ex interest”, if the trade settlement date occurs after the LDR but before the next
dqp) payment date (i.e. the seller will receive the next coupon payment). It means that the all-in price paid by the buyer for
coupon
dqq)
the bond will equal the clean price minus the accrued interest between the trade settlement date and the next coupon payment
dqr)
date.
dqs)The purpose is to compensate the buyer for the interest accrued after the trade settlement date that will be received by the
seller
dqt) as part of the next coupon payment.
dqu)
Dividends:
dqv)
Adqw)
proportion of the profits of the company paid out to the shareholders. The amount to be distributed is determined by the
dqx) of directors and authorised by the shareholders.
board
dqy)
dqz)
Holder:
dra)
The party that holds an instrument. It would imply that the party either subscribed or purchased the instrument.
drb)
drc)
Interest:
drd)
The
dre) amount paid over and above the principal as compensation for the use of the sum of money over a period of time. It
compensates
drf) for the decrease in the time value of money of the principal amount over the period the money is used, as well as
the
drg) risk that the outstanding amount might not be repaid (credit risk). It is typically expressed as an annual percentage of the
drh)
principal amount. There are two types of interest rates, not defined in IFRS, relevant to this chapter: coupon, the interest rate
dri)
stipulated in an instrument (for example a bond) and can be either a fixed or a variable rate; and market, the interest rate that
drj) participants require from an instrument given its remaining life and its risk. In an arms-length transaction, the coupon
market
drk)
interest rate will equal the market interest rate when the instrument is first issued. After that, the market interest rate might
drl)
change
drm) as the view that market participants have of the instrument changes.
drn)
Issuer/Writer:
dro)
The
drp) party that gave or issued an instrument.
drq)
drr)
Principal/capital/nominal/face value:
The amount borrowed under a loan, bond or debenture, excluding interest. The principal amount of a bond is called its “face
value”.
 drs)
drt)
dru)
drv)
drw)
drx)
dry)
drz)
dsa)
dsb)
dsc)
dsd)
dse)
dsf)
dsg)
dsh)
dsi)
dsj)
dsk) Prescribed Book Chapter 18 paragraph 3 (Continued):
dsl)
Last
dsm) date to register (LDR):
The
dsn) date on which the holder of a share or bond is designated to receive a dividend or a coupon payment. For bonds this date is
also
dso)known as the “book-closed” date. Registration as the new owner in the register takes place on the settlement date of the
dsp) transaction.
trade
dsq)
dsr)
3.2 Financial asset (IAS 32.11)
dss)
A financial asset is:
dst)
dsu) cash (for example a deposit at a bank);
dsv)any equity instrument of another entity (for example investment in shares of another entity);
dsw) a contractual right to receive cash (for example a receivable (debtor) and loans (receivables)) or another financial asset
dsx) from another entity; or
dsy)a contract that will or may be settled in the entity’s own equity instruments, that fall outside the scope of this chapter.
dsz)
Physical
dta)
assets such as inventories, and intangible assets such as patents, are not financial assets. Although these assets create
opportunities
dtb) to generate cash inflows (future economic benefits – refer to the Conceptual Framework for Financial Reporting),
they
dtc)do not give rise to a contractual right to receive cash or other financial assets. Using the same principle, prepaid
expenses
dtd) will clearly not be financial assets as they do not give rise to a contractual right to receive cash or other financial
assets,
dte) but rather the benefits for which the advance payment was made.
dtf)
dtg)
3.3 Financial liability (IAS 32.11)
Adth)
financial liability is a contractual obligation to:
dti)deliver cash (for example creditors and loans payable) or another financial asset (for example loan repayable in
dtj)
dtk)government stocks) to another entity;
dtl)exchange financial instruments with another entity under conditions that are potentially unfavourable; or
dtm) a contract that will or may be settled in the entity’s own equity instruments, which fall outside the scope of this chapter.
dtn)
Liabilities imposed by statutory requirements such as income taxes do not represent financial liabilities, since such liabilities
dto)
are not contractual in nature.
dtp)
dtq)
3.4
dtr)
Equity instrument (IAS 32.11)
An
dts)equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its
liabilities
dtt) (it is thus a residual interest in the net assets). Note that the contract in terms of which the reporting entity has to
issue
dtu)a fixed number of equity instruments in exchange for a fixed amount of cash is also an equity instrument.
dtv)
dtw)
3.5 Financial instrument (IAS 32.11)
Adtx)
financial instrument is a contract that gives rise to both a financial asset of one entity and a financial liability or equity
dty)
instrument of another entity.
dtz)
Primary instruments such as receivables, payables and equity, as well as derivative instruments such as futures, options and
dua)
swaps
dub) are included in this definition.
Aduc)
contract is an agreement between two or more parties with clear economic results. The parties have limited discretion to
avoid
dud) their contractual obligations and the contract is usually enforceable by law.
TERMINOLOGY
due) Study par 3.1 of the prescribed textbook to get a better understanding of the different types of financial
instruments and related terms.
duf)
dug) Take note: Bonds/Debentures, cum div and ex div transactions does not form part of this module.
duh)
dui) FINANCIAL ASSET
duj) Study par 3.2 of the prescribed textbook
duk)
dul)A financial asset is any asset that is:
a) cash;
b) an equity instrument of another entity (example: investments);
c) a contractual right:
a. to receive cash or another financial asset from another entity (example: accounts receivables); or
b. to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity (example: purchased options); or
d) a contract that will or may be settled in the entity's own equity instruments (not part of this module)
dum) Work through example 18.1 of the prescribed textbook
dun)
duo) FINANCIAL LIABILITY
dup) Study par 3.3 of the prescribed textbook
duq)
dur) A financial liability is any liability that is:
a) a contractual obligation:
a. to deliver cash or another financial asset to another entity (example: creditors); or
b. to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity (example: written options); or
b) a contract that will or may be settled in the entity's own equity instruments (not part of this module)
dus) Work through example 18.2 of the prescribed textbook

dut)

duu) EQUITY INSTRUMENT

duv) Study par 3.4 of the prescribed textbook
duw)
dux) An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities. An equity instrument is presented as part of total equity on the face of the
statement of financial position.
duy) Work through example 18.3 of the prescribed textbook
duz)
dva)FINANCIAL INSTRUMENT
dvb) Study par 3.5 of the prescribed textbook
dvc)
dvd) A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
dve) Work through example 18.4 of the prescribed textbook

dvf)

dvg)DERIVATIVE INSTRUMENTS
dvh) Examples of financial assets and financial liabilities
dvi)
dvj) F INANCIAL ASSET/ FINANCIAL LIABILITY REASON
dvk)

dvl)
dvm)
dvn)
dvo)
dvp)
dvq)
dvr)
dvs)
dvt)
dvu)
dvv)
dvw)
dvx)
dvy)
dvz)
dwa)
dwb)
dwc)
dwd) F INANCIAL ASSET/ FINANCIAL LIABILITY REASON

dwe)
dwf)
dwg) THE FOLLOWING ARE NOT FINANCIAL ASSETS AND FINANCIAL LIABILITIES – IAS32

Prescribed Book Chapter 18 paragraph 4.1:

4 Recognition of financial instruments

4.1 Initial recognition
Recognition generally refers to when items would be accounted for in the financial records, therefore initial recognition
specifically refers to the timing of the recognition of financial instruments.

An entity recognises a financial asset or financial liability on its statement of financial position when, and only when, it becomes
dwh)
adwi)RECOGNITION
party to the contractual provisions of the instrument.
dwj)INITIAL RECOGNITION
Contractual
dwk) Study rightspar
and4.1
obligations under most derivatives
of the prescribed textbookare therefore recognised on the statement of financial position when
the entity becomes a party the contract. This differs from the normal rules in respect of recognition that require at least one of
dwl)
dwm)
the parties involved to perform before recognition takes place.
dwn)
dwo)
dwp)
dwq)
dwr)
dws)
dwt)
dwu)
dwv)
dww)
dwx)
dwy)
dwz)
dxa)
dxb) An entity shall recognise a financial asset or a financial liability on its statement of financial position when,
and only when, the entity becomes a party to the contractual provisions of the instrument.
dxc)
dxd)AT WHAT STAGE SHALL AN ENTITY RECOGNISE THE FOLLOWING ITEMS ON ITS STATEMENT OF FINANCIAL POSITION ?
dxe)
dxf) 1. Unconditional receivables and payables
dxg) Recognised as assets or liabilities when the entity becomes a party to the contract and, as a consequence,
has a legal right to receive or a legal obligation to pay cash.
dxh)
dxi) 2. Assets to be acquired and liabilities to be incurred as a result of a firm commitment to
purchase or sell goods or services
dxj) It is generally not recognised until at least one of the parties has performed under the agreement.
dxk)
dxl) For example:
 An entity that receives a firm order does not generally recognise an asset (and the entity that places the order
does not recognise a liability) at the time of the commitment but, rather, delays recognition until the ordered
goods or services have been shipped, delivered or rendered.
 If a firm commitment to buy or sell non-financial items is within the scope of this standard, its net fair value is
recognised as an asset or liability on the commitment date.
dxm)
dxn) 3. Planned future transactions
dxo) No matter how likely they are, they are not assets and liabilities because the entity has not become a party
to a contract.
dxp)
dxq)MEASUREMENT OF FINANCIAL INSTRUMENTS
dxr) DEFINITIONS RELATING TO MEASUREMENT
dxs) Study par 5.1 of the prescribed textbook
dxt)
dxu) Prescribed Book Chapter 18 paragraph 5.1:
dxv)
dxw)
5.1
dxx)
Definitions related to measurement
5.1.1
dxy)Fair value (IFRS 13)
Most
dxz)of the financial instruments within the scope of IFRS 9 are initially measured at fair value. Fair value is defined in IFRS
13
dya)as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants
dyb) at the measurement date. It should be noted that IFRS 13 sets out the requirements for measuring the fair value of
adyc)
financial asset or financial liability.
dyd)
The fair value of an instrument would generally be considered to be its quoted price, but a valuation technique, such as
dye)
discounted cash flow, may be used to determine fair value if the market for the instrument is not active.
dyf)
Fair value is thus measured with reference to:
dyg)
dyh) transaction price (being the fair value of the consideration given or received); or
dyi)quoted market price in an active market for an identical asset or liability; or
dyj)estimated discounted value of all future cash payments or receipts; or
dyk) recent prices of similar instruments where there is no active market.
dyl)
dym)
If there is a common valuation technique used by market participants where there is no active market and it has provided
dyn)
reliable
dyo) estimates of market prices, this technique should be used. The calculation of fair value falls outside the scope of this
chapter.
dyp)
dyq) Fair value
dyr) Fair value is of a instrument would be the price/amount at which the asset (or liability) could be bought or
sold in a current transaction between willing parties, or transferred to an equivalent party
dys) Amortised cost – Ignore par 5.1.2 – 5.1.3 and example 18.6 and 18.7 of the prescribed textbook
(dealt with in later studies)
dyt)
dyu) Transaction costs
dyv) Study par 5.1.4 of the prescribed textbook
 dyw) Transaction costs are incremental costs that are directly attributable to the acquisition,
dyx) issue or disposal of a financial asset or financial liability. An incremental cost is one that
dyy) would not have been incurred if the entity had not acquired, issued or disposed of the
dyz) financial instrument.
dza)
Prescribed
dzb)CLASSIFICATION OF FINANCIAL ASSETS Book Chapter
AND FINANCIAL 18 paragraph 5.2:
LIABILITIES
dzc) Study par 5.2 of the prescribed textbook
5.2 Classification of financial assets and financial liabilities
dzd)
The following classification categories can be identified for financial instruments:
dze)
dzf)
dzg)
dzh)
dzi)
dzj)
dzk)
dzl)
dzm)
dzn)
dzo)
dzp)
dzq)
dzr)the classification of financial instruments has a direct impact on initial and subsequent
Since
dzs)
measurement, classification is discussed in detail at this point. An entity should classify
dzt) assets as subsequently measured at either amortised cost, fair value through
financial
dzu)
profit or loss or at fair value through other comprehensive income on the basis of both:
dzv)
the entity’s business model for managing the financial asset; and
 dzw)
the contractual cash flow characteristics of the financial asset.
 dzx)
dzy)
An entity should classify its financial liabilities as subsequently measured at amortised cost using the effective interest rate
dzz)
eaa) except for:
method,
 eab)
financial liabilities at fair value through profit or loss;
eac)
financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or when the continuing
 ead)
involvement approach applies;
eae)
financial guarantee contracts;
 eaf)
commitments to provide a loan at a below-market interest rate; and
 eag)
 eah)
contingent consideration recognised by an acquirer in a business combination (IFRS 3).
eai)
eaj)
5.2.1
eak)Financial assets at fair value through profit or loss
This
eal)category is the default category for purposes of classifying financial assets, unless the financial asset is part of a hedging
relationship
eam) in which case the principles regarding hedge
accounting
ean) would have to be applied.
Aeao)
financial asset at fair value through profit or loss is a financial asset that falls within the
eap) sub-categories:
following
 eaq)
Mandatorily measured at fair value through profit or loss. Items that meet the definition of held for trading would
ear)
automatically fall into this subcategory.
eas)
eat) o A financial asset is classified as held for trading if it
eau) o is acquired principally for the purpose of selling or repurchasing it in the near future;
eav) o is part of a portfolio of identified financial instruments that are managed together and for which there is evidence
eaw) of a recent, actual pattern of short-terms profit-taking; or
eax) is a derivative (except for a derivative that is a designated and effective hedging instrument).
eay)
eaz)
Examples of held for trading financial assets:
eba)
shares held for speculative purposes; and
 ebb)
rights to the above-mentioned shares (if not a hedging instrument).
 ebc)
Designated as measured at fair value through profit or loss.
 ebd)
ebe)
Designating a financial asset into this category is allowed if it will eliminate or significantly reduce a measurement or
ebf)
recognition inconsistency (“accounting mismatch”) that would otherwise arise. Designation must take place at initial
ebg)
recognition and the designation is irrevocable.
ebh)
ebi)
5.2.3
ebj)Financial assets at fair value through other comprehensive income
Aebk)
financial asset at fair value through other comprehensive income is a financial asset
that
ebl)falls within the following sub-categories:
Mandatorily measured at fair value through other comprehensive income.
 ebm)
ebn) assets that meet both of the following requirements should be classified as subsequently measured at fair value
Financial
ebo) other comprehensive income:
through
ebp)
o the asset is held within a business model with the objective of collecting contractual cash flows and selling the
ebq)
asset; and
o the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding.
 ebr)
ebs)
ebt)
ebu)
ebv)
ebw)
ebx)
eby) Prescribed Book Chapter 18 paragraph 5.2 (Continued) :
ebz)
eca) Designated as measured at fair value through profit or loss.
ecb)
Designating a financial asset into this category is allowed if it will eliminate or significantly reduce a measurement or
ecc)
recognition inconsistency (“accounting mismatch”) that would otherwise arise. Designation must take place at initial
ecd)
recognition and the designation is irrevocable.
ece)
ecf)
5.2.3
ecg)Financial assets at fair value through other comprehensive income
Aech)
financial asset at fair value through other comprehensive income is a financial asset
that
eci)falls within the following sub-categories:
ecj)Mandatorily measured at fair value through other comprehensive income.
eck)
Financial assets that meet both of the following requirements should be classified as subsequently measured at fair value
ecl)
through other comprehensive income:
ecm) o the asset is held within a business model with the objective of collecting contractual cash flows and selling the
ecn)
eco)
asset; and
ecp) o the contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of
ecq) principal and interest on the principal amount outstanding.
ecr) Designated as measured at fair value through other comprehensive income.
ecs)category is only available for equity instruments that are not held for trading. An entity may, on initial recognition make
This
ect)
an irrevocable election to present all fair value changes due to subsequent measurement on an equity instrument in other
ecu)
comprehensive income instead of in profit or loss. This classification is available on an instrument-by-instrument basis.
ecv)
ecw) Financial assets
ecx) An entity shall classify financial assets as subsequently measured at either amortised cost or fair value
(2 sub categories) on the basis of both:
ecy) a) An entity’s business model for managing financial assets
ecz) b) The contractual cash flow characteristics of the financial asset
eda)
edb) A financial asset shall be measured at fair value unless it is measured at amortised cost.
edc)
edd) Take note: For the purpose of this module only the following financial asset categories will be dealt with:
ede) - At fair value through profit or loss
edf)- At fair value through other comprehensive income
edg)
edh) FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
edi) Study par 5.2.1 of the prescribed textbook.
edj)This is the default category for purposes of classifying financial assets.

edk) Financial assets will be classified in this category if:

 It is mandatorily measured at fair value
 Upon initial recognition designated by the entity as “at fair value through profit or loss”. A financial asset can
only be designated upon initial recognition if it will eliminate or reduce a measurement or recognition
inconsistency.
edl)Financial assets that are classified as held for trading automatically fall into this subcategory.
edm) Held for trading means it is a short term investment and is intended to sell or repurchase in the near
future.
edn) Work through example 18.8 of the prescribed textbook (Ignore case III)
edo)
edp) FINANCIAL ASSETS AT FAIR VALUE THROUGH OTHER COMPREHENSIVE INCOME
edq) Study par 5.2.3 of the prescribed textbook
edr)
eds) This category is only available for equity instruments not held for trading (eg. Investment in another
company with the intention not to sell the shares in the near future).
edt)
edu) For example:
edv) A Ltd purchased 7 000 ordinary shares in B Ltd. These shares were held as part of a long term investment
portfolio. These shares will then be classified as a financial asset at fair value through other comprehensive
income.
edw)
edx)FINANCIAL ASSETS AT AMORTISED COST
edy) Ignore par 5.2.2 of the prescribed textbook
edz) This category financial asset does not form part of this module
eea)
 eeb) FINANCIAL LIABILITIES AS AMORTISED COST
eec) Ignore par 5.2.4 of the prescribed textbook
eed)
eee)FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
eef) Study par 5.2.5 of the prescribed textbook
eeg)
eeh)
eei) Prescribed Book Chapter 18 paragraph 5.2.5:
eej)
5.2.5
eek)Financial liabilities at fair value through profit or loss
Aeel)
financial liability at fair value through profit or loss is a financial liability that falls within the following sub-categories:
eem) When it meets the definition of held for trading. If the financial liability is part of a hedging relationship the principles
een) regarding hedge accounting would have to be applied.
eeo) Upon initial recognition, the financial liability is designated by the entity as at fair value through profit or loss.
eep)
eeq) Designating a financial liability into this category is allowed if it will result in more relevant information either by
eer)eliminating or significantly reducing a measurement or recognition inconsistency (“accounting mismatch”) that would
ees) otherwise arise; or
eet)A portfolio of financial liabilities is evaluated on a fair value basis in terms of the entity’s documented risk management or
eeu) investment strategy.
eev)
eew)
Designation must take place at initial recognition and the designation is irrevocable.
eex) A financial liability is classified as held for trading if it is:
 acquired or incurred principally for the purpose of selling or repurchasing it in the near term; or
 on initial recognition is part of a portfolio of identified financial instruments that are managed together and for
which there is evidence of a recent actual pattern of shortterm profit-taking;
eey)
eez) INITIAL MEASUREMENT OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES
efa) Study par 5.3 of the prescribed textbook
efb)
efc) Prescribed Book Chapter 18 paragraph 5.3:
efd)
efe)
5.3 Initial measurement of financial assets and liabilities
Ateff)
initial recognition of a financial asset or financial liability, an entity should measure it at its fair value. This fair value is
efg)
generally the consideration given or received, i.e. the transaction price.
efh)
Transaction costs directly attributable to the acquisition or issue of the financial asset should be added to, or, in the case of a
efi)
liability,
efj) should be deducted from the fair value described above. In the case of financial assets or liabilities at fair value through
profit
efk) or loss, transaction costs are expensed.
Inefl)
summary, transactions costs are accounted for as follows:
efm)
efn)
efo)
efp)
efq)
efr)
efs)
eft)
efu)
efv)
efw)
efx)
efy)
efz) Initial measurement can be summarised as follows:

ega)
egb) The fair value of a financial instrument on initial recognition is normally the transaction price (i.e. the fair
value of the consideration given or received).
egc) Prescribed Book Chapter 18 paragraph 5.4:
egd)SUBSEQUENT MEASUREMENT OF FINANCIAL ASSETS
ege)
5.4 Study measurement
Subsequent par 5.4 of the ofprescribed textbook
financial assets
egf)
As already indicated, IFRS 9 defines three categories of financial assets, namely
egg)_ financial assets at fair value through profit or loss;
egh)
egi)_ financial assets at amortised cost; and
egj)_ financial assets at fair value through other comprehensive income.
The
egk)above classifications are extremely important, as they determine the methods applied at subsequent measurement of
egl)
financial assets as well as the applicable accounting treatment.
egm)
egn)Financial assets at fair value through profit or loss
5.4.1
ego)
For financial assets held as at fair value through profit or loss, all gains or losses (realised and unrealised) calculated on the
egp)
subsequent
egq) measurement of these instruments are recorded directly in profit or loss.
egr)
5.4.2
egs)Financial assets at amortised cost
For
egt)those financial assets carried at amortised cost, a gain or loss is recognised in profit or loss when the financial asset is
derecognised
egu) or impaired, as well as through the amortisation process.
egv)
Examples of a financial asset at amortised cost include a debt security with a variable interest rate (payments are
egw)
determinable).
egx)
Most equity securities cannot be financial assets at amortised cost, either because they have an indefinite life (such as ordinary
egy)
shares),
egz)
or because the amounts the holder may receive can vary in a manner that is not predetermined (such as share options,
warrants
eha) and rights) and therefore the cash flows associated with the instrument does not represent principal and interest
repayments.
ehb)
ehc)
Modification
ehd) of cash flows
ehe) the contractual cash flows of a financial asset measured at amortised cost are renegotiated or modified and it does not
When
ehf) in the derecognition of the asset, an entity has to recalculate a new gross carrying amount for the financial asset. The
result
ehg)
new gross carrying amount is calculated as the present value of the modified contractual cash flows discounted at the financial
ehh)
asset’s original effective interest rate. The gross carrying amount of the financial asset before modification is then restated to
ehi)
the
ehj) gross carrying amount and a modification gain or loss is recognised in profit or loss.
new
ehk)
5.4.3
ehl) Financial assets at fair value through other comprehensive income
Aehm)
financial asset is considered to be measured at fair value through other comprehensive
income
ehn) when:
eho) _ The financial asset (debt instrument) is held within a business model with the objective of collecting contractual cash
ehp) flows and selling the financial asset; or
ehq) _ An entity has made an irrevocable election on initial recognition to classify an investment in equity instruments into
ehr)
ehs) this category.
All financial assets classified as at fair value through other comprehensive income are carried at fair value subsequent to
eht)
initial
ehu) recognition.
ehv)
ehw) Fair value adjustments on investments in debt instruments
5.4.3.1
ehx)
An investment in debt instruments classified at subsequently measured at fair value through other comprehensive income, is
ehy)
measured at fair value on the statement of financial position.
ehz)
The gain or loss arising from changes in the fair value of the investment in debt instruments, which is not attributable to
eia)
interest,
eib) impairment losses and foreign exchange losses, are recognised in equity via other comprehensive income in the
statement
eic) of profit or loss and other comprehensive income.
The
eid)gain or loss arising from changes in the fair value of the investment in debt instrument, which is attributable to interest,
impairment
eie) losses and foreign exchange losses, are recognised in profit or loss. The amounts recognised in profit or loss should
be the same as the amounts that would have been recognised in profit or loss if the investment in debt instruments were
eif)
eig)
measured at amortised cost.
eih)cumulative fair value gain or loss previously recognised in equity via other comprehensive income is reclassified to
The
eii) or loss when the financial asset is derecognised.
profit
eij)
eik)
5.4.3.2
eil) Fair value adjustments on investments in equity instruments
Aeim)
gain or loss arising subsequent to initial recognition from a change in the fair value of a financial asset categorised as at fair
value
ein) through other comprehensive income (equity instruments) will be taken to equity via other comprehensive income in the
statement
eio) of profit or loss and other comprehensive income.
The
eip)cumulative gain or loss previously recognised in equity via other comprehensive income is never subsequently recycled
eiq)
(reclassified) to profit or loss. The entity may, however, transfer the cumulative gain or loss directly within equity. This transfer
eir) usually occur upon derecognition of the financial instrument. Dividends received from this investment shall be
would
eis)
recognised in profit or loss when the entity’s right to receive payment of the dividend is established
eit)
eiu)
eiv)
eiw)
eix)
eiy)
eiz)
eja) Prescribed Book Chapter 18 paragraph 5.4 (Continued) :
ejb)
5.4.4
ejc) Financial assets that do not have a quoted price in an active market
IFRS
ejd) 9 does acknowledge that cost may, in limited circumstances for equity instruments that do not have a quoted price in an
eje) market, be an appropriate estimate of fair value. IFRS 9 provides indicators of when cost may not be representative of
active
ejf)value.
fair
ejg)
ejh)
eji) After initial recognition, an entity shall measure a financial asset at:
ejj) _ Amortised cost (not dealt with in this module); or
ejk) _ Fair value through profit or loss; or
ejl) _ Fair value through other comprehensive income.

ejm) The accounting treatment of financial assets can be summarised as follows:

ejn)

ejo) Work through example 18.10 and 18.11

Prescribed of the prescribed
Book Chapter textbook
18 paragraph 5.5:
ejp)
ejq)Subsequent
5.5 SUBSEQUENT MEASUREMENT
measurement OF FINANCIAL
of financial LIABILITIES
liabilities
ejr)Study par 5.5 of the prescribed textbook
After initial recognition, an entity should measure all financial liabilities, other than liabilities at fair value through profit or
ejs)
loss
ejt)and derivatives that are liabilities, at amortised cost.
eju)
5.5.1
ejv) Financial liabilities at amortised cost
For
ejw)those financial liabilities measured at amortised cost, a gain or loss is recognised in profit or loss when the financial
liability
ejx) is derecognised as well as through the amortisation process.
ejy)
ejz) Financial liabilities at fair value through profit or loss
5.5.2
eka)
For financial liabilities held as at fair value through profit or loss, all gains or losses (realised and unrealised) calculated on the
ekb)
subsequent measurement of these instruments are recorded directly in profit or loss.
ekc)
ekd)
For
eke) financial liabilities designated into the category as at fair value through profit or loss, the subsequent changes in fair
value
ekf) must be separated between those changes that are due to changes in credit risk of the issuer and other changes. Changes
due
ekg) to credit risk of the issuer must be recognised in other comprehensive income and accumulate in equity.
ekh)
eki)
All other changes must be recognised in profit or loss. Separation is, however, not required if the separation would create or
ekj) an accounting mismatch in profit or loss or if the financial liability is a loan commitment or a financial guarantee
enlarge
contract. Under these circumstances all changes in fair value must be recognised in profit or loss.
ekk)
ekl)
ekm)
ekn)
eko)
ekp)
ekq)
ekr)The accounting treatment of financial liabilities can be summarised as follows:

eks)

ekt)Take note: Financial liabilities at amoritised cost does not form part of this module

eku)DERECOGNITION
ekv)DERECOGNITION OF A FINANCIAL ASSET
ekw) Study par 6.1 of the prescribed textbook
Prescribed Book Chapter 18 paragraph 6.1 :
ekx)
eky)
6.1 Derecognition of a financial asset
ekz)
Inela)
contrast with recognition, derecognition refers to the removal of an asset from the statement of financial position.
Due
elb)to the complexity of transactions related to financial assets and liabilities, it is not always clear when a financial asset or
liability
elc) should be derecognised. An entity must derecognise a financial asset only when
eld)_ the contractual rights to the cash flows from the financial asset expire; or
ele)_ the financial asset is transferred and the transfer qualifies for derecognition.
elf)
elg)
Transfers
elh) of financial instruments fall outside the scope of this chapter. Contractual rights to cash flows normally expire when
an asset
eli) such as a share investment is sold or a financial asset at amortised cost matures.
elj)
elk)
ell)
elm)
eln)
elo)
elp)
elq)
elr)
els)
elt)
elu)
elv)
When
elw) a financial asset that is classified as at fair value through profit or loss is derecognised, the carrying amount will first have
toelx)
be restated to its fair value on date of derecognition with a resultant fair value adjustment recognised in profit or loss. As a
ely) there will be no additional profit or loss on derecognition provided that the asset was sold at fair value.
result
elz)
ema)
Any transaction costs relating to the sales transaction will be recognised as an expense in profit or loss.
emb)
When
emc)a financial asset that is classified as at fair value through other comprehensive income is derecognised, the carrying
amount
emd) will first have to be restated to its fair value on date of derecognition with a resultant fair value adjustment recognised
in other comprehensive income. As a result there will be no profit or loss on derecognition recognised in profit or loss provided
that the asset was sold at fair value. Any transaction costs relating to the sales transaction will be recognised as an expense in
profit or loss.
 eme)
emf)
emg)
emh)
emi)
emj)
emk)
eml)
emm)
emn) Derecognition is the removal of a previously recognised financial asset from an entity's statement of
financial position.
emo)
emp) An entity shall derecognise a financial asset when, and only when:
emq) a) the contractual rights to the cash flows from the financial asset expire; or
emr) b) the financial asset is transferred and the transfer qualifies for derecognition.
ems)
emt) Financial assets recognized as “at fair value through other comprehensive income” or “at fair value
through profit or loss” must first be restated to fair value before recognition. This will result in no additional
profit or loss on derecognition provided that the asset was sold at fair value.
emu)
emv) The entity may decide to reclassify the resultant balance in the mark-to-market reserve (relating to the
asset derecognised), directly to retained earnings.
emw)
emx) Refer to the journal entry dated 2 January 20.14 in example 18.14 of the prescribed textbook
as example of the accounting treatment at derecognition. Work through example 18.17 of the
prescribed textbook.
emy)
emz) DERECOGNITION OF A FINANCIAL LIABILITY
ena) Study par 6.2 of the prescribed textbook
enb)
enc)
Prescribed Book Chapter 18 paragraph 6.2 :
end)
ene)
6.2 Derecognition of a financial liability
enf)
Aeng)
financial liability (or portion thereof) is removed from the statement of financial position if, and only if, it is extinguished, i.e.
when
enh)the obligation specified in the contract is settled,
cancelled
eni) or expires.
enj)
The difference between the carrying amount of a liability (or part of a liability) that is extinguished or transferred to another
enk)(including the related amortised cost) and the amount paid for the liability, is included in profit or loss for the year.
party
enl)
enm)
enn)
eno)
enp)
enq)
enr)
The
ens)liability is extinguished if
 ent)_ the entity settles the liability by paying the creditor, generally with cash, other financial asset, goods or services;
 enu)_ the entity is discharged legally of the primary responsibility for the obligation (or part thereof) by the creditor or via legal
env)process;
 enw)_ an exchange takes place between an existing lender and the provider of the debt instruments with substantially different
enx)
conditions that leads to the extinguishment of the old debt (derecognition) and the recognition of a new debt instrument;
eny)
enz)and
eoa) _ a change to the conditions of an existing debt instrument (regardless of whether it can be attributed to the financial
eob)problems of the debtor or not)) is effected that would lead to the extinguishment of the old debt (derecognition).
eoc) An entity shall remove a financial liability (or a part of a financial liability) from its statement of financial
position when, and only when, it is extinguished, that is, when the obligation specified in the contract is:
eod) a) settled/discharged; or
eoe) b) cancelled; or
eof)c) expires.
eog)
eoh) A financial liability (or a part of it) is extinguished when the debtor either:
eoi) a) discharges the liability (or part of it) by paying the creditor, normally with cash, other financial assets, goods
or services; or
eoj) b) is legally released from primary responsibility for the liability (or part of it) either by process of law or by the
creditor. (If the debtor has given a guarantee this condition may still be met.)
eok) c) An exchange between an existing borrower and lender of debt instruments with substantially different
terms.
eol) d) A change to the conditions of an existing debts instrument.
eom) Work through example 18.18 of the prescribed textbook
eon) PRESENTATION
eoo) Study par 7 of the prescribed textbook
eop)
eoq)
eor)
eos)
eot)
eou)
eov)
Prescribed Book Chapter 18 paragraph 7:
eow)
eox)
7eoy)
Presentation
IAS 32 deals mainly with presentation (how the items should be presented on the face of the financial statements) of financial
eoz)
instruments.
epa) IFRS 7 deals with disclosures in respect of financial instruments.
IAS 32 includes requirements for the presentation of financial instruments and deals with the following:
epb)
epc)_ classification of financial instruments between assets, liabilities and equity;
epd)_ the classification of related interest, dividends, losses and gains driven by their statement of financial position
epe)
epf)classification; and
epg)_ circumstances in which financial assets and financial liabilities should be off-set.
eph)
7.1 Liabilities and equity
epi)
epj)
IAS 32.15 determines that the issuer of a financial instrument should at initial recognition classify the instrument, or its
epk)
component parts, as either a financial liability or as equity in accordance with the substance of the contractual arrangement
epl)
at initial recognition, utilising the definitions of a financial liability, financial asset and an equity instrument.
epm)
epn)
The
epo)critical feature in the case of a financial liability is that the issuer does not have an unconditional right to avoid
delivering
epp) cash or another financial asset to settle an obligation.
epq)
The
epr)substance, rather than the legal form, thus governs the classification of a financial instrument. This stipulation has the
effect
eps) that some items that at face value would appear to be equity on the face of the statement of financial position, would
ept) constitute debt. This once again influences ratio analysis and especially ratios related to solvency as is therefore
actually
epu)
extremely important.
epv)LIABILITIES AND EQUITY
epw) Study par 7.1 of the prescribed textbook
epx)
epy) The issuer of a financial instrument shall classify the instrument, or its component parts, on initial
recognition as a financial liability, a financial asset or an equity instrument in accordance with:
 _ the substance of the contractual arrangement, and
 _ the definitions of a financial liability, a financial asset and an equity instrument.
epz)
eqa) A critical feature in differentiating a financial liability from an equity instrument is the existence of a
contractual obligation of one party to the financial instrument (the issuer) either to:
 _ deliver cash or another financial asset to the other party (the holder), or
 _ to exchange financial assets or financial liabilities with the holder under conditions that are potentially
unfavourable to the issuer.
eqb)
eqc) Although the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or
other distributions of equity, the issuer does not have a contractual obligation to make such distributions
because it cannot be required to deliver cash or another financial asset to another party.
eqd) For example, a preference share that provides for mandatory redemption by the issuer for a fixed or
determinable amount at a fixed or determinable future date, or gives the holder the right to require the issuer
to redeem the instrument at or after a particular date for a fixed or determinable amount, is a financial liability.
(Refer to learning unit 1 par 1.5.3)
eqe)
eqf) THE CLASSIFICATION OF PREFERENCE SHARES
eqg)

eqh) Refer to study unit 1

eqi) EXAMPLE 7
eqj)Lula-Lee Ltd issued 1 000 redeemable preference shares on 1 January 20.10. The shares are redeemable in
cash at the option of the holder. If the options are not exercised, the shares will be redeemable on 31
December 20.12.
eqk) Must the preference shares be presented as a financial liability or equity in the annual
financial statements of Lula-Lee Ltd?
eql)The preference share redeemable in cash at the option of the holder, or redeemable by the issuer on 31
December 20.12, creates an obligation on the part of the issuer to deliver cash to the holder. Therefore it
meets the definition of a financial liability.
eqm)
eqn) EXAMPLE 8
eqo) Lula-Lee Ltd issued 1 000 redeemable preference shares on 1 January 20.10. Lula-Lee Ltd has the option to
redeem the shares at any time.
eqp) Must the preference shares be presented as a financial liability or equity in the annual
financial statements of Lula-Lee Ltd?
eqq) Lula-Lee Ltd does not have a present obligation to transfer cash or financial assets to the holder and
therefore it does not meet the definition of a financial liability. The preference shares will be presented as
equity in the annual financial statements of Lula-Lee Ltd.
eqr)
eqs) EXAMPLE 9
eqt) Lula-Lee Ltd issued 1 000 convertible preference shares on 1 January 20.9. The shares will be converted to
ordinary shares on 31 December 20.12.
equ) Must the preference shares be presented as a financial liability or equity in the annual
financial statements of Lula-Lee Ltd?
eqv) If the criteria for classification of an equity instrument is applied:
 _ the instrument includes no contractual obligation to deliver cash or another financial asset, or to exchange
financial asset, or to exchange financial asset or liabilities; and
 _ the instrument will be settled in the entity's own equity instruments (ordinary shares) Therefore this is an
equity instrument.
eqw) The latter represents a non-derivative that presents no contractual obligation to be settled by the issuer by
issuing a variable number of its ordinary shares (equity instruments).
eqx) If any entity does not have an unconditional right to avoid delivering cash or another financial asset to
settle a contractual obligation, the obligation meets the definition of a financial liability. (IAS 32.19)
eqy) A financial instrument that does not explicitly establish a contractual obligation to deliver cash or another
financial asset may establish an obligation indirectly through its terms and conditions.
eqz)
era) For example:
 a financial instrument may contain a non-financial obligation that must be settled if, and only if:
o _ the entity fails to make distributions, or
o _ to redeem the instrument.

erb) If the entity can avoid a transfer of cash or another financial obligation only by settling the
erc)non-financial obligation, the financial instrument is a financial liability;
erd)
 a financial instrument is a financial liability if it provides that on settlement the entity will deliver either:
o cash or another financial asset, or
o its own shares whose value is determined to exceed substantially the value of the cash or other
financial asset. (IAS 32.20)
ere)
erf) INTEREST, DIVIDENDS, LOSSES AND GAINS
erg) Items such as interest, dividends, losses and gains relating to a financial instrument or a component that is
a financial liability shall be recognised as income or expense in profit or loss.
erh)
eri) Dividend payments on shares wholly recognised as liabilities are recognised as expenses in the same way as
interest on a bond. Gains and losses associated with redemption or refinancing of financial liabilities are
erj) recognised in profit or loss. Redemption or refinancing of equity instruments are recognised as changes in
equity. Changes in fair value of the entitys’ equity instruments are not recognised in the annual financial
statements.
erk) Study example 18.20 of the prescribed textbook
erl)
erm) TRANSACTION COST ON EQUITY INSTRUMENTS
ern) Ignore par 7.2.2 & 7.3 of the prescribed textbook
ero)
erp) DISCLOSURE
erq) Study par 9 of the prescribed textbook
err)
ers)
ert)
eru)
erv)
erw)
erx)
ery)
erz)
esa)
esb)
esc) Prescribed Book Chapter 18 paragraph 9:
esd)
9ese)
Disclosure
9.1 Statement of financial position
esf)
9.1.1
esg)Disclosures in respect of categories of financial assets and liabilities
esh)
The carrying amounts of each of the categories of financial assets (or liabilities) as identified by IFRS 9 shall either be
esi)
presented on the face of the statement of financial position or disclosed in the notes. The categories are:
esj)financial assets at fair value through profit or loss, showing separately
esk)
esl)those mandatorily measured at fair value in terms of IFRS 9; and
esm)those designated to this category at initial recognition
esn)financial assets measured at fair value through other comprehensive income, showing separately
eso)those mandatorily measured at fair value in terms of IFRS 9; and
esp)those designated to this category at initial recognition;
esq)
esr)financial assets measured at amortised cost;
ess)financial liabilities measured at amortised cost;
est)financial liabilities at fair value through profit or loss, showing separately
esu)those that meet the definition of held for trading in terms of IFRS 9; and
esv)those designated to this category at initial recognition.
esw)
esx)
9.2 Disclosures in respect of income, expenses, gains or losses
esy)
An entity
esz) shall present the following items of income, expense, gains or losses on the statement of profit or loss and other
comprehensive
eta) income, or disclose it in the notes:
etb)Net gains or net losses on
etc)financial assets and liabilities designated as at fair value through profit or loss;
etd)
ete)financial assets and liabilities classified as at fair value through profit or loss;
etf)financial assets designated as at fair value through other comprehensive income;
etg)financial assets classified as at fair value through other comprehensive income;
eth)financial assets measured at amortised cost; and
eti)financial liabilities measured at amortised cost.
etj)
etk)Total interest revenue and total interest expense on
etl)financial assets measured at amortised cost; and
etm)financial assets classified as at fair value through other comprehensive income.
etn)
eto)
9.3 Accounting policies
etp)
The following shall be disclosed:
etq)
 a summary of significant accounting policies for all financial instruments.
etr)
ets)
9.4 Impairment and credit risk
ett)
IFRS
etu)7 requires the following disclosure:
etv)Information about the credit risk of financial instruments;
etw)A reconciliation of the loss allowance account; and
etx)An explanation of significant changes in the gross carrying amounts of financial assets.
ety)
IAS 1 requires impairment losses on financial assets to be disclosed in a separate line item in the statement of profit or loss and
other comprehensive income.
etz)
eua) The disclosure requirements of IAS 32 have been scrapped and have been replaced by a new standard,
namely IFRS 7. Although the old standard has been scrapped, many of the principles contained in the new
standard are similar to those in the old standard. The disclosure requirement of IFRS 7 is very specialised and
will not be handled in this module. It will however, be handled in detail in later accounting studies.
eub)
euc)
eud)
eue)
euf)
eug)
euh)
eui)
euj)
euk)
eul)
eum)
eun)
euo)
eup)

euq) LEARNING UNIT 9

eur) REVENUE – IFRS15
eus)DEFINITIONS
eut) The following terms are used in this Standard with the meanings specified:
euu)
euv) A contract is an agreement between two or more parties, which creates enforceable rights and
obligations.
euw)
eux) A contract asset is an entity’s right to consideration in exchange for goods or services that the entity has
transferred to a customer when that right is conditioned on something other than the passage of time (for
example, the entity’s future performance).
euy)
euz) A contract liability is an entity’s obligation to transfer goods or services to a customer for which the
entity has received consideration (or the amount is due) from the customer.
eva)
evb) A customer is a party that has contracted with an entity to obtain goods or services that are an output of
the entity’s ordinary activities in exchange for consideration.
evc)
evd) Income is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than those relating
to contributions from equity participants.
eve)
evf)A performance obligation is a promise in a contract with a customer to transfer one of the following:
 A good or a service (or a bundle of goods or services) that is distinct;
 A series of distinct goods or services that are substantially the same and that have the same pattern of
transfer to the customer.
evg)
evh) Revenue is income arising in the course of an entity’s ordinary activities.
evi)
evj) The stand-alone selling price is the price at which an entity would sell a promised good or service
separately to a customer.
evk)
evl) The transaction price (for a contract with a customer) is the amount of consideration to which an entity
expects to be entitled, in exchange for transferring promised goods or services to a customer, excluding
amounts collected on behalf of third parties (for example, VAT).
evm)
evn)

evo)FIVE STEPS FOR REVENUE RECOGNITION

 evp) Study par 6 of the prescribed textbook.
evq)
evr)
evs)
evt)
evu) Prescribed Book Chapter 10 paragraph 6:
evv)
6evw)
Five-step revenue model
evx)
An entity should apply the five-step revenue model to an individual contract with a customer. An entity may apply the revenue
evy)
model
evz)
to a portfolio of contracts (or performance obligations) with similar characteristics if the entity reasonably expects that
the result of doing so would not differ materially from the result of applying this revenue model to the individual contracts (or
ewa)
performance
ewb) obligations) within the portfolio.
ewc)
Revenue
ewd) is recognised and measured according to the following five steps as set out in IFRS 15:
ewe)
ewf)
ewg)
ewh)
ewi)
ewj)
ewk)
ewl)
ewm)
Each
ewn) step is discussed in more detail below:
ewo)
6.1 Identify the contract (step 1)
ewp)
6.1.1
ewq) Contract criteria
ewr)
The first step in the revenue model is to determine whether a contract with a customer exists. A contract with a customer can be
ews) oral or implied but must meet the following criteria in order to be a contract within the scope of IFRS 15:
written,
 ewt)the parties have approved the contract and are committed to perform;
ewu)
 ewv)the entity can identify each party’s rights regarding the goods or services to be transferred;
 eww)the entity can identify the payment terms of those goods or services to be transferred;
 ewx)the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash flows is expected to
ewy)change as a result of the contract); and
 ewz)it is probable that the entity will collect the consideration.
exa)
exb)
Ifexc)
a contract with a customer does not meet the five criteria above, any consideration received by the entity in terms of such a
contract
exd) is only recognised as income if one of the following events has occurred:
 exe)The entity has no remaining obligation to transfer goods or services to the customer and all consideration has been received
exf)and is non-refundable; or
 exg)The contract has been terminated and the consideration received is non-refundable.
Ifexh)
one of the two events above is also not applicable, then the entity recognises any
exi)
consideration
exj)
received in terms of such a contract as a liability. A liability is recognised until
such
exk) time as the contract meets the above five criteria or one of the two events above have
occurred.
exl) The liability amount is equal to the amount of consideration received from the
customer.
exm)
Itexn)
is important to note that a contract does not exist if each party has the unilateral enforceable right to terminate a wholly
exo)
unperformed contract without compensation (i.e. paying a penalty) to the other party.
exp)
exq)Combination of contracts
6.1.2
exr)
Each contract that meets the five criteria, as discussed above, is accounted for separately in terms of IFRS 15. In certain
exs)
instances,
ext) two or more contracts with the same customer entered into at or near the same time, may be accounted for as a
single
exu)contract.
The
exv)contracts have to meet one of the following in order to be accounted for as one contract:
 exw)the contracts are negotiated as a package with a single commercial objective;
 exx)the amount of consideration paid under one contract is dependent on the price or performance under another contract; or
exy)
 the goods or services promised under the contracts constitute a single performance obligation.
exz)
eya)
6.1.3
eyb)Contract modification
Sometimes
eyc) parties to a contract change the price or scope of the original contract. If such a change is approved by both parties
and
eyd)the change creates new enforceable rights and obligations, a contract modification in terms of IFRS 15 exists. A contract
modification
eye) may either be treated as a new and separate contract or as an amendment to an existing contract. If the contract
eyf)
modification is treated as a separate contract the revenue recognition principles are applied to the separate contract that arose
eyg)
from the modification, and the accounting of the existing contract (original contract) is not affected.
Aeyh)
contract modification results in a new and separate contract if both the following conditions are present:
 eyi)the scope increases because of additional promised goods or services that are distinct; and
eyj)
 the price increases by an amount of consideration that reflects the stand-alone selling price of these goods and services, and
any appropriate adjustments to that price to reflect the circumstances of the contract.
 eyk)
eyl)
eym)
eyn) Prescribed Book Chapter 10 paragraph 6 (Continued):
eyo)
Ifeyp)
a contract modification does not result in a new and separate contract an entity accounts for it in one (or a combination) of
eyq)
the following ways:
eyr)
 eys)A replacement of the original contract with a new contract (if the remaining goods or services under the original contract
eyt)are distinct from those already transferred to the customer)
 eyu)A continuation of the original contract (if the remaining goods or services under the original contract are distinct from
eyv)those already transferred to the customer, and the performance obligation is partially satisfied at modification date).
eyw)
eyx)
6.2 Identify the performance obligations (step 2)
eyy)
IFRS 15 requires that an entity recognise revenue as and when performance obligations in a contract are satisfied by the entity.
eyz)
Identifying performance obligations in a contract are therefore an important step in revenue recognition. A promise to deliver a
eza)
good
ezb) or service in terms of a contract, is a performance obligation when the good or service is distinct. The term distinct means:
 ezc)The customer can benefit from the good or service either on its own or together with other resources that are readily
ezd)available to the customer (i.e. the good or service is capable of being distinct); and
 eze)The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the
ezf)contract (i.e. the good or service are distinct within the context of the contract).
ezg)
The above two principles are discussed in more detail below.
ezh)
ezi)
6.2.1
ezj)Benefit
Aezk)
customer can benefit from a good or service if the good or service can be used, consumed or sold in order to generate
economic
ezl) benefits for the customer. Sometimes a customer can only use or consume a good or service in conjunction with other
readily
ezm) available resources. A readily available resource is a good or service that is sold separately by the entity or other
entities
ezn) or is a resource that the customer has already obtained from the entity or from other transactions or events. If an entity
ezo) sells a good or service separately, this would indicate that a customer can benefit from the good or service on its own or
regularly
ezp)
with other readily available resources.
ezq)
ezr)
6.2.2 Separately identifiable
ezs)
Factors
ezt) that indicate that an entity’s promise is separately identifiable include:
 ezu)The entity does not provide a significant service of integrating the good or service with other goods or services promised in
ezv)the contract into a bundle that represents the combined output for which the customer has contracted.
 ezw)The good or service does not significantly modify or customise another good or service promised in the contract.
 ezx)The good or service is not highly dependent on, or highly interrelated with, other goods or services promised in the contract.
ezy)
ezz)
6.2.3
faa)Non-distinct good or service
Iffab)
a good or service is not distinct it cannot be identified as a separate performance obligtaion. A good or service that is not
distinct
fac) should be combined with other goods or services until the entity identifies a bundle of goods or services that are distinct.
fad)
6.2.4
fae)A series of distinct goods or services
Afaf)
series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the
fag)
customer is also a performance obligation.
Afah)
series of distinct goods or services has the same pattern of transfer to the customer if both the following criteria are met:
fai)
 each distinct good or service in the series that the entity promises to transfer to the customer would meet the criteria to be a
faj)
fak)performance satisfied over time; and
 fal)the same method would be used to measure the entity’s progress toward complete satisfaction of the performance obligation
fam)to transfer each distinct good or service in the series to the customer.
fan)
fao)
fap)
faq)
far)
fas)
fat)
fau)
fav)
faw)
fax)
fay)
faz)
fba)
fbb)
fbc)
fbd)
fbe)
 fbf)
fbg)
fbh) Prescribed Book Chapter 10 paragraph 6 (Continued):
fbi)
6.3
fbj)Determine the transaction price (step 3)
fbk)
Determining the transaction price is straightforward in many transacations where the transaction price is a fixed price. If the
fbl)
transaction price is based on variable consideration, determining the transaction price is more complex. Variable consideration
isfbm)
where for example discounts have an impact on the selling price of a contract. There are also other matters, such as the time
fbn)
value of money, that have an impact on the transactions price of a contract.
fbo)
fbp)
6.3.1
fbq)Variable consideration
Variable
fbr) consideration encompasses any amount that is variable under a contract. The amount of consideration received under
afbs)
contract can vary due to discounts, rebates, refunds, credits, incentives, performance bonuses, penalties, contingencies, price
concessions
fbt) (including concessions due to doubts about the collectability from the customer’s credit risk) and other similar
fbu)
items.
fbv)
Iffbw)
the consideration of a contract is variable, then the entity has to estimate the amount to which it will be entitled to after
fbx)
delivering
fby)
the promised goods or services. An entity estimates an amount of variable consideration by using either the expected
value
fbz) (probability weighted method) or the most likely amount (single most likely amount in a range), depending on
whichever
fca) has the better predictive value. This estimate is however limited to the extent that, it is highly probable that its
inclusion
fcb) of this estimate in revenue will not result in a significant revenue reversal in the future as result of a re-estimation.
fcc)
fcd) The time value of money
6.3.2
Infce)
determing the transaction price, the entity has to adjust the amount of considertaion for the effects of the time value of
fcf) if the contract includes a significant financing component. Revenue is therefore recognised at an amount that reflects
money
fcg)
the price that a customer would have paid for the goods and services if the customer had paid cash when the goods and services
fch)
transfer
fci) to the customer. To this end, the entity has to discount the promised consideration for the effect of the time value of
money.
fcj)
fck)
6.3.2.1
fcl) Determining if the financing component is significant
To determine if the financing component is significant, the entity considers several factors, including both of the following:
fcm)
fcn)the difference between the amount of promised consideration and the cash selling price; and
fco)the combined effect of:
fcp)
fcq)the expected length of time between when the entity transfers the goods or services to the customer and when the customer
fcr)pays for those goods or services; and
fcs)the prevailing interest rates in the relevant market.
fct)
Infcu)
the above example it is clear that a significant financing component exists because the
fcv)
customer receives and obtaines control of the goods but the payment of the consideration is only due later (i.e. the length of time
offcw)
time between the transfer of the goods and payment of the consideration is significant). A financing component in a contract
fcx)
may
fcy)
also exist in an opposite scenario than the one in the above example: a customer pays for the goods upfront but the goods
are
fcz)transfered to the customer at a later point in time. In such a case a contract liability (revenue received in advance
liability)
fda) is recognised when the consideration is received by the entity. The contract liability is adjusted over the period with
the
fdb)interest expense (calculated using the implicit interest rate of the contract) until the goods or services are transferred to
the
fdc)customer.
fdd)
Afde)
contract will not have a significant financing component if, for example, the following
fdf)
conditions exist:
fdg) The customer paid in advance and the timing of the transfer is at the discretion of the customer.
fdh)
fdi)A substantial amount of the consideration varies on the occurrence or non-occurrence of a future event that is not within
fdj)the control of the customer or entity.
Even
fdk)though the contract has a significant financing component, it is not necessary to separate the financing component if the
period
fdl) between transfer of the goods or services and receipt of payment is expected to be less than one year.
fdm)
fdn) Measuring and recognising the financing component
6.3.2.2
fdo)
The discount rate to be used is the rate that would be reflected in a separate financing transaction between the entity and the
fdp)
customer
fdq)
at contract inception. The discount rate
should
fdr) reflect the customer’s credit risk. After the contract inception the discount rate is not adjusted for changes in interest
rates
fds)or other circumstances.
The
fdt)effects of financing (interest) are presented separately from revenue in the statement of profit or loss and other
comprehensive
fdu) income. Interest is accrued from the date that the entity recognised a contract asset (i.e. when the right to
fdv) consideration is recognised).
receive
fdw)
fdx) Non-cash consideration
6.3.3
Iffdy)
the consideration received by the entity is not in cash, then the entity measures the noncash
fdz)
consideration at fair value (IFRS 13). If the entity cannot reasonably estimate the fair value of the non-cash consideration, it
measures the considerations indirectly by reference to the stand-alone selling price of the goods or services promised to the
customer.
 fea)
feb)
fec) Prescribed Book Chapter 10 paragraph 6 (Continued):
fed)
6.3.4
fee)Consideration payable to a customer
fef)
Consideration payble to a customer is the amounts that an entity pays to a customer in the form of cash, credit or other items
feg)as coupons or vouchers) that the customer can apply against amounts owed to the entity. In determining how to account
(such
feh)
for the consideration payable it first has to be determined if the consideration payable is for the purchase of distinct goods or
fei)
service from the customer.
fej)
fek)
6.3.4.1
fel) Consideration payable for distinct goods or service
Infem)
this case the entity’s customer is also a supplier to the entity. The consideration payable to the customer for goods or services
isfen)
therefore accounted as a purchase from a supplier. The income is recognised at the amount of consideration from the
customer
feo) that the entity is entitled to in terms of IFRS 15.
fep)
feq) Consideration payable for distinct goods or service
6.3.4.2
Infer)
this case the consideration receivable from the customer is reduced by the consideration payable to the customer. Therefore
fes)
the revenue recognised from the sale to the customer is reduced by the consideration payable to the customer. Die reduction in
fet)
consideration
feu) is at the later date of the revenue recognition or the consideration received from the customer.
fev)
6.4
few)Allocate the transaction price to the performance obligations (step 4)
6.4.1
fex)Allocating the transaction price
Allocating
fey) the transaction price to performance obligations is only necessary where more than one performance obligation
fez) in a contract with a customer. The allocation of the transaction price is based on the stand-alone selling prices of the
exists
ffa)
underlying goods or services and depicts the amount of consideration to which the entity expects to be entitled in exchange for
ffb)
satisfying each performance obligation. The best evidence of a stand-alone selling price is the observable price of goods or
ffc)
services when the entity sells those goods or services separately in similar circumstances and to similar customers. If the stand-
ffd)
alone
ffe) selling prices are not directly observable, then the entity needs to estimate them based on suitable estimation methods
(example
fff) expected cost plus relevant profit margin).
ffg)
The
ffh)transaction price can be amended after inception of a contract. In such a case an entity allocates the transaction price
change
ffi) to the performance obligations on the same basis as at contract inception. A change in revenue is not recognised for
ffj)
changes in stand-alone selling prices of goods or services after contract inception.
ffk)
ffl) Allocating a discount
6.4.2
ffm)
Affn)
customer receives a discount when the sum of the stand-alone selling prices of the promised goods or services in the
contract
ffo) exceeds the transaction price. A discount given to a customer is allocated proportionately to all performance
obligations
ffp) on a relative standalone selling price basis.
Inffq)
certain cases an entity may allocate a discount only to some performance obligations in the contract if all of the following
criteria
ffr) are met:
ffs)the entity regularly sells each distinct good or service (or each bundle of goods or services) in the contract on a stand-alone
fft)basis;
ffu)the entity regularly sells, on a stand-alone basis, a bundle of some of those distinct goods or services at a discount to the
ffv)
ffw) stand-alone selling price of the goods or services in each bundle;
ffx)the discount ascribed to each bundle is substantially the same as the discount in the contract; and
ffy)an analysis of the goods or services in each bundle provides observable evidence of the performance obligation to which the
ffz)entire discount in the contract belongs.
fga)
fgb)Allocating variable consideration
6.4.3
fgc)
Variable consideration promised in a contract may be attributable to the entire contract, or to a specific part of a contract. If
fgd)
variable
fge) consideration promised in a contract relates to the entire contract, then the variable consideration is allocated to all
the
fgf)performance obligtations in a contract based on the stand-alone selling prices of the promised goods or services in the
contract.
fgg) If variable consideration promised in a contract relates to a part of a contract, then the variable consideration is
allocated
fgh) to those specific performance obligations based on their stand-alone selling prices. This can be done only if the terms
offgi)
the variable consideration specifically concern these performance obligations and the allocation of the consideration that the
fgj) is obliged to receive, is reflected.
entity
fgk)
fgl)
6.5 Satisfying the performance obligations (step 5)
fgm)
An entity
fgn)
recognises revenue when the entity satisfies a performance obligation. A performance obligation is satisfied when
the
fgo)entity transfers the promised goods or services to a customer thereby giving the customer control of that asset.
By definition a customer obtains control of the asset when:
fgp)
fgq) the customer has the ability to direct the use of the asset; and
fgr)the customer has the ability to receive substantially all the remaining benefits from the asset.
Afgs)
performance obligation can be satisfied at a point in time or over a period of time. IFRS 15 requires the entity to determine
atfgt)
contract inception firstly if the performance obligation is satisfied over time. If this is not the case, it is assumed that the
fgu)
performance obligation is satisfied at a point in time.
 fgv)
fgw)
fgx)
fgy)
Prescribed Book Chapter 10 paragraph 6 (Continued):
fgz)
fha)
6.5.1
fhb)Performance obligation satisfied over time
Afhc)
performance obligation is satisfied over time if one of the following criteria is met:
fhd) the customer simultaneously receives and consumes the benefits as the entity performs;
fhe)
 the entity’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
fhf)the entity’s performance does not create an asset with an alternative use to the entity, and the entity has an enforceable
fhg)
fhh)
right to payment for performance completed to date.
Once
fhi) it is determined that the performance obligation is indeed satisfied over time, the entity recognises revenue over time based
on the measure of the progress towards complete satisfaction of that performance obligation. In order to determine the
fhj)
measure
fhk) of progress, the entity should apply a single method for each performance obligation and this should be applied
consistently
fhl) to similar performance obligations and in similar circumstances. The method to determine the measure of progress
can
fhm) be either the input method or the output method.
fhn)
fho)
fhp)
fhq)
fhr)
fhs)
fht)
fhu)
fhv)
fhw)
fhx)
fhy)
Asfhz)
circumstances change over time, an entity shall update its measure of progress to depict the entity’s performance completed
fia)
tofib)
date. Such changes shall be accounted for as a change in accounting estimate in accordance with IAS 8 Accounting Policies,
Changes
fic) in Accounting Estimates and Errors.
Infid)
some circumstances, for instance in the early stages of a contract, the entity is unable to reasonably measure the outcome of a
performance
fie) obligation, but the entity expects to recover the costs incurred in satisfying the performance obligation. The revenue
recognised
fif) is therefore limited to the costs incurred until such time that the outcome can be measured.
fig)
fih) Performance obligations satisfied at a point in time
6.5.2
Iffii)
an entity does not satisfy a performance obligation over time it consequently satisfies the
fij)
performance obligation at a point in time. The point in time when a performance obligation is satisfied by the entity, is the point
fik)
infil)
time that the customer obtains control of the asset in terms of the two requirements illustrated above, i.e. the customer has the
ability
fim) to direct the use of the asset and has the ability to receive the benefit from the asset. In addition, an entity also
considers
fin) the following indicators that control transferred to the customer:
fio)The customer has a present obligation to pay for the asset.
fip)The customer has accepted the asset.
fiq)The customer has significant risks and rewards of ownership of the asset.
fir)
fis)The customer has physical possession of the asset.
fit) The
Thecustomer has legal
core principle title to
of IFRS 15the asset.
– Revenue from Contracts with Customers, is that an entity recognises revenue to
depict the transfer of promised goods or services to customers in an amount that reflects the consideration to
which the entity expects to be entitled in exchange for those goods or services (par 02). To be able to apply
this core principle an entity performs the following five steps for revenue recognition.
fiu)
fiv)
fiw)
fix)
fiy) STEP 1 – IDENTIFY THE CONTRACT(S) WITH A CUSTOMER
fiz) Study par 6.1 of the prescribed textbook.
fja)
fjb) A contract is an agreement between two or more parties that creates (legally) enforceable rights and
obligations. Contracts can be in a written or oral format or can be implied by an entity’s customary business
practices. An entity accounts for a contract with a customer only when all of the following criteria are met:
a) The parties to the contract have approved the contract (in writing, orally or in accordance with other
customary business practices) and they are committed to perform their respective obligations;
b) The entity can identify each party’s rights regarding the goods or services to be transferred;
c) The entity can identify the payment terms of the goods and services to be transferred;
d) The contract has commercial substance (the risk, timing or amount of the entity’s future cash flows is
expected to change because of the contract);
e) It is probable that the entity will collect the consideration.
fjc)
fjd) It is important to note that a contract does not exist if each party has the unilateral enforceable right to
terminate a wholly unperformed contract without compensation (i.e. paying a penalty) to the other party. A
contract is wholly unperformed if both of the following criteria are met:
 The entity has not yet transferred any promised goods or services to the customer;
 The entity has not yet received, and is not yet entitled to receive, any consideration in exchange for
promised goods or services.
fje)
fjf) Two issues that may complicate the identification of contracts:
 Existence of a combination of contracts
 Modification of contracts
fjg)
fjh) COMBINATION OF CONTRACTS
fji) Study par 6.1.2 of the prescribed textbook.
fjj) When two or more contracts are entered into with the same customer at or near the same time, you must
determine whether the contracts are to be accounted for as a single contract or as a separate contract.
fjk) The contracts have to meet one of the following in order to be accounted for as one contract:
 The contracts are negotiated as a package with a single commercial objective;
 The amount of consideration paid under one contract is dependent on the price or performance under
another contract; or
 The goods or services promised under the contracts constitute a single performance obligation.
fjl)
fjm) CONTRACT MODIFICATIONS
fjn)Study par 6.1.3 of the prescribed textbook.
fjo)
fjp) A contract may be modified after its inception. A contract modification is a change in the scope and/or price
of a contract that is approved by the parties to the contract. A contract modification exists when the parties
to a contract approve (in writing, orally or implied) a modification that either creates new or changes existing
enforceable rights and obligations of the parties to the contract. An entity accounts for a contract
modification as a separate contract if both of the following conditions are present:
 the scope of the contract increases because of the additional promised goods or services that are distinct; and
 the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone
selling prices of the additional promised goods or services and any appropriate adjustments to that price to
reflect the circumstances of the particular contract.


fjq)

fjr) If a contract modification does not result in a new separate contract an entity accounts for it in one (or a
combination) of the following ways:
 A replacement of the original contract with a new contract (if the remaining goods or services under the
original contract are distinct from those already transferred to the customer before or on the amendment date)
 A continuation of the original contract (if the remaining goods or services under the original contract are
distinct from those already transferred to the customer, and the performance obligation is partially satisfied at
modification date).
fjs)
fjt) STEP 2 – IDENTIFY THE SEPARATE PERFORMANCE OBLIGATIONS IN THE CONTRACT
fju)Study par 6.2 of the prescribed textbook
fjv) The next step is to identify the performance obligations in the contract at its inception. IFRS 15 requires that an
entity recognise revenue as and when performance obligations in a contract are satisfied by the entity.
Identifying performance obligations in a contract are therefore an important step in revenue recognition. A
 promise to deliver a good or a service in terms of a contract, is a performance obligation when the good or
service is distinct. The term distinct means:
 The customer can benefit from the good or service, either on its own or together with other resources
that are readily available to the customer (i.e. the good or service is capable of being distinct); and
 The entity’s promise to transfer the good or service to the customer is separately identifiable from other
promises in the contract (i.e. the good or service are distinct within the context of the contract).
fjw)

fjx)

 iii. Non-distinct good or service: A good or service that is not distinct should be combined with other
goods or services until the entity identifies a bundle of goods or services that are distinct.
 A series of distinct goods or services: A series of distinct goods or services that are substantially
the same and that have the same pattern of transfer to the customers is also a performance obligation.
fjy)

fjz)

fka) STEP 3 – DETERMINE THE TRANSACTION PRICE

fkb) Study par 6.3 of the prescribed textbook.
fkc)
fkd)The next step is to determine the transaction price for the contract. It is the amount of consideration to which
an entity expects to be entitled to (in terms of both the contract and its customary business practices) in
exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (i.e. VAT). The consideration promised in a contract with a customer may include fixed amounts,
variable amounts, or both. The nature, timing and amount of consideration promised by a customer affect the
estimate of the transaction price, and an entity considers the effects of all of the following:
fke)
fkf)a) Variable consideration
fkg)An amount of consideration can vary because of discounts, rebates, refunds, credits, price concessions,
incentives, performance bonuses, penalties or other similar items or because the entity’s entitlement to the
consideration is contingent on the occurrence or non-occurrence of a future event. For example, an amount of
consideration would be variable if either a product was sold with a right of return or a fixed amount is promised
as a performance bonus on achievement of a specified milestone. An entity estimates an amount of variable
consideration by using either of the following methods consistently throughout the contract, depending on
which method the entity expects to better predict the amount of consideration to which it will be entitled:
 The expected value is the sum of probability-weighted amounts in a range of possible consideration amounts.
This method may be appropriate if an entity has a large number of contracts with similar characteristics.
 The most likely amount is the single most likely amount in a range of possible consideration amounts. This
method may be appropriate if the contract has two possible outcomes only (an entity either achieves a
performance bonus or does not).

fkh)

fki) b) The existence of a material financing component in the contract (Time value of money)
fkj) The promised amount of consideration is adjusted for the effects of the time value of money. The objective
of the adjustment is for an entity to recognise revenue at an amount that reflects the price that a customer
would have paid for the promised goods or services if the customer had paid cash for those goods or services
(cash selling price). An entity considers all relevant facts and circumstances in assessing whether a contract
contains a significant financing component, including both of the following:
 the difference, if any, between the amount of promised consideration and the cash selling price of the
promised goods or services; and
 the combined effect of both of the following:
o the expected length of time between transferring the promised goods or services to the customer and
payment; and
o the prevailing interest rates in the relevant market.
fkk)As a practical expedient, an entity does not have to adjust the promised amount of consideration for the
effects of a significant financing component if the entity expects, at contract inception, that the period
between transfer of a promised good or service to a customer and payment by the customer for that good or
service will be one year or less.
fkl)

fkm) c) Non-cash consideration

fkn)The transaction price for contracts in which a customer promises consideration in a form other than cash is
measured at the fair value of the non-cash consideration (IFRS 13). If an entity cannot reasonably estimate
the fair value of the non-cash consideration, the entity measures the consideration indirectly by reference to
the stand-alone selling price of the goods or services promised to the customer.

fko)

fkp) d) Consideration payable to a customer

fkq)Consideration payable to a customer includes cash, credit or other items (a coupon or voucher) that can be
applied against amounts owed to the entity. In determining how to account for the consideration payable it first
has to be determined if the consideration payable is for the purchase of distinct goods or services from the
customer.
 Consideration payable is for distinct goods or service: In this case the entity’s customer is also a
supplier to the entity. The consideration payable to the customer for goods or services is therefore accounted
as a purchase from a supplier. Revenue from sales to this customer is accounted for at the consideration on
which the entity is entitled to in terms of IFRS 15
 Consideration payable is not for distinct goods or service: In this case the consideration receivable from
the customer is reduced by the consideration payable to the customer. Therefore the revenue recognised from
the sale to the customer is reduced by the consideration payable to the customer. The reduction in
consideration is at the later date of the revenue recognition or the consideration received from the customer.
fkr)
fks) STEP 4 – ALLOCATE THE TRANSACTION PRICE TO THE PERFORMANCE OBLIGATIONS IN THE CONTRACT
fkt) Study par 6.4 of the prescribed textbook.
fku)
fkv) Allocating the transaction price
fkw) Allocating the transaction price to performance obligations is only necessary where more than one
performance obligation exists in a contract with a customer. The allocation of the transaction price to several
performance obligations is based on the stand-alone selling prices of the underlying goods or services and
depicts the amount of consideration to which the entity expects to be entitled in exchange for satisfying each
performance obligation. The best evidence of a stand- alone selling price is the observable price when the
entity sells that good or service separately in similar circumstances and to similar customers. If a stand-alone
selling price is not directly observable, an entity estimates the stand-alone selling price based on suitable
estimation methods (example expected cost plus relevant profit margin).
fkx)

fky)

fkz) Allocation a discount

fla) A customer receives a discount for purchasing a bundle of goods or services if the sum of the stand-alone
selling prices of those goods or services promised in the contract exceeds the transaction price. A discount
given to a customer is allocated proportionately to all performance obligations on a relative stand-alone
selling price basis.
flb)
flc) Allocating variable consideration
fld)Variable consideration promised in a contract may be attributable to the entire contact, or to specific part of a
contract. If variable consideration promised in a contract relates to the entire contract, then the variable
consideration is allocated to all performance obligations in a contract, based on the stand-alone selling
prices of the promised goods or services in the contract.
fle)
flf) STEP 5 – RECOGNISE REVENUE WHEN (OR AS) THE ENTITY SATISFIES A PERFORMANCE OBLIGATION
flg)Study par 6.5 of the prescribed textbook.
flh)
fli) The next step is to recognise revenue when (or as) the entity satisfies a performance obligation by transferring
a promised good or service (for example an asset) to a customer. An asset is transferred when (or as) the
customer obtains control of that asset. For each performance obligation identified, an entity determines at
contract inception whether it satisfies the performance obligation over time or at a point in time. If an entity
does not satisfy a performance obligation over time, the performance obligation is satisfied at a point in time.
flj)
flk) Goods and services are assets, even if only momentarily, when they are received and used. Control of an
asset refers to the ability to direct the use of, and obtain substantially all of the remaining benefits from, the
asset. Control includes the ability to prevent other entities from directing the use of, and obtaining the benefits
from, an asset. The benefits of an asset are the potential cash flows (inflows or savings in outflows) that can be
obtained directly or indirectly in many ways, such as by:
 using the asset to produce goods or provide services (including public services),
 using the asset to enhance the value of other assets,
 using the asset to settle liabilities or reduce expenses,
 selling or exchanging the asset,
 pledging the asset to secure a loan, and
 holding the asset.
fll) Control may be transferred either over time or at a point in time.
flm)
fln)Performance obligations satisfied over time
flo) An entity transfers control of a good or service over time and, therefore, satisfies a performance obligation and
recognises revenue over time, if one of the following criteria is met:
 The entity simultaneously receives and consumes the benefits provided by the entity’s performance as the
entity performs;
 The entity’s performance creates or enhances an asset (work in progress) that the customer controls as the
asset is created or enhanced;
 The entity’s performance does not create an asset with an alternative use to the entity, and the entity has an
enforceable right to payment for performance completed to date.
flp)
flq)Measuring progress towards complete satisfaction of a performance obligation
flr) For each performance obligation satisfied over time, an entity recognises revenue over time by measuring the
progress towards complete satisfaction of that performance obligation to depict the transfer of control of
goods or services promised. Appropriate methods of measuring progress include output methods and input
methods.
 Output method: Revenue recognition is based on the goods or services produced up to date. This method
considers the results of appraisals, milestones reached or units produced.
 Input method: Revenue recognition is based upon the entity’s efforts or inputs. This method considers the
resources consumed, labour hours expended, costs incurred or time lapsed.
fls)
flt) When applying a method for measuring progress, an entity excludes from the measure of progress any goods
or services for which it does not transfer control to a customer. Conversely, an entity includes in the
measure of progress any goods or services for which it does transfer control to a customer when
satisfying that performance obligation.
flu)
flv) As circumstances change over time, an entity updates its measure of progress to reflect any changes in the
outcome of the performance obligation. Such changes to an entity’s measure of progress is accounted for as a
change in accounting estimate in accordance with IAS 8 – Accounting Policies, Changes in Accounting
Estimates and Errors.
flw)
flx) An entity recognises revenue for a performance obligation satisfied over time only if it can reasonably measure
its progress towards complete satisfaction of the performance obligation. In some circumstances (early stages
of a contract), an entity may not be able to reasonably measure the outcome of a performance obligation, but
it may still expect to recover the costs incurred in satisfying the performance obligation. In these
circumstances, the entity recognises revenue only to the extent of the costs incurred until such time that it can
reasonably measure the outcome of the performance obligation.
fly)

flz)

fma) Performance obligations satisfied at a point in time

fmb) If a performance obligation is not satisfied over time, an entity satisfies the performance obligation at a
point in time. To determine the point in time at which a customer obtains control of a promised asset and the
entity satisfies a performance obligation, the entity considers the requirements for control and the indicators of
the transfer of control, which include, but are not limited to, the following:
 The customer has a present obligation to pay for the asset.
 The customer has accepted the asset.
 The customer has significant risks and rewards of ownership of the asset.
 The customer has physical possession of the asset.
 The customer has legal title to the asset.
fmc)

fmd) CONTRACT COSTS

fme) Study Paragraph 7 of the prescribed textbook.
fmf)
fmg) Prescribed Book Chapter 10 paragraph 7:
fmh)
fmi)
7fmj)
Contract costs
An
fmk)entity can incur costs in order to obtain a contract and/or to fullfil a contract. The accounting treatment of such costs are
discussed
fml) in more detail below:
fmm)
7.1
fmn) Costs to obtain a contract
fmo)to obtain a contract may include costs such as marketing costs, legal costs and sales
Costs
fmp)
commission paid. These costs can be recognised as an asset if:
fmq) the costs are incremental to obtaining the contract with a customer; and
fmr)
fms) the entity expects to recover those costs.
The
fmt) incremental costs of obtaining a contract are those costs that it would not have incurred if the contract had not been
obtained
fmu) (for example, payment of sales commission). The costs capitalised as an asset is amortised on a systematic basis (refer
to 7.3 below). As a practical expedient, an entity may recognise the costs of obtaining a contract as an expense when incurred if
fmv)
fmw)
the amortisation period of the asset is one year or less.
fmx)
fmy)
7.2 Costs to fullfil a contract
fmz)
If the costs incurred to fullfil a contract with a customer are in the scope of another Standard, such as IAS 2, Inventories, an
fna)
entity
fnb) accounts for those costs in accordance with that Standard. If the costs incurred to fullfil a contract with a customer are
not
fnc) in the scope of another Standard, then IFRS 15, allows those costs to be recognised as an asset when:
fnd)the costs are directly related to a contract (or a specific anticipated contract);
fne)the costs generate or enhance resources of the entity that will be used in satisfying the performance obligations; and
fnf)the costs are expected to be recovered.
fng)
fnh)
Direct
fni) costs include direct labour, direct raw material and costs directly related or chargeable to the contract. The following
costs
fnj) can not be recognised as an asset in terms of IFRS 15 and should be treated as an expense:
fnk)general and administrative costs (unless these costs are explicitly chargeable to the customer under the contract);
fnl)costs of wasted material, labour or other resources;
fnm) costs that relate to satisfied or partially satisfied performance obligations (i.e. costs that relate to past performance); and
fnn)
 costs for which the entity cannot distinguish whether the costs relate to unsatisfied performance obligations or satisfied
fno)
fnp)performance obligations or partially satisfied performance obligations.
fnq)
7.3
fnr)Amortisation and impairment
Iffns)
an entity recognises an asset for contract costs, the asset is amortised on a systematic basis, consistent with the pattern of
transfer
fnt) to the customer of the goods or services to which the asset relates.
fnu)
An entity shall update the amortisation to reflect a significant change in the entity’s expected timing of transfer to the
fnv)
customer of the related goods or services. Such a change shall be accounted for as a change in estimate in accordance with IAS
fnw)
8, Accounting Policies, Changes in Accounting Estimates and Errors.
fnx)
An asset recognised for contract costs is also tested for impairment in terms of IFRS 15.
fny)An entity can incur costs in order to obtain a contract and/or to fulfil a contract. The accounting treatment of
such costs includes the following:
1. Costs to obtain a contract;
2. Costs to fulfil a contract;
3. Amortisation and impairment

fnz)
 foa)
fob) PRESENTATION
foc)
fod) Prescribed Book Chapter 10 paragraph 8:
foe)
fof)
8 Presentation
fog)
IFRS
foh)15 provides guidance on the presentation of the following revenue related items in the
statement
foi) of financial position:
foj)
8.1
fok) Trade receivable
Afol)
trade receivable is an entity’s unconditional right to consideration that arises when the entity transfers goods or services to
afom)
customer but the customer’s payment of the consideration is still outstanding. There is therefore no conditions attached to the
fon)
payment of consideration to the entity.
Afoo)
trade receivable is accounted for in terms of IFRS 9.
fop)
foq)
8.2
for) Contract assets
Afos)
contract asset is an entity’s conditional right to consideration that arises when the entity transfers goods or services to a
customer
fot) but the customer’s payment of the consideration is still outstanding. In other words, the payment of consideration to
the
fou) entity is dependent on the occurence of uncertain future events. The right is conditional on something other than the lapse
of time.
fov)
fow)
Contract assets are assessed for impairment in terms of IFRS 9.
fox)
foy)
8.3 Contract liabilities
foz)
Afpa)
contract liability arises when a customer pays consideration to the entity before the entity has transfered the goods or
services
fpb) to the customer. This is also referred to as “revenue received in advance”. In this case revenue is not recognised but
instead
fpc) the entity recognises a contract liability until the goods or services are transferred to the customer. The liability
recognised
fpd) therefore represent the entity’s obligation to deliver goods or services in the future, or to repay the amount of
consideration
fpe) to the customer.
fpf) IFRS 15 provides guidance on the presentation of the following revenue related items in the statement of
financial position:
1. Trade receivable
2. Contract assets
3. Contract liabilities

fpg) DISCLOSURE
fph) Study paragraph 9 of the prescribed textbook.
fpi)
fpj) Prescribed Book Chapter 10 paragraph 9:
9fpk)
Disclosure
fpl)objective of the disclosure requirements is for an entity to disclose sufficient information to enable users of financial
The
fpm)
statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
fpn)
customers. To achieve that objective, an entity shall disclose qualitative and quantitative information about all of the following:
fpo)
fpp)
9.1 Contracts with customers
fpq)
An entity discloses the following amounts for the reporting period, unless those amounts are presented separately in the
fpr)
statement
fps) of profit or loss and other comprehensive income in accordance with other Standards:
fpt)revenue recognised from contracts with customers, (separately disclosed); and
fpu) any impairment losses recognised on any receivables or contract assets.
fpv)
fpw)
Infpx)
terms of contracts with customers, the entity also has to provide information about the following:
fpy) Disaggregation of revenue;
fpz) Contract balances;
fqa) Performance obligations;
fqb) Transaction price allocated to remaining performance obligations.
fqc)
fqd)
9.2 Significant judgements, and changes in the judgements
fqe)
The
fqf)entity discloses information regarding:
fqg) Determining the timing of satisfying performance obligations; and
fqh) Determining the transaction price and amounts allocated to performance obligations.
fqi)
fqj)
9.3 Assets recognised from the costs to obtain or fulfil a contract
fqk)
The entity discloses information regarding the:
fql)
fqm) Closing balance of such assets;
fqn)Determining the amortisation
The objective method; requirements of IFRS 15 is for an entity to disclose sufficient information to
of the disclosure
 Amount
enable of amortisation
users andstatement
of financial impairment;toand
understand the nature, amount, timing and uncertainty of revenue and
 Judgements used in determining those costs incurred.
 cash flows arising from contracts with customers. To achieve that objective, an entity shall disclose qualitative
and quantitative information about all of the following:
1. Contract with customers;
2. Significant judgements, and changes in the judgements;
3. Assets recognised from the costs to obtain or fulfil a contract.

fqo)

fqp) 9.6 SHORT AND SWEET

fqq) Study par 10 of the prescribed textbook for a summary of the Five-step
revenue model.
Prescribed Book Chapter 10 paragraph 10:
fqr)

fqs)

fqt)

fqu)

fqv)

fqw)

fqx)