International Accounting Standards

IFRS-15 Revenue from contract with Customer

Revenue: The gross inflow of economic benefits (cash, receivables, other assets) arising from
the ordinary operating activities of an enterprise.

 Revenue from the sale of goods and /or provision of services should be
recognised by applying the following five steps: 

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

IAS 10 – Events After the Reporting Date

Events after the end of the reporting period are those events, both favorable and unfavorable,
that occur between the end of the reporting period and the date when the financial statements
are authorized for issue.

 Adjusting Events: The financial statements are adjusted to reflect those events that
provide evidence of conditions that existed at the end of the reporting period
o Examples:
 Irrecoverable Debts
 Allowances for Inventory because of NRV
 Insurance Claims being negotiated
 Discovery of Fraud & Error
o Adjust amount recognize in Financial statements

 Non-adjusting Events: The financial statements are not adjusted to reflect events that
arose after the end of the reporting period
o Examples:
 Business combination ( Consolidation)
 Destruction of major production plant by fire
 Foreign Exchange Rates
o Disclosure in notes if material
 But if non-adjusting events impacts going concern of the company then financial
statements are made on breakup basis.

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IAS 38 – Intangible Assets

Definition
Intangible asset is an identifiable non-monetary asset, without physical substance, held for use
in the production or supply of goods or services, or for rental to others, or for administrative
purposes.

Measurement
 Amortization: An intangible asset with a finite useful life
 Impairment: An intangible asset with infinite useful life

Research & Development

Research:
 Original and planned investigation to gain new scientific or technical knowledge and
understanding
 Expense in Income statement

Development:
Application of research findings or other knowledge to a plan or design for the production of
new or substantially improved materials, devices products processes systems or services before
the start of commercial production or use
Recognition Criteria

S Separate Project
E Expenditure identifiable and reliably measured
C Commercially Viable
T Technically feasible
O Overall profitable
R Resources available to complete

Note:
 If criteria not met, write off as expense in income statement
 Once written off, not reversible
Subsequent Treatment:

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 Once capitalized, amortize annually on commercial productivity basis

 Annually review for SECTOR, if no longer met, then immediately write off as expense

Illustration: Research & Development

An entity has incurred the following expenditure during the current year:
(a) $100,000 spent on the design of a new product - it is anticipated that this design will be taken
forward over the next two year period to be developed and tested with a view to production
in three years time.
(b) $500,000 spent on the testing of a new production system which has been designed
internally and which will be in operation during the following accounting year. This new
system should reduce the costs of production by 20%.
How should each of these costs be treated in the financial statements of the entity?

Illustration 2: R & D
Amortization of development expenditure
Improve has deferred development expenditure of $600,000 relating to the development of
New Miracle Brand X. It is expected that the demand for the product will stay at a high level for
the next three years. Annual sales of 400,000, 300,000 and 200,000 units respectively are
expected over this period. Brand X sells for $10.
How should the development expenditure be amortized?

Test your understanding 6

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D&E are both development projects. Both projects are anticipated to be successful. They have
clearly-defined parameters. The project expenditure is carefully controlled. The prototypes
proved successful. The budgets show sales well in excess of total costs. Finance is readily
available. Project D has commenced production and the revenues have started to flow in.

Project Project
D E
$000 $000
Costs accumulated to 1.1.X5 (and meeting capitalization criteria) 400 350
Costs incurred during the year 600 250
Total anticipated net revenues 30,000 15,000
Net revenues during the year 6,000 nil
The company has also invested $340,000 in development project F but the tests are at present
inconclusive.
Describe with reasons the accounting for the above issues.

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets

PROVISION:
A liability of uncertain timing or amount

LIABILITY:
 Present obligation as a result of past events
 Settlement is expected to result in an outflow of resources (payment)
CONTINGENT LIABILITY:
 A possible obligation depending on whether some uncertain future event occurs, or
 A present obligation but payment is not probable or the amount cannot be measured
reliably

CONTINGENT ASSET:
 A possible asset that arises from past events, and
 Whose existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the enterprise

Recognition of a Provision
An enterprise must recognize a provision if, and only if:

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 A present obligation (legal or constructive) has arisen as a result of a past event (the
obligating event),
 Payment is probable ('more likely than not'), and
 The amount can be estimated reliably.
 Reported as Liability in SFP

CONTINGENT LIABILITY:
 Disclosure if amount is possible & not remote
CONTINGENT ASSET:
 Disclosure if amount is probable & not remote
Degree of probability of an outflow/inflow of Liability Asset
resources
Virtually certain > 95 % Provide Recognize
Probable > 50% Provide Disclose by note
Possible > 25% Disclose by No disclosure
note (Ignore)
Remote < 5% No disclosure No disclosure

IAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors

Accounting Policies: are the specific principles, bases, conventions, rules, and practices applied
by an entity in preparing and presenting financial statements.
Changes in Accounting Estimates: are adjustments to the carrying value of an asset or liability,
or the amount of annual consumption of an asset and expected future benefits and obligations
associated with, assets and liabilities. These changes arise due to new information or
developments and therefore are not to be classed as correction of errors.
Prior period errors: are omissions and misstatements, relating to the financial statements of
previous periods arising from a failure to use, or misuse, information that was available when
those financial statements were authorised for issue.

ACCOUNTING POLICIES:
 Accounting policies are set using:
o IFRS (International Financial Reporting Standards)
o IFRICs (International Financial Reporting Interpretation Committee)
 If there are some items which are not covered by these items then accountants use their
judgements over these assets which include information that:
o Is relevant to the economic decision making needs of users

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o Is reliable
o Represents faithfully
o Reflects the economic substance of the transaction
o Is neutral
o Is prudent
o Is complete in all material aspects.

CHANGE IN ACCOUNTING POLICY:

 An entity shall only change its accounting policy if:
o It is required to do so by a standard or interpretation, or
o It would result in the financial statements providing more relevant and reliable
information
 If the new standard does not have any transition provisions, or it is a voluntary change
in policy, then the entity shall apply the change in policy retrospectively.
 Retrospective Effect: an entity shall adjust the opening balance of each affected part of
equity for the earliest period presented and the comparative amounts disclosed for
each prior period as if the new policy had always been applied

CHANGES IN ACCOUNTING ESTIMATES:

Many Items recognized in the financial statements must be measured with an element of
estimation attached to them.
 Receivables may be measured after allowing for a general bad debt provision
 Inventory is measured at lower of cost or net realizable value but must provide for
obsolescence
 A provision under IAS 37 by its very nature may be an estimation of future economic
benefits to be paid out
 Non-current assets are depreciated; the charge takes into account the expected pattern
of consumption of the asset and its expected useful life. The consumption pattern and
expected life are estimates

Accounting Treatment:
The effect of the change shall be recognized prospectively by including in the current and future
periods profit and loss. There is no impact upon prior period statements

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