IAS 27 

Separate Financial Statements

Objective
This Standard deals with the accounting treatment of Investment in Subsidiary, Joint Venture &
Associate in the Separate Financial Statements of the Investor along with the related disclosure
requirements.
Scope
The requirements of this standard are applicable in the Separate Financial Statements of
the Investor to account for its Investment in Subsidiary, Joint Venture & Associate.
Definitions
1. Consolidated Financial Statements:
The financial statements which are prepared by combining the assets, liabilities, income,
expenses and the cash flows of the Parent and its Subsidiaries, and are presented as the financial
statements of a single economic entity are called Consolidated Financial Statements.
2. Separate financial statements:
The financial statements which are prepared and presented by the Parent or an Investor, in which
the investment in subsidiary, joint venture & associate are accounted for at Cost or in
accordance with IFRS 9, are called Separate Financial Statements.
 Separate financial statements are those which are prepared in addition to consolidated
financial statements and the financial statements in which investment in associate or joint
venture is accounted for as per Equity Method under IAS 28.
 The financial statements of the entity which has exemption from preparation of
consolidated financial statements for its subsidiaries and equity method for its associate
holdings as per IFRS 10, are also deemed as separate financial statements
 The financial statements which are prepared by the entity which does not have any
investment in subsidiary, joint venture or associate are not separate financial statements.
Preparation of Separate Financial Statements
When an entity prepares Separate Financial Statements, it will account for its investment in
subsidiary, joint venture or associate and any other ordinary investment either:
 At Cost or
 As per the IFRS 9 requirements
The entity should also consider the following points:
 Any Dividend Income from investment in subsidiary, joint venture or associate and any
other ordinary investment will be recognized in statement of profit or loss of the investor,
when it becomes receivable.
 If the investment under Cost model is classified as held for sale, then it will be measured
as per the requirements of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations. However, there will be no impact upon the investments which are measured
in accordance with IFRS 9 in such circumstances.
Disclosure
This Standard requires an entity to disclose the following:
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1. If the entity has used the exemption for the preparation of consolidated financial statements for
its subsidiaries and equity method for its associate holdings as per IFRS 10, then the entity
should disclose in its separate financial statements:
(a) The name of the group entity which has prepared the consolidated financial statements for the
public use, and the place where these are available.
(b) The details of its substantial investments in subsidiary, joint venture or associate which
includes:
 The name of the investee business entity
 The location of the investee business entity
 Proportion of its holding in such business entity
 The method used by the entity to account for such holdings.
2. The entity (Parent) which prepares separate financial statements and consolidated financial
statements for its subsidiaries should identify the consolidated financial statementsseparately in
its separate financial statements. And the separate financial statements should also include the
following:
The statement identifying, that these are separate financial statements
 The name of the investee business entity
 The location of the investee business entity
 Proportion of its holding in such business entity
 The method used by the entity to account for such holdings.

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IAS 28 - Investments in Associates and Joint
Ventures
Objective
This Standard deals with the accounting treatment of investment in associate and joint venture. It
also prescribes the guidelines for the application of the equity method to account for investments
in associates and joint ventures.
Scope
The requirements of this standard are applicable in the financial statements of entities which
have investment in associate or joint venture to account for such investments.
Definitions
Associate
The entity which is subject to significant influence by another entity is called associate.
Significant Influence
It is the ability to participate in the operating, financial and accounting policy decisions of the
investee but other than control or joint control over the investee.
Joint Arrangement
It is when two or more parties have joint control of another entity.
Joint Control
It is the contractually agreed sharing of control of an arrangement which requires mutual consent
of the parties sharing control regarding the relevant activities of such arrangement.
Joint Venture
It is when a separate legal entity is subject to joint control of two or more parties and the parties
that have joint control of the arrangement have rights to the net assets of such arrangement.
Joint Venturer
The party to a joint venture that has joint control of the arrangement is called joint venturer.
Establishment of Significant Influence
 The entity is deemed to have significant influence over the investee if the entity owns,
directly or indirectly (e.g. through subsidiary), 20 percent or more of the voting rights of
the investee, unless it is clear that this is not the case.
 On the other side, if the entity owns, directly or indirectly (e.g. through subsidiary), less
than 20 per cent of the voting rights of the investee, it is assumed that the entity does not
have significant influence over the investee. However, there are some certain
circumstances when entity owns less than 20% voting rights of the investee but entity can
exercise significant influence over the investee such circumstances may include:
(a) The entity has representation on the board of directors or equivalent governing body of the
investee;
(b) The entity has the right to participate in policy-making processes regarding relevant activities
of the investee
(c) Occurrence of substantial transactions between the entity and its investee;
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(d) Inter-change of management personnel between the entity and its investee
(e) Provision of essential technical information and services by the entity to investee.
 The entity may own share warrants, share call options, debt or other equity instruments
that are convertible into ordinary shares and have the potential, if exercised or converted,
to give the entity additional voting rights in the investee. Therefore, in determination of
significant influence, the entity should consider not only the existing voting rights but
also such potential voting rights, if these are currently exercisable or can be converted
any time, when assessing whether an entity has significant influence.
 The entity should consider all the pertinent facts and circumstances including the
contractual terms relating to the potential voting rights when these are considered in the
assessment of significant influence.
 The entity loses the significant influence over the investee when entity loses its ability to
participate in the operating, financial and accounting policy decisions of the investee.
Equity Method and Application
 When an entity has significant influence over, or a joint control of, an investee. It will
account for such investment in an associate or a joint venture as per the Equity Method
under this standard
 Equity method requires the investment in associate or joint venture to be measured at:
(a) Cost of investment which is adjusted for
(b) Investor’s share of profit or loss in the investee’s post acquisition profit or loss and
(c) Investor’s share of other comprehensive income, in the investee’s post acquisition other
comprehensive income
(d) Any dividend received will be deducted from the carrying amount of investment
 If potential voting rights exist and have been considered in determination of an entity’s
interest in an associate or a joint venture, the entity’s share of investee’s net assets will be
determined on the basis of existing ownership interests only.
 If the investee has in issuance irredeemable preference share, the investee’s profit should
be adjusted for the dividend relating to such preference shares whether or not the
dividend has been declared, before determining the entity’s share of profit or loss in
investee’s profit or loss.
 The application of equity method will start right from the date when the entity obtains
significant influence over, or a joint control of, an investee.
 On the date of acquisition of the investment in associate or joint venture, the difference
between the original cost of acquiring the investment and the entity’s share in the fair
value of the identifiable net assets of investee will be accounted for as follows:
(a) Any excess of original cost of acquiring the investment over the entity’s share in the fair
value of the identifiable net assets of the investee will be goodwill, which is not recognized
separately as it is included in the carrying amount of the investment.
(b)  Any excess of entity’s share in the fair value of the identifiable net assets of investee over
the original cost of acquiring the investment will be treated as income in the entity’s financial
statements in the period in which the investment is acquired.
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  Appropriate adjustment will be made in respect of additional depreciation based on the
fair value of investee’s depreciable assets at the date of acquisition in determination of
entity’s share of the associate or joint venture.
 If the reporting date of associate or joint venture is different from the reporting date of the
entity. The entity will account for such situation as follows:
(a) If the difference between the reporting date of the associate or joint venture and the reporting
date of the entity is no more than three months, then adjustments will be made for the effects of
material transactions or events that has taken place between that date and the reporting date of
the entity’s financial statements
(b) If the difference between the reporting date of the associate or joint venture and the reporting
date of the entity is more than three months, then the associate or joint venture is required to
prepare additional financial statements to the same reporting date as the financial statements of
the entity for the application of equity method.
 If the accounting policies of the associate or joint venture are different from the
accounting policies of the entity for like transactions or events, adjustment will be made
to bring in line the accounting policies of the associate or joint venture as to the entity’s
accounting policies before the application of equity method.
 If the associate or a joint venture has reported net loss for the period, the entity will
recognize its share of loss in associate or joint venture only up to extent of its interest in
the associate or joint venture, any excess loss will not be recognized. The interest in an
associate or a joint venture is the carrying amount of the investment in the associate or
joint venture calculated using the equity method.
 However, if the entity’s interest is reduced to zero because of entity’s share of post
acquisition loss in associate or joint venture, additional losses and related liability can
only be recognized up to the extent that the entity has a legal or constructive obligation to
compensate such excess losses. And if the associate or joint venture reports profit in the
subsequent periods, the entity will recognize its share of profit after its share of losses not
recognized.
 Intra-group receivable and payable balances with associate and joint venture are not
cancelled out.
 Similarly, intra-group sales with associate or joint venture are not cancelled out.
However, the profit or loss on such transactions will be eliminated as follows:
(a) For downstream transaction (i.e. when entity is seller of stock to the associate or joint
venture) and upstream transaction (i.e. when associate or joint venture is seller of stock to the
entity), any resulting gain will be recognized only up to the extent of other investor’s interest
and such gain up to the extent of entity’s own interest will be eliminated.
(b) In case of downstream transactions, if there is loss on the assets to be sold or contributed, or
impairment loss on such assets, these losses will be recognized in full in the financial statements
of Investor

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(c) In case of upstream transactions, if there is loss on the assets to be sold or contributed, or
impairment loss on such assets, the investor will recognize its share of loss in its own financial
statements.
(d) If an entity receives equity interest in an associate or joint venture in exchange for the
contribution of a non-monetary asset to an associate or a joint venture, any resulting gain or loss
on this transaction will be accounted for as above in (a) to (c) above.
Impairment Loss on Investment in Associate or joint Venture
If there is an indication of impairment in respect of entity’s investment in associate or joint
venture, the whole carrying value of the investment will be tested for impairment as a single
asset under IAS 36 by comparing the recoverable amount with its carrying value using equity
method, and any resulting impairment loss will be charged against the carrying value of
investment in associate or joint venture.
Discontinuing the Use of the Equity Method
The entity will discontinue the use of the equity method right from the date when it loses
significant influence over, or joint control of, an associate or a joint venture. And it will be
accounted for as follows:
(a) If this investment becomes a subsidiary, then it will be accounted for as per IFRS 3 Business
Combination& IFRS 10 Consolidated financial statements.
(b) If this investment becomes ordinary investment, the retained investment will be accounted for
under IFRS 9, any gain or loss will be recognize in statement of profit or loss which is the
difference between:
(i) Proceeds from disposal of part interest plus fair value of retained investment and
(II) Carrying value of the investment on this date.
(c) When the entity ceases the use of the equity method, the entity is required to reclassify any
gain or loss that had previously been recognized in other comprehensive income to the statement
of profit or loss.
(d) If the investment in associate becomes an investment in joint venture or vice versa, the entity
will continue to recognize the use of equity method.
Classification as Held for Sale
 If an entity classifies an investment or a portion of an investment in an associate or a joint
venture as held for sale, such investment or portion of investment will be covered under
IFRS 5.
 The entity will account for any remaining portion of investment in associate or joint
venture using the equity method, till the disposal of the portion which is classified as held
for sale.
 However, after the disposal of the portion which is classified as held for sale, the entity
will account for any remaining interest in the associate or joint venture as per IFRS 9
unless the remaining interest continues to be an associate or joint venture, in such a case
the entity will use the equity method.
Exemptions from Equity Method Application

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  The entity is not required to account for its investment in associate or joint venture as per
the equity method if it meets all of the following:
(a) The entity is a wholly or a partially-owned subsidiary of another entity and its owners do not
have any objection for not applying the equity method.
(b) The debt or equity instruments of the entity are not traded in the public, local and regional
markets.
(c) The entity is not in the process of issuing any class of instruments for trading in a public
market.
(d) The entity’s ultimate or any intermediate parent prepares consolidated financial statements
for use by the public.
 If an investment in an associate or a joint venture is held by, or is held indirectly through
an entity that is a venture capital organization, or a mutual fund, the entity may chose to
measure such investments in those associates and joint ventures at fair value through
profit or loss as per IFRS 9.
Separate Financial Statements
When an entity prepares Separate Financial Statements, it will account for its Investment in
associate and any other ordinary investment either:
 At Cost or
 As per the IFRS 9
 
Worked Example
On 1 January 2013, AB Ltd. acquired 30% of the ordinary share capital of Grange a private
limited company, which gives it the significant influence over the investee. The purchase
consideration was $5 million, and on this date the fair value of the net assets of Handy was $18
million.
On the date of acquisition, the retained earnings and other reserve of Grange Ltd were $8 million
and $6 million respectively. The summarized statement of financial position of Grange Ltd at 31
December 2013 is as follows:
 
  $m
Share capital of $1   4
Other reserves 6
Retained earnings 10
Total Net Assets 20
 
There had been no new issues of shares by Grange Ltd, since acquisition by AB Ltd and the
estimated recoverable amount of the net assets of Grange Ltd at 31 December 2013 was $22
million.
Required
Discuss how the investment in Grange Ltd. will be accounted for in the financial statements of

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AB Ltd for the year ended 31 December 2013 and calculate the impairment loss in respect of
investment in associate(if any) at 31 December 2013.
Solution:
 If an entity owns 20% or more of the voting rights in another entity, it is deemed that the
entity have significant influence over the investee. When an entity has significant
influence over an investee the entity will account for such investment in an associate as
per the Equity Method under IAS 28.
 Equity method requires the investment in associate or joint venture to be measured at:
(a) Cost of investment, which is adjusted for
(b) Investor’s share of profit or loss, in the investee’s post acquisition profit or loss and
(c) Investor’s share of other comprehensive income, in the investee’s post acquisition other
comprehensive income
(d) Any dividend received will be deducted from the carrying amount of investment.
 On the date of acquisition of associate, any excess of entity’s share in the fair value of the
investee’s identifiable net assets over the cost of investment will be treated as income in
the entity’s financial statements in the period in which the investment is acquired.
Therefore, the excess or negative goodwill of $0.4 million [$5 million – ($18×30%)] will
be treated as income in the statement of profit or loss (Dr. Cost $0.2million, Cr. P/L
$0.2million).
 
Note:
 The $0.4 million is not part of post acquisition retained earnings. It is adjustment to the original
cost to adjust the negative goodwill.
 This is investment in associate therefore, the equity method will be applied as follows:
  $’m
Cost of investment 5
Plus adjustment of negative goodwill [$5 million – ($18×30%)] 0.4
  Adjusted Cost 5.4
Plus Share of Post Acquisition Profit ($10 - $8) × 30%   0.6
Plus Share of Post Acquisition OCI     -
Carrying value of investment   6
For the purpose of impairment test, the recoverable amount will be compared with its carrying
value using equity method as follows:
  $’m
Carrying value of investment (using equity method as above) 6
Impairment Loss   -
Recoverable value ($22 million × 30%) 6.6
As the recoverable value is higher than carrying value, therefore there is no impairment loss and
investment will remain at $6 million in the statement of financial position of AB Ltd.

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IFRS 3 - Business Combination
Objective
This standard prescribes the guidelines to enhance the relevance, reliability and comparability of
the financial information reflected by the acquirer in its consolidated financial statements in
respect of a business combination. To achieve the objective, this standard provides the
accounting requirements for:
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  The recognition and measurement of identifiable assets and liabilities of the acquiree
along with valuation of non-controlling interest
 The determination of goodwill or bargain purchase gain relating to the business acquired
 The related disclosures required to enable the users of financial statements to analyze the
effects of business combination
Scope
The requirements of this standard are applicable to the transactions which meet the definition of
business combination as defined in this standard. However, this standard is not applicable to the
following:
 The arrangements which are classified as joint arrangements as per IFRS 1: Joint
Arrangements
 The purchase of an acquiree by the investment entity as defined in IFRS 10: Consolidated
Financial Statements and which is measured at fair value through profit or loss
 The combination of entities which are under common control before and after the
business combination
 The transaction in which acquiree is not a business
Identifying a Business Combination
The entity will identify the transaction as a business combination, if it entails all of the
following:
 Acquiree meets the definition of ‘Business’ as defined in this standard
 There must be an absolute ‘Acquirer’ in the business combination
 The transaction results in ‘Control’ of one entity over another entity
Business
In order to qualify as a business combination transaction, the acquiree should meet the definition
of business as defined in this standard:
- Business is an interrelated set of activities which must have three essential elements:
 Inputs (which are used to produce output such as plant and machinery, infrastructure,
human resource, intellectual property or materials)
 Process (it encompasses the techniques, procedures or methods to be applicable to the
input to produce output)
 Output (the ultimate produce of the input and process which generates economic
benefits)
- The acquiree may be a business activity under development or it may be a ceased activity but it
contains the three essential elements of business as mentioned above.
- If in a transaction, acquiree does not meet the definition of ‘Business' such transaction is
referred as ‘Asset Acquisition’ and in such circumstances whatever the cost is paid will become
the cost of asset acquired and no goodwill is calculated
The Acquisition Method
The entity is required to apply the ‘Acquisition Method’ to account for each business
combination, which includes the following:
 Determination of Acquirer

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  Determination of Date of Acquisition
 Determination and recognition of goodwill or bargain purchase gain relating to acquiree
business
 Determination and recognition of assets and liabilities acquired in the business
combination transaction and the related non-controlling interest in acquiree
Determination of Acquirer
The acquirer is a party which has control over the investee, therefore; this standard requires that
an entity will first apply the requirements in IFRS 10: Consolidated Financial Statement to
identify which party controls the acquiree. However, if the guidance in IFRS 10 does not help in
determining that which party controls the investee, then the entity will apply the guidelines in
IFRS 3 to identify the acquirer, which are as follows:
 The acquirer is normally the party that transfers cash, other assets or assumes a liability in
a business combination transaction, which is mainly affected by transfer of cash, other
assets or assumption of a liability
 The acquirer is normally the party that issues its equity instruments in a business
combination transaction, which is mainly affected by exchange of equity instruments.
However, in a business combination transaction, which is normally referred as ‘Reverse
Acquisition’ the entity which issues equity instruments becomes an acquiree.
The entity should also consider the following facts and circumstances to identify the acquirer in a
business combination transaction, which is mainly effected by exchange of equity instruments:
 The acquirer is the entity which owns majority of the voting rights in the investee
 The acquirer is the entity which dominates the management of the other entity
 The acquirer is the entity which has the ability to appoint, remove or reassign the key
management personnel of the investee
 The acquirer is the entity which owns largest minority holding in the investee
 The acquirer is the entity which pays premium over the fair value of net assets of the
investee 
 The acquirer is the entity which is larger in size than that of the investee
Date of Acquisition
It is the date when investor takes over the control of the investee, normally it is ‘Closing Date’
i.e. when assets and liabilities are taken over and consideration is transferred. However,
sometimes date of acquisition may be before or after the closing date e.g. when acquirer obtains
the control of investee before the closing date as per written contract.
Recognition of Assets and Liabilities at the Date of Acquisition in Acquiree
The acquirer will recognize the identifiable assets and liabilities of acquiree at the date of
acquisition, separately from the goodwill acquired in a business combination. However, only
those identifiable assets and liabilities will be recognized which will meet the following
conditions:
a) The asset and liability which meet the definition of asset or liability given in the IASB’s
framework

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b) The asset and liability must be arising as a result of the business combination i.e. it must be
the part of what the acquirer and acquiree has exchanged in a business combination transaction,
not from a separate transaction other than the business combination
The assets and liabilities which arise from a separate transaction other than the business
combination will be accounted for in the post acquisition period financial statements
For example, if the acquirer makes a plan for restructuring relating to the acquiree business such
as to relocate or close an activity of acquiree in future, the resultant cost of restructuring is not
the liability at the date of acquisition and it will be recognized in the post acquisition period
financial statements
Similarly, some assets and liabilities relating to acquiree may need to be recognized which may
not be reflected in acquiree financial statements, if those satisfy the recognition conditions as
mentioned above such as intangible assets related to acquiree business in the form of brand
name, customer relationships, or market share which may not have been recognized in acquiree
financial statements as these may be internally generated from acquiree perspective
Designation or classifying the Assets and Liabilities of Acquiree
The acquirer can designate or classify any assets or liability at the acquisition date relating to
acquiree. However, the classification should be made as per the facts, circumstances and
conditions at the date of acquisition such as:
a) Classification of a certain financial asset or liability of acquiree as at amortized cost or fair
value
b) Designation of a derivative financial instrument as hedging instrument
However, classification of the following is not permitted:
 Classification of lease contracts held by acquiree as finance or operation lease
 Classification of insurance contracts held by acquiree
Exception to Recognition
If there is contingent liability related to acquiree at the date of acquisition, the acquirer will not to
apply IAS 37 to account for that contingent liability of acquiree, instead the acquirer is required
to recognize such contingent liability of acquiree at fair value, in contrary to IAS 37, if acquiree
has present obligation for it and amount of obligation is reliably measurable, even it does not
requires probable outflow of economic resources.
Measurement of Assets and Liabilities of Acquiree at Acquisition date
The assets and liabilities of acquiree will be measured at their fair value at the date of
acquisition. The acquirer should not recognize any separate allowance for receivables related to
the trade receivable of acquiree as it is reflected in the fair value of receivables.
Exception to Measurement
a) Re-acquired Right
The acquirer is required to recognize the re-acquired right which was previously granted to
acquiree (such as franchise right or brand name under a licensing agreement), along with other
assets and liabilities of acquiree as part of business combination and such re-acquired right will
be recognize at fair value at the date of acquisition and the fair value will be determined ignoring

12
any renewal potential of that right. It will be amortized subsequently at its remaining contractual
life at the acquisition date.
b) Asset held for Sale
The acquirer will measure the non-current asset classified as held for sale at fair value less cost
to sell as per the requirements of IFRS 5.
c) Share Based Payment
If the acquirer grants or replaces any share based payment award of acquiree, then such payment
will be treated as per the requirements of IFRS 2 Share Based Payment.
Exception to Recognition and Measurement both
a) Income Taxes
The acquirer is required to recognize any deferred tax asset or liability relating to the assets and
liabilities of the acquiree at the date of acquisition as per the requirements of IAS 12 income
taxes.
b) Employee Benefits
The acquirer will recognize any employee benefit liability or asset relating to acquiree business
at the date of acquisition as per the requirements of IAS 19 Employee Benefits.
c) Indemnification
If shareholders of acquiree (seller) guarantee the acquirer, any liability, loss or a provision
relating to acquiree above a specified limit, then the acquirer will recognize such indemnification
as an asset at the date of acquisition on the same basis as the indemnified item, in the acquiree’s
financial statements i.e. if the indemnified amount is measured at fair value, the related
indemnification asset will also be measure at fair value.
Valuation of Non-controlling Interest
The interest in acquiree which is held by the party other than the acquirer is termed as non-
controlling interest; this standard allows two options to measure the non-controlling interest at
the date of acquisition as:
 Measure the non-controlling interest at its fair value at the date of acquisition, which is
normally the quoted price of interest held by non-controlling interest or
 Measure the non-controlling interest at its proportionate share in net assets of acquiree
Valuation of Goodwill or Bargain Purchase Gain
The acquirer will measure the goodwill acquired in a business combination as the excess (a) over
(b):
a) The sum of:
 The fair value of consideration transferred by acquirer
 The value of non-controlling interest, determined as per the requirements of this standard
 In case of Step Acquisition, the fair value of previously held equity interest in acquiree
b) The fair value of net assets of acquiree at acquisition date
If the (a) is less than (b) then the difference will be treated as bargain purchase gain or negative
goodwill, which will be treated as income of acquirer. However, in such a case the acquirer
should reassess the assets and liabilities of the acquiree which are recognized and should
incorporate the additional assets or liabilities which become apparent in the reassessment and
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then the acquirer is required to reconsider the measurement values which are allocated to the
assets or liabilities of the acquiree.
Consideration Transferred
The acquirer will measure the consideration transferred to acquire the control in a business
combination at its fair value on the acquisition date. The consideration transferred may be in the
form of cash, other assets, equity instruments or debt instruments issued by acquirer, or
contingent consideration.
 If other assets transferred as part of consideration are recognized at amounts other than
the fair value, then such assets will be measured at fair value at the acquisition date and
any resulting difference will be charged to profit or loss
 However, if other assets are being transferred to the acquiree instead of owners of
acquiree by acquirer as consideration in a business combination, in such circumstances
the assets transferred will be measured at carrying value and no gain or loss will be
recognized for such assets which will be controlled by acquirer both before or after the
business combination
 If the acquirer is obliged to transfer a contingent consideration in exchange for the
acquiree’s business at the date of acquisition, the acquirer will recognize such contingent
consideration at its fair value at the date of acquisition and it will be recorded as part of
cost of investment in acquiree.
Business Combination Expenses
The business combination charges such as valuation fee, consultation fee, legal charges and
professional charges incurred by acquirer for the purpose of business combination will be treated
as expense of the acquirer and will be charged to statement of profit or loss. However, any
issuance cost of equity or debt instruments will be accounted for as per IFRS 9 Financial
Instruments.
Business Combination achieved in Stages
When an acquirer obtains the control of acquiree in stages i.e. in more than one transaction, it is
termed as piecemeal or step acquisition such as when an entity first acquirers 25% interest in
acquiree in 20X7 and later the acquirer purchases further 45% interest in the same acquiree in
20X9 which ultimately gives acquirer the control over acquiree. 
 In case of business combination which is achieved in stages, the acquirer is required to
re-measure its equity interest previously held in the acquiree at its fair value on the date
of acquisition, the resulting gain or loss will be recognized in statement of profit or loss.
 If there are any fair value gains or losses relating to previously held equity interest,
recognized in other comprehensive income in prior accounting years, the amount that has
been recognized in other comprehensive income may be transferred to retained earnings.
Measurement Period
This standard allows the acquirer one year from the date of acquisition onward to complete
business combination accounting. It is termed as measurement period. This period is provided to
allow the reasonable time to acquirer to identify, recognize and measure:
a) The assets and liabilities of acquiree
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b) The fair value of previously held equity interest in acquiree if any
c) The valuation of non-controlling interest
d) The determination of goodwill or bargain purchase gain acquired in business combination
e) Determination of cost of investment
If the reporting date of acquirer comes within the measurement period and business combination
accounting has not been completed to date, then the acquirer will use the provisional values for
consolidation purpose and this fact will be disclosed in the accounting notes.
Later if any information becomes available within the measurement period which indicates the
facts and circumstances existed at the date of acquisition; it (increase or decrease) is adjusted
retrospectively to the date of acquisition and will be treated as measurement period adjustment to
reflect the affect of new information obtained as per the facts and circumstances exited at the
acquisition date. Such adjustment will also affect the value of the goodwill. The acquirer is
required to restate the relevant amounts in the comparative information of the prior year reflected
in the current year’s consolidated financial statements such as adjustment to the depreciation or
amortization charges.
Any adjustment to the date of acquisition in respect of the information that becomes available
after the measurement period will be treated as an adjustment of error as per IAS 8: Accounting
Policies, Changes in Accounting Estimates and Errors
Disclosures
This standard requires the acquirer to disclose the following:
 Business combination that has taken place during the accounting period
 Business combination that has taken place after the reporting date but before the date of
authorization financial statements for issue
 The details of the adjustments which have been recognized in the current accounting
period in respect of business combination

IFRS 10 - Consolidated Financial Statement

Objective
This standard prescribes the principle of control and the guidelines which are used by the entity
for the identification and establishment of control. It also deals with the preparation and
presentation of consolidated financial statements if the reporting entity has control over one or
more other entities
Scope
The requirements of this standard are applied by the parent for the preparation and presentation
of consolidated financial statements in respect of one or more other entities it controls except for
the following:
a) The parent is not required to prepare the consolidated financial statements in respect of one or
more other entities it controls if it satisfy the all the below mentioned conditions simultaneously:

15
  The reporting entity itself is a wholly or a partially owned subsidiary of another entity
and its owners do not have any objection for not preparing the consolidated financial
statements
 The equity or debt instruments of the reporting entity are not traded in any public, local
and regional market
 The reporting entity is not in the process of issuing any class of instruments for trading in
a public market
 The ultimate or any intermediate parent of the reporting entity prepares consolidated
financial statements for public use.
b) If the parent is an investment entity, which is not required to prepare consolidated financial
statements in respect of one or more other entities it controls, and measures such investments at
fair value through profit or loss as per the requirements of this standard
c) If the entity subject to control is a post employment or other long term employee benefit plan
which is covered under IAS 19
Control
The entity is deemed to have control over investee if entity has the following aspects with the
investee:
a) Right or exposure to the variable returns from investee
b) Power over investee
c) Current ability to use the power over investee to affect those returns from the investee
 The entity should also consider all the related facts and circumstances in the assessment
of control and the entity is required to reassess the aspects establishing control if
circumstances indicate that there is change in one or more of the three elements of control
 If the entity is required to act together with one or more other parties, to control an
investee and no investor can direct the relevant activities of investee on individual basis,
such circumstances will give rise to joint control therefore, in this case each investor will
account for its interest in the investee in accordance with IFRS11
 In certain circumstances, when two or more entities have existing rights which give them
the independent ability to direct, the different relevant activities of the investee, then in
such a situation, the entity having the current ability to direct the relevant activities that
most substantially affect the returns from investee, will be deemed to have control over
investee.
In determination of control the entity should also consider the following:
1. Purpose and Structure of the Entity
The entity should also consider the purpose and structure of the investee, such as how the
decision about the relevant activities are taken and whether the voting rights underlying equity
instruments in the investee are used to exercise control over the investee, because in some cases
the voting rights underlying equity instruments are only used to take decision about
administrative activities and the controlling rights are subject to the contractual arrangements
with the other parties.
2. Return
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The variable returns from investee includes fluctuating returns from investee, these may be
positive or negative depending upon the performance of the investee. These include dividend
income or management fee for the managerial services provided to investee based on the
performance of investee.
3. Power
Power over investee is one of the essential elements of control. The entity is deemed to have
power over investee, when it is able to direct the relevant activities of the investee which
includes the decision about the operating, financial and accounting policies of investee such as:
 Nature of goods or services
 Decision regarding capital investment
 Research and development activities
 Decision regarding capital structure
 Appointment of key management personnel of the investee
4. Ability to use the Power
In order to control an investee, the investor must have the present ability to exercise the power
over investee. The power always comes with certain rights. The rights which individually or in
combination give the investor power over investee are:
 Normally, it is when an investor owns more than 50% voting rights of the investee, but
there are circumstances, when investor owns less than 50% voting rights of the investee
but investor is still able to exercise the power over investee, such rights include:
 When investor has the right to appoint, remove or reassign the key management
personnel of the investee who are able to direct the relevant activities of the investee
 When investor has the right to appoint, remove or reassign another entity which is able to
direct the relevant activities of the investee
 When investor has the rights to direct the investee to enter into or veto any changes to
transactions for the benefit of the investor
 When investor has other rights in the contract which gives investor the ability to direct
the relevant activities of the investee
 When investor has majority of the voting rights in investee while remaining voting rights
are held by large number of individuals and each is having holding less than the
investor’s aggregate holding
 Sometimes, an investor has a passive interest in the investee which may also indicate that
investor has present ability to use the power over investee. It includes:
a) The key management personnel of the investee those direct its relevant activities are current or
former employees of the investor.
b) The operations of investee are dependent upon the investor
c) The investor has financed the major part of the operations of investee
d) The significant portion of investee’s obligations is guaranteed by the investor
e) The investee is dependent upon the investor in respect of its core services such as technology,
supplies or raw materials.

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f) The investee depends on the investor for key management personnel, such as when the
investor’s personnel have specialized knowledge of the investee’s operations.
 The rights which are used to determine the investor’s ability to exercise the power over
investee must be substantive rights (the rights which give rise to control, as mentioned
above)
 The entity acting as an agent to make decisions for another entity on behalf of the
investor (principal) does not assume to have control over the investee, instead investor
will be treated as having those delegated decision making rights directly and thus controls
the investee
 The rights which are used to determine the investor’s ability to exercise the power over
investee should not be protective rights (which are used only to safe guard the interest of
the parties holding such rights and do not give rise to control, these are exercisable in
limited circumstances such as bank covenants)
 In determination of investor’s ability to exercise the power over investee, the entity
should also consider the investor’s contractual relationship with the other parties that
have voting rights in the same investee
 If the entity owns share options, share warrants, debt instruments or any other equity
instruments which are convertible into ordinary shares, and have the potential to entitle
the entity with additional voting rights in the investee, if exercised or converted.
Therefore, in determination of entity’s ability to exercise the power over investee, the
entity should consider not only the existing voting rights but also such potential voting
rights, if these are currently exercisable or can be converted any time and such rights are
in the money (at favorable terms)
Accounting Requirements
The entity which is parent is required to prepare consolidated financial statements in respect of
all the entities it controls either directly or indirectly, for this purpose entity will consider the
following:
 The consolidation of investee starts right from the date when control is obtained
 The parent will consolidate the investee on the using purchased method of accounting i.e.
100% addition of assets, liabilities, incomes and expenses of investee with like items of
the parent, on the basis of single economic entity concept i.e. parent and its investee
under control will be treated as one entity for the purpose of consolidation
 The investment held by the parent in investee and investee’s equity at the date of
acquisition will be eliminated and these will be used to calculate goodwill
 The assets and liabilities of the investee will be consolidated at fair value as per IFRS 3
and any resulting adjustment will be made for the additional depreciation or amortization
based on the fair value of investee’s depreciable assets at the date of acquisition
 The consolidation of investor and its investee should be performed using the same
accounting policies and, if the accounting policies of the investor are different from those
of the investee in respect of like transactions or events, then adjustment will be made to

18
 bring in line the accounting policies of the investee as to the accounting policies of
investor before consolidation.
 If the reporting date of investor is different from those of the investee, such situation will
be accounted for as follows:
a) If the difference between the reporting date of investor and that of the investee is less than
three months, then adjustments will be made for the effects of material events or transactions
which has taken place between the reporting date of the investor and investee’s financial
statements
b) If the difference between the reporting date of investor and that of the investee is more than
three months, then the investee is required to prepare, additional financial statements to the same
reporting date as the financial statements of the parent for the purpose of consolidation.
 The unrealized profit relating to transactions between the parent and investee will be
eliminated on consolidation
 Similarly, intra-group (between the parent and investee) receivable and payable balances 
will be eliminated on consolidation
 The non-controlling interest will be presented separately in the equity section of the
consolidated statement of financial position from the equity of the owners of the parent
Loss of Control
If the parent disposes off its interest in investee which results in loss of control, it will be
accounted for as follows, the parent will:
 De-recognize the assets, liabilities, goodwill and non-controlling interest relating to the
investee from the consolidated financial statements, from the date it ceases to have
control over investee
 Recognize the resulting gain on loss on disposal of interest in investee in the statement of
profit or loss
 Recognize any interest retained in investee after the disposal, as per the requirements of
IFRS 9
 Reclassify to statement of profit or loss, any items related to the investee which are
recognized in the other comprehensive income.
Changes in the Ownership Interest
If there is change in the ownership interest between the investor and non-controlling interest in
investee, such change in ownership interest will be accounted for as transaction between owners
and any resulting difference will be directly recognized in equity.
Investment Entity
A parent will be treated as an investment entity in the following conditions:
 It obtains funds for providing investment management services to one or more investors
 Its business objective is to invest funds only for the purpose of returns from capital
appreciation, investment income or both for the investors
 It measures and evaluates the performance of all its investments on a fair value basis.
Additionally the investment entity should have the following characteristics:
 it has more than one investment

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  it has more than one investor
 It has investors that are not related parties of the entity
 it has ownership interests in the form of equity or similar interests
Accounting for Investment Entity
A parent which is investment entity is not required to consolidate its subsidiaries or apply IFRS
3, when it obtains control of another entity. Instead, such parent (investment entity) will measure
its investment in a subsidiary at fair value through profit or loss in accordance with IFRS 9
 However, a parent of an investment entity will consolidate all entities that it controls,
including those controlled through an investment entity unless the parent itself is an
investment entity.
 A parent that either ceases to be an investment entity or becomes an investment entity
shall account for the change in its status prospectively from the date at which the change
in status occurred
 A parent that ceases to be an investment entity will consolidate all its subsidiaries it
controls prospectively from the date at which the change in status occurred and for this
purpose the acquisition date will be treated as the date at which the change in status
occurred
 
Application Examples
Example 1
AB Ltd owns 49% voting rights in another entity. The remaining voting rights are held by large
number of individuals, and each individual owns less than 1% voting rights.
None of the shareholders has any arrangements to consult any of the others or make collective
decisions.
Required:
Determine whether AB Ltd has control over investee?
Solution
In this case, on the basis of the absolute size of holding owned by AB Ltd i.e. 49% and the
relative size of the other shareholdings, the investor concludes that AB Ltd has a sufficient
dominant voting interest in the investee to meet the power criteria and hence AB Ltd has control
over investee.
 
Example 2
AB Ltd owns 75% voting rights in another entity, while remaining 25% voting rights are held by
another Investor B who also has an option to acquire half of AB Ltd’s voting rights. But the
option is exercisable after next two years at a fixed price.
Required:
Determine whether AB Ltd has control over investee?
Solution
In this case, AB Ltd has existing voting rights which are more than 50% and is actively directing
the relevant activities of theinvestee.
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Although investor B has options to purchase additional voting rights from AB Ltd (that, if
exercised, would give it a majority of the voting rights in the investee). However, these options
will not be considered in determination of control over investee by investor B because these are
not currently exercisable until after two years.

IFRS 11 - Joint Arrangements

Objective
This standard defines joint control, along with the guidelines for the identification of type of joint
arrangement in which entity is involved. It also prescribes the accounting principles which are
applicable when an entity has interest in jointly controlled arrangements. This standard classifies
the joint arrangements on the basis of rights and obligations.
Scope
The requirements of this standard are applicable to entities which have interest in joint
arrangements
Joint Arrangement
The arrangements which are subject to joint control of two or more parties are termed as joint
arrangements. These are established in order to share the risk and costs, and these have the
following features:
 These are contractual agreements i.e. arise as a result of a contract
 The involvement of two or more parties
A joint arrangement may be a joint operation or a joint venture
Joint Control
It is contractually agreed sharing of control by two or more parties which requires the
independent consent of each party sharing control when decisions about the relevant core
activities are made.

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  In joint arrangements, no single party can control the joint arrangement independently
and a party sharing joint control can prevent any of the other parties from controlling the
arrangement on individual basis.
 In some certain situations, the terms of the contract relating to the decision making
process are agreed upon by the parties which implicitly leads to joint control.
Example 1
A joint arrangement has three parties in which A owns 50% voting rights, while B owns 30%
and C owns 20% voting rights in the arrangement. The terms of the contract among the parties
A, B and C state that at minimum 75% of the voting rights are needed to exercise the control
over the arrangement.
In this case, although A can obstruct the decision making process, but it cannot exercise control
over the arrangement. It requires the consent of B because the provisions of contract specify that
at minimum 75% voting rights are needed to control over the arrangement. This reflects that both
A and B jointly control the arrangement as no individual party can take decision without the
consent of the other party
Example 2
An arrangement is established by two parties and each party owns 50% voting rights of the
arrangement and the terms of the contract require that at minimum 51% voting rights are needed
to exercise the control over the arrangement.
In this case, it is implicit in the contract terms that both parties jointly control the arrangement
because no party can exercise the control over the arrangement on individual basis without the
consent of the other party.
However, in some situations, the contractual terms agreed upon by the parties to the joint
arrangement need a minimum percentage of the voting rights to exercise the control over the
arrangement. If that required minimum percentage of the voting rights can only be obtained by
amalgamation of the voting rights of more than one parties acting together, in such
circumstances the terms of the contract should specify that which combination of investors are
needed to agree independently to exercise the control over the arrangement.
Example
A joint arrangement is established by three parties in which A owns 50% voting rights while B
and C each own 25% voting rights of that arrangement. The terms of the contract among A, B
and C state that a minimum of 75% voting rights are needed to exercise the control over the
arrangement.
In this case, although A can obstruct the decision making process but it cannot control the
arrangement because it needs the consent of either B or C. In such a situationthe terms of the
contract among the parties should specify that which combination or group of parties is needed
to independently exercise the control over the arrangement, i.e. either (A & B) or (A & C).
Types of Joint Arrangement

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The entity is required to identify the types of joint arrangement in which it is involved. This
standard classifies the joint arrangements on the basis of rights and obligations relating to the
parties to joint arrangement as follows:
Joint Operation
The joint arrangement in which parties to the joint arrangement have the direct right to the assets
and liabilities of that joint arrangement, is termed as joint operation and the parties to the joint
operation are called as joint operators.
Joint Venture
The joint arrangement in which parties to the joint arrangement have the right to the net assets of
that joint arrangement, is termed as joint venture and the parties to the joint venture are called as
joint venturers.
In the assessment of rights and obligations, the entity should take into account the following
aspects:
a) Formation of the arrangement
b) If the joint arrangement is formed in the form of a separate vehicle then the entity should
consider:
 The legal form of separate vehicle
 The contractual terms of the arrangement
 Other relevant circumstances
Joint Arrangement not Structured through Separate Vehicle
 The joint arrangements which are not formed in the form of separate vehicle are joint
operations because the parties to such joint arrangements have the direct right to the
assets and liabilities of that joint arrangement. When an entity has an interest in a joint
operation, it will recognize its proportionate share of assets, liabilities, incomes and
expenses from that joint operation in its own financial statements
 In some cases, the parties to a joint arrangement may agree to have an asset in common
which will be shared and operated together, and the terms of the contract establish the
right of each party to the jointly control asset and how the operating costs and revenue
relating to the jointly control asset will be shared among the parties. In this case, each
party will recognize its proportionate share of joint asset, relating liability, and
proportionate share of incomes and expenses from that jointly control asset
Joint Arrangement Structured through Separate Vehicle
 The joint arrangements which are formed in the form of a separate vehicle i.e. assets and
liabilities are held under a separate legal entity, which causes the separation of the legal
entity from its joint owners, such arrangements are normally joint ventures, because the
parties to such joint arrangements have the right to the net assets of that joint
arrangement. However the party should also consider the legal form of the entity,
contractual terms of the arrangement and other relevant circumstances

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  In some cases, the parties to the joint arrangement which is formed in the form of a
separate legal entity, may modify the feature of the contractual agreement relating to the
legal entity in such a way which enables those parties to have the direct right to the assets
and liabilities of the legal entity in a specified proportion, such modification to the feature
of the corporation will cause the joint venture to be a joint operation
Example
Two parties established a joint arrangement in the form of an incorporated separate legal entity.
Each party to the arrangement owns 50% voting rights of the incorporated entity. The
incorporation results in the separation of the joint owners from this entity and this reflects that
the assets and liabilities held in the jointly control entity are the assets and liabilities of the
incorporated entity. In such a case, the parties to the jointly controlled entity have the right to the
net assets of the jointly controlled entity, therefore it will be treated as a joint venture.
However the parties to the jointly controlled entity, modify the feature of the contractual
agreement relating to the legal entity in such a way which enables those parties to have the direct
right to the assets and liabilities of the legal entity in a specified proportion, such modification to
the feature of the corporation will cause the joint venture to be joint operation
When an investor has interest in a joint venture, it will account for its interest in joint venture as
per the equity method under IAS 28.
Joint Investor
The party which is participant to a joint operation or joint venture, but does not have joint control
over the joint arrangement as per the contractual terms, will be termed as joint investor. The joint
investor will account for its interest in joint operation or joint venture as follows:
 If the joint investor is a party to joint operation, it will recognize its proportionate share
of assets, liabilities, incomes and expenses from that joint operation in its own financial
statements
 If the joint investor is a party to joint venture, it will account for its interest in joint
venture as per the requirements of IFRS 9.
Classification of Joint Arrangements
  Joint Operation Joint Venture
Structure These joint arrangements are normally in These joint arrangements are structured
the form of un-incorporated arrangements in the form separate legal entities
The terms of The contractual terms provide the parties
The contractual terms provide the
the contract to the arrangement, direct right to the
parties to the arrangement, right to the
assets and liabilities of the joint
net assets of the joint arrangement
arrangement
Right of the The parties to the arrangement, have the The parties to the arrangement have
parties direct right to the assets and liabilities of right to the net assets of the joint
the joint arrangement i.e. the assets and arrangement i.e. the assets and liabilities
liabilities of the joint arrangement are the of the joint arrangement are the assets

24
 assets and liabilities of joint operators and liabilities of the separate legal entity
Obligation The parties to the joint operation are liable The parties to the joint venture are not
for for the liabilities of the joint operation liable for the liabilities of the joint
Liabilities venture, instead the separate legal entity
will be liable for the liabilities of the
joint operation

IAS 36 - Impairment of Assets

Objective
This standard provides guidelines to be followed by the entity to make sure that its assets are
notstated atmore than its recoverable value. If carrying value of an asset exceeds its recoverable
value then the excess is treated as impairment loss. The standard also prescribes the
circumstances for the reversal of impairment loss and related disclosures required.
Scope
This standard is applicable for the impairment of all the non-current assets, other than the
following:
 Financial assets under IFRS 9
 Deferred tax asset under IAS 12
 Inventory which is covered under IAS 2
 Investment property under fair value model in accordance with IAS 40
 Biological assets which are measured at fairvalue less costs to sell under IAS 41
 Non-current asset or a disposal group classified as held for sale under IFRS 5
 Asset arising from construction contract underIAS 11
However, this standard is applicable for the impairment of financial assets which are classified as
subsidiaries as per IFRS 10, joint ventures which are covered under IFRS 11, and associates
covered under IAS 28.
Definitions
Impairment Loss

25
If the carrying value of an asset exceeds the recoverable value of an asset, the excess is known as
Impairment loss.
Recoverable Value
Recoverable value for an asset or a cash generating unit is determined as the higher of:
 The Value in Use and
 The Fair Value less costs to sell
Value in Use
It is present value of estimated future net cash inflows that an entity would obtain from the
continuous use of the asset over its useful life and from its ultimate disposal.
Costs to Sell
These are additional costs which are expected to be incurred to sell an asset or a cash generating
unit, other than finance cost and income tax expense.
Carrying Value
It is the amount at which the asset appears in the statement of financial position and it is
calculated as Cost less Accumulated Depreciation and Accumulated Impairment Loss.
Depreciation
It is the systematic allocation of the depreciable amount of an asset over its related useful life.
Useful Life
It is the period of time for which asset will be used by the management.
Cash Generating Unit
It is the smallest identifiable group of assets that is capable to generate cash inflows which are
largely independent of the cash flows from other assets or groups of assets.
Corporate Assets
These are the assets, other than goodwill, which do not generate cash inflows independently but
these support other assets to generate future cash inflows
Identification of impairment Loss
An asset or cash generating unit is considered to be impaired when its carrying value exceeds the
recoverable value. However an entity should apply the impairment test as follows:
1) The entity is required to apply impairment test on annual basis for the following assets:
(a) Goodwill acquired in a business combination
(b) Intangible assets having indefinite useful life
(c) Intangible asset under development
2) For all other non-current assets or a cash generating unit, the entity will assess at each
reporting date that whether an indication exist for the impairment loss. If such an indication
exists the entity is required to apply the impairment test as prescribed in this standard. The
indications reflecting impairment loss are as follows:
Internal Indications
Following are the internal indicators which may reflect the existence of impairment loss:
 Significant reduction in the actual cash inflows than budgeted
 Physical damage or deterioration
 Operating Loss or net cash outflows from the asset
 Frequent repair and maintenance of asset

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External Indications
Following are the external indicators which may reflect the existence of impairment loss:
 Sudden fall in market value
 Technological, economic or legal changes in the market with an adverse effect upon the
entity
 Increase in the interest rates which will affect the discount rate of the entity
 Decrease in demand of the product related to the asset
 
Determination of Recoverable Value
The entity will follow the following rules for the determination of recoverable value of an asset
or a cash generating unit:
 Normally recoverable value is the higher of value in use or fair value less cost to sell
 If either the value in use or fair value less the cost to sell is determined to be higher than
the carrying value, there is no need to determine the second element as there is no
impairment loss.
 If the entity is unable to determine the fair value less cost to sell of an asset because of its
specialized nature then it’s value in use will be taken as its recoverable value
 The recoverable value of the asset which is classified as held for sale will be its fair value
lesscost to sell
 This standard requires that the recoverable value should be determined for individual
assets. If it becomes impracticable, then it should be determined for a cash generating
unit.
Fair value less cost to sell
It is determined as market value of asset less its cost to sell such as legal charges, stamp duty
charges or transaction duties other than amount which is recognized as liability.
Value in Use
It is present value of estimated future net cash inflows that an entity would obtain from the
continuous use of asset over its useful life and from its ultimate disposal. The entity should
consider the following aspects in determination of value in use of an asset or a cash generating
unit:
 Value in use is determined by estimating asset’s future cash inflows and outflows; then
multiplying these with an appropriate discount rate
 The future cash inflows include the estimated cash inflows that an entity would obtain
from continuous use of asset and from its ultimate disposal proceeds expected at the end
of its useful life
 The future cash outflows include the regular or day to day repair and maintenance of the
asset
 In determining the future cash flows, the entity should take into account the effect of any
expected variation in cash flows and timing of such cash flows
 The effect of passage of time
 The cash flow forecasts prepared by the entity should be supplemented by the appropriate
and realistic assumptions by the management on the basis of management’s best estimate
in the current circumstances

27
  The cash flow forecasts prepared should be based on most recent financial forecast
approved by management up to maximum of five years unless a later period could be
justified and then cash flows for entire life of the asset are determined by extrapolation.
 The entity should consider the expected future cash flows in the present condition of the
asset without taking into account the effect of:
 Any future reorganization to which entity has not been committed yet or
 Any planned future improvement , up-grade, or enhancement to the asset
 The entity should use pre-tax discount rate and pre-tax expected future cash flows i.e.
before taking into account the effect of any income tax
 For foreign currency cash flows, these will be determined in the currency in which such
cash flows will arise and entity will use applicable discount rate.
Recognition & Measurement of Impairment Loss on Individual Asset
The entity will account for the impairment loss related to the individual asset as follows;
 Impairment loss is only when carrying value of asset exceeds its recoverable value. The
excess is treated as impairment loss and in such circumstances the asset will be written
down to its recoverable value.
 The impairment loss on the asset under cost model will be charged to statement of profit
or loss as an expense. However, impairment loss on the asset under revaluation model
will be charged first against its revaluation surplus if any, to the extent it is available in
the previous periods and any excess impairment loss will be charged to statement of
profit or loss.
 After the charge of impairment loss, asset’s depreciation or amortization charge will be
determined on the basis of any recoverable value less any residual value, over its
remaining useful life
Identifying a Cash Generating Unit
This standard requires the entity to determine the recoverable value for an individual asset when
there is an indication of impairment. However, if it becomes impracticable to calculate the
recoverable value of an individual asset then in such circumstances recoverable value will be
determined for the group of assets i.e. the cash generating unit to which the asset belongs. The
recoverable value of an individual asset may not be determinable in the following circumstances:
 When value in use of an asset is not determinable on individual basis or value in use is
materially different from its fair value less cost to sell
 When asset is dependent upon other asset to generate economic benefits
In such circumstances, recoverable value should be determined for the group of assets i.e. the
cash generating unit to which asset belongs. Cash generating unit is the smallest, identifiable
combination of assets that is capable to generate cash inflows which are significantly
independent of the cash flows from other assets orgroups of assets.
Example
An entity engaged in mining operations owns a customizedprivate railway to be used for its
mining activities and operations. There is an indication that the private railway is impaired.
However, the private railway does not generate cashinflows independently from the cash inflows
of the other assetsof the mine, and is dependent upon other assets of the mine to generate
economic benefits or alternativelyit could be sold only for scrap value.
The recoverable of the private railway is not determinable because its value in use cannot be

28
determined on individual basis, as it does not generate cash inflows independently from other
assets and is probably different from its scrap value. Therefore, the entity needs to determine the
recoverable value of the cash generating unit as whole to which the private railwaybelongs, i.e.
the mine as a whole.
 If an active market is available for the output produced by an asset or group of assets,that
asset or group of assets shall be identified as a cash-generating unit even if some or all of
itsoutput is used internally and in such circumstances, the cash flows of the cash
generating unit should reflect the management’s best estimate of future price(s) that can
be obtained in an arm’s length transaction.
 The entity is required to identify the cash generating units consistently over the
accounting periodsusing the same asset or types of assets, unless a change in assets of
cash generating unit can be justified.
Determination of Carrying Value of a Cash Generating Unit
The carrying value of a cash generating unit includes the following:
1) The carrying value of directly related assets in the cash-generating unit that are inter-
dependentto generate future cash inflows, withouttaking into account any recognized liability
related to the assets in the cash generating unit, unless therecoverable value of the cash
generating unit is not determinable without consideration of this liability
2) Share of goodwill, as goodwill does not generate economic benefits independently and it
supports other assets to generate future cash inflows, therefore, goodwill arising in a
businesscombination at the date of acquisition, will be allocated to each of the cash generating
units of the acquirer, or group of cash generating units, to which goodwill is expected to support
to generate future economic benefits using reasonable consistent basis. However, each cash
generating unit or group of cash generating units to which the goodwill is allocated should:
a) Reflect the smallest level in the entity at which the goodwill isassessed for internal reporting
purposes and
b) Not greater than the operating segment as defined in IFRS 8
3) The entity should also allocate the share of all thecorporate assets which relate to the cash
generating unit under review for impairment as follows:
a) If a portionof the carrying value of a corporate asset can be allocated on a reasonable and
consistent basis to the cash generating unit, the entitywill compare the carrying value of the cash
generating unit, including the allocated share of carrying value of corporate asset, with
itsrecoverable value and will recognizeany resultant impairment loss as per the requirements of
this standard.
b) If entity does not have any reasonable and consistent basis to allocate the portion of carrying
value of corporate asset to the cash generating unit, entity will:
i)  Compare the carrying value of such cash generating unit, excluding the corporateasset, with
its recoverable valueand will recognizeany resultant impairment loss as per the requirements of
this standard, and then,
ii)  The entity is required to determine the smallest group of cash generating units including the
cash generating unit under review, to which a share of the carrying value of the corporate asset
can be allocated on areasonable consistent basis and compare the carrying value of such group of
cashgenerating units,including allocatedshare of the corporate asset with the recoverable value of

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thegroup of cash generating units and will recognizeany resultant impairment loss as per the
requirements of this standard.
Impairment Loss for a Cash Generating Unit
If the carrying value exceeds the recoverable value of cash generating unit, the excess is treated
as impairment loss and it will be accounted for in the following order:
a) First, to the allocated goodwill in the cash generating till it comes to zero
b) Then any remaining impairment lossto the remaining assets in the cash generating unit on
proportionate basis, using the carrying values of assets in the cashgenerating unit
The allocated impairment loss to each asset will be treated as impairment loss on individual asset
and will be recognizeas per the requirements of this standard. However, while allocating
impairment loss, the carrying value of each asset in the cash generating unit should not decrease
thanthe higher of:
a) Recoverable Value
b) Zero
Reversal of Impairment Loss
After the impairment loss is recognized, the entity should assess at each year end date that is
there any indication of reversal of impairment loss, if any indication exist such as increase in
demand of the product related to the asset or decrease in interest rates, in such circumstances the
entity will reverse the impairment loss as follows:
 The impairment loss on individual asset will be reversed but up to a limit i.e. the carrying
value of the asset should not go beyond the amount that would have been if impairment
loss has never been charged, after the reversal of impairment loss.
 The reversal of impairment loss on individual asset will be charged to statement of profit
or loss, however reversal of impairment loss of asset under revaluation model will be
accounted for as revaluation increase as per IAS 16  
 After the reversal of impairment loss, the depreciation or amortization charge will be
based on the revised carrying value less residual value over its remaining useful life.
 The reversal of impairment loss on a cash generating unit will be allocated to the assets
on pro-rata basis of carrying values of assets in that cash generating unit and the allocated
increase in the carrying value of each asset in the cash generating unit will be accounted
for, as the increase in carrying value of individual asset as per the requirements of this
standard, however the impairment loss on goodwill is not reversed.
Disclosures
 The impairment loss recognized in the current reporting period
 The line item in which loss is presented in the statement of profit or loss
 The amount of impairment loss recognized, related to asset under revaluation model in
the other comprehensive income statement and any reversal related to such assets
 The amount of reversal of impairment loss recognized in the current period and the line
item in the statement of profit or loss in which such reversal is presented
 The entity is required to disclose the following in respect of individual asset, cash
generating unit and goodwill for which impairment loss is recognized in the current
period:
a) The description of individual asset

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b) The description of cash generating unit
c) The circumstances reflecting impairment loss
d) Any change in the assets of the cash generating unit as compared to the previous accounting
period
 How the entity has determined the recoverable value
 Basis to determine the fair value less cost to sell and value in use
 The entity’s estimates of future cash flows, related supportable assumptions and discount
rates for determination of value in use
 Amount of goodwill allocated to the cash generating unit
 Description of the assets forming cash generating unit
 
Worked Examples
Example 1
The financial controller of AB Ltd has identified a matterbelow which may indicate an
impairment loss:
AB Ltd operates a plant which has a cost of $1,280,000 and accumulated depreciation of
$800,000 at 1 January 2013. It is being depreciated at 12.5% on cost using straight line method.
On 1 July 2013 in the mid of the current year, the plant was damaged because of collusion with a
factory vehicle. On this date, the entity estimated that present value of the plant in use is
$300,000 and it has a current disposal value of $40,000.
Required
Calculate impairment loss on the company’s plant if any, and prepare the extracts of financial
statements for the year ended 31 December 2011 for AB Ltd.
Solution:
Statement of Profit or Loss   31.12.11
  $’000
Depreciation Expense ($80 + $75) (W1)   (155)
Impairment Loss(W1)   (100)
 
Statement of Financial Position   31.12.11
  $’000
Assets:  
Non-Current Asset:  
Plant(W1)  225
 
(W1)
Plant   31.12.11
$’000
Cost 1,280
- Accumulated Depreciation (800)
Carrying Value at 01.01.13   480

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 - Current Year Dep. (6 months) ($1,280 × 12.5%) × 6/12   (80)
Carrying Value at 30.06.13   400
Impairment loss   (100)
Recoverable value(W2)   300
- Current Year Dep. (6 months) ($300 / 2 years) × 6/12     (75)
Carrying Value at 31.12.13   225
 
(W2) Recoverable Value:
It is determined as the higher of,
 Value in Use  $300
 Fair Value less costs to sell   $40
 
Example 2
AB Ltd has acquired 100% share capital of Advent on I January 2011, which is engaged in the
supply of basic foods. The entity was generating healthy profits, but has now started reporting
operating losses from the last few months because of bad reputationresulting from numerous
customers becoming ill, because of the supply of sub-standard foods inMay 2011.
The carrying values of Advent'sassets at 31 December 2011 are as follows:
  $'000
Goodwill   14,000
Factory Building   24,000
Purifying plant 16,000
Inventories   10,000
Total   64,000
Based on the estimated future cash flows, the directors have estimated that the value in use of
Advent as a cash generating unit at 31 December 2011is $40 million. Thereis no reliable estimate
of the fair value less costs to sell of Advent.
Required
Calculate the carrying values of Advent’s assets at which thesewill be presented in the
consolidated statement offinancial position of AB Ltd, for the year ended 31 December 2011.
Solution:
(W1) Impairment loss at 31 December 2013
  $’000
Carrying value of cash generating unit   64,000
Impairment Loss (24,000)
Recoverable value 40,000
(W2) Allocation of Impairment loss to cash generating unit
C.V at Imp. Loss at New C.V at
  31.12.13 31.12.13 31.12.13
$’000 $’000 $’000
Goodwill 14,000 (14,000) -

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Factory Building   24,000 (6,000) 18,000
Purifying plant   16,000 (4,000) 12,000
Inventory   10,000 - 10,000
  64000 24,000 40,000
Notes:
 The impairment loss of $14,000 out of 24,000 will be first allocated to goodwill.
 Then the remaining loss of $10,000($24,000 - $14,000) will be allocated to other assets
of the cash generating unit i.e. factory building and purifying plant on the basis of their
respective carrying value as follow:
Factor Building = $10,000 × $24,000 / ($24,000 + $16,000) = $6,000
Purifying plant = $10,000 × $16,000 / ($24,000 + $16,000) = $4,000
 The inventory will not be charged any impairment loss under IAS 36 as it is covered
under IAS 2.

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