Financial Reporting - I Book

Level: BS Accounting & Finance
Financial Reporting-I
Course Code: 5062
Department of Commerce
Faculty of Social Sciences and Humanities
Allama Iqbal Open University, Islamabad
FINANCIAL
REPORTING-I
CODE: 5062 Units: 1-9
Level: BS Accounting & Finance
DEPARTMENT OF COMMERCE
(Faculty of Social Sciences and Humanities)
ALLAMA IQBAL OPEN UNIVERSITY ISLAMABAD
i
(All Rights Reserved with the Publisher)
Year of Printing ........................ 2023
Quantity .................................... 1000
Layout Setting .......................... Muhammad Zia Ullah
Incharge Printing ..................... Dr. Sarmad Iqbal
Printer........................................ Allama Iqbal Open University
Publisher ................................... Allama Iqbal Open University,

Islamabad
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COURSE TEAM
Chairman: Prof. Dr. Syed Muhammad Amir Shah
Course Development
Coordinator/Writer: Dr. Muhammad Munir Ahmad
Reviewer: Prof. Dr. Syed Muhammad Amir Shah
Editor: Fazal Karim
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CONTENTS
INTRODUCTION ..................................................................................................V
PREFACE .................................................................................................... VI
COURSE OBJECTIVE ....................................................................................... vii
UNIT- 1 REGULATORY AND CONCEPTUAL FRAMEWORK FOR

FINANCIAL REPORTING IN PAKISTAN .......................................1
UNIT-2 PRESENTATION OF FINANCIAL STATEMENTS (IAS 1) ..........27
UNIT-3 INVENTORIES IAS-2 .......................................................................43
UNIT-4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING

ESTIMATES AND ERRORS IAS-8 .................................................51
UNIT-5 STATEMENT OF CASH FLOWS IAS-7 .........................................63
UNIT-6 EVENTS AFTER THE REPORTING PERIOD IAS-10 ...................73
UNIT-7 PROPERTY, PLANT AND EQUIPMENT (IAS-16) ......................85
UNIT-8 REVENUE IAS – 18 ..........................................................................97
UNIT-9 BORROWING COSTS IAS-23 .......................................................105
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INTRODUCTION
Financial reporting is a standard accounting practice that uses financial statements

to disclose a company’s financial information and performance over a particular
period, usually on an annual or quarterly basis. Financial reporting is important for
management to make informed business decisions based on facts of the company’s
financial health. Potential investors and banks will also use your company’s
financial reporting to decide, if they want to invest or loan you money.
Realizing the importance of Financial Reporting, the Department of Commerce of

the University introduced the subject of Financial Reporting at the master level for
the students of M. Com and BS (Accounting & Finance) programs. This course has
been developed for students who have already completed basic courses of
accounting and want to join accountancy field. This course consists of 9 units,
which comprises on conceptual framework of financial reporting, International
Accounting Standard (IAS) 1, 2, 7, 8, 10, 16, 18 and 23. Each unit covers the
following aspects of IAS; history, objectives, scope, key concepts, related
accounting treatment and related disclosure in the financial statements.
It is earnestly hoped that the book will amply to fulfil the objectives for which it
has been designed. Although the efforts have been made to ensure error free version
of book but still, room for improvement always exists. Comments and suggestions
for improving the contents and quality of the book are welcomed and will be
gratefully acknowledged.
I owe a great deal to Prof. Dr. Syed Muhammad Amir Shah, Chairman Department
of Commerce, whose supervision, support and guidance made possible the
completion of this book.
Dr. Muhammad Munir Ahmad

Course Development Coordinator
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PREFACE
It is matter of immense pleasure that the Department of Commerce of Allama Iqbal
Open University has prepared a course book of “Financial Reporting-I (8567)”
for the students of M. Com and BS (Accounting & Finance). This course will help
the students in developing the basic understanding of globally accepted accounting
standards i.e., International Accounting Standards (IASs) and International
Financial Reporting Standards (IFRSs).
International Financial Reporting has high demand in all the countries since
companies are going around the global and require a consistent reporting standard
and format. They cover all the aspects of International Financial Reporting in depth.
The understanding of accounting standards is necessary for the students having
academic degrees in the field of Accounting and Finance.
This book is equally beneficial for the accounting students of all levels in other
universities as well. I hope this book will be helpful in understanding the corporate
reporting requirements and enabling them to join corporate sector. We shall be
grateful to the teachers, students and readers for their comments and suggestions
for further improvement.
Prof. Dr. Zia Ul-Qayyum

(Vice-Chancellor)
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COURSE OBJECTIVES
Upon successful completion, students will have the knowledge and skills to:
1. Understand the conceptual framework of financial reporting

2. Read, understand, interpret and analyse general purpose financial reports.
3. Know the history, objectives, and scope of each accounting standards
4. Understand differing financial reporting standards and their impact on
financial statements.
5. Prepare the disclosure notes with reference to the standards, which are
covered in this course.
6. Make sound financial decisions in real world settings.
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Unit-1
REGULATORY AND CONCEPTUAL

FRAMEWORK FOR FINANCIAL
REPORTING IN PAKISTAN
Written by:
Dr Muhammad Munir Ahmad
Reviewed by:
Prof. Dr. Syed Muhammad Amir Shah
Unit-1 Regulatory and Conceptual Framework for Financial Reporting in Pakistan
CONTENTS
Introduction ..................................................................................................... 3
Objectives ..................................................................................................... 3
1.1 Introduction ..................................................................................................... 4
1.1.1 Significance of IFRS Adoption................................................................. 5
1.1.2 Objectives of IFRS.................................................................................... 6
1.1.3 Scope of IFRS ........................................................................................... 6
1.1.4 IFRS Versus GAAP .................................................................................. 7
1.1.5 Principles-Based and Rules-Based Framework ........................................ 8
1.2 Important Bodies Behind the IFRS ........................................................................ 8
1.2.1 IFRS Foundation ....................................................................................... 8
1.2.2 The IASB .................................................................................................. 9
1.2.3 The IFRS Interpretations Committee ....................................................... 9
1.3 The Regulatory Framework of Accounting ......................................................... 10
1.3.1 The Regulatory System ........................................................................... 10
1.3.2 Financial Reporting Council ................................................................... 11
1.3.3 Accounting Standards Board .................................................................. 12
1.3.4 Financial Reporting Review Panel.......................................................... 12
1.3.5 Urgent Issues Task Force ........................................................................ 13
1.3.6 Why a Regulatory Framework is Necessary ........................................... 14
1.4 The Conceptual Framework of Accounting ......................................................... 14
1.4.1 Chapter 1- Objectives of Financial Reporting ........................................ 15
1.4.2 Chapter 2- Qualitative Characteristics of Useful Financial Information ........ 17
1.4.3 Chapter 3 - Financial Statements and the Reporting Entity .................... 18
1.4.4 Chapter 4- The Elements of Financial Statements .................................. 18
1.4.5 Chapter 5- Recognition and Derecognition ............................................ 19
1.4.6 Chapter 6- Measurement ......................................................................... 19
1.4.7 Chapter 7- Presentation and Disclosure .................................................. 20
1.4.8 Chapter 8- Concepts of Capital and Capital Maintenance ...................... 20
Self-Assessment Questions ............................................................................................... 20
Appendix 1.1 ................................................................................................... 22
Appendix 1.2 ................................................................................................... 25
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INTRODUCTION
This unit is about the the regulator and conceptual framework of financial
reporting. The first part describes the regulatory framework of the accounting
following the description of conceptual framework in second part. The conceptual
framework describes the fundamental concepts for financial reporting that guide
the Board in developing IFRS Standards. It helps to ensure that the Standards are
conceptually consistent and that similar transactions are treated the same way, so
as to provide useful information for investors, lenders and other creditors. At the
end of the unit self-assessment questions are given, so that students can prepare
themselves for examination. The list of IASs and IFRSs are provided at the end of
the unit as well so that the reader my know the detail list of these standards.
OBJECTIVES
After studying this unit, the student will be able:

• to understand the regulatory framework and its importance
• to describe the structure and objectives of the International Accounting
Bodies
• to understand the conceptual framework and its importance
• to understand the elements of financial statements
• to differentiate between a principles-based and a rules-based framework
• to comprehend the recognition criteria in financial statements
• to distinguish between an accounting policy and an accounting estimate
• to understand the different measurement criteria in financial statements
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1.1 INTRODUCTION
Every country has its own accounting language. The language describes how
particular types of transactions and other events should be reflected in financial
statements. Like US GAAP, German GAAP etc. or IACs. However, the differences
between two country’s GAAP may be minor that is like comparing languages like
Dutch with Afrikaans or Scottish with Irish. These differences, however small, will
still result in miscommunication.
The acronym "IAS" stands for International Accounting Standards. This is a set of
accounting standards set by the International Accounting Standards Committee
(IASC), located in London, England. The IASC has a few different bodies, the main
one being the International Accounting Standards Board (IASB), which is the
standard-setting body of the IASC.
The IASC does not set GAAP, nor does it have any legal authority over GAAP.
However, a lot of people do listen to what the IASC and IASB have to say on
matters of accounting.
When the IASB sets a new accounting standard, several countries tend to adopt the
standard, or at least interpret it, and fit it into their individual country's accounting
standards. These standards, as set by each country’s accounting standards board,
will in turn influence what becomes GAAP for each country. For example, in the
United States, the Financial Accounting Standards Board (FASB) makes up the
rules and regulations which become GAAP. The best way to think of GAAP is as a
set of rules that accountants follow. Each country has its own GAAP, but overall,
there are not many differences between countries.
To avoid miscommunication, accounts all over the world are joining together to
develop a single global accounting language, which is understandable and of a high
quality. The rules of this language are explained in a set of global standards, i.e.,
IFRS. All the countries that adopt the global accounting language, must comply
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with these rules (IFRSs).
To fulfill the Need for a set of single globally accepted accounting standards that
could provide quality, reliability, and transparency in financial reporting, IASC was
restructured and IASB (International Accounting Standards Board) was born in the
year 2001. IASB adopted all the Pronouncements issued by its predecessor body
and all subsequent pronouncements where Termed as IFRS. In short, the rules of
our global accounting consist of:
♦ The Framework
♦ The global accounting standards (IFRS), including both the (i) standards
(IASs and IFRS) and their (ii) Interpretations (SICs and IFRICs), short detail
is as under:
♦ IAS – Standards issued before 2001 (total 41 IAS issued, sixteen suspended)
♦ IFRS –Standards issued after 2001 (total 17 IFRS issued, one suspended)
♦ SIC-Interpretations of accounting standards, giving specific guidance on
unclear issues (33 SIC, twenty-nine suspended)
♦ IFRIC- Newer interpretations, issued after 2001 (15 IFRIC) All International
Accounting Standards (IASs) and Interpretations issued by the former IASC
(International Accounting Standard Committee) and SIC (Standard
Interpretation Committee) continue to be applicable unless and until they are
amended or withdrawn.
1.1.1 Significance of IFRS Adoption

During the last decade with the advent of Globalization, the need for and
importance of IFRS has gained strength, especially after their adoption by the
European Union in 2005 and the Securities and Exchange commission of the US
allowing foreign listed companies to file financial statements with IFRS (without
reconciliation with the US GAAPS. At present more than one hundred countries
permit or require the use of IFRS, and many more look forward to achieving
convergence / adoption by 2011. This global recognition for IFRS is on account of
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following benefits:
♦ Comparability: Financial Statements of local entities can be easily and reliably
be compared with their Global peers; this feature help prospective investors and
stakeholders to accurately assess the performance of entities.
♦ Cross – Border Investments: Adoption / convergence with IFRS is likely to
promote investments, because of the goodwill which IFRS enjoys with the
Global investor communities
♦ Multi-Reporting: Different entities within the group that reside in different
jurisdictions may be required to prepare a dual set of financial statements for
external financial reporting; one for local statutory financial reporting in the
home country and second for reporting to the parent company. This increases
the efforts of the finance function, introduces complexity in financial reporting
and increases costs of the finance function. Group-wide adoption of IFRS
eliminates the need for such multiple reporting, if IFRS is accepted or required
in all countries of operation
♦ Cost of Capital: IFRS eliminates barriers to cross-border listings as it is
accepted as a global financial reporting framework and allows companies to seek
admission to almost all the world's stock markets. Even in cases where listing on
overseas exchanges is permitted using local GAAP, international investors
ascribe an additional risk premium if the underlying financial information is not
prepared in accordance with international standards.
1.1.2 Objective of IFRS

The objective of IFRS is to develop, in the public interest, a single set of high quality,
understandable and enforceable global accounting standards that require high quality,
transparent and comparable information in financial statements and other financial
reporting to help participants in the world's capital markets and other users make
economic decisions and to promote the use and rigorous application of those
standards taking into account of the special needs of small and medium-sized entities
and emerging economies and thus bring about convergence of national accounting
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standards and International Accounting standards.
1.1.3 Scope of IFRS

IFRS set out recognition, measurement, presentation and disclosure requirements of
transaction and events in general purpose financial statements. General purpose
financial statements intend to meet the common needs of shareholders, creditors,
employees, and the public at large for information about an entity's financial position,
performance, and cash flows. Other financial reporting includes information provided
outside financial statements that assists in the interpretation of a complete set of
financial statements or improves users' ability to make efficient economic decisions.
IFRS applies to the general-purpose financial statements and other financial reporting
by profit-oriented entities regardless of their legal form. Entities other than profit-
oriented business entities may also find IFRSs appropriate. IFRS can apply to
individual, company, and a group’s consolidated financial statements. Some IFRS
allow both a 'benchmark' and an 'allowed alternative 'treatment.’
1.1.4 IFRS Versus GAAP

The GAAP is short for: Statements of Generally Accepted Accounting Practice. These
include the documented acceptable methods used by businesses to ‘recognize, measure
and disclose’ business transactions. The best of these statements from all over the world
are being merged into the IFRSs, which is short for International Financial Reporting
Standards. The biggest difference is that IFRS provides fewer detailed rules than U.S.
GAAP. IFRS also contains limited industry-specific guidance.
Because of longstanding convergence projects between the IASB and the FASB,
the extent of the specific differences between IFRS and GAAP has been shrinking.
Yet significant differences do remain, most any one of which can result in
significantly different reported results, depending on a company's industry and
individual facts and circumstances. For example:
♦ IFRS does not permit Last In, First Out (LIFO).
♦ IFRS uses a single-step method for impairment write-downs rather than the
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two-step method used in U.S. GAAP, making write-downs more likely.

♦ IFRS requires capitalization of development costs once certain qualifying
criteria are met. U.S. GAAP requires development costs to be expensed as
incurred, except for costs related to the development of computer software,
for which capitalization is required once certain criteria are met.
1.1.5 Principles-Based and Rules-Based Framework
There are two main approaches to accounting:
• Principles based approach such as that used by the IASB.
• Rules based approach such as that used in the USA.
(A) Principles-based framework

• Based upon a conceptual framework such as the Statement of Principles.
• Accounting standards are based on the conceptual framework.
Number of accounting standards are designed, based on principles based conceptual
framework of accounting and named as international accounting standards or
International financial reporting standards. (See Appendix 1 and Appendix 2).
(B) Rules-based framework:
• ‘Cookbook’ approach
• Accounting standards are a set of rules which companies must follow.
Based on rules-based accounting, number of rules are designed named as GAAP’s,

which are implemented on these countries which do not follow the International
Accounting Standards or International Financial Reporting Standards, for example
USA is one of the countries, which follow GAAP’s known as US GAAP.
1.2 IMPORTANT BODIES BEHIND THE IFRS

1.2.1 IFRS Foundation.
The IFRS (International Financial Reporting Standards) Foundation is an
independent, not-for-profit private sector organization working in the public
interest. Its principal objectives are:
♦ To develop a single set of high quality, understandable, enforceable, and
globally accepted international financial reporting standards (IFRSs) through
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its standard-setting body, the IASB.

♦ To promote the use and rigorous application of those standards.
♦ To take account of the financial reporting needs of emerging economies and
small and medium-sized entities (SMEs); and
♦ To promote and facilitate adoption of International Financial Reporting
Standards (IFRSs), being the standards and interpretations issued by the
IASB, through the convergence of national accounting standards and IFRSs.
The governance and oversight of the activities undertaken by the IFRS Foundation
and its standard-setting body rests with its Trustees, who are also responsible for
safeguarding the independence of the IASB and ensuring the financing of the
organization. The Trustees are publicly accountable to a Monitoring Board of
public authorities.
1.2.2 The IASB (International Accounting Standards Board)

The IASB is the independent standard-setting body of the IFRS Foundation,
established in April 2001 in replacement of International Accounting Standards
Committee which was established in June 1973 in London. Its members (currently 15
full-time members) are responsible for the development and publication of IFRSs,
including the IFRS for SMEs and for approving Interpretations of IFRSs as developed
by the IFRS Interpretations Committee (formerly called the IFRIC). All meetings of
the IASB are held in public and webcast. In fulfilling its standard-setting duties the
IASB follows a thorough, open, and transparent due process of which the publication
of consultative documents, such as discussion papers and exposure drafts, for public
comment is a vital component. The IASB engages closely with stakeholders around
the world, including investors, analysts, regulators, business leaders, accounting
standard-setters and the accountancy profession.
1.2.3 The IFRS Interpretations Committee

The IFRS Interpretations Committee is the interpretative body of the IASB.
The Interpretations Committee comprises fourteen voting members appointed by the
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Trustees and drawn from a variety of countries and professional backgrounds. The
mandate of the Interpretations Committee is to review on a timely basis widespread
accounting issues that have arisen within the context of current IFRSs and to provide
authoritative guidance (IFRICs) on those issues. Interpretation Committee meetings are
open to the public and webcast. In developing interpretations, the Interpretations
Committee works closely with similar national committees and follows a transparent,
thorough, and open due process.
1.3 THE REGULATORY FRAMEWORK OF ACCOUNTING
The regulatory framework of accounting consists of the followings:

♦ The Regulatory System
♦ Regulatory Bodies
♦ Standard- Setting Process
1.3.1 The Regulatory System

The current standard-setting regime was introduced in 1990 and is as follows:
Financial Reporting Council

The FRC Promotes Good
Financial Reporting
Financial Reporting Review Panel

Accounting Standards Board The FRRP inquiries into apparent
The ASB develops, issues and Departures from accounting standards and the
withdraws accounting standards. provisions of the companies Acts in the annual
accounts of large companies.
Urgent Issue Task Force

The UITF assists the ASB in areas Where an accounting
standard or Companies Act provision exists, but
Where unsatisfactory or conflicting interpretations have
developed or Seem likely to develop.
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1.3.2 Financial Reporting Council

The role of the Financial Reporting Council (FRC) is to guide the standard-setting
process and to ensure that its work is properly funded. It is also the ‘Political’ front
to the bodies involved in the standard setting process and produces and annual
review which summarizes recent events and action by the bodies. The FRC
comprises around twenty-five members drawn from the users and preparers of
accounts, and auditors.
1.3.3 Accounting Standards Board

The aims of the ASB are to establish and improve financial accounting and
Reporting standards, for the benefit of users, preparers, and auditors of financial
information.
The ASB intends to achieve its aims by:
♦ Developing principles to guide it in establishing standards and to provide a

framework within which others can exercise judgment in resolving accounting
issues
♦ Issuing new accounting standards, or amending existing ones, in response to

evolving business practices, new economic developments and deficiencies
being identified in current practice
♦ Addressing urgent issues promptly
♦ Working with the International Accounting Standards Board (IASB), with

national standard setters and relevant European Union (EU) institutions to
encourage high quality in the IASB's standards and their adoption in the EU.
The ASB has:
♦ up to ten members
♦ a full-time chairman
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♦ a full-time technical director

♦ part-time members who are all well versed in accounting and financial matters.
1.3.4 Financial Reporting Review Panel

The FRRP has about thirty members and is concerned with the examination and
questioning of departures from accounting standards by large companies. In
consultation with the Financial Services Authority (FSA) (the regulator of listed
companies) it will select industry sectors which are likely to give rise to difficult
accounting issues.
It will then select from each of them several accounts for review and will also
investigate matters that are brought to its attention.
The powers of the FRRP are:
♦ For serious breaches it can now require companies to redraft the offending
accounts
♦ For minor faults it is more likely to ask the companies for an assurance that
the rules will be complied with in the future.
1.3.5 Urgent Issues Task Force

The UITF is a committee of the Accounting Standards Board (ASB) and is made
up of a few people of major standing in the field of financial reporting.
The role of the UITF is to:

The UITF is only concerned with significant disparities of current practice
or major developments likely to create serious divergences in the future.
♦ Assist the ASB in situations where either an accounting standard or a

provision of the Companies Act exists, but where different interpretations,
which may be unsatisfactory or conflicting, have developed
♦ Determine a consensus (UITF Abstract) of the appropriate accounting treatment
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♦ Reach this consensus by relying on principles rather than detailed rules.
The UITF is only concerned with significant disparities of current practice or major
developments likely to create serious divergences in the future.
1.3.6 Why a Regulatory Framework is Necessary

A regulatory framework for the preparation of financial statements is necessary for
the following reasons:
• Financial statements are used by a wide range of users – investors, lenders,
customers, etc.
• They need to be useful to these users
• They need to be comparable
• They need to provide some basic information
• They increase users’ understanding of and confidence in financial statements
• They regulate the behavior of companies towards their investors.
Accounting standards on their own would not be a complete regulatory framework.

To fully regulate the preparation of financial statements and the obligations of
companies and directors legal and market regulations are also required.
1.4 THE CONCEPTUAL FRAMEWORK OF ACCOUNTING

A conceptual framework is:
• a coherent system of interrelated objectives and fundamental principles
• a framework which prescribes the nature, function and limits of financial
accounting and financial statements.
The IASB issued the revised comprehensive set of concepts for financial reporting
in March 2018 that is known as the conceptual framework of financial reporting. It
consists upon the eight chapters:
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Chapter 1-The objective of financial reporting

Chapter 2 - Qualitative characteristics of useful
financial information
Chapter 3 - Financial statements and the reporting
entity
Chapter 4 - The elements of financial statements
Chapter 5 - Recognition and derecognition
Chapter 6 - Measurement
Chapter 7 - Presentation and disclosure

Chapter 8 - Concepts of Capital and Capital
Maintenance
1.4.1 Chapter 1- Objectives of Financial Reporting

This chapter describes the objectives of general-purpose financial reporting, what
information is needed to achieve that objective and who are the primary users (users)
of financial reports.
The objectives of financial statements are to provide financial information that is

useful to users in making decisions relating to providing resources to the entity.
Such decisions involve:

• buying, selling, or holding equity and debt instruments.
• providing or settling loans or other forms of credit; or
• voting or otherwise influencing management’s actions.
In making these decisions, users assess

• The economic resources of the entity, claims against those resources, and
prospects for future net cash inflows to the entity, and
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• Management’s stewardship of the entity’s economic resources.
1.4.2 Chapter 2- Qualitative Characteristics of Useful Financial Information

This chapter narrates the elements which make the financial statements useful
financial information, which are (A) Fundamental qualities and (B) Enhancing qualities
(A) Fundamental Qualities

The conceptual framework for financial reporting describes two fundamental
qualities as follows:
a. Relevance
Information is relevant if it could influence the economic decisions of users and is
provided in time to influence those decisions. Financial information can be
effective in decisions if it has predictive value or confirmatory value.
ii. Faithful representation

Accounting information should represent what are purports to represent and should
ensure that the selected method of measurement has been used without error or bias.
This attribute is sometimes called Validity. Information must report the economic
substance of transactions, not just their form and surface appearance.
A faithful representation is, to the maximum extent possible, complete, neutral, and
free from error.
(B) Enhancing qualities

These qualities are helpful in differentiating more useful and less useful information.
These qualities increase the more usefulness of information but cannot make non-
useful information as valuable. These are:
i. Comparability
Comparability enables users to identify similarities and differences between
two or more sets of economic circumstances.
For example, users must be able to:
• Compare the financial statements of an entity over time to identify trends
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• Compare the financial statements of different entities to evaluate their

relative financial position and performance.
For this to be possible there must be consistency and disclosure of accounting policies.
An important implication of comparability is that users are informed of the

accounting policies employed in preparation of the financial statements, any
changes in those policies and the effects of such changes. Compliance with
accounting standards, including the disclosure of the accounting policies used by
the entity, helps to achieve comparability.
Because users wish to compare the financial position and the performance and
changes in the financial position of an entity over time, it is important that the
financial statements show corresponding information for the preceding periods.
ii. Verifiability
Verifiability pertains to maintenance of audit trails to information source

documents that can be checked for accuracy. Verifiability also pertains to
the existence of alternative information sources as backup. Verification
implies a consensus and implies that independent measures using the same
measurement methods would reach the same conclusion.
iii. Timeliness
Accounting information should be timely if it is to influence decisions. Like

the news of the world, stale financial information has less impact than fresh
information. Lack of timeliness reduces relevance.
iv. Understandability
Understandability depends on:

• The way in which information is shown in the financial statements.
• The capabilities of the users of the financial statements.
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It is assumed that users:
• Have a reasonable knowledge of business and economic activities.

• Are willing to study the information provided with reasonable diligence.
For information to be understandable users need to be able to perceive its

significance; it must be included in the financial statements if it is relevant and
dependable even if it is difficult for some users to understand.
1.4.3 Chapter 3 - Financial Statements and the Reporting Entity

This is new chapter in revised conceptual framework of 2018, which narrates the
scope and the objectives of financial statements. It also provides a description of
the reporting entity.
Financial statements are the form of financial reports which provide information
about the income, expenses, assets, liabilities, and equity of reporting entity.
The reporting entity is described as an entity that is required to prepare financial

statements and it is not necessarily to be a legal entity. It may be part of an entity, a
single entity or comprise more than one entity.
As a result, financial statements may be Consolidated, Unconsolidated and

combined. In consolidated financial statements, parent and its subsidiaries are
reported as a single entity whereas in case of unconsolidated financial statements,
parent company only reports its own financial position. Combined financial
statements report assets, liabilities, equity, income, and expenses of entities which
are not linked like parent and subsidiary.
1.4.4 Chapter 4- The Elements of Financial Statements

This chapter has been updated in new conceptual framework of 2018 by revising
the definitions of assets and liabilities. The words of expected inflow and outflow
have been excluded from the definitions of assets and liabilities, respectively. The
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new definitions are mentioned as below:

i. Assets
A present economic resource controlled by the entity because of past events, whereas
an economic resource is a right that has the potential to produce economic benefits.
ii. Liabilities
A present obligation of the entity to transfer an economic resource because of past
events, whereas an obligation is a duty or responsibility that the entity has no
practical ability to avoid.
iii. Equity
Equity is assets minus liabilities.
iv. Income
Income is defined as the increases in assets, or decreases in liabilities, which result in
increases in equity, other than those relating to contributions from holders of equity
claims.
v Expenses
The term expenses are defined as the decreases in assets, or increases in liabilities,
which result in decreases in equity, other than those relating to distributions to
holders of equity claims.
1.4.5 Chapter 5- Recognition and Derecognition

This chapter guides about the recognition and derecognition of financial elements
in/from the financial statements. Recognition is simply mean to include and
derecognition is about to exclude financial elements.
i. Recognition is appropriate if it results in both relevant information about
assets, liabilities, equity, income and expenses and a faithful representation
of those items, because the aim is to provide information that is useful to
investors, lenders, and other creditors.
Assets and liabilities may be recognized only when their recognition is relevant and
provide faithful representation as described in chapter 2.
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ii. Derecognition means the removal of all or part of a recognized asset or

liability from an entity’s statement of financial position.
For an asset, when entity lose its control over recognized asset, derecognition will
occur. For example, sale of an assets.
In case of liability, when the entity has no longer obligation of payment,

derecognition will occur. For example, payment to creditors.
1.4.6 Chapter 6- Measurement

The concept of measurement is that in which amount assets, liabilities, equity,
income, and expenses are recognized in financial statements. In this connection,
conceptual framework describes two measurement bases, i.e., Historical cost and
current value basis.
i. Historical cost basis

This measurement is based on the transaction price at the time of recognition of
element of financial statement. However, the cost of asset may be decreased in case
of impairment and cost of liability may be increase if they become onerous.
ii. Current value basis

In current value measurement basis, each element is updated to reflect the
conditions at the date of its measurement. It further includes the following three
methods:
➢ Fair Value
➢ Value in use
➢ Current Cost
1.4.7 Chapter 7- Presentation and Disclosure

The main objective of this chapter is to provide an effective communication tool
in the financial statements. It guides about the inclusion of income and expenses in
the statement of profit and loss and other comprehensive income. It also includes
the concepts of presentation and disclose.
19
1.4.8 Chapter 8- Concepts of Capital and Capital Maintenance

This chapter is same as was in previous version of framework. It describes two
concepts of capital, i.e., financial capital and physical capital.
i. Financial Capital
It is another name of net assets or equity. According to the financial maintenance
concept the profit will be recorded in the financial statements when the net assets
at the end of the period is greater than the beginning period net assets after
excluding the contributions and distributions to equity holders. It may be measured
at nominal monetary units or units of constant purchasing power.
ii. Physical capital

It means the productive capacity of an entity based on number of manufactured
units per day. Here the profit is earned, if the productive capacity increases during
the period after excluding self the movements in equity holders.
ASSESSMENT QUESTIONS
i. Describe what is meant by a conceptual framework of accounting? Also
discuss whether a conceptual framework is necessary and what an alternati
ve system might be.
ii. Discuss what is meant by faithful representation and
relevance and describe the qualities that enhance these characteristics.
iii. Distinguish between changes in accounting policies and changes in accoun
ting estimates and describe how accounting standards apply the principle
of comparability where an entity changes its accounting policies.
iv. Define what is meant by ‘recognition’in financial statements and discuss t
he recogni- ion criteria. Also apply the recognition criteria to:
a. assets and liabilities
b. income and expenses.
v. Explain the following measurement basis:
20
a. Historical cost
b. Current value
vi. Apply the principle of substance of over form to the recognition and de-
recognition of assets and liabilities.
vii. Recognize the substance of transactions in general, and specifically
account for the following types of transaction:
a. goods sold on sale or return/consignment stock
b. sale and repurchase/leaseback agreements
c. factoring of debtors.
viii. Describe the advantages and disadvantages of the use of historical cost acc
ounting.
ix. Discuss whether the use of current value accounting overcomes the proble
ms of historical cost accounting.
x. Distinguish between a principles-based and a rules-based framework and d
iscuss whether they can be complementary.
21
APPENDIX 1.1
International Accounting Standards
No Name Issued
IAS 1 Presentation of Financial Statements 2007
IAS 2 Inventories 2005
Consolidated Financial Statements

IAS 3 1976
Superseded in 1989 by IAS 27 and IAS 28
Depreciation Accounting
IAS 4
Withdrawn in 1999
Information to Be Disclosed in Financial Statements

IAS 5 1976
Superseded by IAS 1 effective 1 July 1998
Accounting Responses to Changing Prices

IAS 6 Superseded by IAS 15, which was withdrawn December
2003
IAS 7 Statement of Cash Flows 1992
Accounting Policies, Changes in Accounting Estimates

IAS 8 2003
and Errors
Accounting for Research and Development Activities

IAS 9
IAS 10 Events After the Reporting Period 2003
22
Construction Contracts
IAS 11 1993
Superseded by IFRS 15 as of 1 January 2018
IAS 12 Income Taxes 1996
Presentation of Current Assets and Current Liabilities

IAS 13
Segment Reporting
IAS 14 1997
Superseded by IFRS 8 effective 1 January 2009
Information Reflecting the Effects of Changing Prices

IAS 15 2003
Withdrawn December 2003
IAS 16 Property, Plant and Equipment 2003
Leases
IAS 17 2003
Revenue
IAS 18 1993
Employee Benefits
IAS 19 1998
Superseded by IAS 19 (2011) effective 1 January 2013
IAS 19 Employee Benefits (2011) 2011
Accounting for Government Grants and Disclosure of

IAS 20 1983
Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates 2003
23
Business Combinations
IAS 22 1998
Superseded by IFRS 3 effective 31 March 2004
IAS 23 Borrowing Costs 2007
IAS 24 Related Party Disclosures 2009
Accounting for Investments

IAS 25
Superseded by IAS 39 and IAS 40 effective 2001
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Separate Financial Statements (2011) 2011
Consolidated and Separate Financial Statements

IAS 27 Superseded by IFRS 10, IFRS 12 and IAS 27 (2011) 2003
effective 1 January 2013
IAS 28 Investments in Associates and Joint Ventures (2011) 2011
Investments in Associates
IAS 28 Superseded by IAS 28 (2011) and IFRS 12 effective 1 2003
January 2013
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
Disclosures in the Financial Statements of Banks and

IAS 30 Similar Financial Institutions 1990
24
Interests in Joint Ventures

IAS 31 Superseded by IFRS 11 and IFRS 12 effective 1 January 2003
2013
IAS 32 Financial Instruments: Presentation 2003
IAS 33 Earnings Per Share 2003
IAS 34 Interim Financial Reporting 1998
Discontinuing Operations
IAS 35 1998
IAS 36 Impairment of Assets 2004
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS 38 Intangible Assets 2004
Financial Instruments: Recognition and Measurement

IAS 39 2003
IAS 40 Investment Property 2003
IAS 41 Agriculture 2001
25
APPENDIX 1.2
International Financial Reporting Standards
No Name Issued
IFRS 1 First-time Adoption of International Financial Standards 2008
IFRS 2 Share-based Payment 2004
IFRS 3 Business Combinations 2008
IFRS 4 Insurance Contracts 2004
Non-current Assets Held for Sale and Discontinued

IFRS 5 2004
Operations
IFRS 6 Exploration for and Evaluation of Mineral Assets 2004
IFRS 7 Financial Instruments: Disclosures 2005
IFRS 8 Operating Segments 2006
IFRS 9 Financial Instruments 2010
IFRS 10 Consolidated Financial Statements 2011
IFRS 11 Joint Arrangements 2011
IFRS 12 Disclosure of Interests in Other Entities 2011
IFRS 13 Fair Value Measurement 2011
IFRS 14 Regulatory Deferral Accounts 2014
IFRS 15 Revenue from Contracts with Customers 2014
IFRS 16 Leases 2016
IFRS 17 Insurance Contracts 2017
26
Unit-2
PRESENTATION OF FINANCIAL
STATEMENTS (IAS 1)
Written by:
Reviewed by:
27
Unit-2 Presentation of Financial Statements (LAS 1)
CONTENTS
Introduction ............................................................................................29
Objectives ............................................................................................29
2.1 Introduction ............................................................................................30

2.1.1 History of IAS 1...................................................................................... 30
2.1.2 Objectives of IAS 1 ........................................................................32
2.1.3 Scope ............................................................................................32
2.1.4 Goal of Financial Statements .................................................................. 32
2.1.5 IFRS Based Financial Statements ..................................................32
2.2 General Features of Financial Statements..................................................33

2.2.1 Going Concern ...............................................................................33
2.2.2 Accrual ...........................................................................................33
2.2.3 Consistency ....................................................................................33
2.2.4 Materiality ......................................................................................33
2.2.5 Comparative Information .............................................................33
2.2.6 Offsetting .....................................................................................34
2.3 Structure of the Financial Statements ........................................................34

2.3.1 Statement of Financial Position .....................................................34
2.3.2 Statement of Comprehensive Income ............................................36
2.5 Self-assessment questions ..........................................................................38

2.4 Annexure: Annual Reports of FFC ............................................................39
28
INTRODUCTION
This unit is about the International Accounting Standard- 1 which represents a
basis of the whole IFRS reporting, as it sets overall requirements for the
presentation of financial statements, guidelines for their structure and minimum
requirements for their content. This unit provides the historical perspective,
objectives of IAS 1, Scope, basic principles and structure of financial statements.
At the end self-assessment questions are given so that students can prepare
themselves for examination.
OBJECTIVES
• to describes the basis for presentation of general-purpose financial

statements,
• to make it possible to compare the company's financial statements to those
of previous periods and other companies.
• to understand the overall requirements for the presentation of financial
statements,
• to draft the structure of financial statements.
29
2.1 INTRODUCTION
IAS 1 prescribes the overall presentation requirements of financial statements, as
well as general rules on how financial statements are to be presented. A complete
set of financial statements including comparison figures for the previous year, must
be provided by an organization at least once every year (including comparative
amounts in the notes). A full set of financial statements comprising of:
• A statement of financial position

• A profit/loss and other comprehensive income statement for the period. The
components of income and cost that are not included in profit or loss under
IFRS Standards are referred to as "other comprehensive income."
According to IAS 1, an organization can either present a single profit and
loss statement or two separate accounts that include additional
comprehensive revenue.
• A statement of equity changes for the period.
• Cash flow statements for the period.
• A compilation of major accounting policies and additional explanatory
information in the form of notes.
IFRS Standards must be explicitly and unreservedly stated in the notes of a

company's financial statements. If a company does not meet all the IFRS Standards'
requirements, it cannot claim that its financial statements conform with IFRS
Standards. The use of IFRS Standards, along with extra disclosures when applicable,
is assumed to result in financial statements that are presented in a fair manner.
Issues like as offsetting and categorization modifications are also addressed in IAS 1.
2.1.1 History of IAS 1

In April 2001, the International Accounting Standards Board (Board) adopted IAS
1 Presentation of Financial Statements, originally issued by the International
Accounting Standards Committee in September 1997. It replaced IAS 1 Disclosure
of Accounting Policies (issued in 1975), IAS 5 Financial Statement Information to
30
be Disclosed (originally approved in 1977), and IAS 13 Financial Statements to

Present Current Assets and Current Liabilities (presented in 1977). (Approved in 1979).
IAS 1 was revised in December 2003 as part of the Board's first technical projects.
Board issued a revised version of the International Accounting Standards in
September 2007, which included changes to the presentation of equity and
comprehensive income as well as a new terminology for financial statements. The
Board of Directors amended IAS 1 in June 2011 to improve the presentation of
other income comprehensive income.
Amending IAS 1 in December 2014, the Disclosure Initiative (Amendments to IAS 1)

addressed criticisms of IAS 1's existing presentation and disclosure requirements,
allowing companies to apply their own discretion in meeting these new standards
of disclosure. Paragraph 82A of IAS 1 was clarified by the amendments as well.
A new definition of material was issued by the Board in October 2018.

(Amendments to IAS 1 and IAS 8). As a result, the definition of "material" and the
way it should be applied were made clearer in this amendment, which included
guidance that had previously appeared in other IFRS Standards, as well as improved
explanations to go along with the definition.
The Board issued a classification of liabilities as current or non-current in January

2020. (Amendments to IAS 1). To qualify as non-current under IAS 1, a liability
must be able to be deferred at least 12 months after the reporting period. This
clarified this criterion.
As of January 1, 2023, annual reporting periods beginning on or after that date will
be exempt from the mandatory effective date of IAS 1 Classification of Liabilities
as Current or Non-current amendments, which the Board issued in July 2020.
31
2.1.2 Objectives of IAS 1
The objectives of IAS 1 are:
• to describes the basis for presentation of general-purpose financial
statements,
• to make it possible to compare the company's financial statements to those
of previous periods and other companies.
• International Accounting Standards 1 (IAS 1) sets out the overall
requirements for the presentation of financial statements, as well as
guidelines for their structure and minimum content requirements.
2.1.3 Scope
All general-purpose financial statements prepared and presented in accordance with
International Financial Reporting Standards (IFRS) are covered by IAS 1. (IFRSs).
Those financial statements designed for a broad audience are known as general
purpose financial statements (GPFS) or “all-purpose financial statements.”
2.1.4 Goal of Financial Statements

The goal of general-purpose financial statements is to give information about an
organization's finances, performance, and cash flow that can be used by a wide
range of people in making economic decisions. To achieve this goal, financial
statements provide data about an organization's: Assets, liabilities, equity, income,
and expenses, as well as contributions and distributions to owners (in their capacity
as owners), cash flows.
This information, along with the rest found in the notes to the financial statements,
aids in the prediction of future cash flows for the entity, particularly in terms of
timing and certainty.
2.1.5 IFRS Based Financial Statements

Basic accounting and financial reporting concepts and presentation style are
explained in IAS -1, "Presentation of Financial Statements."
The following are the IFRS based financial statement:
32
• The Statement of Financial Position as at the end of the period
• A Statement of Comprehensive Income for the period
• A Statement of Changes in Equity for the period
• A Cash Flow Statement or Statement of Cash Flows for the period
• Notes, comprising a summary of the significant accounting policies and

other explanatory information.
2.2 GENERAL FEATURES OF FINANCIAL

STATEMENTS
2.2.1 Going Concern

The preparation of financial statements on a going-concern assumption basis is
necessary (Unless entity is in liquidation or has ceased trading or there is an
indication that the entity is not a going concern). In easier words, if an entity is
going concern, it means that it can continue its operations without going into
liquidation on its own.
2.2.2 Accrual
Only cash flow information is exempt, otherwise organizations are required to
utilize the accrual method of accounting.
2.2.3 Consistency
The presentation and classification of an entity must be maintained from one time
period to the next.
2.2.4 Materiality
Separate exhibits are required for each type of material and for things that differ in
nature or purpose.
2.2.5 Comparative information

In the financial statements and in the notes, IAS 1 mandates that comparative
33
information be provided with regard to the prior period for all amounts shown in
the financial statements.
2.2.6 Offsetting
Unless recommended by IFRS, Assets and liabilities, and income and expenses,
may not be offset.
2.3 STRUCTURE OF THE FINANCIAL STATEMENTS
2.3.1 Statement of Financial Position

Statement of Financial Position
As at June 30, 2022
EQUITY AND LIABILITIES 2022 2021
Equity attributable to the owners of the parent
Share Capital X X
Retained Earnings X X
Other components of Equity X X
Non-controlling Interest X X
Total Equity XXX XXX
Non-current Liabilities
Long-term borrowings X X
Deferred tax X X
Long term provisions X X
Total non-current liabilities XX XX
Current Liabilities
Trade and other payables X X
34
Short-term borrowings X X
Current portion of long- term borrowings X X
Current tax payable X X
Short-term provisions X X
Total current liabilities XX XX
Total liabilities XXX XXX
ASSETS 2022 2021
Non-current Assets
Property, Plant & Equipment X X
Goodwill X X
Other Intangible Assets X X
Investments in Associates X X
Available for Sale Investments X X
Current Assets
Inventories X X
Trade Receivables X X
Other Current Assets X X
Cash & Cash Equivalents X X
Total Assets XXX XXX
35
2.3.2 Statement of Comprehensive Income
2.3.2.1 Two-part Statement of Comprehensive Income
• First part presents Statement of Income
• Second part presents Statement of Other Comprehensive Income
2.3.2.2 Two Separate Statements

• Statement of Other Comprehensive Income presents certain items of
unrealized gain / loss to be directly accounted for in the equity. This
statement intends to present the periodic effect.
36
Statement of Profit and Loss
For the year ended on June 30, 2022
2022 2021
Revenue X X
Cost of sales X X
Gross Profit X X
Other Income X X
Distribution Costs X X
Administrative Expenses X X
Other Expenses X X
Finance Costs X X
Share of profit of associates X X
Profit Before Tax X X

Income tax expense X X
Profit for the year from continuing X X
operations X X
Profit (Loss) for the year from discontinued
operations X X
Profit for the year
Profit attributable to: X X
Owners of the entity X X
Non-controlling interest
Total Comprehensive Income attributable X X
to: X X
Owners of the entity X X
Non-controlling interest X X
Earning per share X X
Basic
Diluted
37
2.5 SELF-ASSESSMENT QUESTIONS:
1. Discuss application of substance over form in the context of the followings,
with examples:
i. Consignment Stock
ii. Sale and Repurchase
2. How to classify expenses in profit and loss account?

3. Describe the eight general principles to be applied in the presentation of
financial statements. Which principles are more subjective? Explain your
answer.
4. Why is it important for entities to disclose the measurement bases used in
preparing the financial statements?
5. What is the purpose of a statement of financial position? What comprises a
complete set of financial statements in accordance with IAS 1?
6. What are the major limitations of a statement of financial position as a source
of information for users of general-purpose financial statements?
38
2.4 Annexure: Annual Reports of FFC
39
40
41
42
Unit-3
INVENTORIES IAS-2
Written by:
Reviewed by:
43
Unit-3 Inventories IAS-2
CONTENTS
Introduction of the unit ..........................................................................................45
Objectives of the unit ............................................................................................45
3.1 Introduction ............................................................................................46
3.1.1 History ................................................................................................... 46
3.1.2 Objectives of IAS 2 ........................................................................46
3.1.3 Scope of IAS 2 ...............................................................................46
3.2 Key Concepts ............................................................................................46
3.2.1 Inventories are Assets ....................................................................47
3.2.2 Components of the Cost of Inventory ............................................47
3.2.3 Items not to be Included in the Cost of Inventory .........................47
3.2.4 IAS 2's Underlying Principle .........................................................47
3.3 Inventory System .......................................................................................48
3.4 Cost Measurement .....................................................................................49
3.5 Disclosure ............................................................................................49
3.6 Self-Assessment Questions ........................................................................49
44
INTRODUCTION
This unit is based on the International Accounting Standard 2 (IAS 2) of
inventories, which provides guidance for determining the cost of inventories and
the subsequent recognition of the cost as an expense, including any write-down to
net realizable value. It also provides guidance on the cost formulas that are used
to assign costs to inventories. This unit provides the history of IAS 2, objectives
of IAS 2, Scope, measurement criteria and disclosure requirements of this standard.
At the end self-assessment questions are given for the practice of the students.
OBJECTIVES

a. to understand the objectives of IAS 2
b. to know the scope of IAS 2
c. to calculate the cost of inventories
d. to perform the accounting treatment of inventories in the light of IAS 2.
e. to find out the value of inventories by applying LCM rule.
45
3.1 INTRODUCTION
IAS 2 Inventories specifies how to account for a wide range of inventory categories,
including but not limited to: An inventory must be measured at the lower of its cost
or its net realizable value (NRV). The standard specifies techniques for estimating
cost, including first-in-first-out (FIFO), weighted average cost and specific
identification.
A recent version of IAS 2 was released in December 2003, applicable to annual

periods starting on or after January 1, 2005,
3.1.1 History
• October 1975- IAS 2 Valuation and presentation of inventories in the
context of the Historical cost system
• December 1993- IAS 2 Inventories were issued
• December 2003- IASB revised IAS 2 to be effective on or after January 1,
2005
3.1.2 Objectives of IAS 2
To prescribe the accounting procedure of inventories is the focus of IAS 2. This
standard covers the computation of inventory costs, the kind of inventory technique
used, the allocation of costs to assets and expenses, and the valuation factors related
with any write-downs to net realizable value.
3.1.3 Scope of IAS 2

IAS 2 covers:
• Inventory of assets held for sale in the normal course of business,
• inventory kept for production for sale,
• inventory held as materials, supplies to be used in the manufacturing
process and
• inventor utilized for performing services
An inventory includes the expenses of a service that have yet to be recouped,
if the service provider is a business (for example, the work in progress of auditors,
architects, and lawyers).
46
Agriculture and forest goods, agricultural output after harvest, or minerals and
mineral products are exempt from IAS 2 if they are measured at net realizable value
in line with well-established methods in their respective sectors. Produce obtained
from harvested living plants and animals is not included in this category, nor are
living plants and animals themselves.
IAS 2 does not include construction contracts (IAS 11) or financial instruments
(IAS 39), but it nevertheless applies its principles when choosing how to apply
specific characteristics of the omitted standards IAS 11
3.2 KEY CONCEPTS

3.2.1 Inventories are assets:
• Held for sale in the normal course of business.
• Currently being produced for sale.
• Materials or supplies to be utilized in the production for sale.
3.2.2 Components of Cost of Inventory:

• The purchase price (including taxes, shipping, and handling) minus trade
discounts).
• Conversion cost (fixed and variable factory overheads)
• Expenditures incurred to get inventory to their current location and
condition, including fixed and variable production overheads.
3.2.3 Items not to be Included in the Cost of Inventory:
• Abnormal quantities of waste materials, labor, and overheads.
• Costs associated with storing an item until it is required for a subsequent
production procedure.
• administrative expenditures,
• expenses related to the sale of goods.
3.2.4 IAS 2's Underlying Principle

Inventories should be measured at the lower of cost and net realizable value.
The net realizable value (NRV) is the estimated selling price less the estimated
47
costs of completion and costs necessary to make the sale.
Estimated Selling Price xxxx

Less Costs of Completion xxxx
Costs necessary to make sales xxxx
Sometimes, NRV is lower than the cost of inventory. The reason of lower NRV
than Cost may be (i) Damaged Goods (ii) Out of fashion (iii) Slow moving
items.
3.2.5 Expenses incurred for selling inventory should be recognized in the period
when the relevant revenue is recorded.
3.2.6 Any inventory write-downs to NRV, including any inventory losses,
should be recorded as an expense in the period in which they occurred.
3.2.7 Fair value is the amount an asset or obligation would fetch in a market
transaction at the time of measurement if it were sold or transferred in an
orderly manner.
3.3 INVENTORY SYSTEM

There are two types of inventory systems:
a. Perpetual inventory system
b. Periodic inventory system
3.3.1 Comparison of two inventory system

PERPETUAL SYSTEM PERIODIC SYSTEM
1 A Continuous record of sale and Record only at the time of
purchase Purchase
2 Prepare Store Ledger card No Store Ledger card
3 Inventory account to be debited Purchase Account to be debited
4 Closing stock is in the trial balance Closing stock out of trial balance
5 Excessive cost Low cost
6 High Control Less Control
7 Low Embezzlement High Embezzlement
48
3.4 COST MEASUREMENT
A unique cost identification is used to allocate the cost of stocks that are not
typically interchangeable as well as those that are generated and separated for
specific projects. The following cost formulae are used to determine the cost of
other inventories:
• The weighted average costing
• First in First out (FIFO)
3.5 DISCLOSURE
It is essential that the financial statements should include the following
information:
• Cost formulae and other accounting policies
• Inventories’ carrying amount in total and as per category
• Cost of inventor sales
• Inventories pledged as security for liabilities
• Amount of inventories held at fair value less costs to sell
• Amount of any write-downs and reversals of any write-downs and
circumstances or events that led to the reversal of write-downs
3.6 SELF-ASSESSMENT QUESTIONS
1. Mubeen Ltd.'s inventory costs Rs. 50,000. Ten percent of the inventory's
selling price is paid to the manager, and the estimated selling price is Rs.
45,000. The company measures its inventories at the lower of cost and
NRV and you need to determine how much inventory should be recorded
in the financial statements.
2. A corporation spent Rs. 350,000 on raw material. The General Manager,
whose annual compensation is Rs 120,000, spent 25% of his time working
on procurement. If ending inventory is zero, you must figure out how
much inventory is worth.
49
3. The following are the month-end balances for Soban Ltd.: Purchase price
Rs. 70,000, transportation costs Rs. 6000, selling costs Rs. 3000, storage
cost Rs. 2,000, and administrative costs of Rs. 5,000 for the month are
included in this figure. You are asked to figure out how much inventory
you have.
4. Following data pertains to green traders, which uses perpetual inventory.
You are required to (a) calculate the cost of inventory using FIFO and
weighted average method and (b) prepare the trading account:
Date Opening Inventory Purchased Sold

1/1/2022 100 units @Rs. 12
each
5/1/2022 300 units @Rs.13
each
7/1/2022 300 units @
30/each
10/1/2022 400 units @Rs. 14
each
15/1/2022 500 units @ Rs. 15
each
500 units
@30/each
20/1/2022 400 units @Rs. 16
each
30/1/2022 700 units @
30/each
50
Unit-4
ACCOUNTING POLICIES, CHANGES

IN ACCOUNTING ESTIMATES AND
ERRORS IAS-8
Written by:
Reviewed by:
51
Unit-4 Accounting Policies, Changes in Accounting Estimates and Errors IAS-8
CONTENTS
Introduction of the unit ..........................................................................................53
Objectives of the unit ............................................................................................53
4.1 Introduction to IAS 8 ........................................................................................... 54
4.2 History of IAS 8................................................................................................... 54
4.3 Objectives of IAS 8 ....................................................................................54
4.4 Scope of IAS 8 ...........................................................................................54
4.5 Key Concepts ................................................................................................... 55
4.5.1 Accounting Policies ................................................................................ 55

4.5.2 A Change in Accounting Estimate.......................................................... 55
4.5.3 Materiality............................................................................................... 55
4.5.4 Prior Period Errors .................................................................................. 55
4.5.5 Impracticable Modifications ................................................................... 55
4.6 Accounting Policies ............................................................................................. 55

4.6.1 How Do You Choose an Accounting Policy .......................................... 56
4.6.2 When Can You Change the Accounting Policy ...................................... 56
4.6.3 What are the Options for Changing the Accounting Policy.................... 56
4.6.4 Treatment of Accounting Policies .......................................................... 56
4.6.5 Disclosure and Presentation Accounting Policy ..................................... 57
4.7 Accounting Estimates ........................................................................................... 57

4.7.1 Changes in Accounting Estimates .......................................................... 57
4.7.2 How the Accounting Estimate can be Changed. ..................................... 58
4.8 Errors ................................................................................................................... 58
4.8.1 Example ................................................................................................... 58
4.8.2 Presentation and Disclosure ..................................................................... 58
4.9 Summary .............................................................................................................. 59
4.10 Self-Assessment Questions……………………………………………………...59
52
INTRODUCTION
This unit is based on the International Accounting Standard 8 (IAS 8) of
Accounting policies, changes in accounting estimates and errors, which provides
guidance for selecting and changing accounting policies, together with the
accounting treatment and disclosure of changes in accounting policies, changes
in accounting estimates and corrections of errors occurred during accounting
period. This unit provides the history of IAS 8, objectives of IAS 8, scope,
criteria for developing and change in accounting policies and accounting
estimates and disclosure requirements of this standard. At the end self-
assessment questions are given for the practice of the students.
OBJECTIVES

 to define the criteria for choosing and updating accounting policies
 to perform the accounting treatment and disclosure of changes in accounting
policies,
 to differentiate between accounting treatment of Changes in accounting policies
and changes in accounting estimations
 to implement the accounting treatment of errors corrections in the light of IAS 8
 to know the disclosure requirements of IAS 8
53
4.1 INTRODUCTION TO IAS 8
IAS 8 provides the framework for the selection and change of accounting policies. In
addition, it narrates the procedures and disclosures for any modifications in accounting
estimates and corrections of mistakes from previous periods that are made.
4.2 HISTORY OF IAS-08

October 1976 Draft E8: The Income Statement Treatment of Unusual
Items and Changes in Accounting Estimates and
Accounting Policy
February 1978 The Unusual and Prior Period Item and Changes in
Accounting Policy (IAS 8)
July 1992 Expenditures, Errors, and Changes in Accounting Policies
E46 Extraordinary Items
December 1993 Changes in accounting policies and fundamental errors in
financial reporting were addressed in the revision of IAS 8
(1993) net profit or loss for the period, fundamental errors,
and changes in accounting policies.
1 January 1995 Effective date of IAS 8 (1993)
18 December 2003 Revised version of IAS 8 issued by the IASB
31 October 2018 Changed as a result of the Material Definition
(Amendments to IAS 1 and IAS 8)
1 January 2020 Effective date of October 2018 amendments
4.3 OBJECTIVES OF IAS 8

• IAS 8 defines the criteria for choosing and updating accounting policies,
as well as the accounting treatment and disclosure of changes in
accounting policies, changes in accounting estimations, and errors
corrections.
• To improve comparability with other entities and over time
4.4 SCOPE OF IAS 8

IAS-08 covers: selecting and applying accounting policies; consistency of
accounting policies; accounting for changes in accounting policies; and correction
of past period mistakes.
54
4.5 KEY CONCEPTS
4.5.1 Accounting Policies are the principles, foundations, conventions,
regulations, and procedures that a company uses to prepare and present the
financial statements.
4.5.2 A Change in Accounting Estimate is a reassessment of the projected future
benefits and responsibilities associated with an asset or liability, or a linked expenditure,
which results in an adjustment to the carrying amount of that asset or liability.
4.5.3 Materiality If omitting, misstating, or obscuring information could reasonably
be expected to influence decisions made by the primary users of general-purpose
financial statements based on those financial statements, which provide financial
information about a specific reporting entity, the information is material.
4.5.4 Prior Period Errors are omissions and misstatements in an entity's
financial statements for one or more prior periods caused by a failure to use, or
misuse of, reliable information that was available and could reasonably have been
obtained and taken into account in the preparation of those statements.
Mathematical errors, errors in implementing accounting standards, oversights or
misinterpretations of facts, and fraud all contribute to such errors.
4.5.5 Impracticable Modifications are those that an entity is unable to
implement despite making every reasonable attempt.
• When effects are not determinable,

• assumptions about management intent in a prior period are required, and
• it is impossible to distinguish information about circumstances in a prior period
and information that was available in that period from other information,
the application of a change in accounting policy or the retrospective correction of
an error becomes impracticable.
4.6 ACCOUNTING POLICIES

Accounting policies are the concepts, foundations, conventions, regulations, and
procedures that a company uses to prepare and report financial statements. For
example, switching from the weighted average approach to the first-in, first-out
(FIFO) method of inventory management (IAS 2), Instead of recognizing revenue
from dispatching, revenue is recognized at the moment of collection/invoicing
(IAS 18). The following, however, are not changes in accounting policies.
55
• The use of an accounting policy for transactions, other events, or
situations that differ in substance from those that have previously
occurred; and
• The use of a new accounting policy for transactions, other events, or
conditions that have not previously occurred or were inconsequential.
4.6.1 How Do You Choose an Accounting Policy?
• You just apply any standard (IFRS/IASs) or interpretation (IFRIC OR
SIC) that exists.
• When there is NO explicit standard or interpretation that applies to your
transaction or item, management must use its best judgement and
construct its own policy; nonetheless, the policy must be as dependable
and relevant as feasible.
4.6.2 When Can You Change the Accounting Policy?
There are two situations in which you can alter your accounting policy:
• When another International Financial Reporting Standards (IFRS)
requires it. This will be the case when new IFRS are produced, and you
are required to implement them.
• When a new accounting procedure produces more accurate, dependable,
and relevant data. In this situation, you are voluntarily implementing a
new accounting policy.
4.6.3 What are the Options for Changing the Accounting Policy?
The following are the steps that may be taken to modify the accounting policy:
• If you use a new IFRS that includes some transitional guidance, you just
follow the requirements laid out in the transition provisions. The new
International Financial Reporting Standards (IFRS) will show you how.
• If there is not any transitional guidance, or if you modify your accounting
policy on your own, you should apply it retroactively (there are some
exceptions).
• "Retrospectively" means going back to past reporting periods and
recalculating every component of equity as though the new policy had
always been in effect. Keep in mind that you will need to rephrase
comparatives as well!
4.6.4 Treatment of Accounting Policies
• When an entity applies a change in accounting policy retrospectively, it
must adjust the opening balances of each affected component of equity for
the earliest prior period presented, as well as the other comparative
56
amounts disclosed for each prior period presented, as if the new
accounting policy had always been applied.
• When determining the cumulative effect of applying a new accounting
policy to all past periods is impractical at the start of the current period,
the business should update the comparative information to apply the new
accounting policy prospectively from the earliest date possible.
4.6.5 Disclosure and Presentation (Accounting Policy)
• The standard's or interpretation's title
• If relevant, a transitional provision
• Nature of change in accounting policies
• Transitional provision description
• To the degree possible, the amount of adjustment for the current period
and each preceding period presented:
• For each line item on the financial statement that is affected.
• Earnings per share (EPS) – updated
• Nature and amount of a change in an accounting estimate for the current
year and, if possible, a future period.
• If estimate is impossible, this information should be made public.
4.7 ACCOUNTING ESTIMATES

• IAS 8 does not define accounting estimate directly, but rather indirectly
through changes in accounting estimates.
• When you alter an accounting estimate, you alter the amount of an asset or
liability, as well as the pattern of consumption in both current and future
reporting periods.
Once more, a word of caution.
• If these adjustments are the consequence of fresh information, a new

trend, or a new development, they are accounting estimations.
• If these changes are the consequence of a mistake, such as an inaccurate
calculation or the improper application of accounting standards, they are
NOT accounting estimates, but errors that must be accounted for as errors.
4.7.1 Changes in Accounting Estimates
A change in accounting estimate is a change in the carrying amount of an asset or
liability, or the amount of periodic consumption of an asset, which arises from an
evaluation of the current condition of assets and liabilities, as well as predicted
future benefits and responsibilities connected with them. Accounting estimates
that change as a consequence of new knowledge or developments are not
57
corrections of mistakes. Bad debts provision, depreciation, and warranty repairs
are all examples of accounting estimates.
4.7.2 How the Accounting Estimate can be Changed?
• Treatment of accounting estimations will be performed prospectively,
unlike the treatment of changes in accounting policies, either:
• During the current reporting period, as part of a "catch-up adjustment."
• In both the current and future reporting periods, If the adjustment has
impact on both (for example, change in useful lives affects depreciation
charges in both the current and the future reporting periods).
• "Prospectively" indicates you do not have to recalculate comparatives or
equity. You do not make any changes to the financial statements from past
reporting periods; instead, you make adjustments to the present and future
reporting periods' computations.
4.8 ERRORS
Prior period errors are omissions and misstatements in an entity's financial
statements for one or more preceding periods caused by a failure to employ, or
misappropriation of, accurate information that:
• Was assessable, when financial statements for those periods were

permitted for release, and
• could expected to have been collected and considered in the preparation
and presentation of such financial statements
4.8.1 Example
Mathematical errors have an impact, mistakes in accounting policy application,
Oversight, misunderstanding of information and deception of fraud are all
examples of errors.
4.8.2 Presentation and Disclosure
• The nature of the error/s from the previous period
• The amount of the adjustment, to the degree possible:
• For each affected financial statement line item; and
• Earnings per share (EPS) revision (EPS)
• The amount of the adjustment at the start of the most recent preceding
period; and
• If retrospective restatement for a specific earlier period is not possible, the
circumstances that led to the occurrence of that situation, as well as a
description of how and when the error was addressed.
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4.9 SUMMARY
Accounting Accounting Errors
policies estimates
Definition are the bases, rules, Adjustments in Prior period errors
conventions the carrying value are omissions from,
practices applied by an of assets and and misstatements
entity in Financial liabilities in the Financial
Reporting Statements
Examples 1) Apply FIFO or 1) Bad debts Effect of

weighted average provisions mathematical
method of inventory 2) Useful life mistakes
2) Borrowing cost to be changes or the ø mistakes in
capitalized or expense pattern of applying
out consumption accounting policies
3) Classification of warranty ø oversight and
expenses in cost of obligation misinterpretation of
goods sold or admin facts and fraud.
expense
4) Revenue recognition
on dispatching or
production
Accounting Retrospective Prospective Retrospective
treatment application restatement if
material
4.10 SELF-ASSESSMENT QUESTIONS
4.10.1 For example whether to use the straight-line method of depreciation or the
reducing balance method is a choice of --------------------.
4.10.2 IAS 16: Property, plant and equipment allows the use of the cost model or the
revaluation model for measurement after recognition. is a choice of ------------------?
4.10.3 A change in the COSTING methods from FIFO to Weighted Average
method. is a choice of -------------------
4.10.4 Full year depreciation shall be charged in the year of purchases whereas
non in the year of disposal. It is a choice of -------------------.
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4.10.5 Management estimates that provision for doubtful debts is estimated up to
5 percent of the total population of trade debts. However, upon identifying the age
of the trade debts, it revealed that bad debts are about 6.5 percent of total
population of trade debts. Management immediately recognizes the increase in
bad debts expense in the books of accounts. It is a choice of -------------------.
4.10.6 Abc Co, apply LIFO method of costing for inventories instead of FIFO. It
is a case of -------------------.
4.10.7
2021 2020
Rs. Rs.
Sales 1,200,000 850,000
Cost of sales (9,00,000) (680,000)
Gross profit 300,000 170,000
Selling and admin expenses (180,000) 127,500
Profit before tax 120,000 42,500
Tax (40%) (48,000) (17,000)
Profit after tax 72,000 25,500
Opening Retained Earnings 475,500 450,000
 In 2021 the company decided to change its costing method of inventories

from weighted average costing to FIFO.
 The impact on the cost of inventories was as follows:
2021 2020
Closing inventories 25,000 35,000
(Understated)
 Required: Prepare profit and loss account and related disclosures as per IAS-8
Solution:
Step-1
Does this involve a change to:

Recognition X
Presentation X
Measurement basis ✓
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Explanation- There is explicitly a change of measurement basis
Conclusion- This is a change of accounting policy, and it should be disclosed.
However, a prior period adjustment will be required only if the difference
between weighted average and FIFO is material.
Step-2
Restated 2020 with Rs. 35,000 add in the cost of goods sold one year closing
stock will be the opening stock in year 2021 in this case
Step-3
Restated comparatives too!
Ab Co, Profit, and loss account for the year ended 31st
December 2021
Restated
2021 2020
Rs Rs
Sales 1,200,000 850,000
Cost of sales (9,10,000) (645,000)
(900,000+35000-25,000)
Gross profit 290,000 205,000
Selling and admin (180,000) (127,500)
expenses
Profit before tax 110,000 77,500
Tax (40%) (44,000) (31,000)
Profit after tax 66,000 46,500
Disclosures
A. Method of valuation of cost of inventories has been changed from
weighted average to FIFO for better presentation of inventories.
B. As a result of change in policy, the closing stock recorded for the year
2021 and 2020 has resulted in understatement of 25,000 and 35,000,
respectively. Therefore, by increasing the stocks, the cost of goods sold for
the current year has been increased by Rs 10,000 and for the last year has
been decreased by Rs. 35000
C. Comparative information has been restated.
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ANSWERS: SELF-ASSESSMENT QUESTIONS
4.10.1 Answer: Selection /application of accounting policy
4.10.2 Answer: Accounting Policy
4.10.3 Answer: Accounting policy
4.10.4 Answer: Accounting policy
4.10.5 Answer: Changes in Accounting Estimates
4.10.6 Answer: Errors Restatement
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Unit-5
STATEMENT OF
CASH FLOWS IAS-7
Written by:
Reviewed by:
63
Unit-5 Statement of Cash Flows IAS-7
CONTENTS
Introduction ........................................................................................................65
Objectives ........................................................................................................65
5.1 Objectives of IAS 7 ..........................................................................................66
5.2 Scope of IAS 7 ................................................................................................66
5.3 Important Concepts .........................................................................................66
5.4 Sections of Cash Flow Statement ...................................................................67
5.4.1 Operating Activities .............................................................................67
5.4.2 Investing Activities ..............................................................................68
5.4.3 Financing Activities ............................................................................69
5.5 Formats of Statement of Cash Flows (Direct Method) ..................................69
5.6 Formats of Statement of Cash Flows (Indirect Method) ...............................70
5.7 Self-Assessment Questions ............................................................................71
64
INTRODUCTION
This unit is based on the International Accounting Standard 7 (IAS 7) statement
of cash flows which prescribes how to present information in a statement of cash
flows about how an entity’s cash and cash equivalents changed during the period.
This unit provides the history of IAS 7, objectives of IAS 7, scope, key
definitions of cash and cash equivalents, methods of preparing cash flow
statements and disclosure requirements of this standard. At the end self-
OBJECTIVES
• to measure the change in cash balances during the period.
• to forecast the future cash flows
• to identify and differentiate among the operating, investing, and financing
activities
• to determine the entity’s capacity to earn cash and cash equivalents
• to assess the cash flow predictability and timeliness
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The cash flow statement is a distinct financial statement that gives extra data for
assessing the entity's solvency and liquidity. Cash flow is also important for
measuring:
• The change in cash balances during the period,
• Cash flow predictability and timeliness
• The entity's capacity to earn cash and cash equivalents, as well as
• Forecasting future cash flows.
5.2 SCOPE OF IAS 7

A cash flow statement that reports cash flows during the reporting period is
needed for all entities. It is possible to report using either the direct or indirect
technique. It is necessary to define cash and cash equivalents. The following are
the several types of cash flows that must be classified:
▪ Operating activities
▪ Investing activities
▪ Financing activities
5.3 IMPORTANT CONCEPTS

5.3.1 Cash includes cash in hand, and demand deposits, net of bank overdrafts
repayable on demand.
5.3.2 Cash equivalents are short-term, highly liquid assets that can easily be
converted to cash and have a low risk of value change, i.e., short-term debt
securities.
Cash equivalents are retained to satisfy short-term cash obligations rather than for
investment or other objectives. As a result, an investment is usually considered a
cash equivalent only if it has a short maturity, such as three months or less, from
the date of purchase. Equity investments are not considered cash equivalents
unless they are cash equivalents, such as preferred shares purchased within a
limited period of maturity and with a set redemption date. Cash and Cash
equivalents can be summarized as follows:
▪ Cash in hand
▪ Cash at bank
▪ Marketable securities and
▪ Bank overdraft
5.3.3 An organization must produce a cash flow statement that categorizes cash
inflows and outflows by operating, financing, and investment activities during the
66
reporting period. It can be prepared anyone of the method (1) Direct Method (2)
Indirect Method
5.3.4 Revenue-generating activities and other activities that do not involve
investing or financing activities are referred to as operating activities.
5.3.5 Investing Activities include the purchase and sale of long-term assets as
well as other investments that are not cash-equivalent investments.
5.3.6 Financing Activities are those that alter the quantity and mix of capital
stock and debt.
Financing Activities are activities that change the size and composition of the
equity capital and borrowings.
5.3.7 Cash flow statement can be prepared according to one of the methods: (i)
Direct Method (ii) Indirect Method
5.4 SECTIONS OF CASH FLOW STATEMENT:

The followings are the three sections:
1. Cash flow from operating activities (CFO)
2. Cash flow from investing activities (CFI)
3. Cash flow from financing activities (CFF)
5.4.1 Operating Activities: Operating activities generate cash flows principally
from the entity's primary revenue-generating activities. As a result, they are
usually the outcome of transactions and other events that have a role in
determining profit or loss. The following are some examples of cash flow from
operating activities:
• Receipts in cash from the sale of goods and the provision of services.
• Any cash receipts against royalties, fees, commissions, and other revenue.
• An insurance company's financial collections and payments from
premiums, claims, annuities, and other policy benefits.
• Cash refunds of income taxes, except they can be directly linked to
investment and financing activities.
• Payments of cash to vendors for products and services.
• Payments made to and on behalf of employees in cash.
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5.4.1.1 Format- CFO (Indirect Method)
Profit After Tax (PAT) XXX

Adjustments: non-cash items
Depreciation XXX
Tax exp XXX
Interest exp XXX
Loss on disposal XXX
Interest income (XXX)
Gain on disposal (XXX)
Before working capital items changes : XXX
Current assets (increase)/decrease (XXX)/XXX
Current liabilities increase/(decrease) XXX/(XXX)
Interest paid (XXX)
Net cash flow from operating activity XXX
5.4.2 Investing Activities: The separate presentation of cash flows deriving from
investment activities is significant, because cash flows show the amount to which
expenditures have been made for resources intended to create future income and
cash flows. Investing activities are only eligible for categorization if they result in
a recognized asset in the statement of financial position. The followings are some
examples of cash flows which belong to investing activities:
a) Cash payments to buy property, land, and equipment, intangibles, and other
long-term assets. These payments consist of include self-constructed
property, plant and equipment and other capitalized development costs.
cash payments to acquire equity or debt instruments of other entities and
interests in joint ventures.
b) Cash receipts from sales and property, plant and equipment, intangibles, and
other long-term assets
c) Cash payments to acquire equity or debt instruments of other entities and
interests in joint ventures
d) Cash receipts from sales and equity or debt instruments of other entities and
interests in joint ventures
e) Loans and cash advances to other parties
f) Receipts of cash from the repayment of advances and loans to third parties.
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5.4.2.1 Format-CFI
Inflows Outflows
Sales proceeds’ of fixed assets Purchase of fixed assets
Sales proceeds’ of long term Purchase of long term investments
investments
Interest received
5.4.3 Financing Activities

The separate disclosure of cash flows deriving from financial activity is
significant because it helps forecast future cash flow claims by capital providers.
Cash flows resulting from financing activities include:
(a) Cash receipts from the sale of shares or other equity instruments
(b) Cash payments made by owners to require or redeem the entity's shares.
(c) Proceeds from the issuance of debentures, loans, notes, bonds, mortgages,
and other short- and long-term debt.
(d) Repayments of borrowed funds in cash
(e) Payments made in cash by a lessee to reduce a finance lease's outstanding
debt.
5.4.3.1 Format-CFF
Inflows Outflows
Issue of share capital Dividend paid
Issue of debenture or long term loan Repayment of long term loan

from bank
5.5 FORMATS OF STATEMENT OF CASH FLOWS

(DIRECT METHOD)
ABC Company
Statement of Cash Flows
for the year ended 31 December 2021
Cash flow from operating activities 2021 Rs. 2020 Rs.
Cash received from customers XXX XXX
Cash paid to suppliers (XXX) (XXX)
Expenses paid (XXX) (XXX)
Cash generated from operations XXX XXX
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Interest paid (XXX) (XXX)
Income tax paid (XXX) (XXX)
Net cash from operating activities (A) XXX XXX
Cash flow from investing activities
Acquisition of shares, debenture etc (XXX) (XXX)
Purchase of property, plant and equipment (XXX) (XXX)
Proceeds from sale of equipment XXX XXX
Interest received XXX XXX
Dividend received XXX XXX
Net cash from/(used in) financing activities (B) (XXX) (XXX)
Cash flow from financing activities
Proceeds from issuance of share capital XXX XXX
Proceeds from long-term borrowings XXX XXX
Payment of finance lease liabilities (XXX) (XXX)
Dividend paid* (XXX) (XXX)
Net cash from/(used in) financing activities (C) XXX XXX
Net increase/(decrease) in Cash & Cash XXX XXX

equivalents(A+B+C)
Cash & Cash equivalent at the beginning of the XXX XXX
period
Cash & Cash equivalent at the end of period XXX XXX
5.6 FORMATS OF STATEMENT OF CASH FLOWS

(INDIRECT METHOD)
ABC Company
Statement of Cash Flows
for the year ended 31 December 2021
Cash flow from operating activities 20x5 Rs. 20x4 Rs.
Profit before tax XXX XXX
Adjustment for:
Depreciation XXX XXX
Loss on sale of property XXX XXX
Profit on sale of investment (XXX) (XXX)
Investment Income (XXX) (XXX)
Interest expenses XXX XXX
Goodwill written off XXX XXX
Amortization of intangible assets XXX XXX
Operating profit before working capital changes XXX XXX
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Changes in working capital

Increase in trade receivables (XXX) (XXX)
Decrease in inventories XXX XXX
Decrease in prepayments XXX XXX
Decrease in accrued expenses (XXX) (XXX)
Decrease in trade payables (XXX) (XXX)
Cash generated from operations XXX XXX
Interest paid (XXX) (XXX)
Income taxes paid (XXX) (XXX)
Net cash from operating activities (A) XXX XXX
Cash flow from investing activities

Acquisition of shares, debenture etc (XXX) (XXX)
Purchase of property, plant, and equipment (XXX) (XXX)
Proceeds from sale of equipment XXX XXX
Interest received XXX XXX
Dividend received XXX XXX
Net cash from/ (used in) investing activities (B) (XXX) (XXX)
Cash flow from financing activities

Proceeds from issuance of share capital XXX XXX
Proceeds from long-term borrowings XXX XXX
Payments of finance lease liabilities (XXX) (XXX)
Dividend paid* (XXX) (XXX)
Net cash from/ (used in) financing activities (C) XXX XXX
Net increase/(decrease) in cash & cash XXX XXX
equivalents
Cash & cash equivalents at the beginning of the XXX XXX
period
Cash & cash equivalents at the end of period XXX XXX

SAQ 1 The following information is extracted from the books of Shah
Corporation; you are required to calculate the cash and cash equivalents.
a. Cash in hand amounting to Rs. 150,000.
b. Cash at bank is Rs. 170,000.
c. Debtors are valued at Rs.40,000.
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d. Receivables are valued at Rs. 15,000.
e. Short-term investment amounting to Rs. 60,000 (To be included in cash
and cash equivalent)
f. Bank overdraft; Rs. 30,000.
Solution SAQ 1
Cash and cash equivalent Rs.

(a) Cash in hand 150,000
(b) Cash at bank 170,000
(c) Short-term investment 60,000
380,000
(d) Bank overdraft Cash and cash Equivalent
(30,000)
350,000
SAQ 2 You are asked to identify operating, investing and financing activities
from the following:
a) Cash received from debtors.
b) Cash received from sale of goods.
c) Cash received from sale of old equipment.
d) Cash received from issue of debentures.
e) Loan payments.
f) Received dividend.
g) Dividend paid.
h) Salaries and wages paid to employees.
i) Cash paid as interest.
j) Amount of interest received.
k) Bought a vehicle.
l) Issued shares against acquisition of a plant
m) Advanced made to suppliers.
n) Amount of taxes paid.
o) Charged depreciation on plant for the year.
p) Bought goods on cash.
q) Amount of loan granted to subsidiary company by the parent company.
Solution SAQ 2
Operating activities: (a), (b), (f), (h), (i), (m), (n), (p), (j)
Investing activities: (c), (f), (j), (k), (q)
Financing activities: (d), (e), (g), (i)
None of the above: (l), (o)
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Unit-6
EVENTS AFTER THE REPORTING

PERIOD IAS-10
Written by:
Reviewed by:
73
Unit-6 Events After The Reporting Period IAS-10
CONTENTS
Introduction ........................................................................................................75
Objectives ........................................................................................................75
6.1 Introduction to IAS 10 ...............................................................................76
6.2 Objectives of IAS 10 ..................................................................................76
6.3 History of IAS-10 ......................................................................................76
6.4 Scope of IAS-10 .........................................................................................77
6.5 Key Concepts ............................................................................................78
6.6 Types of Events after the Reporting Period ...............................................79
6.6.1 Recognition & Measurement of Adjusting Events ........................79
6.6.2 Recognition & Measurement of Non-adjusting Events ................79
6.7 Presentation and Disclosures .....................................................................80
6.8 Self-Assessment Questions: .......................................................................80
74
INTRODUCTION
This unit is based on the International Accounting Standard 10 (IAS 10) which
describes that when an entity should adjust its financial statements for events
after the reporting period; and the disclosures that an entity should give about the
date when the financial statements were authorized for issue and about events
after the reporting period. This unit provides the history of IAS 10, objectives of
IAS 10, scope, key concepts regarding adjusting and non-adjusting events and
disclosure requirements of this standard. At the end self-assessment questions are
given for the better understanding of the concepts discussed in this unit.
OBJECTIVES

• to identify the circumstances in which a business must adjust its financial
statements for events that occurred after the reporting period
• to know about the authorization date
• to differentiate between adjusting events and non-adjusting events
• to pass the necessary adjusting entries in case of adjusting events which
covers under IAS 10
• to prepare the disclosure with respect to IAS 10.
75
The financial position of an entity at a certain date (the reporting date) and the
financial performance of that entity for the period leading up to that date are
reported in the statement of financial position and the statement of comprehensive
income (the reporting period). Events that occur between the reporting date and
the authorization date, on the other hand, may have an impact on the entity's
financial position and financial performance as determined at the reporting date.
As a result, it is critical that events that occur after the reporting date are taken
into account while generating financial statements at that time. While certain
events may have a fiscal impact on the financial position and financial
performance of the reporting period, others may not, but must be stated in the
financial statements for a better understanding.
IAS 10 covers the circumstances in which a business must adjust its financial
statements for events that occurred after the reporting period, as well as the
disclosures that must be made concerning the authorization date and the events
that occurred after the reporting period.
According to IAS 10, a company shall not produce its financial statements on a
going concern basis if circumstances occurring after the reporting period show
that the going concern assumption is not valid.
The Standard's goal is to provide the following recommendations:

• When should a company's financial statements be adjusted for events that
occurred after the balance sheet date?
• The information that a company must include concerning the date on
which the financial statements were authorized for release and events that
occurred after the balance sheet date.
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Exposure Draft E10 Contingencies and Events Occurring After the
Jul-77 Balance Sheet Date
IAS 10 Contingencies and Events Occurring After the Balance Sheet
Oct-78 Date effective 1 January 1980
1994 IAS 10 (1978) was reformatted
Exposure Draft E59 Provisions, Contingent Liabilities and
Aug-97 Contingent Assets
Sep-98 IAS 37 Provisions, Contingent Liabilities and Contingent Assets
Effective date of IAS 37, which superseded those portions of IAS 10
01-Jul-99 (1978) dealing with contingencies
Nov-98 Exposure Draft E63 Events After the Balance Sheet Date
IAS 10 (1999) Events After the Balance Sheet Date superseded those
portions of IAS 10 (1978) dealing with events after the balance sheet
May-99 date
1
January
2000 Effective date of IAS 10 (1999)
18-Dec-
03 Revised version of IAS 10 issued by the IASB
01-Jan-05 Effective date of IAS 10 (Revised 2003)
06-Sep- Retiled Events after the Reporting Period as a consequential
07 amendment resulting from revisions to IAS 1
6.4 SCOPE OF IAS-10

IAS 10 governs the accounting and disclosure of any post–balance sheet
(Statement of Financial Position) events that occur before the financial statements
are authorized for issuance, either favorable or unfavorable. This standard
specifies how such events should be recorded or simple disclosure are necessary.
This standard further narrates that an organization must not produce financial
statements on a going concern basis if developments that occur after the balance
sheet date indicate that the going-concern assumption is no longer valid. The
scope of IAS 10 is seen in the diagram below
77
6.5 KEY CONCEPTS

• Events after the reporting period are those that occur between the end of the
reporting period and the date on which the financial statements are authorized for
issuance, both positive and unfavorable. There are two sorts of events:
(a) those that give evidence of circumstances that existed at the end of the
reporting period (adjusting events after the reporting period); and
(b) those that indicate conditions that occurred after the reporting period
(non-adjusting events after the reporting period).
• If an occurrence occurs after the date of financial statement authorization, it is

neither adjusting nor non-adjusting, because it falls beyond the scope of IAS 10.
• If an event happens after the reporting date but before the date of authorization of
financial statements for issuance, and it materially/severely impacts the entity's
going concern status, it must always be recognized as an adjusting event,
regardless of which definition it fulfils, according to IAS 10. In such a case, the
entity's financial statements will be prepared on a break-up basis.
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6.6 TYPES OF EVENTS AFTER THE REPORTING PERIOD

The term "events after reporting period" refers to occurrences that occur after the
reporting date but before the date on which financial statements are authorized for
release. These might be favorable or non-favorable.
These are classified into two categories as:
• Adjusting Events (Defined in 6.5)
• Non-adjusting Events (Defined in 6.5)
6.6.1 Recognition & Measurement of Adjusting Events

Those that occur after the reporting date but before the financial statements are
authorized for release and give additional/further information about the conditions that
existed at the reporting date. Before the financial statements are finalized and issued, the
organization must account for the adjusting events by modifying their possible financial
consequences in the financial statements. The following are some examples of adjusting
events that require an organization to adjust its financial statements prior to issuance:
▪ Receiving information of a customer's bankruptcy after the reporting date on a
debt that was declared as receivable at year end shows that the debt has become
irrecoverable, and the business should revise the value of receivable recorded in
the statement of financial position.
▪ Reduction in Net realizable Value of Inventory after the reporting date, stated at
cost at year end, as evidenced by the sale of inventory at a low selling price after
the reporting date, indicates that the value of inventory has decreased, and the
entity should adjust the inventory value included in the statement of financial
position.
▪ Receiving information after the reporting date that confirms the asset was
impaired at the time of reporting.
▪ The calculation of the purchase/selling price of an asset purchased or sold within
the current year after the reporting date.
▪ A court lawsuit that was started during the current year and was settled after the
reporting date will offer proof that the corporation has an obligation at year end,
thus the financial statements should be adjusted accordingly.
▪ After the reporting deadline, the discovery of a fraud or any other mistake.
6.6.2 Recognition & Measurement of Non-Adjusting Events

Those that occur after the reporting date but before the date of financial statement
authorization for issuance and are indicative of situations that existed after the reporting
date. Non-adjusting events do not necessitate an adjustment in the financial statements;
instead, IAS 10 requires that such occurrences be mentioned in the notes to accounts if
they are regarded relevant; otherwise, they will be ignored. The following are some non-
adjusting event examples.
▪ After the reporting date, a business line is sold or discontinued.
▪ Any changes in tax rates or rules that apply to the preceding year after the
reporting date
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▪ Any acquisition of a firm after the reporting deadline.

▪ The start of a court case because of circumstances that occur after the reporting
date.
▪ Any loss that occurs after the reporting date because of a natural disaster, such as
a fire or a flood.
▪ Any sale or acquisition asset after the reporting deadline.
▪ A decrease in the value of an investment beyond the reporting deadline
▪ After the reporting date, a dividend is declared.
6.7 PRESENTATION AND DISCLOSURES

In the case of adjusted and non-adjusting events, IAS 10 requires the following
information to be disclosed.
▪ The following are the disclosure criteria for the date of authorization for issue
o The date on which the financial statements were approved for issuance.
o The name of the person who granted the permission
o Name of the party with the authority to change the financial statements after
they have been issued (if any).
▪ The following should be reported for non-adjusting occurrences that might impair
users' capacity to make accurate judgments and decisions:
o The event's nature
o Calculation of the fiscal impact
o A statement if such an estimate is impossible to make
▪ Any additional information regarding those conditions obtained after the Statement
of Financial Position date should be considered when updating disclosures that
pertain to conditions that existed at the Statement of Financial Position date.

SAQ-1
AB Ltd engaged in manufacturing facility and has year-end of 31 December
2020. Its date of authorization of financial statements for issue was 10 February
2021 and the annual general meeting is scheduled on 7 March 2021. You are
required to explain the appropriate accounting treatment of the following events
in the financial statements of AB Ltd. for the year ended 31 December 2020.
i. The company's major warehouse and the inventory it contained, was
completely damaged because of a fire explosion took place on 12 January
2021. The warehouse and the inventory were to have a carrying value $20
million and $12 million respectively on this date.
The company is expected to recover up to maximum of $18 million as it
has not updated its insurance cover. The operations of the entity were
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severally interrupted, and the entity expects to face losses for coming few
years.
ii. A particular type of inventory held by AB Ltd at a different location was
recorded at its cost of $920,000 on 31 December 2020 in the statement of
financial position. The entity sold 70% of this inventory for $560,000 on
15 January 2021, incurring a commission expense of 15% of the selling
price of the inventory.
iii. The government introduced tax changes on 13 March 2021, due to which
the tax liability recorded by entity at 31 December 2020, will increase by
$960,000.
Required
Solution:
i. It will be treated as non-adjusting event as IAS 10 requires any event
which gives rise to loss due to a natural disaster such as fire, flood to be
classified as non-adjusting event because such events do not provide
evidence of the conditions existed at reporting date. However, if this event
has affected the going concern status of the entity, then it will be treated as
adjusting event and entity will have to prepare its financial statements as
per Liquidation basis. The Insurance claim should be disclosed as a
contingent asset in the notes to accounts.
ii. This will be treated as adjusting event as sale of inventory after the
reporting date reflects that the NRV of inventory is less than the cost. The
NRV of 70% inventory is $476,000 calculated using the selling price of
$560,000 less commission expense of $84,000 ($560,000*15%), and it has
a cost of $644,000 ($920,000*70%). Therefore, the entity will need to
adjust down the value of inventory to its NRV (as inventory should be
stated at lower of cost or NRV, whichever is lower) of $680,000
($476,000/70 * 100%) in the statement of financial position for the year
ended 31 December 2020.
iii. This will treat as outside the scope of IAS 10 as it has occurred after the
date of authorization of the financial statements for issue. If it had have
occurred after the reporting date but before the date of authorization of
financial statements for issue, then in such situation it would have been
treated as non-adjusting event.
SAQ-2
Zoha Techno Limited (ZTL) manufactures five hi-tech products, each on a
different plant. It is in the process of preparing its financial statements for the year
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ended June 30, 2021. As the CFO of the company, the following matters are
under your consideration:
i. Inventory carried at Rs. 24 million on June 30, 2021, was sold for Rs. 14 million
after it had been damaged in a fire, in July 2021.
ii. On July 6, 2021, one of ZTL’s corporate customers declared bankruptcy. The
liquidator announced on August 28, 2021, that 22% of the debt would be paid on
liquidation.
iii. A new product introduced by a competitor on August 2, 2021, had caused a
significant decline in the market demand of one of ZTL’s major products. As a
result, ZTL is considering a reduction in price and a cut in production.
iv. On August 19, 2021, the government announced a retrospective increase in the
tax rate applicable to the company.
v. The directors of ZTL declared a dividend of Rs. 4 per share on August 29, 2021.
Required
State how the above events should be treated in ZTL’s financial statements for the
year ended June 30, 2021. You may assume that all the above events are material
to the company.
SOLUTION:
i. Since the event which caused the inventory to be sold at a loss occurred after
the year end, it is non-adjusting event. However, the effect of the event should
be disclosed in the financial statements for the year ended June 30, 2021.
ii. It is an adjusting event in accordance with the requirement of IAS-10. The
debtor’s balance should be written down by 80% amount.
iii. It is non-adjusting event as the subsequent reduction in price is due to an event,
introduction of competitive product, occurred after the reporting period.
iv. Since this change was not enacted before the reporting date, it is a non-
adjusting event. However, a disclosure should be made for this change.
v. Since the declaration was announced after the year-end and there was no
obligation at year-end it is a non-adjusting event. Detail of the dividend
declaration must, however, be disclosed.
SAQ-3
The draft financial statement of Blue Limited, for the year ended 30th June 2021
are currently under consideration by the directors. The profit for the year is shown
as Rs 450,000. Since 30th June 2021, the following events have occurred but have
not been reflected in any way in the draft financial statement to that date.
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i. A substantial quantity of slow-moving inventory was sold for Rs. 160,000.

The item had cost Rs. 300,000 and had been valued for accounts on 31 st
June at their estimated NRV of Rs. 200,000.
ii. A credit customer paid the amount owing of Rs. 65,000 in full. On 30th June,
there were doubts as to whether it would be paid or not. Therefore, A
specific allowance for full amount had been made in the accounts.
iii. Some years previously, Blue Limited guaranteed the overdraft of an
associated company, Uni Limited up to a limit of Rs. 100,000. Shortly after
the Blue’s balance sheet date, it was announced that the associated company
(Uni Limited) was in financial difficulties, and it is now probable that Blue
will have to meet guarantee in full.
iv. In August 2021, plans to merge Blue with Ayub Sons was announced.
v. A 15% cash discount was declared on 5th July 2021.
Required:
A. Describe the accounting treatment for the year ended 30th June 2021.
B. Pass the adjusting entries.
C. Calculate the revised profit figure.
Solution
Req A.
i. This is an adjusting event after the balance sheet date under IAS 10. The
inventory should be reduced by Rs 40,000 in the income statement and
balance sheet
ii. This is an adjusting event after the balance sheet date under IAS 10. The
allowance for doubtful debts should be reduced by Rs 65,000 in the income
statement and balance sheet i.e., the specific allowance created earlier
should be reversed.
iii. it is probable that the guaranteed expense shall be met in full, so this is an
adjusting event. Therefore, provision for guarantee payable should be
increased by Rs. 100,000/-
iv. The proposed merger is a non-adjusting event after the balance sheet date. It
should be disclosed by a note in the financial statements for the year ended
30th June in the following way: Nature: Announcement of merger
v. This is a non –adjusting event and need to be disclosed in the FS
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Req B
Sr.# Description Ref Debit Credit

i Profit & Loss A/c 40,000
Stock A/c 40,000
ii Cash A/c 65,000
Debtor A/c 65,000
Specific Provision A/c 65,000
Profit & Loss A/c 65,000
iii Profit & Loss A/c 100,000
Provision for Guarantee A/c 100,000
iv Non-Adjusting Event
v Non-Adjusting Event
Req C
Profit as per profit and loss 450,000
Add:
Specific provision no longer required 65,000
Less:
Further reduction in stock value 40,000
Provision for guarantee 100,000
Adjusted profit 375,000
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Unit-7
PROPERTY, PLANT AND

EQUIPMENT (IAS-16)
Written by:
Reviewed by:
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Unit-7 Property, Plant and Equipment IAS-16
CONTENTS
Introduction ........................................................................................................87
Objectives ........................................................................................................87
7.1 Introduction of IAS 16 ....................................................................................88
7.2 History of IAS-16 ...........................................................................................88
7.3 Objective of IAS 16 ........................................................................................89
7.4 Scope of IAS 16 .............................................................................................89
7.5 Key Concepts of IAS 16 ................................................................................89
7.6 Recognition of Property, Plant and Equipment .............................................91
7.7 Measurement at Recognition .........................................................................92
7.7.1 Initial Recognition ............................................................................92
7.7.2 Subsequent Recognition ..................................................................92
7.7.2.1 Cost Model ............................................................................92
7.7.2.2 Revaluation Model ..............................................................92
7.8 Depreciation ..................................................................................................93
7.9 Derecognition .................................................................................................93
7.10 Disclosure ......................................................................................................93
7.11 Self-Assessment Questions ............................................................................94
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INTRODUCTION
This unit is based on the International Accounting Standard 16 (IAS 16),
prescribes the accounting treatment for property, plant and which includes the
recognition of property, plant and equipment, measurement at and after
recognition, impairment of property, plant and equipment and derecognition.
This unit provides the history of IAS 16, its objectives, scope, recognition and
derecognition criteria, measurement methods and disclosure requirements of this
standard. At the end self-assessment questions are given for the practice of the
students.
OBJECTIVES
• to understand the objectives and scope of IAS 16
• to know the key terms used in IAS 16
• to calculate the cost of property, plant, and equipment
• to recognize the property, plant, and equipment according to cost and fair
value model
• to calculate the depreciation of property, plant, and equipment according
to the straight line, reducing balancing and unit of production methods.
• to de-recognize the property, plant, and equipment.
• to prepare the disclosures in the light of IAS 16
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7.1 INTRODUCTION OF IAS 16

The accounting treatment of most forms of property, plant, and equipment is
outlined in IAS 16 Property, Plant and Equipment. Property, plant, and equipment
are originally valued at their cost, then measured using either a cost or revaluation
model, and depreciated such that the depreciable amount is assigned on a
systematic basis over the life of the asset.
August 1980 Exposure Draft E18 Accounting for Property, Plant and
Equipment in the Context of the Historical Cost System
published
March 1982 IAS 16 Accounting for Property, Plant and Equipment
issued to be effective from 1 January 1983
1 January 1992 Exposure Draft E43 Property, Plant and Equipment
published
December 1993 IAS 16 Property, Plant and Equipment issued
(Revised as part of the 'Comparability of Financial
Statements' project), to be effective from 1 January 1995
April and July 1998 Amended to be consistent with IAS 22, IAS 36, and IAS 37
to be effective from 1 July 1999
18 December 2003 IAS 16 Property, Plant and Equipment issued, effective for
annual periods beginning on or after 1 January 2005
22 May 2008 Amended by Improvements to IFRSs (routine sales of
assets held for rental), Effective from 1 January 2009
17 May 2012 Amended by Annual Improvements 2009-2011 Cycle
(classification of servicing equipment, effective for annual
periods beginning on or after 1 January 2013
12 December 2013 Amended by Annual Improvements to IFRSs 2010–2012
Cycle, effective for annual periods beginning on or after 1
July 2014
12 May 2014 Amended by Clarification of Acceptable Methods of
Depreciation and Amortization (Amendments to IAS 16
and IAS 38), effective for annual periods beginning on or
after 1 January 2016
30 June 2014 Amended by Agriculture: Bearer Plants (Amendments to
IAS 16 and IAS 41, effective for annual periods beginning
on or after 1 January 2016
May 2017 IFRS 17 Insurance Contracts amended the subsequent
measurement requirements in IAS 16 by permitting entities
to elect to measure owner-occupied properties in specific
circumstances as if they were investment properties
measured at fair value through profit or loss applying IAS
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40 Investment Property.
May 2020 The Board issued Property, Plant and Equipment: Proceeds
before Intended Use (Amendments to IAS 16) which
prohibit a company from deducting from the cost of
property, plant and equipment amounts received from
selling items produced while the company is preparing the
asset for its intended use. Instead, a company will recognize
such sales proceeds and related cost in profit or loss.
7.3 OBJECTIVE OF IAS 16

The objective of IAS 16 is to narrate the accounting treatment for property, plant,
and equipment (PPE), which includes:
▪ Asset’s recognition time,
▪ Asset carrying amounts calculation using both the cost and revaluation models,
▪ In respect to their values, the amount of depreciation and impairment losses to
be reported and recognized
▪ Requirements of disclosures.
7.4 SCOPE OF IAS 16

This Standard shall be implemented in accounting for property, plant, and
equipment, except when another standard requires or enables a different
accounting procedure. This Standard does not applicable to the following items:
▪ IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
classifies property, plant, and equipment as held for sale.
▪ Other than bearer plants, biological assets connected to agricultural
activity (see IAS 41 Agriculture). This Standard only applies to bearer
plants; it does not apply to bearer plant products.
▪ Exploration and evaluation assets (see IFRS 6 Exploration for and
Evaluation of Mineral Resources).
▪ Mineral rights and reserves, such as oil, natural gas, and other
nonrenewable resources.
7.5 KEY CONCEPTS OF IAS 16

7.5.1 Property, plant, and equipment are physical/tangible items that are
▪ retained for use in the manufacture or provision of products or
services, for renting to others, or for administrative matters
▪ Expected to be utilized across several accounting periods
7.5.2 The carrying amount is the amount at which an asset is valued after
depreciation and impairment losses have been deducted, also known as
Written down Value (WDV) book value (BV).
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7.5.3 Cost refers to the amount of cash or cash equivalents paid, or the fair value
of any consideration offered to acquire an asset, at the time of purchase or
construction. The following items are included in the cost of a piece of
property, plant, or equipment:
▪ The purchase price, after subtracting trade discounts and rebates, and
including import tariffs and non-refundable purchase taxes.
▪ Any expenses directly related to bringing the asset to its current location
and condition, which is required for it to operate in the manner envisaged
by management.
▪ The initial cost estimate for dismantling and removing the object, as well
as rehabilitating/restoring the location where it is placed.
▪ The following are some examples of directly attributable costs:
o Employee benefit costs incurred because of the construction or
acquisition of a piece of property, plant, or equipment.
o Site preparation costs.
o Delivery and handling fees at the start.
o Costs of installation and assembly.
o The cost of testing to determine whether the asset is in good
working order.
o Professional charges
▪ The following will NOT be the part of costs of an item of property, plant,
and equipment:
o Costs of a new facility.
o Costs of launching a new product or service.
o Costs of operating business in a new location or with a new
type of customer
o Cost of Administration and other general overhead.
o The cost of excessive waste of material, labor, or other
resources experienced in self-constructing an asset.
▪ A self-constructed asset's cost is calculated using the same criteria as a

purchased asset. The cost of an asset is typically the same as the cost of
creating an asset for sale if a firm builds identical assets for sale in the
normal course of business.
7.5.4 The cost of an asset, or another amount substituted for cost, less its
residual value, is the Depreciable Amount.
7.5.5 The systematic distribution of an asset's depreciable amount throughout its
useful life is known as Depreciation.
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7.5.6 In an arm's length transaction, Fair Value is the amount for which an
asset might be transferred between willing parties.
7.5.7 The amount by which an asset's carrying value exceeds its recoverable
value is known as an Impairment Loss. The higher of an asset's net
selling price and its worth in use is the Recoverable Amount.
7.5.8 The projected amount that a business would now get from disposing of an
asset after deducting the predicted disposal expenses is known as the
Residual Value of the asset. If an asset is intended to be scrapped, it will
have no residual value.
7.5.9 The term "useful life" refers to an asset's actual lifespan rather than its
potential lifespan
▪ A period during which an asset is projected to be accessible for use by
a company, or
▪ The number of production or comparable units that an entity expects to
get from an asset
7.6 RECOGNITION OF PROPERTY, PLANT AND

EQUIPMENT
▪ When it is likely that the future economic benefits associated with the asset will
flow to the company, and the cost of the asset can be determined accurately,
items of property, plant, and equipment should be recognized as assets.
▪ This concept of recognition is applied to all property, plant, and equipment
expenditures as they are incurred. These expenses include the expenditures
of purchasing or constructing a piece of property, plant, or equipment, as
well as the costs of adding to, replacing parts of, or servicing it.
▪ The unit of measure for recognition - what comprises a piece of property,
plant, and equipment – is not specified in IAS 16. However, if the cost
model is utilized, each portion of a piece of property, plant, or equipment
having a cost that is considerable in relation to the item's overall cost must
be depreciated separately.
▪ Parts of some property, plant, and equipment may need to be replaced at
regular periods, according to IAS 16. If the recognized requirements (future
benefits and measurement reliability) are fulfilled, the carrying amount of an
item of property, plant, and equipment will include the cost of replacing a
component of that item when that cost is incurred. According to the
derecognition requirements, the carrying amount of those components that
are replaced is de-recognized.
▪ In addition, whether parts of an item of property, plant, or equipment are
changed, ongoing functioning of the item (for example, an airplane) may
necessitate frequent significant checks for flaws. If the recognition
requirements are met, the cost of each major inspection is recognized in the
carrying amount of the piece of property, plant, and equipment as a
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replacement. If required, the expected cost of a future identical inspection

can be used to determine what the present inspection component cost when
the item was purchased or built.
7.7 Measurement at Recognition

When it comes to asset recognition, there are two scenarios: (a) initial recognition
and (b) subsequent recognition.
7.7.1 Initial Recognition

An item of property, plant, or equipment that qualifies for asset recognition is
measured at its cost.
7.7.2 Subsequent Recognition

An entity's accounting policy must be either the cost model or the revaluation
model, and it must be applied to an entire class of property, plant, and equipment.
7.7.2.1 Cost Model

An item of property, plant, and equipment is carried at cost less any cumulative
depreciation and any accumulated impairment losses once it is recognized as an asset.
7.7.2.2 Revaluation Model

An item of property, plant, and equipment whose fair value can be measured
reliably after it has been recognized as an asset is carried at a revalued amount,
which is its fair value at the date of the revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses.
Revaluations must be carried out with sufficient frequency to ensure that the
carrying amount does not deviate considerably from the fair value at the end of
the reporting period. When a piece of property, plant, or equipment is revalued,
the asset's carrying value is adjusted to the revalued amount. The asset is
considered in one of the following ways at the time of the revaluation:
▪ The gross carrying amount of the asset is changed in accordance with the
revaluation of the asset's carrying value. The gross carrying amount can be
restated proportionally to the change in the carrying amount, or it can be recast
using observable market data. The difference between the gross carrying
amount and the carrying amount of the asset after considering accumulated
impairment losses is adjusted to equal the accumulated depreciation at the date
of the revaluation; or
▪ The asset's accumulated depreciation is subtracted from its gross carrying value.
7.8 DEPRECIATION
Each component of an item of property, plant, or equipment having a substantial
cost in proportion to the total cost of the item must be depreciated separately.
Unless it is included in the carrying value of another asset, the depreciation charge
for each period must be reported in profit or loss.
The depreciable amount of an asset must be distributed in a systematic manner
across the asset's useful life to reflect the pattern in which the asset's future
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economic benefits are projected to be utilized by the entity. To assign the

depreciable value of an asset on a systematic basis during its useful life, a number
of depreciation procedures can be utilized.
These methods include Straight-line method, the diminishing balance method, and
the units of production method:
▪ If the asset's residual value does not vary, straight-line depreciation results in a
constant charge during the useful life.
▪ Over the functional life of the assets, the declining balancing method results in
a decreasing charge.
▪ Unit of production method is based on the predicted usage or output.
The entity chooses the technique that best matches the projected pattern of
consumption of the asset's future economic advantages. Unless the projected
pattern of consumption of those future economic gain changes, that strategy is
followed consistently from period to period. After subtracting the asset's residual
value, the depreciable amount is calculated. In practice, an asset's residual value is
typically negligible, and hence irrelevant in determining the depreciable amount.
7.9 DERECOGNITION
The carrying amount of an item of property, plant and equipment is derecognized
on the event of (a) Disposal; or (b)when no future economic benefits are expected
from its use or disposal.
The difference between the net disposal proceeds, if any, and the carrying amount
of a piece of property, plant, and equipment is used to calculate the gain or loss
resulting from its derecognition.
7.10 DISCLOSURE
The following information to be disclosed in respect of each class of property, plant,
and equipment:
▪ Carrying amount and their basis for calculation
▪ Method/s of depreciation used
▪ Depreciation rates or
▪ Useful lives
▪ Accumulated depreciation and impairment losses, as well as the overall carrying
amount
▪ reconciliation of the carrying amount at the start and closing of the period,
showing:
o additions
o disposals and acquisitions through mergers
o Increase or decline in revaluation
o impairment losses and their reversals
o Depreciation
o net foreign exchange differences on translation
o other movements
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7.11 Self-Assessment Questions

SAQ-1 Sharif Limited imported a machinery with following details:
Rs. ‘000’
Invoice value 1,000
Custom duty 150
Central excise duty 50
Value determined by the authority of customer 1,300
Non-refundable sales tax 225
Income tax- adjustable against final liability 100
Carriage 40
Cost of restoring the site 90
Administration expenses 20
Required: Compute the value to be recognized in respect of property, plant, and

equipment in the books of the company.
Solution: -
Rs.’000’
Invoice value 1,000
Customs 150
Central excise duty 50
Non-refundable sales tax 225
Carriage 40
Cost of restoring the site 90
Cost of machinery
SAQ 2
Shabeer Limited is engaged in the manufacturing of chilling plants. During
production, the normal cost per unit of material, labour and overheads is Rs.
2,000, Rs. 1,500 and Rs. 1,000, respectively. The sale price is Rs. 6,000. During
the month, the company manufactured three plants for internal use. The company
spent Rs. 6,500 on materials, Rs. 5,200 on labour and Rs. 3,000 on overheads.
These actual costs include the effect of abnormal wastage.
Required: What cost should be recognized by the company in respect of property,
plant, and equipment?
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Solution
The company should recognize in respect of property, plant, and equipment,
based on the normal cost of producing the plants. Thus, the cost to be recognized
will be:
Materials (2,000 x 3) Rs. 6,000
Labor (1,500 x 3) Rs. 4,500
Overheads (1,000 x 3) Rs. 3,000
Total cost of three plants Rs. 13,500
Abnormal loss / wastage is recorded in Statement of Comprehensive Income.
SAQ 3
An Asset was purchased for Rs. 120,000 on credit and paid Rs. 130,000 after six
months. It includes Rs. 10,000 interest due to delay in payment:
Required: Cost of the asset to be recognized
Solution
Asset will be recorded at Rs. 120,000 and Rs. 10,000 interests will be changed to
Profit and Loss Account Entries are as under:
Asset 120,000
Payable 120,000
(Asset recognized)
Payable 120,000
Interest expenses 10,000
Bank 130,000
(Payment made)
SAQ 4
Excellent Inc. is installing a new plant at its production facility and has incurred
the following costs:
1. Cost of the plant (cost per supplier’s invoice plus taxes) Rs.10,500,000
2. Initial delivery and handling costs Rs.500,000
3. Cost of site preparation Rs.500,000
4. Consultants used for advice on the acquisition of the plant Rs.650,000
5. Interest charges paid to supplier of plant for deferred credit Rs.300,000
6. Estimated dismantling costs to be incurred after six years Rs.1,000,000
7. Operating losses before commercial production Rs.1,000,000
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Which of these costs can be capitalized as part of the property, plant, and
equipment in accordance with IAS 16?
Solution
According to IAS 16, these costs can be capitalized as directly attributable costs:
Cost of the plant Rs.10,500,000
Initial delivery and handling costs Rs.500,000
Cost of site preparation Rs.500,000
Consultants’ fees Rs.650,000
Estimated dismantling costs to be incurred after six years Rs.1,000,000
Rs.13,150,000
SAQ 5
XYZ Inc. purchased machinery at an initial cost of Rs.2.5 million. After
depreciating the machinery over a period of three years, XYZ Inc. decided to
revalue this machinery. Since there was no other machinery owned by XYZ Inc.
when it revalued this machinery, such a revaluation was that of the entire class of
an item of property, plant, and equipment. At the date of revaluation, accumulated
depreciation amounted to Rs.1 million. The fair value of the asset, by reference to
transactions in similar assets, is assessed to be Rs.1.75 million.
Solution
The entries to be booked would be
Accumulated depreciation Rs.1,000,000

Asset cost Rs.1,000,000
Being elimination of accumulated depreciation against the cost of
the asset
Asset cost Rs.250,000
Revaluation Surplus Rs.250,000
Being uplift of net asset value to fair value
The net result is that the asset has a carrying amount of
Rs.1.75 million = Rs.2.5 million – Rs.1 million + Rs.250,000.
Bibliography
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Unit-8
REVENUE IAS – 18
Written by:
Reviewed by:
97
Unit-8 Revenue IAS-18
CONTENTS
Introduction ...........................................................................................................99
Objectives ..............................................................................................................99
8.1 Introduction to IAS 18 ..................................................................................100
8.2 History of IAS – 18 ......................................................................................100
8.3 Objective of IAS 18 ......................................................................................100
8.4 Scope of IAS 18 ............................................................................................100
8.5 Key Concepts of IAS 18 ..............................................................................101
8.6 Recognition of Revenue ................................................................................101
8.7 Measurement of Revenue .............................................................................102
8.8 Disclosure of IAS-18 ....................................................................................103
8.9 Self-Assessment Questions ...........................................................................103
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INTRODUCTION
This unit is based on the International Accounting Standard 18 (IAS 18), which
prescribes when to recognize and how to measure revenue. It deals with the
revenue which arises from (a) Sales of goods (b) Rendering of services (c) the
use by others of entity assets yielding interest, royalties, and dividends. This unit
provides the history of IAS 18, its objectives, scope, recognition criteria of each
category of revenue and disclosure requirements of this standard. At the end self-
OBJECTIVES
• to understand the objectives and scope of IAS 18
• to differentiate the revenue arising from sale of goods, rendering of
services and interest, royalties and dividends
• to know the recognition criterion in each category of revenue item
• to perform the accounting treatment of revenue according to the IAS 18
• to fulfill the disclosure requirements in the light of IAS 18
99
IAS 18 specifies when revenue should be recognized and how it should be
measured. It covers revenue from the sale of goods, the provision of services, and
the use by others of entity assets that generate interest, royalties, and dividends.
8.2 History of IAS – 18

April 1981 Exposure Draft E20 Revenue Recognition
December 1982 IAS 18 Revenue Recognition
1 January 1984 Effective date of IAS 18 (1982
May 1992 E41 Revenue Recognition
December 1993 IAS 18 Revenue Recognition (revised as part of the
'Comparability of Financial Statements' project)
1 January 1995 Effective date of IAS 18 (1993) Revenue Recognition
December 1998 Amended by IAS 39 Financial Instruments: Recognition and
Measurement, effective 1 January 2001
16 April 2009 Appendix to IAS 18 amended for Annual Improvements to
IFRSs 2009. It now provides guidance for determining
whether an entity is acting as a principal or as an agent
1 January 2018 IAS 18 will be superseded by IFRS 15 Revenue from
Contracts with Customers
8.3 OBJECTIVE OF IAS 18

The objective of IAS 18 is to narrate the accounting treatment of revenue arising
from certain types of transactions and events. Revenue is recognized when future
economic benefits will flow to the entity and the benefits can be measured
reliably. It provides practical guidance on the application of these criteria.
8.4 SCOPE OF IAS 18

8.4.1 IAS 18 covers the accounting treatment of revenue and gains, with respect
to the followings:
• Revenue is distinct from other income1. (Income includes both revenue and gains.)
1
Income is the increase in economic benefits during the accounting period in the form of cash
inflows or increase in the value of assets or decrease of liabilities that results in increase in
equity, other than those relating to contributions from equity participants. Income consists of
both revenue and gains i.e., sales, fees, interest, dividends, and royalties.
100
• Recognition criteria for revenue are identified.
• Practical guidance is provided on
o Moment of recognition,
o Amount to be recognized, and
o Disclosure requirements.
8.4.2 IAS 18 prescribes the accounting treatment of revenue that derived from
• Sale of goods,
• Rendering of services,
• Interest, Royalties and Dividends
8.4.3 These items will not be dealt under IAS 18- Revenue (a) Lease income (b)
The extraction of mineral ores (c) Initial recognition and changes in fair value on
biological assets (d) Initial recognition of agriculture product (e) Initial
recognition of agriculture product (f) Changes in fair value of financial assets and
liabilities (g) Amounts collected on behalf of third parties, for example, a value-
added tax (h) Equity method investments (i) Insurance contracts
8.5 KEY CONCEPTS OF IAS 18

The following terms are used in this Standard with the meanings specified:
8.5.1 Revenue is the gross inflow of economic benefits during the period arising
during the ordinary activities of an entity when those inflows result in increase in
equity, other than increase relating to contributions from equity participants.
▪ The sale of commodities, commissions, and dividends earned are all examples of
economic gains.
▪ Sales tax, income tax collected on behalf of a third party, and sum collected by
consignee on behalf of consignor are examples of economic gains that do not
result in an increase in equity. As a result, these are not considered revenue.
8.5.2 Fair Value is the price for which an asset might be traded, or a liability
paid in an arm's length transaction between knowledgeable, willing parties.
8.5.3 Only gross inflows of economic advantages received and payable by the
entity on its own account are included in revenue. Sales tax, goods and services
taxes, and value added taxes received on behalf of third parties are not economic
benefit that go to the company and do not result in a rise in equity. As a result,
they are not eligible for revenue.
8.6 RECOGNITION OF REVENUE

8.6.1 Revenue from sale of goods is recognized when all the conditions given in
the table are satisfied.
8.6.2 Revenue from the rendering of services will be recognized when last four
conditions are satisfied.
101
8.6.3 Only last two (5&6) conditions need to be satisfied for recognition of
interest, royalties, and dividends as revenue.
Conditions Sale Rendering Interest,
of of services royalties,
goods and
dividends
1 The entity has transferred to the buyer the YES NA NA
significant risks and rewards of ownership of
the goods
2 The entity retains neither continuing YES NA NA
managerial involvement to the degree usually
associated with ownership nor effective
control over the goods sold
3 The amount of revenue can be measured YES YES YES
reliably
4 It is probable that the economic benefits YES YES YES
associated with the transaction will flow to the
entity
5 The costs incurred or to be incurred in respect YES YES NA
of the transaction can be measured reliably.
6 The stage of completion of the transaction YES YES NA
at the end of the reporting period can be
measured reliably and
8.7 MEASUREMENT OF REVENUE

8.7.1 Based on the agreement between both parties, the amount of revenue will be
determined which arise on a transaction. After deducting the amount of trade discounts
and volume rebates, revenue is calculated at the fair value of the consideration received
or receivable.
8.7.2 The most common type of consideration is cash and cash equivalents, and the
revenue is equal to the amount of cash and cash equivalents received receivable. The
fair value of consideration may be less than the nominal amount of cash received or
receivable when the inflow of cash and cash equivalents is postponed. The value of
consideration is determined by discounting all future revenues using an imputed rate of
interest when the arrangement represents a financing transaction (just like interest rate
imputed in lease equating the present value of consideration to the current cash sales
price of goods or services). Interest revenue is calculated as the difference between the
fair value and the nominal value of the consideration.
8.7.3 Exchange of Goods and Services

8.7.3.1 When products or services are traded or swapped for goods or services of
identical type and value, the transaction is not considered a revenue-generating
transaction. This is common with commodities like oil or milk when providers trade or
swap stocks in different areas to meet demand in a specific region on a timely manner.
102
8.7.3.2 When commodities are sold or services are performed in return for items
or services that are not equivalent, the trade is considered a revenue-generating
transaction. The income is calculated based on the fair market value of the
products or services received, less any cash or financial equivalents transferred.
When the fair value of goods or services received cannot be reliably determined,
revenue is calculated using the fair value of goods or services given up, adjusted
for any cash or cash equivalent transferred.
8.8 DISCLOSURE OF IAS-18

8.8.1 The policy used to identify the stage of completion of transactions for
recognizing revenue, involving the delivery of services.
8.8.2 Amount of revenue from each of the following sources:
▪ Sale of goods
▪ Rendering of services
▪ Interest, Royalties and Dividends
8.8.3 Within each of the above categories, the amount of revenue from exchanges
of goods or services.
SELF-ASSESSMENT QUESTIONS:
SAQ 1
According to the conditions of Blue Limited's agreement with a client, the
customer receives a 2% discount on their total purchases over a 12-month period,
if the total sales surpass Rs.1 million. Sales to the client totaled Rs.900,000
throughout the nine-month period from April 1, 2008, to December 31, 2008.
How much revenue should Blue Limited account for?
Solution SAQ 1
Blue Limited completed a Rs.900,000 transaction over the 9-month period. Blue
Limited will sell Rs.1.2 million to its client on a pro rata basis (Rs.900,000 12/9).
As a result, on Rs.900,000, Blue Limited should accrue a 2% retrospective rebate
and recognize revenue of Rs.882,000.
SAQ 2
Full-Service Co. sells equipment for $140,000, which includes a two-year
commitment to service the equipment. Without the service warranty, the same
equipment is sold for $100,000.
Solution SAQ 2
In this example, Full-Service Co. should record $100,000 in income from the sale
of items. The remaining $40,000 must be recorded as service income over a two-
year period.
103
SAQ 3
▪ Sale is completed but goods are delivered on payment of the last
installment. When a huge portion of Due amount is received, revenue can be
recorded because the items are on hand and available for delivery, and the
entire payment is collected.
▪ Sales made with a condition to install the equipment. Revenue can be
recorded on delivery if the installation is a simple operation and is a minor
portion of the sales contract.
▪ Sale is made and the buyer accepts the title and billing, but the delivery of
goods is delayed at the buyer’s request. In this situation, revenue is
recognized when the buyer obtains ownership, if delivery is likely to occur,
the item is on hand, identifiable, and available for delivery to the buyer at the
time the sale is recognized, and the customer expressly recognizes the delayed
delivery instructions.
▪ Sales made on consignment. In this instance, revenue is recognized only
after the products have been sold by the consignee.
SAQ 4
A retailer, named as Audi Electronics, deals in consumer goods, grants its
customers a right to return the goods in case of a defect in the product sold.
The simple fact that the client has the right to return the items in this circumstance
cannot be deemed a significant retention of risks and rewards on the ownership of
the goods provided to the customers. The risk that the items sold will be returned
by customers is one that is not transmitted. As a result, revenue is recognized at
the time of sale in such circumstances, if the seller can accurately forecast future
returns of items and record a provision under IAS 37, Provisions, Contingent
Liabilities, and Contingent Assets.
SAQ 5
▪ Over the subscription period, subscription income is recognized on a
straight-line basis.
▪ Professional fees for software development are determined by the stage at
which the work is completed; and
▪ Installation fees are recognized based on the level of completion over the
course of the installation.
SAQ – 6
Given
Trial Balance, December 31, 2022, shows Sales Revenue Amounting Rs. 12,456,000
The Company is engaged in the trading of cement. Revenue includes Rs. 6,000,000 for
4000 bags of cement at Rs. 1,500 per bag. The contract was signed on November 30,
2022, and up to December 31, 2022. 2,000 bags were delivered. Cash received up to
December 31, 2022, on this contract was Rs. 4,000,000. You are required to (a) Pass
Adjusting Entry (b) and narrate the amount to be reported in P/L for 2022, as sales
revenue.
Solution SAQ – 6
Rs. Rs.
a. Sales Revenue 1,000,000
Advances for customer 1,000,000
b. Income Statement
Sales Revenues Rs. 11,456,000
104
Unit-9
BORROWING COSTS IAS-23
Written by:
Reviewed by:
105
Unit-9 Borrowing Costs IAS-23
CONTENTS
Introduction ......................................................................................................107
Objectives ......................................................................................................107
9.1 Introduction to IAS 23 ..................................................................................108
9.2 Core Principles ..............................................................................................108
9.3 History of IAS-23 .........................................................................................108
9.4 Scope of IAS 23 ............................................................................................108
9.5 Important Concepts / Definitions ..................................................................109
9.5.1 Borrowing Cost ...............................................................................109
9.5.2 Qualifying Assets ............................................................................109
9.6 Recognition of Borrowing Cost ....................................................................109
9.7 Borrowing Costs Eligible for Capitalization.................................................110
9.8 Commencement of Capitalization.................................................................110
9.9 Suspension of Capitalization.........................................................................110
9.10 Cessation of Capitalization .........................................................................111
9.11 Disclosures Regarding Borrowing Costs .....................................................111
9.12 Self – Assessment Questions ............................................................................. 112
106
INTRODUCTION
This unit is based on the International Accounting Standard 23 (IAS 23), which
is related to the Borrowing costs that are directly attributable to the acquisition,
construction, or production of a qualifying asset form part of the cost of that
asset. It prescribes history of IAS 23, its objectives, core principles, recognition
criteria of borrowing costs, commencement of capitalization, suspension of
capitalization, accounting treatment in case of general loan and specific loan and
disclosure requirements of this standard. At the end self-assessment questions are
given for the practice of the students.
OBJECTIVES

• to understand the scope and objectives of IAS 23
• to identify the qualifying assets
• to prescribe the borrowing cost
• to know and apply the criteria of capitalizing the borrowing cost
• to perform the accounting treatment in case of specialized loan for qualifying
assets.
• to perform the accounting treatment in case of general loan and utilized for
qualifying assets as well.
• to disclose the borrowing cost in the notes to the accounts.
107

Some assets may take longer to acquire, develop, or produce than one accounting
period. If borrowing expenses are linked to specific assets over the course of a
time, it may be reasonable to include these charges as part of the costs of
preparing those assets for their planned use or sale. The main challenge is
determining which criteria should be used to capitalize these costs.
9.2 CORE PRINCIPLES

According to IAS 23, Borrowing Costs directly relevant to the purchase, building,
or manufacturing of a 'qualifying asset' (one that must take a significant amount of
time to prepare for its intended use or sale) must be included in the asset's cost.
Whereas other borrowing costs will be recorded/recognized in profit and loss
account as expenses.

In March 2007, IAS 23 was republished, and it now applies to year periods
beginning on or after January 1, 2009.
November 1982 Exposure Draft E24 Capitalization of Borrowing Costs
March 1984 IAS 23 Capitalization of Borrowing Costs
August 1991 Exposure Draft E39 Capitalization of Borrowing Costs
December 1993 IAS 23 (1993) Borrowing Costs (revised as part of the
'Comparability of Financial Statements' project)
1 January 1995 Effective date of IAS 23 (1993) Borrowing Costs
25 May 2006 Exposure Draft of proposed amendments to IAS 23
29 March 2007 IASB amends IAS 23 to require capitalization of
borrowing costs.
22 May 2008 IAS 23 amended for 'Annual Improvements to IFRSs 2007
for components of borrowing costs
1 January 2009 Effective date of March 2007 and May 2008 amendments
to IAS 23
9.4 SCOPE OF IAS 23
All borrowing costs, which are defined as interest and other fees incurred by a
company in connection with borrowing money, must be accounted for under IAS 23.
108
Borrowing costs related to the purchase, building, or production of an asset are

required to be capitalized under IAS 23 if they fulfil the requirements of
generating probable benefit and can be quantified reliably.
The Standard does not deal with the actual or imputed cost of equity, including
preferred capital not classified as a liability.
An entity is not required to apply the Standard to borrowing costs directly
attributable to the acquisition, construction, or production of:
a. A qualifying asset measured at fair value, for example a biological asset within
the scope of IAS 41 Agriculture.
b. Inventories that are manufactured, or otherwise produced, in massive quantities
on a repetitive basis and that take a substantial period to get ready for sale.
9.5 IMPORTANT CONCEPTS / DEFINITIONS:
9.5.1 Borrowing Cost comprise the interest and other cost on borrowed funds for
development and acquisition of qualifying assets.
Examples of Borrowing Cost:
a. Interest on long term loans.
b. Interest in respect of lease liabilities recognized in accordance with IFRS 16
Leases.
c. Exchange differences arising from foreign currency borrowings to the extent
that they are regarded as an adjustment to interest costs.
d. Additional cost such as Bank charges and commission for arranging
funds/loans.
9.5.2 Qualifying Assets:
A qualifying asset is an asset which requires considerable time to complete.
Examples of Qualifying Assets:

Depending on the circumstances, any of the following may be qualifying assets:
a. Manufacturing plant
b. Power generation facilities
c. Investments properties
d. Inventory (not routinely manufacturing)
e. Intangible assets
9.6 RECOGNITION OF BORROWING COST

Borrowing expenses that are linked to the purchase, building, or production of a
qualifying asset must be capitalized as part of the asset's cost. Other borrowing
expenses must be recorded as an expense in the period in which they are incurred.
109
9.7 BORROWING COSTS ELIGIBLE FOR

CAPITALIZATION
The borrowing cost that are directly attributable to the acquisition, construction or
production of a qualifying asset are those borrowing costs that would have been
avoided if the expenditure on the qualifying asset had not been made.
When an entity borrows funds specifically for the purpose of obtaining a

particular qualifying asset, the borrowing costs that relate to that qualifying asset
can be readily identified.
To the extent that an entity borrows funds specifically for the purpose of
obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization as the actual borrowing costs incurred on that
borrowing during the period less any investment income on the temporary
investment of those borrowings.
To the extent that an entity borrows funds generally and uses them for the purpose
of obtaining a qualifying asset, the entity shall determine the amount of borrowing
costs eligible for capitalization by applying a capitalization rate to the
expenditures on that asset. The capitalization rate shall be the weighted average of
the borrowing costs applicable to all borrowings of the entity that are outstanding
during the period.
9.8 COMMENCEMENT OF CAPITALIZATION

An entity shall begin capitalizing borrowing costs as part of the cost of a
qualifying asset on the commencement date. The date on which the entity initially
satisfies all the following requirements is the commencement date for
capitalization:
a) It spends expenditures for the asset.
b) It incurs borrowing costs; and
c) It performs activities that are necessary to prepare the asset for its intended
use or sale.
Payments of cash, transfers of other assets or the assumption of interest-bearing
liabilities are all considered as expenditures on a qualifying asset.
9.9 SUSPENSION OF CAPITALIZATION

If activities on qualifying asset have been stopped owing to controllable factors, then
an entity shall suspend capitalization of borrowing costs during that period.
110
An entity does not suspend capitalizing borrowing costs when a temporary delay is a
necessary part of the process of getting an asset ready for its intended use or sale.
9.10 CESSATION OF CAPITALIZATION

An entity shall cease capitalizing borrowing costs when all the activities
necessary to prepare the qualifying asset for its intended use or sale are complete.
An asset is normally ready for its intended use or sale when the physical
construction of the asset is complete even though routine administrative work
might continue. If minor modification, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this indicates that
all the activities are complete.
9.11 DISCLOSURES REGARDING BORROWING COSTS:

An entity shall disclose:
a) Accounting Policy.
b) The amount of borrowing costs capitalized during the period.
c) The capitalization rate used to determine the amount of borrowing costs
eligible for capitalization.
111
SELF – ASSESSMENT QUESTIONS:

SAQ – 1
Identify qualifying assets:
a) Power plant being in the process of manufacturing
b) Inventories routinely manufactured.
c) Asset ready for use.
d) Special inventories requiring a substantial period for manufacturing.
e) Special order for a special inventory that will be manufactured in 5 months.
Solution – SAQ 1
a) Qualifying asset.
b) Not qualifying asset.
c) Not qualifying asset.
d) Qualifying asset.
e) Qualifying asset.
SAQ – 2
Samar limited borrowed a loan from bank on 15% per annum amounting to Rs.
2,000,000 for the construction of power generation facilities of the company. The
loan was received on January 01 and utilized Rs. 600,000 on Qualifying Asset.
On January 01, the company deposited the remaining amount in a bank yielding
interest @ 6%. Whole of the amount is withdraw and paid to contractor on March
01. The company returned the loan to bank after 9 months i.e., on October 01.
You are required to calculate the amount of borrowing cost eligible for
capitalization.
Solution – SAQ 2
Interest paid to bank (2,000,000 x15% x 9/12) Rs. 225,000
Less: Interest income (1,400,000 x 6% x 2/12) Rs. 14,000
Borrowing cost eligible for capitalization Rs. 211,000
SAQ – 3
XYZ Communication Ltd is sole distributor of Mobile Phones in Islamabad.
Mobile cases are imported by the company and after assembling and packing,
mobiles are sold out from their showroom. The company decided to introduce the
latest brand of mobile. However local assembling of such sets would cost Rs. 30
million. The directors decided to finance this project by obtaining loan equivalent
to 70% of the project cost at 20% per annum for the period of six months.
The Loan was sanctioned on July 1, 2022 and was immediately placed in saving
account for one month. The expected yield on saving account is 12% annually.
112
Due to certain internal delays the company started utilization of borrowing form
August 1, 2022. The entire loan was paid off on Dec 31, 2022.
The Company applies capitalization rate to average expenditure.
Required: Computer amount of borrowing costs eligible for capitalization in

accordance with IAS 23.
Solution – SAQ 3
Loan obtained Rs. 21 m
------------------
Weighted average expenditure per annum
Rs. 21 m / 12 x 5 Rs. 8.75 m
Borrowing cost eligible for capitalization:

Rs. 8.75 x 20 % Rs. 1.75 m
___________
SAQ – 4
In November 2021 the company borrowed Rs. 4,000,000 at 24 % to finance
construction of the plant.
Repayments of loan will start a month after completion of project.
During the year ended Oct 31, 2022, expenditure on the building was Rs. 3,000,000.
The expenditure was incurred evenly through the year.
What amount of interest should be capitalized in year ended Oct. 31, 2022?
Solution – SAQ 4
Average expenditure (Rs.)
(Rs. 3,000,000 / 2) 1,500,000
Interest rate to be used 24 %
Avoidable Interest (Rs.) 360,000
Interest to be capitalized (Rs.) 360,000
Since the loan exceeds the expenditure, it is a case of specific borrowing.
SAQ – 5
Mr. ABC constructed building for own use. During 2022 Mr. ABC incurred
average accumulated expenditure of Rs. 860,000.
The only loan outstanding during 2022 was a 17% Rs. 800,000 debentures
redeemable after five years. Find amount of interest to be capitalized for 2022
Solution – SAQ 5
Average expenditure Rs. 860,000
Interest rate 17%
Amount to be capitalized Rs. 146,200
________
113
Department of Commerce
Faculty of Social Sciences and Humanities
Allama Iqbal Open University, Islamabad

Financial Reporting - I Book

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Financial Reporting - I Book

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Level: BS Accounting & Finance

CODE: 5062 Units: 1-9

Level: BS Accounting & Finance

Year of Printing ........................ 2023

Quantity .................................... 1000

Layout Setting .......................... Muhammad Zia Ullah

Incharge Printing ..................... Dr. Sarmad Iqbal

Printer........................................ Allama Iqbal Open University

Publisher ................................... Allama Iqbal Open University,

Chairman: Prof. Dr. Syed Muhammad Amir Shah

Reviewer: Prof. Dr. Syed Muhammad Amir Shah

Editor: Fazal Karim

COURSE OBJECTIVE ....................................................................................... vii

UNIT- 1 REGULATORY AND CONCEPTUAL FRAMEWORK FOR

UNIT-2 PRESENTATION OF FINANCIAL STATEMENTS (IAS 1) ..........27

UNIT-3 INVENTORIES IAS-2 .......................................................................43

UNIT-4 ACCOUNTING POLICIES, CHANGES IN ACCOUNTING

UNIT-5 STATEMENT OF CASH FLOWS IAS-7 .........................................63

UNIT-6 EVENTS AFTER THE REPORTING PERIOD IAS-10 ...................73

UNIT-7 PROPERTY, PLANT AND EQUIPMENT (IAS-16) ......................85

UNIT-8 REVENUE IAS – 18 ..........................................................................97

UNIT-9 BORROWING COSTS IAS-23 .......................................................105

Financial reporting is a standard accounting practice that uses financial statements

Realizing the importance of Financial Reporting, the Department of Commerce of

Dr. Muhammad Munir Ahmad

Prof. Dr. Zia Ul-Qayyum

1. Understand the conceptual framework of financial reporting

REGULATORY AND CONCEPTUAL

After studying this unit, the student will be able:

with these rules (IFRSs).

1.1.1 Significance of IFRS Adoption

1.1.2 Objective of IFRS

standards and International Accounting standards.

1.1.3 Scope of IFRS

1.1.4 IFRS Versus GAAP

two-step method used in U.S. GAAP, making write-downs more likely.

(A) Principles-based framework

Based on rules-based accounting, number of rules are designed named as GAAP’s,

1.2 IMPORTANT BODIES BEHIND THE IFRS

its standard-setting body, the IASB.

1.2.2 The IASB (International Accounting Standards Board)

1.2.3 The IFRS Interpretations Committee

1.3 THE REGULATORY FRAMEWORK OF ACCOUNTING

The regulatory framework of accounting consists of the followings:

1.3.1 The Regulatory System

Financial Reporting Council

Financial Reporting Review Panel

Urgent Issue Task Force

1.3.2 Financial Reporting Council

1.3.3 Accounting Standards Board

The ASB intends to achieve its aims by:

♦ Developing principles to guide it in establishing standards and to provide a

♦ Issuing new accounting standards, or amending existing ones, in response to

♦ Addressing urgent issues promptly

♦ Working with the International Accounting Standards Board (IASB), with

The ASB has:

♦ a full-time technical director

1.3.4 Financial Reporting Review Panel

The powers of the FRRP are:

1.3.5 Urgent Issues Task Force

The role of the UITF is to:

♦ Assist the ASB in situations where either an accounting standard or a

♦ Reach this consensus by relying on principles rather than detailed rules.