CHAPTER 23

FIRST TIME ADOPTION OF IFRS (IFRS-1)

Objectives
To ensure that financial statements and interim financial statements:
 Are transparent and comparable over all periods
 Provide suitable starting point for accounting under IRFS
 Generate at cost less than benefits to users.
Scope
This IFRS is applicable to entities which first time adopt IFRS by an explicit and
unreserved statement in the FS of confidence with IFRS
Any entity’s first financial statements under IFRS will be of the entity: -
a) Presented its most recent financial statements
 Under national regulations inconsistent with IFRS
 Conformity with IFRS except did not contain explicit and un-
reserved statements
 Contained explicit statement of compliance with some but not all
IFRS
 Under national regulations and IFRS only applied where no local
regulations exist
 Under national regulations with reconciliation of amounts to
amounts determined under IFRS.
b) IFRS only applied on the internal FS
c) IFRS only on consolidated FS
d) Did not present FS of previous periods
Definition
Date of transition to IFRSs
The beginning of the earliest period for which an entity presents full
comparative information under IFRSs in its first IFRS financial statement
Deemed cost
An amount used as a surrogate for cost or depreciated cost at a given date.
Subsequent depreciation or amortization assumes that the entity had initially
recognized the asset or liability at the given date and that its cost was equal
to the deemed cost.
First IFRS financial statements
The first annual financial statements in which an entity adopts IFRS, by an
explicit and un-reserved statement of compliance with IFRS
First time adopter
An entity that presents its first IFRS financial statements
Opening IFRS balance sheet
An entity’s balance sheet at the date of transition to IFRS
Previous GAAP
The basis of accounting that a first-time adopter used immediately before
adopting IFRS.
Reporting date
The end of the latest period covered by financial statements or by an interim
financial report
Recognition and Measurement
The entity will prepare opening IFRS balance sheet at the date of first time
adoption of IFRS.
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Accounting policies
An entity shall use the same accounting policies in its opening balance sheet
and for all the periods presented in its first IFRS statements. Those policies shall
comply with the IFRS effective at the reporting date except specified in this
IFRS.
Except provided in this IFRS an entity in its opening IFRS balance sheet:-
 Recognize all assets and liabilities whose recognition is required by IFRS
The most important of these are likely to be derivative financial assets and
liabilities, and deficits or surpluses under defined benefit plans. These
would include not just pension plans but also items such as medical care
costs and life insurance. Other recognizable liabilities might be deferred
tax balances and certain provisions such as environmental and
decommissioning costs.
 Not recognize assets/liabilities not permitted by IFRS
For example, IFRS do not permit the following assets to be recognized:
research, start-up and pre-operating costs, staff training, deferred
advertising expenditure, and relocation costs.
Liabilities that are not permitted to be recognized under IFRS are: general
or contingency provisions, future restructuring costs and operating losses,
and provisions for major overhauls of assets.
 Reclassify the assets / liabilities as per the requirement of IFRS
 Certain intangible assets recognized on a business combination would
need to be reclassified as goodwill if their recognition does not meet
IAS 38, Intangible Assets criteria. It is also possible that the reverse could
occur.
 Items classified as share capital may need to be reclassified as debt.
IAS 32 requires redeemable preference shares to be classified as debt,
and compound financial instruments (e.g. convertible loan notes) may
have to be split between debt and equity.
 IAS 10 does not allow dividends proposed after the balance sheet
date to be treated as a liability.
 The definition of a reportable segment may change - this would cause
a reclassification of segment information.
 Some investments that may not have been consolidated under
previous GAAP may meet the definition of a subsidiary under IFRS and
have to be consolidated.
 Apply all IFRS for measurement of asset/liabilities
The resultant adjustment of change in measurement basis will be treated
as change in accounting policies and will be directly recognized in
rationed earnings.
For example, while IAS 12 does not allow deferred tax assets or liabilities to
be discounted to a present value, other jurisdictions do allow discounting.
The net effect of the above adjustments should be recognized in retained
earnings or other appropriate category of equity.
Exceptions to the IFRS
These are two categories of exceptions in applying IFRS in opening balance
sheet:
a) Exemption from some requirements of IFRS (Optional exemptions)
b) Retrospective applications of some aspects of other IFRS (Mandatory
exemptions)

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Exemptions from other IFRS
An entity may elect to use one or more of the following exemptions:
 Business combinations
 Fair value or revaluations as deemed cost
 Employee benefit
 Commutative transactions difference
Business Combinations
Previous business combinations (occurring before the opening balance
sheet) do not have to be restated to comply with IFRS. Mergers (pooling of
interests) do not have to be re-accounted for as acquisitions, previously
written off goodwill does not have to be reinstated, and the fair values of
assets and liabilities may be retained. However, an impairment test for any
remaining goodwill (after reclassifying any necessary intangibles as goodwill)
must be made in the opening balance sheet.
Fair value or revaluations as deemed cost
An entity may elect to use the fair value of the above items as the deemed
cost under IFRS. Fair values may have been a market-based revaluation or an
indexed amount under previous GAAP. IFRS allow the carrying value of the
above assets to be based on a cost or revaluation model. This exemption has
the effect of allowing a revalued amount to be used under the cost model.
One advantage of the cost model is that there is no obligation to keep asset
values up-to-date. Thus this exemption means that an entity could use fair
value as the deemed cost and not have to revalue each year end.
Employee benefit
An entity may choose to recognize all actuarial gains and losses on
employee defined benefit plans at the opening balance sheet date. Under
IFRS a 'corridor' approach can be used to smooth out fluctuations in the
actuarial valuations of defined benefit plans. This exemption has the effect of
resetting any corridor to zero.
Commutative translation difference
This exemption allows all translation gains and losses relating to foreign entities
to be recognized in retained profits at the opening balance sheet date.
Similar to the above, the effect is to reset the translation reserve to zero.
Retrospective applications of some aspects of other IFRS
There are three important exceptions to the general restatement and
measurement principles set out above.
 De-recognition of financial instruments
 Hedge accounting
 Information to be used in preparing IFRS estimates retrospectively
De-recognition of financial instruments
a) A first time adopter is not permitted to de-recognize retrospectively
financial assets or financial liabilities that had been recognized under
its previous GAAP in a financial year beginning before January 1, 2004,
except if the information necessary was obtained at the time of the
past transactions. In general, IAS 39 de-recognition requirements
should be applied prospectively.
b) However, if an SPE was used to effect the de-recognition of financial
instruments and the SPE is controlled at the opening IFRS balance sheet
date, the SPE must be consolidated.

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Hedge accounting
a) The conditions set forth by IAS-39 for hedging relationship that qualifies
for hedge accounting are to be applied as of the opening IFRS
balance sheet date. The hedge accounting practices, if any, that
were used in periods prior to the opening balance sheet may not be
retrospectively changed.
b) This is consistent with the transition provisions in IAS-39. However, some
adjustments may be needed to take account of the existing hedging
relationships under GAAP at the opening balance sheet date.
Information to be used in preparing IFRS estimates retrospectively
a) In preparing IFRS estimates retrospectively, the entity must use the
inputs and assumptions that had been used to determine previous
GAAP estimates in periods before the date of transition to IFRS,
provided that those inputs and assumptions are consistent with IFRS.
b) The entity is not permitted to use information that became available
only after the previous GAAP estimates were made except to correct
an error.
Disclosures
IFRS 1 requires disclosures that explain how the transition to IFRS has affected
the entity's financial position, performance and cash flows. This is achieved
by:
 a reconciliation of equity under previous GAAP to equity under IFRS,
both at the date of transition and at the end of the last reported
period under previous GAAP. For a 31 December 2005 adopter this
would be at 1 January 2004 and 31 December 2004
 a reconciliation of profit from previous GAAP to IFRS for the last
reported period under previous GAAP. For the above company this
would be for the year to 31 December 2004.
The reconciliations should be supplemented by explanations and disclosure
of:
 material adjustments made to the financial statements in adopting
IFRS for the first time
 correction of errors discovered in previous GAAP
 the recognition or reversal of any impairment losses in preparing the
opening balance sheet
 any specific exemptions it has elected to use under IFRS 1 (eg the use
of fair values as deemed cost).
Example 1
(a) IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’
was issued in June 2003. Its main objectives are to ensure high quality
information that is transparent and comparable over all periods
presented and to provide a starting point for subsequent accounting
under International Financial Reporting Standards (IFRS) within the
framework of a cost benefit exercise.
Required:
(i) Describe the circumstances where the presentation of an entity’s
financial statements is deemed to be the first-time adoption of IFRSs
and explain the main financial reporting implementation issues to
beaddressed in the transition to IFRSs.

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(ii) Describe IFRS 1’s accounting requirements where an entity’s previous
accounting policies for assets and liabilities do not comply with the
recognition and measurement requirements of IFRSs.
(b) Transit, a publicly listed holding company, has a reporting date of 31
December each year. Its financial statements include one year’s
comparatives. Transit currently applies local GAAP accounting rules,
but is intending to apply IFRSs for the first time in its financial statements
(including comparatives) for the year ending 31 December 2005. Its
summarized consolidated balance sheet (under local GAAP) at 1
January 2004 is:
Rs. Rs.
(000) (000)
Property, plant and equipment 1,000
Goodwill 450
Development costs 400
Current assets 1,850
Inventory 150
Trade receivables 250
Bank 20
420
Current liabilities (320)
Net current assets 100
1,950
Non-current liabilities
Restructuring provision (250)
Deferred tax (300) (550)
Net assets 1,400
Issued share capital 500
Retained earnings 900
Total equity 1,400

Additional information:
(i) Transit’s depreciation policy for its property, plant and equipment has
been based on tax rules set by its government. If depreciation had
been based on the most appropriate method under IFRSs, the carrying
value of the property, plant and equipment at 1 January 2004 would
have been Rs.800,000.
(ii) The development costs originate from an acquired subsidiary of
Transit. They do not qualify for recognition under IFRSs. They have a tax
base of nil and the deferred tax related to these costs is Rs.100,000.
(iii) The inventory has been valued at prime cost. Under IFRSs it would
include an additional Rs.30,000 of overheads.
(iv) The restructuring provision does not qualify for recognition under IFRSs.
(v) Based on IFRSs, the deferred tax provision required at 1 January 2004,
including the effects of the development expenditure, is Rs.360,000.
Required:
Prepare a summarized balance sheet for Transit at the date of transition to
IFRSs (1 January 2004) applying the requirements of IFRS 1 to the above items.

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 OPERATING SEGMENTS (IFRS 8)
Core principle
IFRS 8’s core principle is that an entity should disclose information to enable
users of its financial statements to evaluate the nature and financial effects of
the types of business activities in which it engages and the economic
environments in which it operates.
Scope
IFRS 8 applies to the separate or individual financial statements of an entity
(and to the consolidated financial statements of a group with a parent):
• Whose debt or equity instruments are traded in a public market; or
• That files, or is in the process of filing, its (consolidated) financial
statements with a securities commission or other regulatory
organization for the purpose of issuing any class of instruments in a
public market.
However, when both separate and consolidated financial statements for the
parent are presented in a single financial report, segment information need
be presented only on the basis of the consolidated financial statements.
Operating segments
IFRS 8 defines an operating segment as follows.
An operating segment is a component of an entity:
• That engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same entity);
• Whose operating results are reviewed regularly by the entity’s chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess its performance; and
• For which discrete financial information is available.
Not all operations of an entity will necessarily be an operating segment (nor
part of one). For example, the corporate headquarters or some functional
departments may not earn revenues or they may earn revenues that are only
incidental to the activities of the entity. These would not be operating
segments. In addition, IFRS 8 states specifically that an entity’s post-retirement
benefit plans are not operating segments.
IDENTIFICATION OF REPORTABLE SEGMENTS
Aggregation Criteria
Operating segments often exhibit similar long-term financial performance if
they have similar economic characteristics. For example, similar long-term
average gross margins for two operating segments would be expected if their
economic characteristics were similar. Two or more operating segments may
be aggregated into a single operating segment if aggregation is consistent
with the core principle of this IFRS, the segments have similar economic
characteristics, and the segments are similar in each of the following respects:
(a) the nature of the products and services;
(b) the nature of the production processes;
(c) the type or class of customer for their products and services;
(d) the methods used to distribute their products or provide their services;
and
(e) if applicable, the nature of the regulatory environment, for example,
banking, insurance or public utilities.

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Quantitative thresholds and aggregation
Segment information is required to be disclosed about any operating
segment that meets any of the following quantitative thresholds:
• its reported revenue, from both external customers and inter segment
sales or transfers, is 10 per cent or more of the combined revenue,
internal and external, of all operating segments; or
• the absolute measure of its reported profit or loss is 10 per cent or more
of the greater, in absolute amount, of (i) the combined reported profit
of all operating segments that did not report a loss and (ii) the
combined reported loss of all operating segments that reported a loss;
or
• its assets are 10 per cent or more of the combined assets of all
operating segments. If the total external revenue reported by operating
segments constitutes less than 75 per cent of the entity’s revenue, additional
operating segments must be identified as reportable segments (even if they
do not meet the quantitative thresholds set out above) until at least 75 per
cent of the entity’s revenue is included in reportable segments.
Disclosure
The disclosure principle in IFRS 8 is that an entity should disclose ‘information to
enable users of its financial statements to evaluate the nature and financial
effects of the types of business activities in which it engages and the
economic environments in which it operates.’
In meeting this principle, an entity must disclose:
• General information about how the entity identified its operating
segments and the types of products and services from which each
operating segment derives its revenues;
• Information about the reported segment profit or loss, including certain
specified revenues and expenses included in segment profit or loss,
segment assets and segment liabilities and the basis of measurement;
and
• Reconciliation of the totals of segment revenues, reported segment
profit or loss, segment assets, segment liabilities and other material
items to corresponding items in the entity’s financial statements.
In addition, there are prescribed entity-wide disclosures that are required
even when an entity has only one reportable segment. These include
information about each product and service or groups of products and
services.
Analyses of revenues and certain non-current assets by geographical area
are required – with an expanded requirement to disclose revenues/assets by
individual foreign country (if material), irrespective of the identification of
operating segments. If the information necessary for these analyses is not
available, and the cost to develop it would be excessive, that fact must be
disclosed.
The Standard has also introduced a requirement to disclose information
about transactions with major customers. If revenues from transactions with a
single external customer amount to 10 per cent or more of the entity’s
revenues, the total amount of revenue from each such customer and the
segment or segments in which those revenues are reported must be
disclosed. The entity need not disclose the identity of a major customer, nor
the amount of revenues that each segment reports from that customer. For
this purpose, a group of entities known to the reporting entity to be under

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common control will be considered a single customer, and a government
and entities known to the reporting entity to be under the control of that
government will considered to be a single customer.

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PAST PAPERS
Q.1
(a) Specify the criteria for identification of operating segments, in
accordance with the International Financial Reporting Standards. (03
marks)
(b) Jay Limited is an integrated manufacturing company with five
operating segments. Following information pertains to the year ended
31 March 2012:

Operating Internet External Total Profit/(loss) Assets Liabilities

segments revenue revenue revenue

A 38 705 743 194 200 130

B - 82 82 (22) 44 40
C - 300 300 81 206 125
D 35 - 35 10 75 60
E 38 90 128 (63) 50 25
Total 111 1,177 1,288 200 575 380

Required:
In respect of each operating segment explain whether it is a reportable
segment. (09 marks)
Q-2
Gohar Limited (GL), a listed company, is engaged in chemical, soda ash,
polyester, paints and pharma business. Results of each business for the year
ended March 31, 2015 as follows: -
Business Sales Gross Operating Assets Liabilities
profit expenses
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Chemicals 1,790 1,101 63 637 442
Soda ash 216 117 57 444 355
Polyester 227 48 23 115 94
Paints 247 26 16 127 108
Pharma 252 31 12 132 98

Inter – segment sale by chemicals to polyester and soda ash is Rs. 28 million
and Rs. 10 million respectively at a contribution margin of 30%.
Operating expenses include GL’s head office expenses amounting to Rs. 75
million which have not been allocated to any segment. Furthermore, assets
and liabilities amounting to Rs. 150 million and Rs. 27 million have not been
reported in the assets and liabilities of any segment.
Required: -
In accordance with the requirements of International Financial Reporting
Standards:
(a) determine the reportable segments of Gohar Limited; and
(07)

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(b) show how these reportable segments and the necessary reconciliation
would be disclosed in GL’s financial statements for the year ended 31
March 2015. (08)
Practice questions
Q–1
A listed company has different product lines, which are listed as under
along with other information.
Product line Revenue Profit /(loss) Assets
Internal External
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
A 110 120 22 1,500
B 65 130 (15) 750
C -- 70 42 425
D -- 430 16 2,500
E -- 55 (7) 630
F -- 85 13 1,400
Total 175 890 93/(22) 7,205

Required: - Determine the reportable segments?

(10)
Q–2
A listed company has different product lines (Operating segments), the detail
of which along with their relevant information is given as under: -
Operating Revenue Profit/(loss) Assets
segment
Internal External
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
A 210 150 25 70
B 12 200 (14) 85
C 70 150 18 78
D 125 170 42 102
E 80 52 23 78
F 47 153 10 12
G 45 155 7 105
Total 589 1,030 125/(14) 530
Required: - Identify the reportable segment under IFRS 8?
(10)

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A-1
(a)
 An operating segment is a component of an entity:
o That engages in business activities from which it may earn revenues
and incur expenses (including revenues and expenses relating to
transactions with other components of the same entity);
o Whose operating results are regularly reviewed by the entity's chief
operating decision maker to make decisions about resources to be
allocated to the segment and assess the performance; and
o For which discrete financial information is available.
 A business activity which has yet to earn revenues, such as a startup, is an
operating segment if it is separately reported on to the chief operating
decision maker.
(b)
As Jay Limited has both profit and loss making segments, the result of those in
profit and those in loss must be totaled to see which is the greater:
Profits (194+81 + 10) 285
Losses (22+63) (85)
200

So the 10% of profit or loss test must be applied by reference to Rs. 285 million.
Reportable
Segment (Yes / No) Explanation

A Yes Because it generates more than 10% of revenue.

B No Because it fails to meet any of the criteria specified in
IFRS-8
C Yes Because it generates more than 10% of revenue.
D Yes Because it has more than 10% of assets.
E Yes Because its losses are more than 10% of absolute profit.
Check the 75% test is satisfied: (705+300+90)/1,177 = 93%
A-2
a) Determination of reportable segment
Chemicals Soda ash Polyester Paints Pharma Total
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Sales 1,790 216 227 247 252 2,732
Less inter segment sales (38) -- -- -- -- (38)
Sales to external parties 1,752 216 227 247 252 2,694

Gross profit 1,101 117 48 26 31 1,323

Operating expenses (63) (57) (23) (16) (12) (171)
Profit before tax 1,038 60 25 10 19 1,152

Assets 637 444 115 127 132 1,455

Criteria for reportable segment Reporting segment External sales

identification identified identified
1 10% of sales i.e. Rs. 373.2 million Chemicals 65.03%

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2 10% of PBT i.e. Rs. 115.2 million -- --
3 10% of assets i.e. Rs. 145.5 million Soda ash 8.02%
73.05%
Further segments need to be identified
4 Highest in terms of external sales Pharma 9.22%
82.27%
b) Disclosure in the financial statements of Gohar Limited
34- Operating segment results
Chemicals Soda ash Pharma others Total
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Revenue from external customers 1,752 216 252 474 2,694
Inter segment sales 38 38
Revenue from reportable segment 1,790 216 252 2,258

Other information
Operating expenses 63 57 12 39 171
Segment profit before tax 1,038 60 19 35 1,152
Segment assets 637 444 132 242 1.455
Segment liabilities 442 355 98 202 1,097

34.1 Reconciliation of reportable segment revenue, profits or losses and

liabilities
Reportable Other than Elimination of Other Gohar
segment reportable inter adjustments Limited total
total segment segment
total transactions
Rs. (m) Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Revenue 2,258 474 (38) -- 2,694
Operating expenses 132 39 -- 75 246
Segment profit before tax 1,117 35 (11) (75) 1,066
Segment assets 1,213 242 -- 150 1,605
Segment liabilities 895 202 -- 27 1,124

Solutions to Practice Questions

A–1
Identification of reportable segment
Reportable Basis
segment
A Rev/profit/assets
B Rev/profit/assets
C Profit
D Rev/profit/assets
F Profit/assets

W-1 Identification of reportable segment 10% threshold

Segment Revenue Profit/ (loss) Assets

A (230/1,065)x100=22% (22/93)x100=24% (1,500/7,205)x100=21%
B (195/1,065)x100=18% (15/93)x100=16% (750/7,205)x100=10%
C (70/1,065)x100)=7% (42/93)x100=45% (425/7,205)x100=6%
D (430/1,065)x100=40% (16/93)x100=17% (2,500/7,205)x100=35%
E (55/1,065)x100=5% (07/93)x100=8% (630/7,205)x100=9%

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F (85/1,065)x100=8% (13/93)x100=14% (1,400/7205)x100=19%

W-2 Identification of reportable segment 75% threshold

External revenue of reportable segment under 10% threshold/entity
revenue
(835/890) x 100= 94%, therefore no need to identify additional
reportable segment as the external revenue of reportable segment is
greater than 75% of entity revenue.
A–2
Identification of reportable segment
Reportable segment Basis
A Rev/profit/asset
B Rev/profit/asset
C Rev/profit/asset
D Rev/profit/asset
E Profit/asset
F Rev
G Rev/asset

W-1 10% test

Operating Revenue Profit or loss Assets
segment
A 360/1,619x100=22% 25/125x100=20% 70/530x100=13.2%
B 212/1,619x100=13% 14/125x100=11.2% 85/530x100=16.0%
C 220/1,619x100=13.5% 18/125x100=14.4% 78/530x100=14.7%
D 295/1,619x100=18.2% 42/125x100=33.6% 102/530x100=19.2%
E 132/1,619x100=8.15% 23/125x100=18.4% 78/530x100=14.7%
F 200/1,619x100=12.4% 10/125x100=8.0% 12/530x100=2.26%
G 200/1,619x100=12.4% 7/125x100=6.0% 105/530x100=19.8%

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 FINANCIAL REPORTING IN
HYPERINFLATIONARY ECONOMIES (IAS -29)
Scope
This Standard shall be applied to the financial statements, including the
consolidated financial statements, of any entity whose functional
currency is the currency of a hyperinflationary economy.
This Standard does not establish an absolute rate at which
hyperinflation is deemed to arise. It is a matter of judgment when
restatement of financial statements in accordance with this Standard
becomes necessary. Hyperinflation is indicated by characteristics of
the economic environment of a country which include, but are not
limited to, the following:
(a) the general population prefers to keep its wealth in non-monetary
assets or in a relatively stable foreign currency. Amounts of local
currency held are immediately invested to maintain purchasing power;
(b) the general population regards monetary amounts not in terms of the
local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;
(c) sales and purchases on credit take place at prices that compensate
for the expected loss of purchasing power during the credit period,
even if the period is short;
(d) interest rates, wages and prices are linked to a price index; and
(e) the cumulative inflation rate over three years is approaching, or
exceeds, 100%.
Historical cost financial statements
Statement of financial position
a) Statement of financial position amounts not already expressed in terms
of the measuring unit current at the end of the reporting period are
restated by applying a general price index.
b) Monetary items are not restated because they are already expressed
in terms of the monetary unit current at the end of the reporting
period. Monetary items are money held and items to be received or
paid in money.
c) Assets and liabilities linked by agreement to changes in prices, such as
index linked bonds and loans, are adjusted in accordance with the
agreement in order to ascertain the amount outstanding at the end of
the reporting period. These items are carried at this adjusted amount in
the restated statement of financial position.
d) All other assets and liabilities are non-monetary. Some non-monetary
items are carried at amounts current at the end of the reporting
period, such as net realizable value and fair value, so they are not
restated. All other non-monetary assets and liabilities are restated.
e) Most non-monetary items are carried at cost or cost less depreciation;
hence they are expressed at amounts current at their date of
acquisition. The restated cost, or cost less depreciation, of each item is
determined by applying to its historical cost and accumulated
depreciation the change in a general price index from the date of
acquisition to the end of the reporting period. For example, property,

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 plant and equipment, inventories of raw materials and merchandise,
goodwill, patents, trademarks and similar assets are restated from the
dates of their purchase. Inventories of partly-finished and finished
goods are restated from the dates on which the costs of purchase and
of conversion were incurred.
f) Detailed records of the acquisition dates of items of property, plant
and equipment may not be available or capable of estimation. In
these rare circumstances, it may be necessary, in the first period of
application of this Standard, to use an independent professional
assessment of the value of the items as the basis for their restatement.
g) A general price index may not be available for the periods for which
the restatement of property, plant and equipment is required by this
Standard. In these circumstances, it may be necessary to use an
estimate based, for example, on the movements in the exchange rate
between the functional currency and a relatively stable foreign
currency.
h) Some non-monetary items are carried at amounts current at dates
other than that of acquisition or that of the statement of financial
position, for example property, plant and equipment that has been
revalued at some earlier date. In these cases, the carrying amounts
are restated from the date of the revaluation.
i) The restated amount of a non-monetary item is reduced, in
accordance with appropriate IFRSs, when it exceeds its recoverable
amount. For example, restated amounts of property, plant and
equipment, goodwill, patents and trademarks are reduced to
recoverable amount and restated amounts of inventories are reduced
to net realizable value.
j) An investee that is accounted for under the equity method may report
in the currency of a hyperinflationary economy. The statement of
financial position and statement of comprehensive income of such an
investee are restated in accordance with this Standard in order to
calculate the investor’s share of its net assets and profit or loss. When
the restated financial statements of the investee are expressed in a
foreign currency they are translated at closing rates.
k) The impact of inflation is usually recognized in borrowing costs. It is not
appropriate both to restate the capital expenditure financed by
borrowing and to capitalize that part of the borrowing costs that
compensates for the inflation during the same period. This part of the
borrowing costs is recognized as an expense in the period in which the
costs are incurred.
l) An entity may acquire assets under an arrangement that permits it to
defer payment without incurring an explicit interest charge. Where it is
impracticable to impute the amount of interest, such assets are
restated from the payment date and not the date of purchase.
m) At the beginning of the first period of application of this Standard, the
components of owners’ equity, except retained earnings and any
revaluation surplus, are restated by applying a general price index
from the dates the components were contributed or otherwise arose.
Any revaluation surplus that arose in previous periods is eliminated.
Restated retained earnings are derived from all the other amounts in
the restated statement of financial position.

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n) At the end of the first period and in subsequent periods, all
components of owners’ equity are restated by applying a general
price index from the beginning of the period or the date of
contribution, if later. The movements for the period in owners’ equity
are disclosed in accordance with IAS 1.
Statement of comprehensive income
a) This Standard requires that all items in the statement of comprehensive
income are expressed in terms of the measuring unit current at the end
of the reporting period. Therefore all amounts need to be restated by
applying the change in the general price index from the dates when
the items of income and expenses were initially recorded in the
financial statements.
Gain or loss on net monetary position
a) In a period of inflation, an entity holding an excess of monetary assets
over monetary liabilities loses purchasing power and an entity with an
excess of monetary liabilities over monetary assets gains purchasing
power to the extent the assets and liabilities are not linked to a price
level. This gain or loss on the net monetary position may be derived as
the difference resulting from the restatement of non-monetary assets,
owners’ equity and items in the statement of comprehensive income
and the adjustment of index linked assets and liabilities. The gain or loss
may be estimated by applying the change in a general price index to
the weighted average for the period of the difference between
monetary assets and monetary liabilities.
b) The gain or loss on the net monetary position is included in profit or loss.
The adjustment to those assets and liabilities linked by agreement to
changes in prices made in is offset against the gain or loss on net
monetary position. Other income and expense items, such as interest
income and expense, and foreign exchange differences related to
invested or borrowed funds, are also associated with the net monetary
position. Although such items are separately disclosed, it may be
helpful if they are presented together with the gain or loss on net
monetary position in the statement of comprehensive income.
Current cost financial statements
Statement of financial position
Items stated at current cost are not restated because they are already
expressed in terms of the measuring unit current at the end of the reporting
period. Other items in the statement of financial position are restated in
accordance with above paragraphs.
Statement of comprehensive income
The current cost statement of comprehensive income, before restatement,
generally reports costs current at the time at which the underlying
transactions or events occurred. Cost of sales and depreciation are recorded
at current costs at the time of consumption; sales and other expenses are
recorded at their money amounts when they occurred. Therefore all amounts
need to be restated into the measuring unit current at the end of the
reporting period by applying a general price index.
Gain or loss on net monetary position
The gain or loss on the net monetary position is accounted for in accordance
with above paragraphs.
Taxes

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The restatement of financial statements in accordance with this Standard
may give rise to differences between the carrying amount of individual assets
and liabilities in the statement of financial position and their tax bases. These
differences are accounted for in accordance with IAS 12 Income Taxes.
Statement of cash flows
This Standard requires that all items in the statement of cash flows are
expressed in terms of the measuring unit current at the end of the reporting
period.
Corresponding figures
Corresponding figures for the previous reporting period, whether they were
based on a historical cost approach or a current cost approach, are restated
by applying a general price index so that the comparative financial
statements are presented in terms of the measuring unit current at the end of
the reporting period. Information that is disclosed in respect of earlier periods
is also expressed in terms of the measuring unit current at the end of the
reporting period.
Consolidated financial statements
A parent that reports in the currency of a hyperinflationary economy may
have subsidiaries that also report in the currencies of hyperinflationary
economies.
The financial statements of any such subsidiary need to be restated by
applying a general price index of the country in whose currency it reports
before they are included in the consolidated financial statements issued by its
parent. Where such a subsidiary is a foreign subsidiary, its restated financial
statements are translated at closing rates. The financial statements of
subsidiaries that do not report in the currencies of hyperinflationary
economies are dealt with in accordance with IAS 21.
If financial statements with different ends of the reporting periods are
consolidated, all items, whether non-monetary or monetary, need to be
restated into the measuring unit current at the date of the consolidated
financial statements.
Selection and use of the general price index
The restatement of financial statements in accordance with this Standard
requires the use of a general price index that reflects changes in general
purchasing power. It is preferable that all entities that report in the currency of
the same economy use the same index.
Economies ceasing to be hyperinflationary
When an economy ceases to be hyperinflationary and an entity discontinues
the preparation and presentation of financial statements prepared in
accordance with this Standard, it shall treat the amounts expressed in the
measuring unit current at the end of the previous reporting period as the basis
for the carrying amounts in its subsequent financial statements.
Disclosures
The following disclosures shall be made:
(a) the fact that the financial statements and the corresponding figures for
previous periods have been restated for the changes in the general
purchasing power of the functional currency and, as a result, are stated in
terms of the measuring unit current at the end of the reporting period;
(b) whether the financial statements are based on a historical cost approach or a
current cost approach; and

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(c) the identity and level of the price index at the end of the reporting period and
the movement in the index during the current and the previous reporting
period.
E–1
The statement of financial position of an entity operating in hyperinflationary
environment at the start and end of the year under historical cost accounting
is as under: -
Opening Closing
CU CU
Assets
Cash 100 100
Trade receivables -- 250
Stock in trade -- 300
Property, plant and equipment 250 200
Total 350 850
Equity and liabilities
Equity –ordinary share capital 350 350
Retained earnings -- 300
Liabilities 350 650
Current liabilities -- 200
350 850

The statement of comprehensive income for the year ended is as under: -

CU CU
Credit sales 750
Cost of sales
Opening stock --
Credit purchases 600
Closing stock (300) (300)
Gross profit 450
Depreciation (50)
Other operating expenses (75)
Profit before tax 325
Tax expense (25)
Profit after tax 300
For the purposes of this example, the inflation factor was 1.650 and there
were only two types of transactions that happened evenly throughout the
period.
Required: -
Prepare restated statement of financial position and statement of
comprehensive income under the CPP accounting?

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Answer
Statement of financial position Historic cost Inflation factor CPP statements
Assets
Cash 100 -- 100
Trade receivables 250 -- 250
Stock in trade 300 1.65 495
Property, plant and equipment 200 1.65 330
850 1,175
Equity and liabilities
Ordinary share capital 350 1.65 577.50
Retained earnings 300 397.50

Current liabilities 200 -- 200

850 1,175

Statement of comprehensive income

Sales 750 1.325 993.75
Less: - Cost of sales
Purchases (600) 1.325 (795.00)
Closing stock 300 1.65 495.00
(300) (300)
Gross profit 450 693.75
Depreciation (50) 1.65 (82.50)
Other operating expenses (75) 1.325 (99.375)
Profit before tax 325 511.875
Tax expense (25) 1.325 (33.125)
300 478.75
Re-measurement effect (81.25)
[(100+150)/2x0.65]
Net profit after tax 300 397.50

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 ACCOUNTING POLICIES, CHANGES IN
ACCOUNTING ESTIMATES AND ERRORS (IAS-8)
OBJECTIVE
The objective of this IAS is to prescribe the criteria for selecting and changing
accounting policies, together with the accounting treatment and disclosure
of changes in accounting policies, changes in accounting estimates and
correction of errors.
DEFINITIONS
ACCOUNTING POLICIES are the specific principles, basis, conventions, rules
and practices applied by an entity in preparing and presenting financial
statements.
A CHANGE IN ACCOUNTING ESTIMATE is an adjustment of the carrying
amount of an asset or a liability, or the amount of the periodic consumption
of an asset, that results from the assessment of the present status of, and
expected future benefits and obligations associated with, assets and
liabilities. Change in accounting estimates results from new information or
new developments and accordingly are not corrections of errors.
INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRSs) are Standards and
Interpretations adopted by the International Accounting Standards Board
(IASB).
They comprise:
(a) International financial Reporting Standards;
(b) International Accounting Standards; and
(c) Interpretations originated by the International Financial Reporting
Interpretations Committee (IFRIC) or the former Standing
Interpretations Committee (SIC).
MATERIAL Omissions or misstatements of items are material if they could,
individually or collectively; influence the economic decisions of users taken on
the basis of the financial statements. Materiality depends on the size and
nature of the omission or misstatement judged in the surrounding
circumstances. The size or nature of the item, or a combination of both, could
be the determining factor.
PRIOR PERIOD ERRORS are omissions from, and misstatements in, the entity’s
financial statements for one or more prior periods arising from a failure to use,
or misuse of, reliable information that:
(a) was available when financial statements for those periods were
authorized for issue; and
(b) could reasonably be expected to have been obtained and taken into
account in the preparation and presentation of those financial
statements.
Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
RETROSPECTIVE APPLICATION is applying a new accounting policy to
transactions, other events and conditions as if that policy had always been
applied.
RETROSPECTIVE RESTATEMENT is correcting the recognition, measurement and
disclosure of amounts of elements of financial statements as if a prior period
error had never occurred.

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PROSPECTIVE APPLICATION of a change in accounting policy and of
recognizing the effect of a change in an accounting estimate, respectively,
are:
(a) applying the new accounting policy to transactions, other events and
conditions occurring after the date as at which the policy is changed;
and
(b) recognizing the effect of the change in the accounting estimate in the
current and future periods affected by the change.
VOLUNTARY CHANGE
If the entity chooses to use the recent pronouncements of other standard
setting bodies to apply the accounting policies then if the change in the said
pronouncements result in change in accounting policy. The said change in
accounting policy is voluntary change in accounting policy.
ACCOUNTING POLICIES
SELECTION AND APPLICATION OF ACCOUNTING POLICIES
When a standard or an Interpretation specifically applies to a transaction,
other event or condition, the accounting policy or policies applied to that
item shall be determined by applying:
 The IFRSs
 The Interpretations issued by the IASB; and
 Considering any relevant Implementation Guidance issued by the IASB
for the standard or Interpretation.
In the absence of a Standard or an Interpretation that specifically applies to
a transaction, other event or condition, management shall use its judgment in
developing and applying an accounting policy that results in information that
is:
(a) relevant to the economic decision-making needs of users; and
(b) reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance
and cash flows of the entity;
(ii) reflect the economic substance of transactions, other events
and conditions, and not merely the legal form;
(iii) are neutral, i.e. free from bias;
(iv) are prudent; and
(v) are complete in all material respects.
In making the judgment described above, management shall refer to, and
consider the applicability of, the following sources in descending order:
(a) the requirements and guidance in Standards and Interpretations
dealing with similar and related issues; and
(b) the definitions, recognition criteria and measurement concepts for
assets, liabilities, income and expenses in the Framework.
In making the judgment described above, management may also consider
the most recent pronouncements of other standard-setting bodies that use a
similar conceptual framework to develop accounting standards, other
accounting literature and accepted industry practices, to the extent that
these do not conflict with the IFRSs.
CONSISTENCY OF ACCOUNTING POLICIES
An entity shall select and apply its accounting policies consistently for similar
transactions, other events and conditions.
CHANGES IN ACCOUNTING POLICIES
An entity shall change an accounting policy only if the change:

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(a) is required by a Standard or an Interpretation; or
(b) results in the financial statements providing reliable and more relevant
information about the effects of transactions, other events or
conditions on the entity’s financial position, financial performance or
cash flows.
The following are not changes in accounting policies:
(a) the application of an accounting policy for transactions, other events
or conditions that differ in substance from those previously occurring;
and
(b) the application of a new accounting policy for transactions, other
events or conditions that did not occur previously or were immaterial.
Exclusions from the application of IAS-8
The initial application of a policy to revalue assets in accordance with IAS 16
Property, Plant and Equipment or IAS 38 Intangible Assets is a change in an
accounting policy to be dealt with as a revaluation in accordance with IAS 16
or IAS 38, rather than in accordance with this Standard.
Applying Changes in accounting Policies
(a) an entity shall account for a change in accounting policy resulting
from the initial application of a Standard or an Interpretation in
accordance with the specific transitional provisions, if any, in that
Standard or Interpretation; and
(b) when an entity changes an accounting policy upon initial application
of a Standard or an Interpretation that does not include specific
transitional provisions applying to that change, or changes an
accounting policy voluntarily, it shall apply the change retrospectively.
Retrospective application
When a change in accounting policy is applied retrospectively, the entity
shall adjust the opening balance of each affected component of equity for
the earliest prior period presented and the other comparative amounts
disclosed for each prior period presented as if the new accounting policy
had always been applied.
CHANGES IN ACCOUNTING ESTIMATES
As there is lot of uncertainties inherent in the measurement of elements of
financial statements, therefore, estimation is involved in the measurement
such as: -
a) Bad debts;
b) Inventory obsolescence;
c) The fair value of financial assets or financial liabilities;
d) The useful life of, or expected pattern of consumption of the future
economic benefits embodied in, depreciable assets; and
e) Warranty obligations
The effect of a change in an accounting estimate shall be recognized
prospectively by including it in profit or loss in:
(a) the period of the change, if the change affects that period only; or
(b) the period of the change and future periods, if the change affects
both
To the extent that a change in an accounting estimate gives rise to changes
in assets and liabilities, or relates to an item of equity, it shall be recognized by
adjusting the carrying amount of the related asset, liability or equity item in
the period of the change.

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ERRORS
An entity shall correct material prior period errors retrospectively in the first set
of financial statements authorized for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in
which the error occurred; or
(b) if the error occurred before the earliest prior period presented, restating
the opening balances of assets, liabilities and equity for the earliest
prior period presented
Q-1
Chemi Limited (CL) is engaged in manufacturing, purchasing and marketing
of chemicals, including investments in other chemical manufacturing
operations. During the year ended 31 December 2004, CL changed its
accounting policy with respect to the following:

(i) In previous years, investments in associates were based on fair value

method, where such investments were initially recognized at cost and
carried at fair value to the balance sheet. Fair values of investments
were determined on the basis of market value at the balance sheet
date. Adjustments arising from re-measurement to fair value were
reflected through statement of changes in equity. This policy has been
changed to bring it in line with the Group’s policy which states that
investments are initially recognized at cost and at the subsequent
reporting dates, the recoverable amounts are estimated in order to
determine the extent of impairment losses and carrying amounts of
investments are adjusted accordingly. Impairment losses are
recognized as expenses.
(ii) Upto previous year, dividends and other distributions proposed after
balance sheet date but before the financial statements were
authorized for issue were recorded as liability. After the change in the
4th Schedule of the Companies Ordinance 1984, from the current year
onwards, dividends and other distributions are to be recognized as a
liability in the period in which they are declared.
Following information is available from the financial statement of CL:

2004 2003 2002

Market value of shares of A Limited an
associated company as at 3 1st December
(Rupees per share) 45 47 50
Recoverable amount as per IAS 36 of A
Limited
(Rupees per share) 40 44 48
Net profit after tax as per old policy
(Rupees in thousand) 4,004,044 3,144,509 Not given
Capital Reserves – (Rupees in thousand) 160,000 160,000 Not given

Dividend declaration has been as under:

For 2002 declared in 2003 Rupees 8.00 per share
For 2003 declared in 2004 Rupees 10.00 per share
For 2004 declared in 2005 Rupees 12.00 per share

Bonus shares declared and issued in 2003 @ 15%

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 Share Capital of CL as at 1 January 2003 – 256, 495,902 shares of Rs.
10 each
Unappropriated profits as at 1 January 2003 – Rs.8,218,203,000
Investment in A Limited - 100 million shares at Rs.50 per share.
The effective tax rate applicable to the company may be assumed
at 35%.

Required:
A statement of changes in equity for the year ended 31 December 2003 and
2004 as per IAS 8 together with relevant notes. (You may round off all rupee
figures to the nearest thousand). (20)
Q.2
XLS Limited is a listed company and engaged in the assembling of electrical
appliances. During the year, the company changed its accounting policies in
respect of the following:
1. It has started to capitalize the borrowing costs directly attributable to
the qualifying assets. Upto June 30, 2005, the company recognized the
borrowing costs as an expense in the year in which they were incurred.
2. Provision for bad debts shall be provided at 3% instead of 2%. The
management feels that change of above policies will reflect a fair
view of the company’s financial position to the shareholders.

Extracts from the financial statements of the company before incorporation

of above changes are given below:

2006 2005
Rs. in million
Gross profit 486 410
General and administration
(231) (225)
expenses
Selling and distribution expense (110) (98)
Financial charges (32) (31)
Profit before tax 113 56
Income taxes (30) (14)
Profit after tax 83 42
Retained earnings – opening 452 410
Retained earnings – closing 535 452

Following additional information is also available:

1. Details of borrowing costs expensed out in current and prior periods
which are directly attributable to the qualifying assets are as follows:
Amount
Year
Rs. in million
June 30, 2006 16
June 30, 2005 12
June 30, 2004 and before 8

2. The change in the rate of provision for bad debts has been made on
the recommendation of Recovery Department. The company has not
yet made the provision as of June 30, 2006. The details of accounts
receivables are as follows:

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 Accounts receivable as at June 30, 2005 Rs. 100 million
Accounts receivable as at June 30, 2006 Rs. 123 million
Provision as at June 30, 2004 was Rs. 1.6 million.
3. Income tax rate was 25% for both years.

Required:
(a) Present the above changes in the Profit and Loss Account and
Statement of Changes in Equity in accordance with the requirements
of IAS-8 “Accounting Policies, Changes in Accounting Estimates and
Errors”.
(b) Draft an accounting policy about the borrowing costs for disclosure in
the financial statements. (17)
Q–3
You are the Finance Manager of Mehran Limited (ML). Your staff has
prepared draft financial statements of ML for the year ended 31 December
2017 except statement of changes in equity.
For the purpose of preparation of statement of changes in equity you have
gathered the following information:
(i) Share capital and reserves as at 1 January:
2016 2015
Rs. (m) Rs. (m)
Ordinary share capital (Rs. 10 each) 600 600
Share premium 250 250
Retained earnings 930 702

(ii) Net profit for 2017 (draft), 2016 (audited) and 2015 (audited) was Rs.
355 million Rs. 281 million and Rs. 228 million respectively. There was no
item of other comprehensive income.
(iii) A bonus issue of 15% was made on 1 April 2016 as final dividend for
2015.
(iv) An interim cash dividend of 10% was declared on 1 December 2017
which was paid on 5 January 2018.
(v) The draft statement of financial position as on 31 December 2017
shows total assets and total liabilities of Rs. 2,627 million and Rs. 440
million respectively.
Details of outstanding issues: -
(i) At the beginning of 2017, ML relocated one of its manufacturing plants
from Sukkur to Karachi. The relocation resulted in repayment of related
government grant. The repayment of the grant has been debited
directly to retained earnings. Further, depreciation on the plant for
2017 has not been charged and cost of relocation of the plant
amounting to Rs. 12 million has been capitalized.
The plant was installed in Sukkur at a total cost of Rs. 400 million and
had a useful life of 8 years. The plant was available for use on 1
January 2015 and was immediately put into use.

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 ML received the grant of Rs. 160 million towards cost of the plant in
Sukkur. The sanction letter states that if ML ceases to use the plant in
Sukkur before 31 December 2019, it is required to repay the grant in full.
The grant was recorded as deferred income upon receipt and it has
partly been transferred to profit or loss in 2015 and 2016.
(ii) Assets include an amount of Rs. 0.3 million paid on 1 October 2017 for
entering into a forward contract to buy USD 4 million on 1 March 2018.
The forward was acquired to specifically hedge the risk of any future
changes in the exchange rate related to highly probable acquisition of
an equipment in March 2018 at an estimated cost of USD 4 million. No
further adjustment has been made in this respect. Following
information is also available:
01-Oct- 31-Dec-
2017 2017
Conversion rates per USD
- Spot rate Rs. 115.00 Rs. 117.00
- Forward contract (delivery date 01
March 2018) Rs. 117.25 Rs. 119.50

(iii) Liabilities include entire proceeds of Rs. 150 million received on 1

January 2017 on issuance of 1.5 million convertible debentures of Rs.
100 each. The related transaction cost on issuance and interest paid at
year end has been charged to profit or loss.
Each debenture is convertible into 2 ordinary shares of Rs. 10 each on
31 December 2020. Interest is payable at 8% per annum on 31
December each year. On the date of issue, market interest rate for
similar debt without conversion option was 11% per annum. However,
on account of transaction cost of Rs. 4 million, incurred on issuance of
debentures, the effective interest rate has increased to 11.85% per
annum.
(iv) ML’s obligation to incur decommissioning cost relating to a plant
located in Khairpur has not been recognized.
The plant was acquired on 1 January 2015 and had an estimated
useful life of four years. The expected cost of decommissioning at the
end of its useful life is Rs. 60 million. Applicable discount rate is 11%.
(v) Property, plant and equipment include a warehouse which was given
on rent in January 2017 for two years. Previously, the warehouse was in
use of ML.
ML carries its property, plant and equipment at cost model whereas
investment property is carried at fair value model. Carrying value and
remaining useful life of the warehouse on 1 January 2017 was Rs. 55
million and 11 years respectively. Fair values of the warehouse on 1
January 2017 and 31 December 2017 were Rs. 80 million and Rs. 75
million respectively. Depreciation for 2017 has not yet been charged.
Required:
(a) Determine the revised amounts of total assets and total liabilities after
incorporating effects of the above corrections. (15)
(b) Prepare ML’s statement of changes in equity for the year ended 31
December 2017 along with comparative figures after incorporating

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effects of the above corrections, if any. (Ignore taxation. ‘Total’ column
is not required) (10)

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 EVENTS AFTER THE BALANCE SHEET DATE
(IAS – 10)
Objective
The objective of this standard is to prescribe when financial statements should
be adjusted for the post balance sheet events and disclosure of date of
authorization of financial statements for issuance.
Scope
This standard is applied for accounting and disclosure of post balance sheet
events.
Definitions
Events after the balance sheet date are those events favorable and un-
favorable that occurs between the balance sheet and the date when the
financial statements are authorized for issue. Two types of events can be
identified: -
a) Those that provide evidence of conditions existing at the balance
sheet date (adjusting events); and
b) Those that are indicative of conditions that arose after the balance
sheet date (non-adjusting events)
Recognition and Measurement
Adjusting events after the balance sheet date
An entity shall adjust the amounts recognized in the financial statements to
reflect adjusting events after the balance sheet date.
Examples include: -
 The settlement of case after the balance sheet that confirms that the
entity has the present obligation at the balance sheet date.
 The receipt of information that an asset has impaired at the balance
sheet date e.g. bankruptcy of a customer, sale of inventories after the
balance sheet date, which confirms the NRV.
 The determination after the balance sheet of cost of assets purchased
or the proceeds of the assets sold, before the balance sheet.
 The determination after the balance sheet date of bonus or profit
sharing, if the entity has the present legal or constructive obligation.
 The discovery of fraud or error that shows that the financial statements
are incorrect.
EXAMPLE
The directors of shahid hameed Co LTD. Are due to approve the company’s
financial statements for the year ended 31st December 1986.
Since the financial statements were originally prepared the following material
information has become available.
On 15th march 1987 a new brand of cooking oil was found containing some
harmful ingredients and its sale was accordingly banned by the government.
Substantial stock of this product in hand as on 31st December 1986, marketed
by the sale department was subsequently withdrawn from the market and
was returned to the company for a full refund. The company had committed
itself to an advertising schedule for this product involving a total sum of Rs
500,000 to be spent evenly over a period of two years, half of which having
been spent in the financial year 1986.

Page 28 of 40
SOLUTION
Sale of cooking oil was banned by government containing harmful
ingredients subsequent to the balance sheet date. Its effect will be
incorporated in the financial statements. The journal entries will be as
1. Debit supplier account and credit stock account for stocks return to
the suppliers
2. Debit sale account and credit customer’s account for sales returned.
This is an adjusting event since the information exit at the balance sheet date.
Also, the full amount of Rs.500, 000 should be charged to the profit and loss
account for the year ended 31st December 1986.
Non-adjusting events after the balance sheet
An entity shall not adjust the amounts recognized in its financial statements to
reflect non-adjusting events after the balance sheet date.
Examples include decline in the market value of investments between the
balance sheet date and when the financial statements are authorized for
issue.
EXAMPLE
The directors of shahid hameed Co LTD. Are due to approve the company’s
financial statements for the year ended 31st December 1986.
Since the financial statements were originally prepared the following material
information has become available
On 15th February heavy rain causes flooding at company’s warehouse
situated near the river bed resulted in an uninsured stock loss of Rs 1 million.
SOLUTION
Stock is destroyed after balance sheet date so it has no effect on the
financial statements, since the event, which concerns a condition, which
does not exit at the balance sheet date, but disclosure by way of footnote is
essential.
Dividends
If an entity declares dividend to the equity participants after the balance
sheet date, the entity shall not recognize those dividends as a liability at the
balance sheet date.
Going Concern
An entity shall not prepare its financial statements on the going concern basis
if the management determines after the balance sheet date either that it
intends to liquidate the entity or to cease trading, or that it has no realistic
alternative but to do so.
Disclosures
Date of authorization for issue
An entity should disclose: -
 The date when the financial statements are authorized for issuance
 Who gave the authorization
 The fact that the owners or others have any powers to amend the
financial statements
Updating disclosures about conditions at the balance sheet date
The disclosures relating to the conditions in existence at the balance sheet
date should be updated in the light of new information.
Non-adjusting events after the balance sheet date
If the non-adjusting events are material then the following to be disclosed: -
 The nature of the event; and

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 An estimate of its financial effect, or a statement that such an estimate
could not be made.
The following are the examples of non-adjusting events, which requires
disclosure: -
 Major business combinations after the balance sheet date or disposing
of a major subsidiary
 Announcing a plan to discontinue an operation
 Major purchases of assets, classification of assets as held for sale in
accordance with the IFRS 5 other disposal of assets or expropriation of
major assets by Government
 The destruction of a major production plant by fire after the balance
sheet date
 Announcing or commencing and implanting a major reconstruction
 Major ordinary share transactions and potential ordinary share
transactions
 Abnormally large changes after the balance sheet date in asset prices
or foreign exchange rates.
 Changes in tax rates or laws enacted or announced after the balance
sheet date that have significant effect on current and deferred tax
assets and liabilities
 Entering into significant commitments or contingent liabilities e.g.
issuing significant guarantee
 Commencing major litigation arising solely out of events that occurred
after the balance sheet date.

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 PROVISIONS CONTINGENT LIABILITIES AND
CONTINGENT ASSETS (IAS – 37)
Objective
The objective of this IAS is to ensure that appropriate recognition criteria and
measurement bases are applied to provisions, contingent liabilities and
contingent assets.
Scope
This IAS is applicable to all provisions, contingent liabilities and contingent
assets except:
a) those resulting from executory non-onerous contracts
b) those covered by other IAS
Definitions
A provision is a liability of uncertain timing or amount.
A liability is a present obligation of the entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of
resources embodying economic benefits.
An obligating event is an event that creates a legal or constructive obligation
that results in an enterprise having no realistic alternative to settling that
obligation.
A legal obligation is an obligation that derives from:
(a) a contract (through its explicit or implicit terms);
(b) legislation; or
(c) other operation of law.
A constructive obligation is an obligation that derives from an enterprise’s
action where:
(a) by an established pattern of past practice, published policies or a
sufficiently specific current statement, the enterprise has indicated to
other parties that it will accept certain responsibilities; and
(b) as a result, the enterprise has created a valid expectation on the part
of those other parties that it will discharge those responsibilities.
A contingent liability is:
(a) a possible obligation that arises from past events and whose existence
will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the
enterprise; or
(b) a present obligation that arises from past events but is not recognized
because:
(i) it is not probably that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
(ii) the amount of the obligation cannot be measured with
sufficient reliability.
A contingent asset is a possible asset that arises from past events and whose
existence will be confirmed only by the occurrence or non-occurrence of one
or more uncertain future events not wholly within the control of the enterprise.
An onerous contract is a contract in which the unavoidable costs of meeting
the obligations under the contract exceed the economic benefits expected
to be received under it.
A restructuring is a program that is planned and controlled by management,
and materially changes either:
(a) the scope of a business undertaken by an enterprise; or

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(b) the manner in which that business is conducted.
Provisions and other liabilities
Provisions can be distinguished from other liabilities such as trade payables
and accruals because there is uncertainty about the timing or amount of the
future expenditure required settlement.
Provisions and contingent liabilities
In a general sense, all provisions are contingent because they are uncertain
in timing or amount. However, within this Standard the term ‘contingent’ is
used for liabilities and assets that are not recognized because there existence
will be confirmed only by the occurrence of one or more uncertain future
events not wholly within the control of the entity. In addition, the firm
‘contingent liability’ is used for liabilities that do not meet the recognition
criteria.
Recognition
Provisions
A provision shall be recognized when:
a) An entity has a present obligation (legal or constructive) as a result of a
past event;
b) It is possible than an outflow of resources embodying economic
benefits will be required to settle the obligation; and
c) A reliable estimate can be made of amount of the obligation.
If these conditions are not met, no provision shall be recognized.
Present obligation
In rare cases it is not clear whether there is a present obligation. In the cases,
a past event is deemed to give rise to a present obligation if, taking account
of all available evidence, it is more likely than not that a present obligation
exists at the balance sheet date.
Past event
A past event that leads to a present obligation is called an obligating event.
For an event to be an obligating event, it is necessary that the entity has no
realistic alternative to settling the obligation created by the event. This is the
case only:
a) Where the settlement of the obligation can be enforced by law; or
b) In the case of a constructive obligation, where the event (which may
be an action of the entity) creates valid expectations in other parties
that the entity will discharge the obligation.
Contingent Liabilities
An enterprise should not recognize a contingent liability.
a) A contingent liability is disclosed in financial statements, unless the
possibility of an outflow of resources embodying economic benefits is
remote.
b) Where an enterprise is jointly and severally liable for an obligation, the
part of the obligation that is expected to be met by other parties is
treated as a contingent liability.
c) The enterprise recognizes a provision for the part of the obligation for
which an outflow of resources embodying economic benefits is
probable, except in the extremely rare circumstances where no
reliable estimate can be made.
d) Contingent liabilities may develop in a way not initially expected.
Therefore, they are assessed continually to determine whether an

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 outflow of resources embodying economic benefits has become
probable. If it becomes probable that an outflow of future economic
benefits will be required for an item previously dealt with as a
contingent liability, a provision is recognized in the financial statements
of the period in which the change in probability occurs (except in the
extremely rare circumstances where no reliable estimate can be
made.)
CONTINGENT ASSETS
An enterprise should not recognize a contingent asset.
a) Contingent assets usually arise from unplanned or other unexpected
events that give rise to the possibility of an inflow of economic benefits
to the enterprise. An example is a claim that an enterprise is pursuing
through legal processes, where the outcome is uncertain.
b) Contingent assets are not recognized in financial statements since
may result in the recognition of income that may never be realized.
However, when the realization of income is virtually certain, then the
related asset is not a contingent asset and its recognition is
appropriate.
c) A contingent asset is disclosed in financial statements, where an inflow
of economic benefits is probable.
d) Contingent assets are assessed continually to ensure that
developments are appropriately reflected in the financial statements.
If it has become virtually certain that an inflow of economic benefits
will arise, the asset and the related income are recognized in the
financial statements of the period in which the change occurs. If an
inflow of economic benefits has become probable, an enterprise
discloses the contingent asset.
Measurement
The amount recognized as a provision shall be the best estimate of the
expenditure required to settle the present obligation at the balance sheet
date. This means that:
 Provisions for one-off events (restructuring, environmental clean-up,
settlement of a lawsuit) are measured at the most likely amount.
 Provisions for large populations of events (warranties, customer refunds)
are measured at a probability-weighted expected value.
 Both measurements are at discounted present value using a pre-tax
discount rate that reflects the current market assessments of the time
value of money and the risks specific to the liability.
In reaching its best estimate, the enterprise should take into account the risks
and uncertainties that surround the underlying events. Expected cash
outflows should be discounted to their present values, where the effect of the
time value of money is material.
If some or all of the expenditure required to settle a provision is expected to
be reimbursed by another party, the reimbursement should be recognized as
a reduction of the required provision when, and only when, it is virtually
certain that reimbursement will be received if the enterprise settles the
obligation. The amount recognized should not exceed the amount of the
provision. In balance sheet, reimbursement should be shown as an asset and
provision should be shown at gross amount however, in income statement
they can be netted off.
In measuring a provision consider future events as follows:

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 forecast reasonable changes in applying existing technology
 ignore possible gains on sale of assets
 consider changes in legislation only if virtually certain to be enacted
Re-measurement of Provisions
 Review and adjust provisions at each balance sheet date
 If outflow no longer probable, reverse the provision to income.
Application of recognition and measurement rules
a) Future operating losses
Provisions shall not be recognized for future operating losses.
b) Onerous contracts
If an entity has a contract that is onerous, the present obligation under
the contract shall be recognized and measured as a provision.
c) Restructuring
The following are examples of events that may fall under the
definition of restructuring:
 Sale or termination of a line of business
 Closure of business locations
 Changes in management structure
 Fundamental re-organization of company
Restructuring provisions should be accrued as follows:
Sale of operation: accrue provision only after a binding sale
agreement. If the binding sale agreement is after balance sheet date,
disclose but do not accrue
Closure or re-organization: accrue only after a detailed formal plan is
adopted and announced publicly. A board decision is not enough.
Future operating losses: Provisions should not be recognized for future
operating losses, even in a restructuring
Restructuring provision on acquisition (merger): Accrue provision for
terminating employees, closing facilities, and eliminating product lines
only if announced at acquisition and, then only if a detailed formal
plan is adopted 3 months after acquisition.
A management or board decision to restructure taken before the
balance sheet date does not give rise to a constructive obligation
at the balance sheet date unless the entity has, before the balance
sheet date:
a) stated to implement the restructuring plan; or
b) announced the main features the restructuring plan to those
affected by it in a sufficiently specific manner to raise a valid
expectation in them that the entity will carry out the
restructuring.
If an entity starts to implement a restructuring plan, or announces its
main features to those affected, only after the balance sheet date,
disclosure is required under IAS 10 Events after the Balance Sheet Date,
if the restructuring is material and non-disclosure could influence the
economic decisions of users taken on the basis of the financial
statements.
Restructuring provisions should include only direct expenditures caused
by the restructuring, not costs that associated with the ongoing
activities of the enterprise such as: -
a) retraining or relocating continuing staff;

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 b) marketing; or
c) investment in new systems and distribution networks

Examples of Provisions
Circumstance Accrue a Provision?

Restructuring by sale of an Accrue a provision only after a binding

operation sale agreement

Restructuring by closure or Accrue a provision only after a detailed

re-organization formal plan is adopted and announced
publicly. A Board decision is not enough

Warranty Accrue a provision (past event was the

sale of defective goods)

Land contamination Accrue a provision if the company's policy

is to clean up even if there is no legal
requirement to do so (past event is the
obligation and public expectation
created by the company's policy)

Customer refunds Accrue if the established policy is to give

refunds (past event is the customer's
expectation, at time of purchase, that a

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 refund would be available)

Offshore oil rig must be Accrue a provision when installed, and

removed and sea bed add to the cost of the asset
restored

Abandoned leasehold, four Accrue a provision

years to run

CA firm must staff training for No provision (there is no obligation to

recent changes in tax law provide the training)

A chain of retail stores is self- No provision until a an actual fire (no past
insured for fire loss event)

Self-insured restaurant, Accrue a provision (the past event is the

people were poisoned, injury to customers)
lawsuits are expected but
none have been filed yet

Major overhaul or repairs No provision (no obligation)

Onerous (loss-making) Accrue a provision

contract

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PRACTICE QUESTIONS
QUESTION NO.1
At the end of the year of an entity the following points are required to be
resolved.
a) During the year entity sold goods Rs. 100,000 on credit to a customer
but the party did not pay even after the year end and entity decided
to initiate legal proceedings against the customer. The court confirmed
the claim up to 70% of the amount due. The entity has created a
provision of 100% of the amount due on the reporting date.
b) The fair value of investments held at the reporting date was Rs. 1.2
million, after the reporting date but before the authorization of
financial statements the fair value has changed to Rs. 1.5 million.
c) The tax rate applicable for the entity for the tax year 2014 was 34% but
after the year end the Government imposed additional 5% food
surcharge for the year ended June 30, 2014.
d) The entity sells readymade garments, one of its customer filed legal
claim for recovery of Rs. 1 million because his cloths were not properly
stitched and people made fun of him in a family get together. The
entity’s lawyer at the reporting date was of the view that there was a
remote chance of acceptance of claim by the court. However after
the year end but before the reporting date the court confirmed
damages of Rs. 100,000.
Required: - discuss the impact of above events on the financial statements for
the year ended June 30, 2014? (10)
QUESTION NO.2
The following events have been identified by the auditors after the year end
of the company.
a) One of the cases filed against the company by the income tax
department before the Honorable Appellate Tribunal has been
decided against the company, which has resulted in recognition of
additional income tax amounting to Rs. 2 million, but no provision has
been made by the company.
b) During the year company was sued by one of its old employees from
terminating the job. The company has created no provision against
that case but company’s legal advisor is of the opinion that the case
may be decided in the favor of employee and company will be
required to pay compensation amounting to Rs. 1.5 million.
c) The income tax rate has been changed through finance act passed
before the yearend but the deferred tax provision is calculated on the
old income tax rate. The difference in rate will result in recognition of
extra deferred tax expense of Rs. 1.75 million.
d) The company has issued bonus shares after the year end but the basic
and dilution earning per share is based on the old number of shares.
e) One of the operations of the company has been decided by the
board of directors to be discontinued being loss making. The decision
was taken before the yearend but communicated publically after the
yearend. The operation is still presented as part of continuing
operations in financial statements.
Required: Discuss the effect of above events on current year financial
statements? (15)

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QUESTION NO.3
You have been recently appointed the chief accountant of a listed
company and have been asked to assist the auditors in the annual audit of
the company. The audit trainee has given you the following list of outstanding
points.
a) There has been sale of inventory after the year end at below cost price
and inventory is appearing at cost in the statement of financial
position. When you enquired from the relevant staff then you came to
know that a new competitor entered in the market after the year end
because of which the inventory was sold at below the cost price.
b) The company has not created a provision for a case pending before
the honorable High Court, Karachi. You approached the legal advisor,
who responded that an old employee of the company has filed this
case being aggrieved because he was terminated in the last year. The
legal advisor was of the opinion that there is remote chance that the
claim will be awarded to him.
c) The company has offered right shares to its shareholders after the year
but the share capital has not been changed accordingly.
d) The company has not written off a debtor from its books even the said
party has been declared bankrupt by the Honorable Court. When you
enquired, you came to know that said debtor was considered good at
the reporting date but after the year end a major fire broke out at his
factory and destroyed everything.
e) Mr. Jamil is the major supplier of the raw material of your company but
has not been disclosed as related party in the financial statements.
Discuss the accounting treatment of above in the audited financial
statements of the company (15)

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ANSWERS TO PRACTICE QUESTIONS
ANSWER NO. 1
a) This is an adjusting event. As the court has confirmed the recovery up
to 70% of the amount due therefore the debtor should be written off
up to 30% of the amount due and provision in total should be reversed.
The double entry will be:
Provision for doubt full account 100,000
Debtors account 30,000
Profit or loss account
70,000
b) This event is non adjusting event and will not affect the fair value of the
date of reporting. The fair value is a point of time value and reflects the
facts and circumstances of the particular date.
c) The change in tax rate or imposition of surcharge will also be a non-
adjusting event and will not change the calculation of current or
deferred tax because taxes are calculated according to the tax rate
applicable on the reporting date.
d) The entity should create a provision of Rs. 100,000 as there is a
probable chance that the claim will be accepted by court up to said
amount.
ANSWER NO. 2
a) This is an example of an adjusting event and provision for additional
tax should be recognized immediately amounting to Rs. 2 million as the
cases have been filed against the company before the end of current
year.
b) This is also an example of adjusting event and provision should be
recognized amounting to Rs. 1.5 million as the legal advisor is of the
opinion that there is a probable chance of awarding compensation to
the employee.
c) The company should recognize the additional deferred tax expense
because IAS 12 required that the deferred tax should be recognized at
the tax rate substantively enacted by the reporting date. The
additional deferred tax will result in decrease in profit and increase in
provision for deferred tax for Rs. 1.75 million.
d) The bonus issue after the year end is an adjusting event for calculation
of basic and dilutive earning per share (EPS) even announced after
the year end. Therefore, not only the EPS both basic and dilutive of
current year but previous year also will be recalculated after
considering the bonus issue.
e) The operation will continue to be presented as continuing in the
current year because the decision was announced after the year end,
however, in the next year it will be presented as discontinued in the
current year.
ANSWER NO. 3
a) This is an example of a non-adjusting event as the competitor entered
in the market after year end. Therefore, the inventory should remain at
the cost and not reduced to net realizable value.
b) This is an example of a contingent liability but as the chances are
remote, it will not be recognized or disclosed in the financial
statements.

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c) The right issue after year end is a non-adjusting event and the share
capital should not be changed.
d) This is also an example of a non-adjusting event as the condition
relating to this default does not exist at the reporting date. However, if
the material amount is outstanding against this debtor it can be
disclosed in the financial statements.
e) The major suppliers and customers are not related parties as normally
they are not in a position to effect the decision making process of the
entity.

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