IAS 7 Full text Overview

IAS 7 statement of cash flows require the presentation of information about the historical
changes in cash and cash equivalents of an entity by means of a statement of cash flows. Cash
flows during the period are classified according to operating, investing, and financing activities.

Presentation of the IAS 7 Statement of Cash Flows

Statement of Cash Flows

 Cash flows must be analyzed between operating, investing and financing activities.
 For operating cash flows, the direct method of presentation is encouraged, but the
indirect method is acceptable.
 The following section will make you understand IAS 7 format with ias 7 amendment
illustrative examples.

Indirect Method

Starts with:

 Cash Flows from Operating activities:

 Profit before tax

 Adjustment for:
 non-cash items
 remove impact of accruals
 relocate some figures to other position.
 Cash Flows from Investing activities:

 purchase of non-current assets

 sale/disposal of non-current assets
 interest received/dividend received on investment.

Cash Flows from Financing activities:

 purchase of share
  cash from shares
 take loan/issue bonds
 payment under finance lease agreement.

Direct Method

 Cash Flows from Operating activities:

 Receipts from customers

 Less Payments to:
 suppliers
 employees
 operating expenses
 taxation
 interest charges.
 Cash Flows from Investing activities:

 Same as indirect method.
 Cash Flows from Financing activities:

 Same as indirect method.

Accruals Based figures

Interest

 Paid shown in Operating.

 Received shown in Investing.
Dividend

 Paid shown in Financing.

 Received shown in Investing.
Taxation

 Includes Tax expense.

 Includes Deferred Tax.

Presentation Methods: Detailed Explanation

Statement of Cash Flows

Indirect Method

Starts with:

Cash Flows from Operating activities:

 Operating Profit after deducting interest but before tax.

 Adjustment for:

non-cash items
depreciation/amortization (add back to profit)
gain on disposal of NCA (deduct)
Loss in disposal of NCA (add back)
remove impact of accruals
Interest expense (add back)
Interest income (deduct and relocate to Investing activities)
 Movement on working capital item

 Receivables (deduct increase, add decrease)
 Payable (add increase, deduct decrease)
 Inventory (deduct increase, add decrease)
 Interest paid (deduct)
 Taxation (deduct).
Cash Flows from Investing activities:

 Purchase of non-current assets (deduct)

 sale/disposal of non-current assets (add)
 Payment for Investment (deduct)
 Proceed from disposal of Investment (add)
 interest received/dividend received on investment (add).

Cash Flows from Financing activities:

 Purchase of share (deduct)

 cash from shares (add)
 take loan/issue bonds (add)
 payment under finance lease agreement (deduct)
 dividends payments (deduct).
Direct Method

Cash Flows from Operating activities:

 Receipts from customers.

 LESS: Payments to:

 suppliers
 employees
 operating expenses
 taxation
 interest charges.
Cash Flows from Investing activities:

 Same as indirect method.

Cash Flows from Financing activities:

 Same as indirect method.

IFRS 16 Leases Overview

IFRS 16 full text establishes principles for the recognition measurement presentation and
disclosure of leases, with the objective of ensuring that lessee and lessor provide relevant
information that faithfully represents those transactions. (Effective from 2019: see IFRS 16
changes 2019 below)
Understanding IFRS 16 Leases

IFRS 16

 The previous version IAS-17 (Leases) was criticized because it did not required Lessees
to recognize assets and liabilities arising from Operating lease.
 IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize
assets (right-of-use) and liabilities for All leases with a term of more than 12 months
(unless the underlying asset is of low value).
Key IFRS 16 Definition

 Inception date of lease: The earlier of lease agreement and the date of commitment by
the parties. The type of lease is identified at the date of inception.
 Interest rate implicit in lease: That makes present value of lease payment and UN-
guaranteed value equal to fair value and (any) initial direct costs of lessor.
 Economic and Useful life:

 Economic life is the total life of an asset expected to be economically usable by
one or more users.
 Useful life is the Period over which an asset is expected to be available for use by
an entity.

 Residual Value: this may be Guaranteed or UN-guaranteed;

 Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the

value of an asset at the end of lease will be at least a specified amount.
 UN-Guaranteed: is that portion of residual value of asset, the realization of which
is not assured by a party related to the lessor.
 Lease Receipts and Payments: The term lease Payments refer to the payments that a
lessee expects to make over a lease term or the Receipts that a lessor expects over the
economic life of the asset. Payment by a lessee to lessor during a lease term may
comprises of;

 fixed payments (less) any lease incentives.
 variable lease payments.
 purchase option price.
 payment of penalties for terminating the lease.
 Lease Classification:
 
 Finance lease where it transfers substantially all the risks and rewards incidental
to ownership.
 Operating lease where it does not transfer substantially all the risk and rewards
incidental to ownership.
The following IFRS 16 presentation explain IFRS 16 calculation example.

IFRS 16 Lessee accounting: Accounting for lease By Lessee

Accounting for lease by Lessee

IFRS 16 introduces a Single lessee accounting model and requires a lessee to recognize assets
and liabilities for all leases with a term of more than 12 months unless leases for which
underlying asset is of low value.

Recognition and Measurement at commencement date

Right-of-use (Asset)

At commencement date, a lessee should measure the right of use asset at cost.

Cost comprises;

 present value of lease payments.

 any lease payment made at or before the commencement date (less) any lease incentives
received.
 any initial direct cost incurred by lessee.
 any disposal/dismantling costs, incurred by lessee.
Subsequent measurement

 Account for any depreciation expense and accumulated impairment losses (if any).
 If asset is owned at the end of lease term:

 
Depreciate on useful life.
 If asset is not owned at the end of lease term:
 depreciate, earlier of: useful life or lease term.

Liability

At commencement date, a lessee should measure the lease liability at the Present valve of the
lease payments, that are not paid at that date.

Subsequent measurement

 After the initial recognition the lease liability is measured at amortized cost using the
effective interest method.
 Each lease payment consists of TWO elements:
1.
i. Finance charge on the liability to the lessor, by adding a periodic charge to lease
liability, with other side of entry as an expense to P/L.
ii. Partial repayment of liability.
 Total liability must be divided between:

 current liability.
 non-current liability.

Reassessment, Re-measurement of lease liability

 After the commencement date, a lessee should remeasure the lease liability (IF ANY
CHANGE OCCURS) using either unchanged discount rate or revised discount rate to
reflect changes in lease payments.
 A lessee should account for re-measurement of lease liability as an adjustment to the
right-of-use asset to the extent covered by right-of-use asset and remaining amount is
recognized in P/L.

Recognition and Measurement Exemption to lessee

 A lessee may ELECT not to apply the recognition and measurement of right-of-use asset
and liability to:
1.
i. short term lease (12 months or less).
ii. asset of low value:

o
  Examples include; office furniture, laptops, tables, telephones.
 Expense these out on straight line basis or any other method.

IFRS 16 Lessor accounting: Accounting for lease By Lessor

Accounting for lease by lessor

Initial measurement at commencement

Finance lease

 In finance lease the lessor does not record the leased asset in its financial statements, as it
has transferred the risks and reward. Instead, he records the amount as Receivable.
 Receivable is described as:

Net investment (N.I) = Present value of Gross investment or;
Net investment (N.I) = Fair value + Initial direct cost.
Subsequent measurement

 Record payments received during the year by making;

Cash/Bank Debit
Net Investment Credit

 Record finance income, adding a period return to the N.I and other side as income in P/L:
Net Investment Debit
Finance Income Credit

Operating lease

IFRS 16 operating lease

 The lessor records the leased asset in its financial statement, as he has not transferred the
risk and reward of ownership.
 At commencement the lessor adds initial direct costs incurred by lessor.
Subsequent measurement
  Lessor records the depreciation expense; the policy must be consistent with lessor’s
policy.
 Account for any impairment loss.
 Records Rental Income on a straight-line basis over lease term.

Accounting for lease By Lessor (Manufacturer Dealer LESSOR)

Manufacturer Dealer LESSOR

 A manufacturer or dealer often offers to customers to the choice of either buying or

leasing an asset.
 As these are Lessors, therefore lessors accounting treatment are applied.

Finance Lease

A finance lease gives rise to two types of income:

 Profit or loss (difference between sales and cost)

 Finance income.
Initial Measurement

 Record Sales as:

Lease receivable Debit
Sales Credit (lower of fair valve or Present of Lease payments)

 Record cost of Sales:

Cost Debit
Inventory (Asset)Credit

 Transfer Present valve of UN-Guaranteed valve of Net Investment:

Lease Receivable Debit
Inventory (Asset) Credit

 Expense-out initial direct costs:

Income Statement Debit
Cash/Bank Credit
  Record finance income subsequently

Operating Lease

Initial Measurement

 Does not Record Sales

 Record Asset:
Asset Debit
Inventory Credit

 Record depreciation.
 Record impairment.
 Record Rental income.

Sale and Lease Back

Sale and Lease Back

 Sale and lease back transactions involve one entity selling an asset to another entity and
then immediately leasing it back.
 The main purpose is to allow the entity to release cash, that is ‘tied up ‘in the asset.
 Accounting for sale and lease back depends on whether Transfer is sale or not a sale.

Transfer is a sale

For seller-lessee

If the transfer of an asset by seller lessee satisfies the requirement of IFRS 15 then the lessee
shall:

Sale at Fair value:

  De-recognize the carrying value of the asset.
 Recognize the Gain/Loss [ = (fair value – carrying value) * (f.v – p.v) divide by fair
value]
Sale Above Fair value:

 If the sales proceeds are above F.V, the difference between sales proceeds and F.V shall
be treated as Additional financing provided by the buyer lessor (additional financing=
sales – F.V) and to be deducted from lease payments (NPV) for calculation of” Right of
use” &” Gain/Loss “.
 The entity should make following adjustments, others remaining same as above:

 Record lease liability at present value of lease payments including additional
financing.
 Right of use asset: = [carrying value * NPV (i.e. is lease payments net off
additional financing)] divide by fair value (F.V).
 Gain/Loss: = (F.V – C.V) * (F.V – NPV) divide by F.V.
Sale Below Fair value:

 If the sales proceeds are below F.V, the difference between sales proceeds and F.V shall
be treated as prepayments of lease payments. It is added to the lease payments (to make it
Total lease payments) for calculation of “Right of use” & “Gain/Loss”.
 The entity shall make following adjustments, others remaining the same;

 Record lease liability (at P.V of lease payment).
 Record right-of-use (C.V * Total P.V of lease payments) divide by F.V.
 Gain/Loss: [= (F.V – C.V) * (F.V – Total P.V of lease payments)] divide by F.V.

For Buyer-lessor

If the transfer of an asset by seller lessee satisfies the requirements of IFRS 15, then the lessor
shall;

 Account for Purchase of asset according to IAS 16 and treat it as operating lease
according to IFRS 16. Make following entries;
Asset Debit
Cash/Bank Credit

Dep. expense Debit

Acc. dep. credit (over remaining useful life)

Cash Debit
Rental Income Credit (over straight line)

 Account for any initial direct investment.

Transfer is not a sale

For seller-lessee

If the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the
lessor shall;

 continue to recognize the transferred asset.

 shall recognize a financial liability equal to the transferred proceed, in accordance with
IFRS 9.
Cash Debit
Financial liability Credit

 Lease amortization schedule will be needed for principal and interest charge over the
lease term;
Interest charge Debit
Financial liability Debit
Cash Credit

For Buyer-lessor

If the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the
lessor shall;

 Not recognize the transfer of asset.

 Recognize a Financial Asset, equal to the transferred proceed in accordance with IFRS 9;
Financial asset Debit
Cash Credit

 Lease amortization schedule will be needed for principal and interest income over the
lease term;
Cash Debit
Interest income Credit
Financial asset Credit

International accounting standards and group accounts

The following standards relate to accounting for investments:

 IFRS 3 Business combinations

 IFRS 10 Consolidated financial statements
 IFRS 11 Joint Arrangements
 IAS 27 Separate financial statements
 IAS 28 Investments in associates and joint ventures
Guidance on the process of consolidation is set out in two standards, IFRS 3 Business
Combinations and IFRS 10 Consolidated Financial Statements.

Introduction to IFRS 10
IFRS 10 explains that a business under the control of another is a subsidiary and the controlling
entity is the parent.

IFRS 10 covers the on-going rules related to consolidation. It is IFRS 10 that requires:

1. that the financial statements of Parent and Subsidiary be prepared using uniform accounting
policies;
2. the consolidated assets, liabilities, income and expenses are those of the parent and
its subsidiaries added on a line-by-line basis;
3. the elimination of unrealized profit on intra group transactions; and
4. the cancellation of intra group balances.
5. IFRS 10 explains how to account for disposals.
IFRS 10 Definitions
Control – An investor controls an investee when:

1. it is exposed, or has rights, to variable returns from its involvement with the investee; and
2. it has the ability to affect those returns through its power over the investee.
Non-controlling interest (NCI) – the equity in a subsidiary not attributable to a parent.

The non-controlling interest may be stated as either:

 a proportionate share of the identifiable assets acquired and liabilities assumed; or

 at fair value as at the date of acquisition
Consolidated financial statements – The financial statements of a group in which the assets,
liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are
presented as those of a single economic entity.

The requirement to prepare consolidated accounts

An entity that is a parent must present consolidated financial statements. There is an exception
to this rule.

A parent need not present consolidated financial statements if (and only if) it meets all of the
following conditions:

1. The parent itself (X) is a wholly-owned subsidiary, with its own parent (Y).
2. Alternatively, the parent (X) is a partially-owned subsidiary, with its own parent (Y), and the
other owners of X are prepared to allow it to avoid preparing consolidated financial statements.
3. The parent’s debt or equity instruments are not traded in a public market.
4. The parent does not file its financial statements with a securities commission for the purpose of
issuing financial instruments in a public market.
5. The parent’s own parent, or the ultimate parent company (for example, the parent of the parent’s
parent), does produce consolidated financial statements for public use that comply with
International Financial Reporting Standards.
The following might be given as spurious justification for failing to consolidate
a particular subsidiary:

1. The subsidiary’s activities are dissimilar from those of the parent, so that the consolidated
financial statements might not present the group’s financial performance and position fairly.
2. Obtaining the information needed would be expensive and time-consuming and might delay the
preparation of the consolidated financial statements.
3. The subsidiary operates under severe long-term restrictions, so that the parent is unable to
manage it properly.
Investment entities exemption
An investment entity might take shares in another entity in order to make gains through
dividends or capital appreciation, not to become involved in business of that entity.
An investment entity must not consolidate the entities that it controls but it must measure them at
fair value through profit or loss in accordance with IFRS 9 Financial Instruments.

An entity is an investment entity only if it meets all of the following criteria:

1. Its only substantive activities are investing in multiple investments for capital appreciation,
investment income (dividends or interest), or both.
2. It has made an explicit commitment to its investors that its purpose of investment is to earn
capital appreciation, investment income (dividends or interest), or both.
3. Ownership in the entity is represented by units of investments, such as shares or partnership
interests, to which proportionate shares of net assets are attributed.
4. The funds of its investors are pooled so that they can benefit from professional investment
management.
5. It has investors that are unrelated to the parent (if any), and in aggregate hold a significant
ownership interest in the entity.
6. Substantially all of the investments of the entity are managed, and their performance is evaluated,
on a fair value basis.
7. It provides financial information about its investment activities to its investors.

Group financial statements – Disposals

IFRS 10 Consolidated Financial Statements contains rules on accounting for disposals of a
subsidiary.

Accounting for a disposal is an issue that impacts the statement of profit or loss.

There are two major tasks in constructing a statement of profit or loss for a period during which
there has been a disposal of a subsidiary:

1. The statement of profit or loss must reflect the pattern of ownership of subsidiaries in the period.
2. When control is lost, the statement of profit or loss must show the profit or loss on disposal of the
subsidiary.
The rules in IFRS 10 cover full disposals and part disposals.

Full disposals
Profit or loss on disposal
IFRS 10 specifies an approach to calculating the profit or loss on disposal.

This approach involves comparing the asset that is recognized as a result of the disposal (i.e. the
proceeds of the sale) to the amounts that are derecognized as a result of the disposal.
The calculation of profit or loss on disposal must be supported by several other calculations.
These are:

 the goodwill arising on acquisition, which in turn needs the net assets of the subsidiary at the date
of acquisition; and
 the net assets of the subsidiary at the date of disposal, which in turn needs a calculation of the
equity reserves at the date of disposal.
Part disposals
When a parent makes a part disposal of an interest in a subsidiary it will be left with a residual
investment. The accounting treatment for a part disposal depends on the nature of the residual
investment. Whether part disposal:

 results in loss of control

 does not result in loss
Part disposal with loss of control
If a part disposal results in loss of control the parent must recognize a profit or loss on disposal
in the consolidated statement of profit or loss.
Part disposal with no loss of control

A part disposal which does not result in loss of control is a transaction between the owners of the
subsidiary. In this case the parent does not recognize a profit or loss on disposal in the
consolidated statement of profit or loss. Instead, the parent recognizes an equity adjustment.

The double entry to record the equity adjustment is:

Cash Dr.

Non-controlling interest (new) Cr.

Retained earnings Cr.

IAS 8 full text Overview

IAS 8 gives guidance in selecting and applying accounting policies, accounting for changes in
estimates and reflecting corrections of prior period errors.

Tackling IAS 8 in TWO simple steps:

 Identifying whether it’s an accounting policy Change in Accounting estimate and Error.
 Accounting treatment for the identified event.
The IAS 8 disclosure for accounting policies estimates and errors are covered in these two steps.

Step 1: Identifying the Event

Identifying
Accounting Policies

 IAS 8 accounting policies are the specific principles, bases, conventions, rules and
practices applied by an entity in preparing and presenting financial statements.
 IAS 8 Change in Accounting Policy occurs because of inappropriate use of:

 recognition.
 measurement.
 presentation.
given by IFRS

 Application of a NEW accounting Policy to transaction or event is not a change in

accounting policy.

Changes in Accounting Estimates

 Change in accounting estimate is an adjustment to the carrying amount of an asset or

liability, or related expense, resulting from reassessing the expected future benefits and
obligations associated with that asset or liability.
 to some extent is based on management’s judgment. For example, judgments on:

 bad debts
 inventory obsolesces
 fair value of assets and
 liabilities
 life of non-current asset
 depreciation pattern i.e. straight line or reducing.
 change in accounting estimate results from “New information or New development “.
 change in accounting estimate does not mean Error has been made.
 if it’s difficult to distinguish between change in accounting policy and estimate, then it
shall be treated as change in accounting estimate.

Error

Prior period errors are omissions from, and misstatements in, an entity’s financial statements for
one or more prior periods arising from:

 mathematical mistake.
 mistake in applying “accounting policies “.
 misinterpretation of facts and fraud.
Step 2: Accounting treatment for the identified event

Accounting treatment

Accounting Policies

 Transitional Provision an explanation given by IFRS on how a NEW standard has to be

applied.
 In absence to a transitional provision, apply accounting policies Retrospectively.
 When change in Accounting Policy occur:

 adjust Opening balances for each item affected by change, from the earliest prior
period, as if policy had always been applied.
 If impracticable from the earliest date practicable, apply either:

 Specific effect in this case applies the new accounting policy to the carrying
amount of assets and liabilities from the earliest period Retrospective application
if practicable.
 Non-cumulative effect in this case adjusts comparative information to apply new
accounting policy Prospectively from the earliest date practicable.

Changes in Accounting Estimates

Change in accounting estimate is recognized from the current period.

Error

If an error occurs/is discovered:

1. Correct it retrospectively.
2. Restate the comparative amounts.
 The correction of prior period error is excluded from profit in the period when error was
discovered.
 If it is impracticable to use retrospective application apply either:

 Specific effect: Restate the carrying amount of assets and liabilities at the
beginning of earliest period for which retrospective restatement is practicable.
This may be the current period.
  Cumulative effect: the entity must correct error prospectively from the earliest
date practicable.

IAS 10 Full text Overview

IAS 10 events after the reporting period give guidance as:

 to specify when a company should adjust its financial statements for events that
occur after the end of the reporting period, but before the financial statements are
authorized for issue.
 to specify the disclosures that should be given about events that have occurred after the
end of reporting period but before the financial statements were authorized for issue.
Tackle in TWO simple steps:

1. Identify Adjusting and non-Adjusting events.

2. Alter financial statements in response to that identified event.

Step 1: IAS 10 – Identifying Adjusting and non-Adjusting

events
Adjusting Events

IAS 10 Adjusting events are those providing evidence of conditions existing at the end of the
reporting period.

IAS 10 Examples include:

 A court case after the end of the reporting period, conforming that the entity had a present
obligation as at the end of the reporting period.
 An evidence/information that an asset was impaired as at the end of the reporting period:
e.g. Bankruptcy of a customer or information about obsolete inventory.
 An asset purchased/sale before the year end but price had not been finally agreed.
 Discovery of fraud or error showing financial statements are incorrect.
Non-Adjusting Events

Non-adjusting events are indicative of conditions arising after the reporting period.

Examples include:

 A Fall in value of an asset after the end of the reporting period, such as a fall in market
value of investment owned, (A fall in market price will normally reflect conditions arise
after the reporting period not conditions already existing as at the end of period).
 The acquisition/disposal of a major subsidiary.
 Announcement of a plan to discontinue a major operation.
 Announcing/commencing the major restructuring.
 The destruction of a major plant by a fire after the reporting period.
 Dividends declared.

Step 2: IAS 10 – Accounting for the Events identified

Adjusting Events

 These are ADJUSTED in the financial statements. i.e. (an increase/decrease in

assets/revenue/liability/capital/expense).
 If a company obtains information about an adjusting event, it should update the financial
statements to allow for this information.

Non-Adjusting Events

 These are DISCLOSED in the financial statements.

 An entity shall not adjust any amount in financial statements:
Hence is required disclosure of:

 the nature of the event.

 an estimate of its financial effect, or a statement that such an estimate cannot be made.
IAS 37 Provisions Contingent Liabilities and Contingent Assets Overview
IAS 37 full text Outlines the accounting for: (IAS 37 definition)

 Provisions


is a liability with uncertain timing or amount.

the entity has a present obligation.

probable (>50%) outflow of resources.

with a reliable estimate.
 Contingent Liabilities
 i.e. that does not meet the above criteria (anyone or all).
 Contingent Assets

 i.e. the receipt of which is not yet confirmed.

Accounting for Provisions

Provisions

Recognition
A provision shall be recognized in financial statements when ALL of the following are met:

Present Obligation:

 The present obligation must have been arisen from a past event.
 An entity shall determine whether a present obligation exists at the end of the reporting
period by taking account all available evidence:

 opinion of experts
 evidence provided by IAS-10.

Probable Outflow:

 i.e. the probability of greater than 50% of outflow of resources or other events (provided
they are not future costs).

Reliable Estimate:

 This would be an extreme rare case where no reliable estimate can be made.
Measurement
At what Amount?

Best Estimate:

 The amount recognize shall be the best estimate of expenditure require to settle or
transfer it to a third party.
 The estimate and financial effect are determined by:

 judgment of management
 similar transactions occurred
 independent experts
 Ias-10.
Risks and Uncertainties:

 Risk adjustments may INCREASE the amount at which a liability is measured.

 Risk and uncertainties surrounding the amount of expenditure are DISCLOSED.
Present Value:

 The amount of provision shall be the present value of the expenditure, where the effect
of time value of money is material.
Future Events:

 Future events may affect the amount require to settle the obligation (say a change in
technology), an entity might include expected cost increase/decrease associated.
Gains from Expected Disposal:

 gains shall not be taken into account in measuring a provision, even if it is closely
associated to a provision.
Reimbursements:

 reimbursements (like Insurance contracts, indemnity clauses or suppliers’ warranties)

are treated as separate asset (not netted off against provision) when receipt is virtually
certain (>90%).
Changes in Provision:

 each provision must be reviewed at the end of each reporting period.

 this might result in de-recognition of a provision that no longer meets the criteria.
 where discounting is used, the carrying amount of a provision increases in each period to
reflect the passage of time. this is recognized as a borrowing cost.

Use of Provision
  A provision shall be used only for expenditure for which it was originally recognized.
 If the provision is more than the amount needed to settle the liability, the balance is
released as a credit back through Income statement.
 If the provision is insufficient an extra expense is recognized.

IAS 37 Contingent Liabilities

Contingent Liabilities

Contingent liability is one that exist at the reporting date but cannot be recognized because it
fails to meet recognition criteria (anyone or all)

Contingent Liabilities is either;

Possible obligation

 A possible obligation that arises from Past events.

 It has yet to be confirmed whether the entity has a present obligation that could lead to an
outflow of resources.

Present obligation

 A present obligation that fails to meets the other two recognition criteria for provision
recognition i.e.:

 It is not probable that an out flow of resources will occur.
 Reliable estimate of amount cannot be made.
 A contingent liability is disclosed
 A Joint liability is disclosed as a contingent liability to the extent met by the other party a
provision for the part of obligation for which outflow is probable.

IAS 37 Contingent Assets

 A contingent asset is a possible asset that arises from past event. As its existence is yet to
be confirmed.
 Contingent assets usually arise from unplanned or other unexpected event that give rise to
the possibility of an inflow of economic benefits.
 An entity shall not recognize a contingent asset, since this may result in recognition of
income that might never be realized.
 However, when the realization is virtually certain then its recognition is appropriate.
 If an inflow is probable (50%) an entity discloses contingent asset.
IAS 16 Overview
The objective of IAS 16 property plant and equipment (PPE) is to prescribe the accounting
treatment for property, plant and equipment. The principal issue is the timing of recognition of
assets, the determination of their carrying amounts, and the depreciation charges to be
recognized in relation to them. The following is the IAS 16 summary

IAS 16 Property, Plant and Equipment

IAS 16 Recognition criteria
Items of property, plant and equipment should be recognized as assets when:

 It is probable that the future economic benefits associated with the asset will flow to the
enterprise.
 The cost of the asset can be measured reliably.
Initial Measurement
Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at
cost. Cost includes all costs necessary to bring the asset to working condition for its intended use.
This would include not only its original purchase price but also costs of site preparation, delivery
and handling, installation, related professional fees and estimated cost of dismantling and
removing the asset and restoring the site it the payment for an item of Property, Plant and
Equipment is deferred, interest at a market rate must be recognized or imputed.
Elements of cost (IAS 16 directly attributable costs examples)
The cost of an item of property, plant and equipment consists of:

i. Its purchase price less trade discount plus any import taxes; plus
ii. The directly attributable costs of bringing the asset to the location and condition necessary for it
to be capable of operating in the manner intended by management. These directly
attributable costs must include:
a. Employee costs arising directly from the installation or construction of the asset
b. The cost of site preparation
c. Delivery costs
d. Installation and assembly costs
e. Testing costs to assess whether the asset is function properly (net of any sales proceeds of
items produced during the testing phase).
f. Professional fees
 When the entity has an obligation to dismantle and remove the asset at end of its life,
its initial cost should also include an estimate of the costs of dismantling and removing the asset
and restoring the site where it is located.
Subsequent expenditure IAS 16 on Asset
Expenditure relating to non-current assets, after their initial acquisition, should be treated as
expense unless it meets the criteria for recognizing an asset. In practice, this means that
expenditure is capitalized if it improves the asset (for example, by enhancing its performance or
extending its useful life).

Measurement Subsequent to Initial Recognition

IAS 16 Property, Plant and Equipment permits TWO accounting models:

1. Cost Model – The asset is carried at cost less accumulated depreciation and impairment.
2. Revaluation Model – The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation, provided that fair value can be measured reliably.
The Revaluation Model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying
amount of an asset does not differ materially from its fair value at the balance sheet date.

If an item is revalued, the entire class of assets to which that asset belongs should be revalued.

Revalued assets are depreciated in the way as under the cost model.

 If a revaluation results in an increase in value, it should be credited to entity under the heading
“Revaluation Surplus” unless it represents the reversal of a revaluation decrease of the same
asset previously recognized as an expense, in which case it should be recognized as income.
 A decrease arising as a result of a revaluation should be recognized as an expense to the extent
that it exceeds any amount previously credited to the revaluation surplus relating to the same
asset.
 When a revalued asset is disposed-off, any revaluation surplus may be transferred directly to
retained earnings.
Depreciation (Cost and Revaluation Models)
IFRS property plant and equipment

For all depreciable assets:

 The depreciable amount (cost less depreciation, impairment and residual value) should be
allocated on a systematic basis over the asset’s useful life. The residual value and the useful life
of an asset should be reviewed at least at each financial year-end and, if expectations differ from
previous estimates, any change is accounted for prospectively as a change in estimate under IAS
8.
 The depreciation method used should reflect the pattern in which the asset’s economic benefits
are consumed by the enterprise. The depreciation method should be reviewed at least annually
and, if the pattern of consumption of benefits has changed, the depreciation method should be
changed prospectively as a change in estimate under IAS 8.
Depreciation should be charged to the income statement, unless it is included in the carrying
amount of another asset. Depreciation begins when the asset is available for use and continues
until the asset is derecognized, even if it is idle.

Derecognition (Retirement and Disposal) of An Asset

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use
and no future economic benefits are expected from its disposal. The gain or loss on disposal is
the difference between the proceeds and the carrying amount and should be recognized in the
income statement.
IAS 12 Income Taxes Overview

IAS 12 full text prescribes the accounting treatment for income taxes. Which recognizes both the
current tax and the future tax (Deferred Tax) consequences of the future recovery or settlement
of the carrying amount of an entity’s assets and liabilities.

Understanding IAS 12 Income Taxes

By looking at Statement of Comprehensive Income;

Tax Expense

Current Tax

Deferred Tax Expense

It’s the Income taxes Payable (i.e. payable for the current period) in respect of the taxable
profit/loss to the tax authorities.

The income taxes that would be payable (i.e. in future period) in respect of the taxable
profit/loss to the tax authorities.

Current Tax
Calculation and Accounting for Current Tax

 Accounting for current tax is simple forward calculation.

 Tax is paid on Taxable profit/ Income.
 When the financial statements are prepared, the tax charge on accounting profits for the
year is likely to be an estimate, which is therefore not the amount of tax that will
eventually be payable. The actual tax charge (based on Taxable Profit), agreed with the
tax authorities is likely to be different.

 Accounting Profit is the profit/loss for a period before deducting tax expense. A
series of adjustments is made against a company’s accounting profit to arrive at
its Taxable profit, adjustments involve:

o
o Adding back inadmissible deductions.
o Deducting admissible deductions.
 Then, current tax is calculated by applying a Tax rate provided by tax authorities on
taxable profit/income.
 Current tax is an Expense (a Debit) in statement of profit/loss, with the other side a tax
payable (a Credit, under current liabilities) in statement of Financial Position.
The following section explains IAS 12 deferred tax examples with other IAS 12 disclosure
requirements.

IAS 12 Deferred Tax

Calculation and Accounting for Deferred Tax

IAS 12 deferred tax

Accounting for deferred tax is based on the principle that tax consequence of an item should be
recognized in the same period as the item is recognized i.e. matching concept.

Accounting for deferred tax is based on the identification of Temporary differences, which is the
difference between carrying amount of an asset or liability in statement of financial position and
its Tax Base.

Tax Base

The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes in accordance with tax authorities.

Of Asset

Charge to P/L

 Tax base is the total amount of expense that will be allowed as expense in future.
 For example, PPE will be charge in profit/loss as expense over the period.
Convertible into Cash/another asset

 The amount that would be received in future but not taxable by tax authorities.
 For example, for Receivables; are taxed on received basis. So, the tax base is Zero (nil)
for today, as there would be ‘zero amount’ to be received in future but not taxable.

Of Liability

Charge to P/L

 The tax base is it carrying amount less the amount on which no tax will be imposed in
future.
 For example, Revenue received in advance.
Other Liability
  The tax base is it carrying amount less the amount that will be allowed as Expense in
future.
 Payment to Account payable.

Differences

Temporary Differences

Taxable Temporary Differences

 The difference which results in taxable amounts in determining taxable profit/loss of

future periods.
 They caused by Debit balance in carrying amount of asset/liability as compared to tax
base.
 They lead to deferred tax liabilities.
Deduct able Temporary Differences

 The differences which result in deductible amounts in determining taxable profit/loss of

future periods.
 They are caused by a Credit balance in carrying amount of asset/liability in financial
statement compared to tax base.
 They lead to deferred tax assets.

Permanent Difference

 Permanent differences arise from items of income and expenditures;


 that have been included in the calculation of accounting profit but will NEVER be
included in calculation of taxable profit. So, NO deferred tax should be
recognized.

Deferred Tax Recognition and Measurement rules

Deferred tax is recognized as either;

Deferred Tax Liability

 These are the amounts of income taxes payable in future periods.

 It must be recognized for ALL taxable temporary difference, except;

 on initial recognition of good will.

Deferred Tax Asset

 These are the amounts of income taxes recoverable in future periods in respect of all
deduct able temporary differences:

 A deferred tax asset must be recognized for carry forward unused tax losses and
credits.

Double Entry for Deferred Tax:

Deferred Tax Expense/Credit

Charged to Profit and Loss.

Deferred Tax Liability/Asset

Charged as Balance sheet item.

IFRS 5 Full Text Overview

 A company might hold an asset at the year-end that it has the intension of selling.
 IFRS 5 non-current assets held for sale and Discontinued operations contains rules which impact
the measurement and presentation of such assets i.e. IFRS 5 sets out requirements that specify the
accounting treatment for assets held for sale, and the presentation and disclosure of discontinued
operations.
 IFRS 5 identifies three classes of item that might be described as held for sale:
1. Non- current assets (Individual assets)
2. Disposal groups (group of non-current assets)
3. Discontinued operations
Definitions
Disposal group – A group of assets to be disposed of in a single transaction, and
any liabilities directly associated with those assets will be transferred in the transaction.

 Some disposal groups might fall into the definition of a discontinued operation.
  A disposal group may be a group of cash-generating unit, single cash-generating unit, or part of
cash-generating unit.

Held for sale

Non-current Assets and Disposal groups
IFRS 5 Criteria
The following conditions must apply at the reporting date for an asset (or disposal group) to be
classified as held for sale:

1. It must be available for immediate sale

2. The sale must be highly probable i.e.;
i. Management must be committed
ii. An active program to locate a buyer
iii. The sale must be actively marketed at a price reasonable in relation to its current fair
value
3. The sale must be expected to be completed within one (1) year from the date of classification as
held for sale.
 If the criteria are met after the reporting date but before the authorization of the financial
statements the asset must not be classified as held for sale as at the reporting date (i.e. non-
adjusting event);
 However, entity is required to make certain disclosures

Sale expected in over 1-year period

 Circumstances might extend the period to complete the sale beyond a year. This does not preclude
an asset from being classified as held for sale as long as;
o Delay is caused by events or circumstances beyond the entity’s control; and
o There is sufficient evidence that the entity remains committed to its plan to sell the asset.
 Costs to sell that are to be paid after one year should be discounted with the unwinding of the
discount recognized subsequently as finance cost in Profit/Loss.
Non-current assets (or disposal groups) to be abandoned

 Non-current assets (or disposal groups) to be abandoned include non-current assets (or disposal
groups) that are to be;
o Used to the end of their economic life; or
o Closed rather then sold.
 Such assets must not be classified as held for sale.
Assets classified as non-current as per IAS 1 cannot be reclassified as current assets, until they
meet the criteria to be classified as held for sale.

Measurement: Non-current Assets and Disposal groups Held for Sale

 Assets held for sale and disposal groups should be measured at the lower of;
o Carrying amount
o Fair value less cost to sell
 If the value of the ‘held for sale’ asset is adjusted from carrying amount to fair value less costs to
sell, any impairment should be recognized as a loss in the profit/loss unless the asset to which it
 relates is carried at a previously recognized Revaluation Surplus. In this case the loss is taken to
other comprehensive income to the extent that it is covered by the previously recognized surplus
on that Any amount not covered is recognized in profit/loss.
 A non-current asset must not be depreciated (or amortized) while it is classified as ‘held for sale’.
 If the carrying amount is less than the fair value less cost to sell there is no impairment. In this
case there is NO adjustment to the carrying amount of the asset. A gain is NOT recognized on
reclassification as held for sale (A gain on disposal will be included in P/L when the
disposal actually occurs).
 The measurement requirements of IFRS 5 apply to all recognized non-current assets and disposal
groups except for;
o Deferred tax assets
o Assets arising from employee benefits
o Financial assets (IFRS 9)
o Investment Property (IAS 40)

Provided, a non-current asset that is scoped out of IFRS 5 for measurement purposes may fall
within the classification and presentation rules: Such a non-current asset might be part of a
disposal group. In this case the measurement rules of IFRS 5 apply to the disposal group as a
whole but not to the scoped-out assets.

Subsequent Re-measurement
Subsequent remeasurement of non-current asset or disposal group might lead to:

 A further impairment loss, which must be recognized; or

 A gain – which is recognized but only to the extent that is covered by a
previously recognized impairment loss.
Changes to plan of sale
 If an asset (or disposal group) has been classified as held for sale, but the criteria are no longer
met, it must be removed from this classification.
 Such an asset is measured at the lower of;
o The amount at which it would have been carried if it had never been classified as held for
sale (i.e. it carrying amount before it was classified as held for sale as adjusted for any
depreciation, amortization or revaluation that would have been recognized if it had not
been so classified); and
o Its recoverable amount at the date of the subsequent decision not to sell.
 Any necessary adjustment to the carrying amount is recognized in income from continuing
operations.
Discontinued Operations
 A discounted operation is a disposal group that satisfies extra criteria.
 Discontinued operation – A component of an entity that either has been disposed of or it is
classified as held for sale and;
i. Represents a separate major line of business or geographical area of operations.
ii. Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
iii. Is a subsidiary acquired exclusively with a view to resale.
 Component – A component of an entity comprises operations and cash flows that can be clearly
distinguished, from the rest of the entity.
  If an entity disposes of an individual non-current asset, or plans to dispose of an individual asset
in the immediate future, this is not classified as a discontinued operation (unless) the asset meets
the definition of a ‘Component’ of an entity.
 An operation cannot be classified as discontinued in Statement of financial position if criteria for
classifying it as discontinued are met after the end of the reporting period (i.e. non-adjusting).

IFRS 5 non-current assets held for sale and Discontinued

operations Disclosure Requirements
Non-current Assets and Disposal groups
Statement of financial position

 Non-current assets classified as held for sale are presented separately from other assets.
 The assets and liabilities of a disposal group classified as held for sale are presented separately
from other assets and liabilities. These assets and liabilities must not be off-set and present as a
single amount.
 Comparative are not restated to reflect the classification in SOFP for the latest period.
 Any gain or loss on the remeasurement of a non-current asset (or disposal group) classified as
held for sale that does not meet the definition of a discontinued operation is included in profit/loss
from ‘Continuing operation’.
 Changes to plan for sale:
o Disclose the fact
o A description of facts and circumstances and its effect.
Discontinued Operations IFRS
Statement of Comprehensive Income

 A single-amount on the face of P/L comprising the total of:

o The post-tax profit/loss of discontinued operation
o Gain/loss on its assets
Statement of Cash Flow

 The ‘net’ cash flows attributable to the operating, investing and financing activities of
discontinued operations.
Notes to the Financial Statements

 The analysis of that single-amount:

o Revenue, expenses, pre-tax profit/loss of discontinued operation
o Tax expense
o Asset gain/loss
 Comparatives must be restated for these disclosures
Statement of Financial Position

 Asset/liabilities must be disclosed separately from other assets/liabilities.