Intermediate Financial Acct I CH 1-5

Chapter 3: Cash and Cash
Equivalents
(IAS 7 and IFRS 9)

Learning Objectives
 Overview of Financial Instruments

 Cash and internal control
 Reporting of Cash and disclosure requirements
 Recognition and valuation of accounts receivable
 Recognition and valuation of notes receivable
 DE recognition of receivables
 Reporting of receivables and disclosure
requirements
Overview of Financial Instruments
 Types of Assets
Physical
Assets
Assets
Financial
assets
Overview of Financial Instruments
Definition of financial instrument
 Any contract that gives rise to both a financial asset of
one entity and a financial liability or equity instrument
of another entity.
Financial instruments
Financial Assets
Financial
Liabilities
Equity instrument
Derivatives
Financial Assets (IFRS9)
Definition
Any asset that is:
•Cash
•an equity instrument of another entity
•a contractual right to receive cash or another financial asset
•a contractual right to exchange financial assets or liabilities
with another entity on potentially favourable terms
Examples of financial assets:
 Cash
 Trade receivables
 Investment in shares
Financial Liabilities (IFRS9)
Definition
Any liability that is:
 a contractual obligation to deliver cash or another financial
asset
 a contractual obligation to exchange financial assets or
liabilities with another entity on potentially unfavorable
terms.
Examples of financial liabilities:

 Trade payables
 Debenture (like a certificate of loan) loans payable
 Redeemable (repaid after a period) preference (non-equity)
shares
Equity instrument(IFRS9)
Definition
 A contract that evidences a residual interest in the assets of
an entity after deducting all of its liabilities.
 Examples of equity instruments:
 Common stock
 Preferred stock
CASH & Cash Equivalents
Objectives:
 Presenting accounting for cash and cash
equivalents as regards to:
- Measurement,
- Classification,
- presentation, and
- Reporting
Key questions
 What is cash? Cash equivalents?
 What constitutes cash and cash equivalents?
 How do we measure cash and cash equivalents?
 How do we classify and present cash and cash equivalents?
 How do we report cash and cash equivalents?
Applicable Standards
 Accounting for Cash and Cash Equivalents is
mainly governed by:
 IAS 7 - Statement of Cash Flows
 IFRS 9 - Financial Instruments: classification,
measurement, impairment, hedging
 Objective of the Standard:
 is to require the provision(providing) of
information about the historical changes in
cash and cash equivalents of an entity by
means of a statement of cash flows.
Basic Concepts & Terminologies
Cash:
 Comprises cash on hand and demand deposits.
 Held in the form of currencies & notes that are
generally acceptable as a means of exchange.
 Includes the physical currency notes and coins
comprising foreign currency
 Bank overdraft if payable on demand (for the
lender)
Basic Concepts & Terminologies (Continued)
Cash Equivalents:
Are short-term, highly liquid investments
Are readily convertible to known amounts of cash
Are subject to an insignificant risk of changes in
value.
Are non-physical cash instruments which can be
converted to physical cash within a period of 90
days with little or no transaction costs!
E.g Commercial paper, Marketable securities
Scope & Exclusions of Cash & Cash Equivalents (Continued)
 Exclusions
 Cash & cash equivalents do not include the
following:
 Cash Advances with respect to entities
neither fully nor proportionally
consolidated in the group FS;
 Equity Investments unless they are, in

substance cash equivalents such as a
Preferred Stock with specified short
redemption date.

Review questions
 Cash and cash equivalents include all of the following except:
a. Cash held in the form of currencies and notes
b. Demand deposit
c. Equity Investments which do not have the characteristics of cash
equivalents
d. Bank overdraft which is payable on demand
e. Cash on hand
Measurement
 Cash and Cash Equivalents;
 Cash is carried at its face value which is
equivalent to fair value.
 Cash and cash equivalents in foreign
currencies are:
 translated at the exchange rate of the date of the
operation
 Converted to reporting currency on the reporting
dated at closing rates
Presentation
 Cash and Cash Equivalents;
 Distinguish cash available for general
operations from restricted cash
 Classify cash or cash equivalent assets as
a current cash or cash equivalent asset
when it is not restricted from being exchanged
or used to settle a liability for at least twelve
months from the balance sheet date.
 Classify restricted cash as non-current
asset
Presentation (cont’d)
Examples of restricted cash:
 Cash and cash equivalents held by a Group
subsidiary that operates in a country where
there are exchange controls or legal
constraints
 Sinking fund
 Proceeds of a construction mortgage that is
restricted for use only for construction costs
 Funds allocated for special purposes by
action of the company’s board of directors.
Exercise
Identify whether each of the following cash is restricted or
not:
1. Checking account held for general payments
2. Payroll Fund
3. Petty Cash fund
4. Cash and cash equivalents held by a Group
subsidiary that operates in a country where there are
exchange controls or legal constraints
5. Purchase fund
6. Change fund
7. Sinking fund
8. Proceeds of a construction mortgage that is restricted
for use only for construction costs
Offsetting of cash accounts:
 Cash debit and credit accounts with the same
financial entity shall not be reported net,
unless as a result of contractual agreements.
e.g. Assume that EEU has two checking
accounts with CBE (Arada and 6-kilo
branches). The account with Arada branch
shows a debit balance of ETB 50,000 and
that of 6-kilo branch shows a credit balance
of ETB 10,000. How does EEU report these
balances in the balance sheet?
Offsetting of cash accounts:
 Offset bank overdrafts against cash account
provided that overdraft is payable on demand.
e.g. Assume that EEU has a checking account
with CBE. It has also an overdraft facility up to
ETB 20,000. At the end of the period, the
checking account shows a debit balance of ETB
200,000 while overdraft account shows a credit
balance of ETB 15,000. The overdraft is payable
on CBE’s demand. How does EEU report these
balances in the balance sheet?
Review questions
1) How do we measure cash?
2) Cash and cash equivalents in foreign currencies
are initially translated at the exchange rate on the
closing date (true/false)
3) As per International Financial Reporting
Standards, offsetting cash accounts is strictly
forbidden. (true/false)
Reporting
 Movements of cash and cash equivalents during the
period and disclosing the category they belong such
as:
- Cash at bank
- Cash on hand
- Short-term deposits
 Reconciliation of the cash and cash equivalents in the
statement of cash flow to the statement of financial
position
 Amount of cash subject to restrictions as at the end of
the reporting period
Similarities and Difference between IFRS & US
GAAP in relation to Cash & Cash Equivalents
 SIMILARITY
 According to both standards, cash includes cash
on hand & demand deposits.
 IAS 7 define cash equivalents as;
 Short-term highly liquid investments that are
readily convertible to known amounts of cash
which mature within 90 days & are subject to
insignificant risks.
 The definition under US GAAP is similar!
Similarities and Difference b/n IFRS & GAAP (Continued)
DIFFERENCE
 US GAAP does not offset bank overdrafts
against the cash account
 IFRS includes bank overdrafts in the cash &
cash equivalents category if they are
repayable on demand & form an integral
part of an entity’s cash management.
 When there is cash available in another
account in the same bank on which the
overdraft occurred offsetting against the
cash account is required!
TRADE & OTHER RECEIVABLES
Applicable Standards
 IFRS15 – Revenues,
 IAS 32 – Financial Instruments –
Presentation
 IFRS 9– Financial Instruments –
Recognition & Measurement
What is receivable?
Receivables
Are asset designations applicable to all
debts, unsettled transactions or other
monetary obligations owed to a company
by its debtors or customers.
Form part of financial assets under the
category “Loans and Receivables”.
What is receivable?(Continued)
 Loans and receivables are:
 Non-derivate financial asset with
fixed or determinable payments;
- that are not quoted in an active
market &
Classification of Receivables
Receivables could be classified in to trade and non-
trade
Originated
Trade by the entity
Receivables Receivables
Held for
Non-trade trading
Could you mention examples of trade receivables? What

about non-trade?
Scope and Exclusions
 Trade & other receivables include the following:
 Bills receivables;
 Staff advances and prepayments;
 Government Receivables (VAT & other taxes and
dues relating to operations)
 A/R on special transactions with government, public
bodies & international organizations;
Scope and Exclusions (Continued)
 A/R from associate undertakings (current accounts or
capital-account transactions, etc.);
 A/R on disposals of fixed assets and marketable
securities;
 Accrued interest on loans & receivables (whether
relating to investments or otherwise).
 Other A/R (including accrued income);
Scope and Exclusions (Continued)
 Deductions
The following shall be deducted from Trade & Other
Receivables:
 Advances & prepayments received from customers;
 Rebates (refunds);
 Discounts;
 A/P on packaging, containers & materials on which
deposits are charged.
Recognition
A trade receivable arises upon fulfillment of the
conditions required for revenue recognition of a
sale of goods and services ( IFRS 15).
Measurement
 The measurement rules to be applied depend on the
classification of the receivable as:
 “originated by the entity” or
Business Model
 “held for trading”.
 Held for trading: A receivable shall be classified as held for
trading if it is incurred principally for the purpose of selling
or repurchasing it in the near term through factoring,
securitization etc.
 Originated by the entity: Receivables originated by the
entity are all receivables other than those that are originated
with the intention of sale immediately or in the short term.
Measurement (cont’d)
Measurement Methods (IFRS 9)
1. Amortized cost
2. Fair value through profit or loss
Measurement Methods: Amortized cost
 As per IFRS 9, a FA shall be measured at amortized
cost if both of the following conditions are met:
 The asset is held within a business model whose
objective is to hold assets in order to collect
contractual Cash flows
 The contractual terms of the financial asset give
rise on specified dates to cash flow that are solely
payments of principal & interest
Measurement Methods: Fair value
 Financial assets which do not fulfill both of the
above conditions are valued at fair value i.e.
 a Financial asset is measured at fair value unless it
is measured at amortized cost
Example 1: Identify whether each of the following cases require the
classification of receivables as held for trading or held to collect
contractual cash flows:
a. An entity holds loans and advances to customers to collect their contractual
cash flows but would sell an investment in particular circumstances, perhaps
to fund unforeseen cash shortage. Held to collect & trade.
b. An entity’s business model is to purchase portfolios of financial assets, such
as loans. Those portfolios may or may not include financial assets with
incurred credit losses. If payment on the loans is not made on a timely basis,
the entity attempts to extract the contractual cash flows through various
means – for example, by contacting the debtor through mail, telephone, and
so on. Held to collect.
c. ABC Co. has a business model with the objective of buying and reselling loans
and advances from various financial institutions such as microfinance
institutions. Held to Trade
Non-discounted
value
Initial
measurement
Discounted
value
Measurement
timing
Amortized cost
Subsequent
measurement
Fair value
Initial Measurement:
Initial measurement rules detailed below are applicable to both
receivables “originated by the entity” and “held for trading”.
 When a receivable is recognized initially, the Company shall
measure it at its cost, which is its nominal value, including VAT
and other similar taxes.
 When the effect of the passage of time is not significant,
receivables are measured on an undiscounted basis (which
is the most common case).
 When the effect of the passage of time is significant, receivables
are initially measured on a discounted basis in accordance with
guidance given in on the measurement of deferred payments.
Subsequent Measurement
a) Receivables originated by the entity
Initially recognized at cost:
= Nominal value - impairment or uncollectability
Initially measured at discounted value:
= Carrying amount + discount accumulation –
impairments /uncollectibility
b) Receivables held for trading
Measured at fair value
Example 2: On 1st February 2015, Lion International Bank provided
working capital loan amounting Br 2m to its customers (borrowers) in
anticipation that the bank will collect the loan after one year (31 January
2016). The fiscal year ends on June 30. Assume none of this loan was
repaid by 30 June 2016. There is no collateral for the loan, except good
credit history.
a) Identify whether this loan is accounted for using amortized cost or fair
value.
b) What was the value at which the loan should be recorded on 1st of
February 2015?
c) What was the value at which the loan should be reported on 30 June
2015 assuming that there was no impairments during 2015.
d) At what value should the loan receivable recorded as of 30 June 2016?
a) Identify whether this loan is accounted for using amortized cost or fair
value.
Amortized cost because it is originated by LIB and expected to
be received in cash from the borrower
b) What was the value at which the loan receivable should be recorded
on 1st of July 2015?
ETB 2m
c) What was the value at which the loan should be reported on 30 June
2015 assuming that there was no impairments during 2015.
ETB 2m
d) At what value should the loan receivable recorded as of 30 June
2016?
Loan loss provision = 2,000,000 * 20% = 400,000
Net loan receivable = 2,000,000 – 400,000 = 1,600,000
• The entry to record the provision would be:

Bad debt expense ………. 400,000
Allowance for doubtful debts …. 400,000
Measurement (Continued)
 Subsequent Measurement (Continued)
3. Receivables in Foreign Currencies
 Are translated at the exchange rate of the date of
the operation.
 Are restated at closing date using the closing date
exchange rate, and
 the resulting exchange d/c is included in the PL, in
accordance with effects of changes in foreign
exchange rates.
Reporting and disclosure (Continued)
 As stated in “IFRS 7”, the following disclosures are made
with regard to receivables:
 Movements in the balances of Account Receivables
 Allowances for doubtful accounts & all movements
during the year!
 Receivables which are pledged or otherwise
restricted at the end of the reporting period
 Age analysis of receivables
 Receivables that are transferred
 Other relevant disclosures under financial
instruments.
THE END
The end of
chapter -3
Thank You!
Chapter 4: Inventories
International Accounting Standard (IAS-2)
learning objectives
 Nature and classification of inventory
 Physical goods and costs included in inventory
 Valuation of inventories: A cost-basis approach
 Special inventory valuation methods
 Lower-of-cost-or-net realizable value (LCNRV)
method
 Gross profit method
 Retail-inventory method
INVENTORIES
Focus areas:
1. Prescribing the Accounting Treatment for
Inventories, &
2. Introducing the Guidance in relation to:
A. Determination of Inventory Cost,
and the Cost Formulas to be used to

assign costs to inventories.
B. Recognition of Expense including:
- Write-down to net realizable value and
- Reversal of write-downs.
2
ApplicableStandards
1.IAS 2 – Inventories represent:

 Assets held for sale in the ordinary
course of business,
 In the process of production for such sale
or
 In the form of material or supplies to be
consumed:
- In the production process, or
- In the rendering of services.
3
Applicable Standards (Continued)
1.IAS
2.IAS 3838- Inventory
- Inventory maymayinclude intangible
include intangible
assetsthat
assets
assets thatare
that arebeing
are beingdeveloped
being developedfor
developed for resale,
for resale, for
for example,
example, software. software.
2.IAS 40
2.IAS
3.IAS 40
40-- Inventory
Inventory
- Inventory also
also includes
includes
also properties
properties
includes properties
that have
that have been beenpurchased,
purchased, or are
or being
are being
developed,
developed,
developed, forfor
for resale.
resale.
resale.
3.IAS
4.IAS 4141--Agricultural
Agriculturalproduce
producefromfromthe thepoint
point
ofof
of harvest
harvest
harvest is isclassified
is classified
asas
classified as inventory.
inventory.
inventory.
Basic Concepts &Terminologies
 Fair Value – the amount for which an asset
could be exchanged, or a liability settled, b/n
knowledgeable, willing parties in an arm’s
length transaction.
 Net Realizable Value – the amount that is

expected to be realized from the sale of
inventory in the ordinary course of business
less the estimated costs of completion & sale.
5
Categories ofInventory
 Raw Materials- are materials:
Which are actually used in the FG, and/or
Awaiting entry into the production process.
 Work In Progress –The inventory of partially
completed products.
 Finished Goods – Completed manufactured goods
that have not yet been sold.
 Packaging Material- Materials consumed for the
packaging of the FG; such as Sacks & Bags.
6
Categories of Inventory(Continued)
 Spare Parts, Tools & Consumables- machine parts
that are used to replace obsolete or non-useful
machine parts, tools and consumables!
 Promotional & Advertising Materials
 If the ff prerequisites are met, the promotional
materials can be recorded as inventory:
I. Materials are not delivered to the end-consumer.
II. Materials are directly linked to sales transaction.
III. Materials have a significant value individually.
7
Exclusions
The ff items shall be excluded from the inventories of
the Company:
 Goods sold and awaiting delivery.
 Goods delivered and awaiting billing.
 Non-returnable packaging containers, or
stationery, when their total value is not
significant.
 Major spare parts and stand-by equipment
when the entity expects to use them for more
than one period (capitalized in fixed assets)
8
Recognition& Measurement of Inventories
I. RECOGNITION
 Inventories are recognised from the date
that the entity has/takes the risks and
rewards of ownership of the inventory.
 Items owned by an entity that are held on

consignment at another entity’s premises
are included as inventory of the consignor.
(Not as a consignee)
Recognition& Measurementof Inventories (Continued)
II. MEASUREMENT
 Inventories are to be measured at the
lower of cost and net realizable value.
 Comparison of cost with net realizable value

should be carried out on an item-by-item
basis but groups of similar items may be
considered together.
Recognition& Measurement of Inventories (Continued)
 MEASUREMENT – Continued
Producers’ of Agricultural and Forest Products
and minerals and mineral products may be
stated at net realizable value (instead of the
lower of cost & NRV) when this is accepted
industry practice.
If inventories are measured at net realizable
value, changes in NRV must be recognised in the
income statements as they occur!
Cost ofInventories
Cost of Inventories Include:
1. All costs of purchase (purchase price,
transport, handling costs, that
and aretaxes
not
recoverable...),
2. Costs of Conversion, &
3. Other Costs Incurred in bringing the
inventories to their present condition and
location. For example, the costs of designing
products for specific customers in the cost of
inventories.
Cost of Inventories(Continued)
 Example 1:
EEU imported goods at a Cost of 127,000 Birr, 2000 Birr
non-refundable import duties and 1000 Birr refundable
purchase taxes. The risks & rewards of ownership of the
imported goods were transferred to EEU upon collection
of the goods from the port (seller’s) warehouse. EEU was
required to pay for the goods upon collection. EEU
incurred 500 Birr to transport the goods to its warehouse
and a further 2000 Birr in delivering the goods to its
customer. Further selling costs of 300 Birr were incurred in
selling the goods.
What is the cost of purchase?
 Example 1: Answer:
 The cost of purchase is 129,500 Birr!
 It includes the costs incurred in bringing the goods
to their sale location, i.e.
 The 127,000 Birr purchase price
 The non-refundable import duties (2000 Birr) &
 The transport cost to Warehouse (500 Birr).
 Example 2
 EEU buys a good priced at 500 Birr
per unit. However, the supplier
awards EEU a 20 % discount on
orders of 100 units or more. EEU
buys 100 units in a single order.
↑ What is the cost of inventory?
 Example 2: Answer:
 EEU measures the cost of the
inventory at 40,000 Birr!
 [I.e. 100 units x (500 Birr list Price less 20% of

500 Birr volume discount)]
 If inventories are purchased on deferred
settlement terms:
 it is not overvalued by inclusion of the
interest cost inherent in the purchase
arrangement;
 rather the d/c b/n the purchase price for
normal credit terms & the deferred
settlement amount is recognised as
interest expense.
17
 Example 3
 EEU acquired an item of inventory for
2,000,000 Birr on credit. The identical item is
available in the same market for 1,654,000
Birr if payment is made within 30 days of the
date of purchase (i.e. normal credit terms).
What is the cost of inventory?
↑ Example 3,Answer:
 The cost of the inventory is 1,654,000 Birr

(I.e. the purchase price for normal credit terms).
Costs ofConversion
 The costs of Conversion of Inventories include:
1. DM and DL Costs directly related to the
units of production.
2. MOH costs that are incurred in

converting materials into FGs.
Costs of Conversion(Continued)
 Rules for Calculation of Conversion Costs:
 Fixed production OHs should be allocated to
Cost of conversion on the basis of
the normal capacity of the production
facilities!
Normal capacity is the production expected to be
achieved on average over a number of periods or
seasons under normal circumstances, taking into
account the loss of capacity resulting from planned
maintenance.
 Rules for Calculation of C.C (Continued)
 The amount of fixed overhead allocated to

each unit of production should
not increase as a consequence of
low production or idle plant!
22

 In periods of abnormally high production
the amount of Fixed OH allocated to each
unit of production is decreased so that
inventories are not measured above cost!
23
 Example 4
 EEU incurred Fixed Production OHs of
900,000 Birr during a one-month period in which
it manufactured 250,000 units of production.
(When operating at normal capacity EEU manufactures
250,000 units of production per month)
↑How much fixed OH cost should EEU allocates to

each unit produced during the month?
24
Example 4: Answer:
 EEU allocates 3.6 Birr Fixed OH Cost to each
unit produced during the month.
 [Calculation: 900,000 Birr Fixed
Production OH ÷ 250,000 units (i.e.
normal capacity) = 3.6 Birr per unit
produced]
Example 5
 If in a similar situation, EEU may produce
only 200,000 units of production;
↑ The allocated Fixed Production OHs would

be how much?
Rules for Calculation of C.C (Continued)
↑ Example 5: Answer:
 Fixed Production OHs would be 720,000 Birr
(I.e. 200,000 units produced x 3.6 Birr allocation
rate based on normal production rate)
The unallocated Fixed Production OHs of
180,000 Birr must be recognised as an Expense
in the profit or loss. (900,000 incurred less
720,000 allocated to inventory).
Example 6
If EEU manufactured 300,000 Units instead
of 250,000 or 200,000 units during the
month; this level of production is
abnormally high!
↑ How much is allocated to Fixed OH Cost?
Example 6: Answer:
 EEU should allocate 3 Birr fixed OH cost to
each unit produced during the month.
(Calculation: 900,000 Birr ÷ 300,000 units
(actual production) = 3 Birr per unit
produced)
Costs Excluded fromInventories
a) Abnormal amounts of wasted materials,
labour or other production costs!
b) Storage costs, unless those costs are
necessary during the production process
before a further production stage!
c) Administrative OHs that do not
contribute to bringing inventories to
their present location and condition!
d) Selling costs!
36
CostFormulas
 Use Specific Identification Method of Inventory
Costing, for;
 Items that are not ordinarily interchangeable
(unique) &
 Goods or services produced & segregated for
specific projects.
 When there are large numbers of items of inventory
that are ordinarily interchangeable/replaceable use
either;
 The First-In, First-Out (FIFO) or
 Weighted Average Cost Formula.
37
Cost Formulas (Continued)
 The last-in, first-out method (LIFO) is not
permitted by IFRS.
 An entity shall use the same cost formula for

all inventories having a similar nature & use
to the entity.
 For inventories with a d/t nature or use,

different cost formulas may be justified!
Net Realizable Value (NRV)Measurement
 Estimates of net realizable value of inventories:
 are based on the most reliable evidence
available as at the time estimates are made of
the amount on which the inventories are
expected to realize.
 When measuring the NRV
for inventories invoiced in the foreign currency
the currency in which the inventories
will be sold is used!
Net RealizableValueMeasurement (Continued)
 Estimates of NRV ofinventories:(Continued)
 Take into consideration the purpose for which
the inventories are held:
 For example, the NRV of inventory held to satisfy
firm sales or service contract is based on the
contract price.
 If quantities specified in the contract are for less

than the inventory quantities held, the NRV of
excess is based on general selling prices.
WriteDown of Inventories to NRV
Inventories are written down

when the NRV of the inventories
is less than the cost of the inventories.
Inventories are not to be carried

in excess of amounts expected to be realized
from their sale or use!
WriteDown of Inventories to NRV (Continued)
 The write down amount:

 is the d/c b/n the cost of the inventories
and the NRV &
 is expensed immediately in profit or loss
in the period the write-down occurs.
RMs & other Supplies held for use in the

production of inventories are not written
down below cost, if
their finished products are expected to be
sold at or above cost!
Inventories are written down to NRV:

 Item by Item or
 By Grouping of Similar or Related Items-
when the individual write downs may not
be realistic or possible!
Adjust inventory to Lower of Cost & NRV
 To reduce the value of inventory to a NRV
that is lower than the cost recorded in the
company records:
Loss on Inventory Valuation xx

Inventory xx
(Adjusting entry to write down cost to NRV)
Example of NRV
Units Raw Attributable Attribut Expected

materi production able selling
al cost overheads selling
costs
Item 300 160 15 12 185
A
Item B 250 50 10 10 75
At what amount will inventories be stated in the
statement of financial position in accordance
with IAS 2?
Units Cost NRV Lower Total
Item 300 175 173 173 51,900
A
Item B 250 60 65 60 15,000
Reversal of WriteDown
When subsequent assessment of NRV
indicates that the circumstances that led to
the previous write down of inventories below
cost no longer exist, the previous write-down
of inventories is reversed.
Inventory xx
Loss on Inventory Valuation xx
(Reversing entry of inventory valuation)
Reversal of Write Down (Continued)
 The amount of the write down is reversed

(i.e. the reversal is limited to the amount of
the original write down),
so that the new carrying amount is
the lower of the cost
and
the revised net realizable value!
AccountingPolicies
 The cost of perishable produce is calculated

using the First-in, First-out (FIFO) method.
 The Weighted Average or Specific

Identification Method cost formula is used
for all other inventories!
Presentation andDisclosure
An entity shall disclose the following with
regard to inventories:
1.The accounting policies adopted in
measuring inventories, including the cost
formula used.
2.The total carrying amount of inventories
and the carrying amount in classifications
appropriate to the entity.
ories Presentation and Disclosure(Continued)
An entity shall disclose……
3. The amount of inventories recognised
as an expense during the period.
4. Impairment losses recognised
or reversed in profit or loss.
5. The total carrying amount of inventories
pledged/guaranteed as security for
liabilities, if any.
US GAAP Vs. IFRS (ConcerningInventoryAccounting)
1.Similarities
 In both methods primary basis of accounting
for inventory is cost!
 Both define inventory as assets held for sale
in the ordinary course of business, in the
process of production for such sale or to be
consumed in the production of goods or
services!
US GAAP Vs. IFRS (Continued)
 Similarities (Continued)
 The cost of inventory includes all direct
expenditures to ready inventory for sale,
including allocable overhead!
 Selling costs are excluded from the cost of

inventories, as are most storage costs and
general administrative costs!
2. Significant Differences
Methods/ US IFRS
Treatments GAAP (IAS)
1. LIFO is an 1. LIFO is prohibited.
acceptable
Costing method.
Methods 2. Consistent cost 2. Same cost formula
formula for all must be applied to
inventories similar all inventories
in nature is similar in nature or
not explicitly use to the entity.
required!
2. Significant Differences (Continued)
Methods/ US IFRS
Treatmen GAAP (IAS)
ts
1. Inventory is carried at 1. Inventory is carried at
the lower of cost or the lower of cost or
Measu market. net realizable value.
2.Market is defined as 2. Net realizable value
rement current replacement is defined as the
cost. estimated selling
price less the costs
necessary to make
the sale.
2. Significant Differences (Continued)
Methods/ US IFRS
Treatments GAAP (IAS)
Any write-down of Previously recognized
Reversal inventory to the impairment losses are
of lower of cost or reversed up to the
amount of the original
inventory market creates a impairment loss when
new cost basis that
write- the reasons for the
subsequently
downs cannot be impairment no longer
exist!
reversed!
THE END
Thank You!!!
Chapter 5:
Property, Plant, and Equipment (IAS 16)
• Acquisition and Disposition of Property, Plant, and

Equipment
 Characteristics of property, plant, and equipment
 Acquisition & valuation of property, plant and
equipment
 Costs subsequent to acquisition
 Disposition of property, plant and equipment
• Depreciation, Impairments, and Revaluations
1
RELEVANT STANDARDS
Topic List Standards

Property, plant and equipment IAS 16
Fair Value IFRS 13
Impairment IAS 36
2
1. Objective
The objective of IAS 16 is to prescribe the
accounting treatment for property, plant, and
equipment.
The principal issues are the recognition of
assets, the determination of their carrying
amounts, and the depreciation charges and
impairment losses to be recognized in
relation to them.
3
Definition & Scope
Property, Plant and Equipment are tangible
items that :
 Are held for use in the production or
supply of goods or services, for rental to
others, or for administrative purposes
 Are expected to be used during more
than one period.
4
Scope
• This Standard does not apply to:
 Property, plant and equipment classified as held
for sale in accordance with IFRS 5.
 Biological assets related to agricultural activity
(covered by IAS 41 –Agriculture) other than
bearer plants.
 Mineral rights and mineral reserves such as oil,
gas, and similar ‘non-regenerative’ resources
5
Recognition
General
• Property, Plant and Equipment shall be
recognized as an asset if, and only if:
a)It is probable that future economic benefits
associated with the item will flow to the entity;
this can be judged with reference to the fact
whether the entity ability to restrict the access
of others to those benefits
b)The cost of the item can be measured reliably
6
Different Aspects of PP&E Recognition
An item of inventory is accounted for as an item of PP&E

a) Items such as spare parts, stand-by equipment and
servicing equipment are inventory unless they meet
the definition of PP&E
b) In general, an item of inventory is accounted for as an
item of PP&E if it:
Is not held for sale or consumed in a production
process or during the process of rendering services;
Is necessary to operate or benefit from an asset during
more than one operating cycle
7
Examples for items of PPE not consumed and consumed in the
production process
a) For Items of PP&E not consumed in the production process

 An entity operates an oil refining plant. In order for the refining process
to take place, the plant must contain a certain minimum quantity of oil.
This can only be taken out once the plant is abandoned and would then
be polluted to such an extent that the oil’s value is significantly reduced
 In this example the part of the crude that is necessary to operate (in
technical terms) the plant and cannot be recouped (or can be recouped
but would then be significantly impaired), even when the plant is
abandoned, should be considered as an item of PP&E and amortized over
the life of the plant
b) For Items of inventory consumed in the production process
 An entity sells gas and has at any one time a certain quantity of gas in its
gas distribution network. In this example the gas in the pipeline is not
necessary to operate the pipeline. It is held for sale or to be consumed in
the production process or process of rendering services. Therefore this
8
gas is accounted for as inventory
Environmental and safety equipment
 Cost incurred for Environmental protection and

safety equipment can be capitalised when there
is a constructive (self imposed) obligation to
invest in the equipment. For example when the
entity by legislation or voluntarily invest on
environmental & protection equipment
9
Transfers of assets from customers
• Our entity receives from a customer, or another party, an
item of PP&E (or cash for the acquisition or construction of
such items) and then use either to connect the customer to
a network or to provide the customer with ongoing access
to a supply electricity services. While we do this we should
recognize such type PP&E items in our books of records,
since it full fills the following PP&E recognition criteria
 Future economic benefits associated with the PP&E item
will flow to the entity; our entity ability to restrict the
access of others to those benefits
 The cost of the item can be measured reliably
10
Bearer Plants
• Bearer plants (for example the root part of

Eucalyptus trees) that are used in the production or
supply of agricultural produce (wood pole trees used
to install our electric line), are expected to bear
produce for more than one period and have a
remote likelihood of being sold as a plant or
harvested as agricultural produce are classified
under PPE within the scope of IAS 16.
11
Minor items Of PP&E
• A very large number of minor items of PP&E such

as spare parts, tools, staplers, clip meters and
…etc., which nevertheless are used in more than
one accounting period. There are practical
problems in recording them on an asset-by-asset
basis in an asset register; they are difficult to
control and frequently lost. The main
consequence is that it becomes very difficult to
depreciate them. In General we will write off
such immaterial assets as expenses in the period
of addition
12
The right to use of Land
•As per our country land policy, all Lands are

owned by the government, but currently in
so many places our entity uses lands free of
any charge and this should be recognized
initially in our books as asset as long as they
fulfil the asset recognition criteria
13
Measurement Of PPE
General
•Measurement is the process of determining
monetary amounts at which elements are
recognized, this refers to PPE:
 Initial recognition
 Cost incurred Subsequent to Acquisition
 Subsequent recognition
14
Initial recognition of PPE
General
• Initial recognition for PPE refers to its Historical cost
that is whenever an entity initially incurs expense
to acquire asset through purchase or construction
or production or through exchange or if the
payment for PPE deferred (postponed))
15
Elements of cost
The cost of an item of property, plant and equipment comprises
a) Its purchase price, including import duties and non-
refundable purchase taxes, after deducting trade
discounts and rebates.
b) Any costs directly attributable to bringing the asset to
the location and condition necessary for it to be
capable of operating in the manner intended by
management.
c) The initial estimate of the costs of dismantling and
removing the item
16
Cost of PP&E Includes continued
d) Construction cost of material, labor & over head incurred
during the PPE construction period plus:
e) Cost of employee benefits arising directly from the
construction or acquisition of PPE
f) Cost of site preparation
g) Installation and assembly cost
h) Testing cost (by deducting any net proceed from sell any
items produced while bringing the asset to its location)
i) Cost of professional fees
j) Borrowing cost
17
Cost that are not an item PPE will includes
• Cost incurred for the project research activity

• Training costs
• When an item of PPE is constructed by an entity abnormal
amounts of waste of material, labor and other resources
• Start up and pre-operating costs unless those costs are
necessary to bring the asset to its working condition
• Loss incurred before the asset reaches its planned
performance level
• Administrative and other General over head costs
18
Other Issues of Recognition
Asset acquired through production
Include Costs directly related to the units of
production, e.g. direct materials, direct labor and
Fixed and variable production overheads that are
incurred in converting materials into finished goods
Assets acquired through exchange
If the PPE asset acquired through exchange
should be measured at its fair value, but if the
acquired item can’t be measured due to various
reason at its fair value, its cost will be measured
at carrying amount of the asset given
19
Payment for PPE deferred for latter period
• If the payment for an item of PPE deferred (postponed) for a later

period (i.e., for over 2 years period) , the value for PPE should be
discounted by a difference between present value of future
payment
Example No. 1:
• If for example our entity purchase a machine, that will going to be
paid on the following Instalment base
• Total cost of the Machine Birr 800,000.00
• Additional cost incurred during transit Birr 60,000.00 (already
paid)
• Advance payment to be Birr 200,000.00
• The remaining to be paid in 5 years Birr 600,000.00
• Yearly payment made beginning of year Birr 120,000.00
• Incremental borrowing rate is 5%
• PVOA of 1 for 5 installment at 5%=4.32948
20
Payment differed continued
• The present value of the remaining five future liability
payments of 120,000 ETB, discounted at 5% will be equal to
ETB 519,538 (120,000 X 4.32948)
• The Initial total cost of the machine will be 779,538.00=
519538 + 200,000 + 60,000
• We will recognize the machine Initially:

Dr Cr
PP&E 779,538.00
Local purchase payable 519,538.00
Cash at bank (advance) 200,000.00
Cash at bank/material/labor etc., 60,000.00
21
A B C D E F G H I
E=D X 5% F=D + E G=I H=G1/5 I=G - H
Begin periodic payt. Principal Beg. Liability Interest Bal. with Beg. Bal. Depreciation End Bal.
ning at the payment balance after expense(5%) accrued
of beginning principal interest
year payment
1 - 519,538 25,976.90 545,514.90 779,538.00 (155,907.60) 623,630.40
2 120,000 98,724.25 425,514.90 21,275.75 446,790.65 623,630.40 (155,907.60) 467,722.80
3 120,000 103,660.47 326,790.65 16,339.53 343,130.18 467,722.80 (155,907.60) 311,815.20
4 120,000 108,843.49 223,130.18 11,156.51 234,286.69 311,815.20 (155,907.60) 155,907.60
5 120,000 103,000.00 114,286.69 5,714.35 120,000.00 155,907.60 (155,907.60) 0.00
10 120,000 0 0 0 0 0.00 (779,538.00 0
22
Subsequent accounting action that should be taken at
the end of each fiscal period
End of first year/Beginning of 2nd year: End of 3rd year/Beginning of 4th year:
Dr Cr Dr Cr
Local purchase Pay. 94,023.10 Local purchase Pay. 103,660.47
Fin. charge (interest)… 25,976.90 Fin. charge (interest) 16,339.53
Cash at bank 120,000.00 Cash at bank 120,000.00
Dr Cr
Depreciation expense 155,907.60 End of 4th year/Beginning of 5th year:
Accumulated depreciation 155,907.60 Dr Cr
Local purchase Pay. 108,843.49
Remark: Depreciation expense will have similar Fin. charge (interest) 11,156.51
amount for 5 years Cash at bank 120,000.00
End of 2nd year/Beginning of 3rd year: End of 5th year/Beginning of 6th year:
Dr Cr Dr Cr
Local purchase Pay. 98,724.25 Local purchase Pay. 114,286.00
Fin. charge (interest) 21,275.75 Fin. charge (interest) 5,714.00
Cash at bank 120,000.00 Cash at bank 120,000.0
23
Subsequent Expenditures
a) Capitalized If The additional Expenditure incurred

The expenditure meets the definition of an asset
If the entity can demonstrate that the equipment is likely to
increase the economic life or efficiency of the related asset
b) Exclude:
• Additional cost paid on a fully depreciated asset, even if it is
major, is not capitalized. It is considered as expense in the
year in which the amount is paid
• Ordinary repairs (Replacement of minor parts, lubrication,
adjustments, cleaning and painting) are expenditures made to
maintain assets in operating condition; these maintenance
costs are not capitalized 24
De-recognition of PP&E
 In general, the carrying amount of PPE shall be derecognized

Whenever we dispose the asset (that is either on sale of the
asset or transfer it by donation) Or
When an asset has no future economic benefit from its use
due to the asset removal or disposal, it should be de-
recognized
Whenever it is not practical to determine the carrying amount
of the replaced part, the standard allows we can use the cost
of the replacement as an indication of what the cost of the
replaced part was at the time it was acquired or constructed
25
Example 2: Recognition and De-recognition of parts
• Our entity had constructed a 66 KV substation with an estimated useful

life 20 years for Birr 30 million due to the damage reached on the part of
the substation a decision made to replace the badly damaged power
transformer by a new one at a cost of 5 million birr.
• Our entity couldn’t know the original cost of the replaced transformer
therefore it uses the cost of the replacement part to estimate the carrying
value of the original transformer. With the help of the supplier, it
estimates that the cost would have been approximately 3 million Birr and
that this would have a remaining carrying value after 12 year’s
depreciation will be 1.2 million=(3million X8/20)
26
De-recognition example cont..
• Assuming that the damaged transformer returned to our store, the

accounting action for Recognition and De-recognition the replaced
transformer will be as follows
Dr CR
PPE new S/S P/Transformer 5,000,000.00
Accumulated depreciation 1,800,000.00
Stock Account Transformer 1,200,000.00
Cash at Bank/ Payables 5,000,000.00
PPE old S/S P/Transformer 3,000,000.00
27
Accounting action for gain/loss on disposal
For any Gain on disposal of PPE For any loss on disposal of PPE
Dr CR Dr CR
Accumulated depreciation xxx Accumulated depreciation xxx
Cash at Bank/ Receivable xxx Gain/loss on sale of PPE xxx
PP&E xxx PP&E xxx
Gain/loss on sale of PPE xxx
28
PPE Subsequent Measurement
General
IAS 16 allows one of two alternatives to
be chosen as the accounting policy for
measurement of PP&E after initial
recognition. These are:
 Cost model
 Revaluation model
29
• The choice made must be applied to an entire class of PP&E, which
means that not all classes are required to have the same policy. [IAS
16.29].
Under cost model carrying value of the asset will be determined as
follows
Carrying value = Cost of PPE – accumulated depreciation –
Accumulated impairment loss
On the other hand, under Revaluation model carrying value of the
asset will be determined as follows
Carrying value = Fair value of PPE – accumulated depreciation –
Accumulated impairment loss
• The difference between the two model is, when we use the cost
model we get the carrying value of PPE by deducting from the initial
cost of PPE
• While when we use revaluation model we will reach to the carrying
value of PPE by deducting from fair value of the asset
30
Fair value
Fair Value:- is the price that would be received to sell an asset or paid to transfer
liability in an ordinary transaction between market participant at a
measurement date.
• IFRSs permit or require entities to measure or disclose the fair value of assets,
liabilities or equity instruments, to measure fair value the IASB or the Board issued
IFRS 13
• Fair value is an exit price in the principal market, i.e. the market with the highest
volume and level of activity for the asset or liabilty.
• Active market: is a market in which transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing information on an ongoing
basis
• In the absence of a principal market, it is assumed that the transaction to sell the
asset or transfer the liability would occur in the most advantageous market.
• The most advantageous market is the market that would maximize the amount
that would be received to sell an asset or minimize the amount that would be paid
to transfer a liability, taking into account transport and transaction costs. In either
case, the entity must have access to the market on the measurement date. 31
The fair value hierarchy
The fair value
The fair value hierarchy classifies the inputs used to measure fair value into three
levels,
Level 1 Level 2 Level 3
Definition Is there a Quoted Inputs other than Unobservable
prices quoted prices included inputs
(unadjusted) in active within level 1 that are for the asset
markets for identical observable for the or liability
assets or liabilities asset or liability, either
that the entity can directly or indirectly
access at the
measurement date
Examples The price for a Interest rates and yield Projected
financial asset or curves observable at cash flows
financial liability commonly quoted used in a
for the identical asset intervals, implied discounted
is traded on an active volatilities, and credit cash flow
market (e.g. Tokyo spreads calculation 32
Stock Exchange
Fair value valuation technique(s)
• The fair value hierarchy focuses on prioritising the inputs used in valuation
techniques, not the techniques themselves. [IFRS 13.74].
a) Valuation adjustments
• In certain instances, adjustments to the output from a valuation technique may be
required to appropriately determine a fair value measurement in accordance with
IFRS 13. An entity makes valuation adjustments if market participants would make
those adjustments
b) Market Approach
• The market approach uses prices that market participants would pay or receive for
the transaction, for example, a quoted market price. The market price may be
adjusted to reflect the characteristics of the item being measured, such as its
current condition and location, and could result in a range of possible fair values.
c) Cost approach(current Replacement cost approach
• The cost approach reflects the amount that would be required currently to replace
the service capacity of an asset’
33
Fair value continued
• The measurement of amounts (whether recognized or only disclosed) that are
based on fair value will include the following:
 A non-current asset (or disposal group) held for sale measured at fair value less
costs to sell in accordance with IFRS 5 – Non-current Assets Held for Sale and
Discontinued Operations – where the fair value less costs to sell is lower than
its carrying amount;
 Inventories are measured at lower of cost or Net realizable value (fair value less
costs to sell), as per IAS 2;
 PP&E, Intangible asset and Investment property measured by using cost or
revaluation model
Biological assets, agricultural produce and produce growing on a bearer plant
measured at fair value less costs to sell in accordance with IAS 41 – Agriculture.
34
Depreciation & useful life
Depreciation
Deprecation:- is the result of systematic allocation of the
depreciable amount of an asset over estimated
life. The deprecation method will include
Straight line, Diminishing Balance, Number of
units of production
 Components of a depreciable item must be depreciate separately if
the items have :
Materially different consumption patterns
Different useful life
The item amount is significant compared with the total cost (for
Example engine of an air craft)
35
Depreciation continued
• Deprecation of PPE start when the asset is ready for use
• Depreciation of an asset ceases at earlier of the date that
 The asset classified as held for sale or
 Included in a disposal
 The date the asset derecognized
• An entity does not stop depreciating an asset merely because
 It has become idle
Has been retired from active use (unless the asset is fully depreciated)
• We don’t depreciate the land because land has an indefinite life. But, in
relation to leased lands since its service potential is consumed with time it
will depreciate during the lease term period (for example, if we have a 99
year lease right to use the land
36
Useful Life
 Useful life: is
a) The period over which an asset is expected to be available
for use by an entity; or
b) The number of production or similar units expected to be
obtained from the asset by an entity
 Useful life, depreciable amount and deprecation method
should be reviewed at least at the end of each financial year,
if there is any change it should be accounted as a change in
estimate, the effect of the changes to be recognized
prospectively over the remaining life of the asset, without
restatement of previous period.
37
Example :
• We will try to look by the following example,
how to take accounting action whenever the
change in PPE life years estimate occurs:
At the beginning of 2008 the Equipment was
purchased by birr 600,000.00.
Estimated life of the equipment initially was 6
years,
But, at the end of 2010 when we review the
life year of this asset it was found to be 5
years
38
2008 E.C. 2009 E.C. 2010 E.C.
Initial Cost of PPE 600,000.00 600,000.00 600,000.00
Initial life year estimate 6 years 6 years
Initial Deprecation 100,000.00 100,000.00

Reviewed life year 5 years
Cost of the asset …………….. …………………………… …………………………. 600,000.00
Less Accumulated Deprecation …........................ ……………………….. 200,000.00
Net Carrying value ………………………….. ……………………….. 400,000.00
Calculating new deprecation
value using the new remaining
useful life will be ……………….. Yearly deprecation for remaining 3
years 400,000/3= 133,333.33
Depreciation expense adjustment amount to be made for

the next remaining years will be as follows:
Dr Cr
Depreciation Expense 133,333.33
Accumulated depreciation 133,333.33
39
Impairment of PPE
General
In principle an asset is impaired when an entity will not be
able to recover that asset’s carrying value, either through
using it or selling it.
If circumstances arise which indicate assets might be
impaired, a review should be undertaken of their cash
generating abilities either through use or sale.
The purpose of the impairment review is to ensure that
tangible assets are not carried at a figure (i.e., carrying value)
greater than their recoverable amount (RA). This recoverable
amount is compared with the carrying value (CV) of the asset
to determine if the asset is impaired
40
Carrying Recoverable
Compared with
Value Amount
Hig her Of
Fair value less cost Value In

of Disposal use
41
Two sources of information for impairment
Internal sources External sources

 Obsolescence or physically
damaged goods  The fall in the asset market value that
is more significant than would
 Significant changes in extent or
normally expected from the passage
manner in which an asset is used of time or normal use
(such as Idle asset, plans to dispose
 A significant change in technological,
& discontinued operation of an
market, legal or economic
asset sooner than expected )
environment of the business
 Internal reporting, indicates that  An increase in market interest or
the economic performance of an market rate of return on investment
asset is or will be worse than likely to affect the discount rate
expected  the carrying amount of the net assets
of the entity exceeds its market
capitalisation
42
Cost Model
 How to determine the carrying value of PPE at year end

Cost model assumes that at the end of an entity accounting
period PPE should be carried at its carrying value less
Accumulated depreciation and accumulated impairment loss.
In order to investigate if there are any indicators for the
Impairment on our asset :
First, we will estimate the recoverable amount and compare
it with asset carrying amount
To get the recoverable amount, we should first compare Fair
value less cost of sale with Value in use and take the higher
from these two amounts
.
43
Cost model continued
 Then, to find the carrying value of the PP&E asset, we will
deduct from the cost of PPE accumulated depreciation and
Accumulated impairment loss.
 Then, if the carrying value is higher than the recoverable
amount, we will conclude that there is asset impairment and
then this difference will be written off as impairment loss in
the statement of profit or loss.
 Finally, in order to determine carrying value of the PPE that
should be shown on our balance sheet at the end of the
accounting period, we will deduct from the previous period
carrying value of the PPE asset the amount we find as
accumulated depreciation and Accumulated impairment loss
44
Example of subsequent measurement of using cost
model
 Assume that, at the end of year one, we have the following information to
check whether there is an asset impairment :
 Initial cost of the PPE: Birr 600,000.00
 PPE total Life years : 5
 Discount rate : 5%
 Deprecation Per year: Birr 120,000.00
 Accumulated depreciation for year 1 was Birr 120,000.00
 Fair value less costs to sell is assessed as Birr 450,000.00
 Value in use: is an estimate of cash flow the entity expects to drive from the
asset:
 Based on the information we get, the PPE is expected to generate cash flow in
each year birr 125,000 and for 4 years at a discount rate of 5% (see the
present value of annuity table)
 The present value for the asset will be 125,000 x3.5460=443,250
45
Answer
Based on the information given above, at the end of year
one we would we check If there are any indicators for the
Impairment of our asset, to do this first we will find the
recoverable amount in the following way:
The Recoverable amount = will be the higher of the two
amounts shown below: i.e., 450,000.00
Fair value less cost of sale = 450,000.00

Value in use = 443,250.00
Then, we will compare recoverable amount (the higher
amount we found in the above) with the carrying amount
of the asset
The Carrying Amount (CA) = Net value of the asset
Carrying Value =Initial Cost –accumulated Depreciation -
accumulated Impairment
480,000.00 = 600,000 - 120,000 – 0.00 (no
accumulated impairment)
Based on this example, the carrying value of the asset of
Birr 480,000 is greater than the recoverable amount of Birr
450,000.00, therefore we can conclude that there is asset
impairment loss of birr 30,000.
46
Example continued
• Based on this example, the carrying value of the asset of
Birr 480,000 is greater than the recoverable amount of
Birr 450,000.00, therefore we can conclude that there is
asset impairment loss of birr 30,000.
• Based on this information, to recognize this impairment
loss we will take the following accounting action at the
end of year one:
Dr CR
Impairment loss 30,000.00
Accumulated impairment 30,000.00
47
Impairment Reversal
 The impairment reversal will take place, only when the condition that leads to
their original impairment lifted
 In the previous section, we have said that if the recoverable amount (RA) less than
the carrying amount (CA) of the asset, we say there is impairment due to a fall in
the value of the asset and therefore value of the asset should be written down to
its recoverable amount and should be charged as an expense in the profit and loss
statement.
 On the other hand, if the recoverable amount greater than the carrying value the
impairment reversal will take place. But, this happen up to ceiling (if there no any
previous impairment loss balance on the impairment loss account do nothing)
 The principle applied in here is that the asset should not be carried above their
recoverable amount
 In general, when the Recoverable Amount greater than the Carrying amount, the
impairment reversal will take place. But, this happen up to ceiling through
profit/loss statement.
48
Example for Impairment Reversal
• Initial information: Similar On the 2nd year the condition for Impairment
• Asset Value: 600,000.00 lifted:
• Life years : 5 years • Recoverable Amount 500,000
• Residual value: 0 Carrying value:
• • Accumulated Impairment balance (30,000)
• At the end of year 1 Accumulated Depreciation:
• The asset impaired: • For the 1st year 120,000
• Cost of asset 600,000 • For the 2 year 600,000-
nd
• Accumulated Depreciation 120,000 120,000-30,000= 450,000/4 = 112,500

• Carrying value 480,000 • Accumulated depreciation = (232,500)
• Vs • CV=600,000-30,000-232,500= 337,500
• Recoverable value 450,000 Since RA > CA , impairment have been lifted,
• Asset Impairment 30,000 because the recoverable amount (500,000)
greater than the carrying value 337,500 but
• Impairment Adjustment the adjustment should not exceed the ceiling
• Dr Cr
• Loss on Impairment 30,000
• Accumulated Impairment 30,000
49
Example continued
•Ceiling at the end of each year will be • The ceiling at the end of year 2 is 360,000
calculated by deducting the initial • The carrying value 337,500
deprecation amount 120,000 • Impairment to be lifted will be 22,500
Year Ceiling Adjustment for impairment recovery
600,000 Dr Cr
• End of year 1 480,000 Accumulated impairment 22,500
• End of year 2 360,000 Impairment Loss 22,500
ceiling
• End of year 3 240,000
• End of year 4 120,000
• End of year 5 0
50
Revaluation model
General
 If we choose to use this model, revaluation are to occur with sufficient regularity
that will be at the end of each accounting period.
 The frequency of revaluations depends upon the changes in fair values of PPE
 For PPE only with insignificant changes in fair value, it is necessary to revalue the
item only every three or five year
 Once an item of PPE is revalued all items of the same class to be revalued.
 The carrying value of PPE will be revalued to its fair value (usually it will be the
current market value of PPE).
 PPE whose fair value can be measured reliably shall be carried at a revalued
amount
 The revalued amount is fair value of the asset at the date of revaluation less any
subsequent accumulated depreciation and subsequent accumulated Impairment
losses
51
Rules of revaluation
 During Initial Revaluation

 Gains – goes to other comprehensive income – revaluation surplus (OCI)
 Loss – goes to profit & loss (P&L)
 During subsequent revaluation

 Gains – goes to P&L to the extent of reversing previous losses; the remainder goes
to OCI
 Losses – goes to OCI to the extent of reversing gains in OCI; the remainder goes to
P&L
 The decrease recognized in OCI reduces the amount accumulated in equity under
the heading of Revaluation Surplus
52
Example for Revaluation
PPE start at a cost of Birr 100,000.00

T1 Revalued to Birr 120,000.00 For an upward revaluation T3
T2 Revalued to Birr 90,000.00 Dr CR
T3 Revalued to Birr 110,000.00 PP&E 20,000.00
T4 Revalued to Birr 140,000.00 Revaluation surplus 10,000.00
For an upward revaluation T1 Loss on Revaluation 10,000.00
Dr CR
PP&E 20,000.00
Revaluation surplus 20,000.00
For an upward revaluation T4
For dawn ward revaluation T2 Dr CR
Dr CR PP&E 30,000.00
Revaluation surplus 20,000.00 Revaluation surplus 30,000.00
Loss on revaluation 10,000.00
PPE 30,000.00
53
Advantages and disadvantages of using the revaluation
method
Advantages Disadvantages
• Higher asset value = • Higher deprecation = lower

stronger balance sheet net income
• Better debt to equity • Losses go through P&L
• Better comprehensive • No benefit on ultimate sale
income if asset increase in since asset already valued
value at FV; little or no gain on
sale of asset on P&L
54
Terms definitions
Term Definition
PP&E’s are Property, Plant & Equipment assets held for use in the production
or supply of goods or services, for rental to others, or for
administrative purposes
Asset An asset is a resource: [IAS 38.8]
(a) controlled by an entity as a result of past events; and
(b) from which future economic benefits are expected to flow to the
entity
Control The power to obtain the future economic benefits flowing from the
underlying resource and to restrict the access of others to those
benefits
Capitalization shall mean the process of recording of the cost of acquisition,
construction, major rehabilitation & maintenance and other
subsequent costs as PP&E or intangible assets in the book of our
accounts
55
Terms definitions
Term Definition
Deprecation Is the result of systematic allocation of the depreciable amount of
an asset over estimated life.
Impairment loss The amount by which the carrying amount of the asset exceeds its
recoverable amount
Carrying amount The amount at which the asset is recognized in the statement of
financial position after deducting any accumulated amortization
and accumulated impairment losses thereon
Value in use Is an estimate of cash flow the entity expects to drive from the
asset
56
Definition continued
Fair value The price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at
the measurement date
Active market A market in which transactions for the asset or liability take place
with sufficient frequency and volume to provide pricing
information on an ongoing basis
57
The end -5
Thank you
58
Course Title: Intermediate
Financial Acct.I
CHAPTER 1: DEVELOPMENT OF ACCOUNTING
PRINCIPLES AND PROFESSIONAL PRACTICE
Learning Objectives:
 The environment of Accounting
 Overview of Accounting Principles (IFRS Vs
GAAP)
 Financial reporting requirements in Ethiopia
 The IASB and its governance structure
 List of IASB pronouncements
 The IASB’s conceptual framework for financial reporting
 IFRS-based Financial Statements (IAS 1)
Sunday, June 18, 2023
Compiled by: Megersa H (MSc) 2

1.1 The environment of Accounting
 Accounting, like other social science disciplines

and human activities, is largely a product of social,
economic, political and legal conditions,
constraints, and influences environment.
 Modern accounting is the product of many

influences and conditions, three of which deserve
special consideration are:
Sunday, June 18, 2023 Compiled by: Megersa H (MSc) 3
Environment of Acc..
 For purposes of study and practice, the discipline of

accounting is commonly divided into the following areas or
subsets: intermediate financial accounting, managerial (cost)
accounting, tax accounting, and not- for- profit (public sector)
accounting.
 Intermediate Financial accounting a specific branch of
accounting involving a process of recording, summarizing,
and reporting of financial statements relative to the
enterprise as a whole for use by parties both internal and
external to the enterprise.

Environment of Acc..
 Managerial (cost) accounting It is designed to
provide decision-making information for internal
users.
 Tax accounting is the subsector of accounting that
deals with the preparations of tax returns and tax
payments by individuals, businesses, corporations
and other entities.
 Nonprofit accounting is the unique process by
which nonprofits plan, record, and report upon their
finances.

1.2 Overview of Accounting Principles (IFRS Vs GAAP)
 Great strides have been made by the FASB of US and the

IASB of UK to converge the content of U.S. GAAP & IFRS.
 There is continued support for the objective of a single set of
high-quality, globally accepted accounting standards.
 Both are guiding principles that help in the preparation and
presentation of a statement of accounts.
 A professional accounting body issues them. Both of the two
provides relevance, reliability, transparency, comparability,
understandability of the financial statement.

What is IFRS?
 IFRS is International Financial Reporting

Standards (IFRS) are a Set of accounting
standards developed by the International
Accounting Standards Board (IASB) in 2001.
 International Financial Reporting Standards (IFRS)
are a set of accounting rules for the financial
statements of business entities that are intended to
make them consistent, transparent, and easily
comparable around the world.

IFRS
 It is currently the required accounting framework
in more than 120 countries including Ethiopia.
 IFRS requires businesses to report their financial
results and financial position using the same
rules; this means that, without any fraudulent
manipulation, there is considerable uniformity in
the financial reporting of all businesses using
IFRS, which makes it easier to compare and
contrast their financial results.

Generally Accepted Accounting Principles (GAAP)
 IFRS is used primarily by businesses reporting their financial

results anywhere in the world except the United States.
 Generally Accepted Accounting Principles, or GAAP, is the

accounting framework used in the United States. GAAP is
much more rules-based than IFRS.
 IFRS focuses more on general principles than GAAP, which

makes the IFRS body of work much smaller, cleaner, and
easier to understand than GAAP.

Principles-Based vs. Rules-Based Standards
 IFRS are referred to as being principles-based standards

 Provide core principles (objectives) with minimum
guidance.
 They are more loosely framed, allowing for professional
judgment to be applied
 The judgments are expected to be consistent with clear
conceptual framework
 Results in accounting that is more flexible to deal with
unique economic and business circumstances
 Some argue that allowing professional judgment
introduces bias

US GAAP of FASB (1929) are referred to as
being rules-based standards:
 They are more prescriptive

 Provide a rule for every situation
 Body of knowledge too large and complicated
 Although more guidance is a comfort to some, it
becomes difficult to ensure that the standards
are all consistent.

Benefits of IFRS
 It benefits the economy by increasing the growth of its
international business.
 By encouraging the international investors to invest, it leads to
more foreign capital flows to the country.
 Financial statements prepared using a common set of
accounting standards help investors better understand
investment opportunities.
 The industry is able to raise capital from foreign markets at
lower cost if it can create confidence in the minds of foreign
investors that their financial statements comply with globally
accepted accounting standards.
 It offers accounting professionals more opportunities in any
part of the world if same accounting practices prevail
throughout the world.
Major Difference's of GAAP&IFRS
1) Inventory costing method
 IFRS doesn’t allow LIFO method
 US GAAP allows LIFO method
2) Reversal of inventory write-downs

 IFRS allows
US GAAP doesn’t allow
3) Valuation of property, plant, and equipment

 IFRS: Cost less accumulated depreciation (or) fair
value(revaluation)
 U.S.GAAP: Cost less accumulated depreciation

Differences …………….
4) Valuation of intangible assets
 IFRS: Cost less accumulated amortization (or) fair
value(revaluation)
 U.S GAAP: Cost less accumulated amortization.
Revaluation prohibited
5) Research and development expenditures
 IFRS:
 Research: expensed in the period incurred

 Development: that meet specified criteria: capitalized
 U.S GAAP: Both expensed in the period incurred
6) Contingencies
 IFRS: threshold for “probable” is defined as “more
likely than not” (greater than 50%)
 U.S. GAAP: accrue if it is probable and can be
reasonably estimated. GAAP defines probable as
“likely to occur” (a higher threshold of occurrence
than under IFRS)
7) Valuation of long-term contingencies
IFRS:present value—time value of money is material
U.S.GAAP: present value—only when timing of cash flows is
certain
8) Treatment of convertible debt
 IFRS: convertible debt is divided into its liability (bonds) and
equity (conversion option) elements
 U.S. GAAP: entire issue price is recorded as a liability
9) Cash inflows from interest and dividends received
 IFRS: either operating or investing cash flows
 U.S. GAAP: operating cash flows
10) Disclosure of noncash activities
 IFRS: Disallows presentation on the face of the statement and
requires reporting in a disclosure note
 U.S. GAAP: Reported either on the face of the statement of
cash flows or in a disclosure note

1.3 Financial reporting requirements in Ethiopia
 Ethiopia passed a financial reporting law in 2014 which
requires the use of IFRS by commercial businesses operating in
Ethiopia.
 Proclamation No. 847/2014
 Regulation No. 332/2014
 Accounting and Auditing Board of Ethiopia (AABE) is

established by Regulation No. 332/2014
 It is an autonomous government organ accountable to
MOFEC.
 It is headed by the Director General
 It has 12-member Board of Directors
 Monitor & control IFRS implementation in Ethiopia

Structure, strategic plan, and roadmap of AABE
The proclamation (No. 847/2014) requires:

 Commercial organizations to follow
 International Financial Reporting Standards (IFRS), or
 International Financial Reporting Standards for Small and

Medium Enterprises (IFRS for SME)
 Charities and societies to follow International Public Sector
Accounting Standards (IPSAS)
 Public auditors to follow International Standards for Auditing.
 Public interest entity (PIE) should use the full IFRS

AABE duties (among others)
 Issue standards and directives relating to financial reporting
and auditing and ensure their compliance.
 Receive and register financial statements of reporting entities
 Review and monitor the accuracy and fairness of FS to enforce
compliance with the reporting standards
 Register and license public auditors
 Oversee professional accountancy bodies
 Establish, publish and review a code of professional conduct
and ethics for certified public accountants and certified
auditors
 Conduct or arrange for the conduct of professional
examination for the purpose of registering certified public
accountants
roadmap of AABE Reporting
SME
Reporting Date:
Other PIEs 2011
Reporting Date:
Significant PIEs
Transition Date: SMEs
2010/11
•IFRS rep
Transition Date: other SM
Other PIEs •IFRS/Quarterly •Audit p
2009/10
reporting by other •Stakeho
Transition Date: PIEs commun
IFRS Competency
Significant PIEs
2008/09 •IFRS/Quarterly •Audit procedures •Complia
reporting by sig. PIEs •Stakeholders monitori
•Audit procedures communications Other PIE
•Stakeholders •Compliance
2007/08 •Transition monitoring for sig.
communications
adjustments •Other PIE’s prepare PIEs
•Prepare IFRS opening SFP & •SMEs prepare
•Awareness opening SFP and
•Assessment
opening SFP comparative figs
•Amendment of laws, •Dry Runs for •Dry Runs for other comparative figs
regulation and directives “significant PIEs” PIEs •Stakeholders
•Training •SME’s commence communications
•Planning/impact analysis
•Prepare •Dry Runs for SMEs
transition planning
•Transition adjustments/ comparative
opening BS for sig. PIEs figures
Realization and standardization of statutory reporting

1.4 The IASB and its governance structure
 The current structure of the IASB's governance network

includes the Monitoring Board, IFRS Foundation, IASB,
IFRS Interpretations Committee, and IFRS Advisory Council
for a total of 108 individual actors.
 See the organizational structure/governance structure of IASB
in the following slide.

1.5 List of IASB pronouncements
 The IASB has issues Annual Improvements to IFRS Standards.

The IASB issues three major types of pronouncements:
1. International Financial Reporting Standards
2. Conceptual Framework for Financial Reporting
3. International Financial Reporting Standards Interpretations

(1) International Financial Reporting Standards:
 Financial accounting standards issued by the IASB are referred to

as International Financial Reporting Standards (IFRS).
 The IASB has issued 17 of these standards to date, covering in
2001).

List of 17 IFRS: Use this link: https://www.iasplus.com/en/standards/ifrs
 IFRS 1: First-time Adoption of  IFRS 9: Financial Instruments

International Financial  IFRS 10: Consolidated Financial
Reporting Standards Statements
 IFRS 2: Share-based Payment  IFRS 11: Joint Arrangements
 IFRS 3: Business  IFRS 12: Disclosure of Interests

Combinations in Other Entities
 IFRS 4- Insurance Contracts  IFRS 13: Fair Value
with limited exceptions Measurement
 IFRS 5: Non-current Assets  IFRS 14: Regulatory Deferral
Held for Sale and Discontinued Accounts
Operations  IFRS 15: Revenue from
 IFRS 6: Exploration for and Contracts with Customers
Evaluation of Mineral  IFRS 16: Leases
Resources
 IFRS 17: Insurance Contract
 IFRS 7: Financial Instruments:
applied to all insurance types
Disclosures
 IFRS 8: Operating Segments
(1) International Financial Reporting Standards:
 The committee issued 41 IASs, the list of International

Accounting Standards (IAS) for detailed information
 Use this link: https://www.iasplus.com/en/standards/ias

the list of 41 International Accounting Standards (IAS)
Name Issued
IAS 1 Presentation of Financial Statements 2007*
IAS 2 Inventories 2005*
IAS 3 Consolidated Financial Statements 1976
IAS 4 Depreciation Accounting 1999
IAS 5 Information to Be Disclosed in Financial Statements 1976
IAS 6 Accounting Responses to Changing Prices 1999
IAS 7 Statement of Cash Flows 1992
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 2003
IAS 9 Accounting for Research and Development Activities
IAS 10 Events After the Reporting Period 2003
IAS 11 Construction Contracts 1993
IAS 12 Income Taxes 1996*
IAS 13 Presentation of Current Assets and Current Liabilities 1998
IAS 14 Segment Reporting 1997
IAS 15 Information Reflecting the Effects of Changing Prices 2003
IAS 16 Property, Plant and Equipment 2003*
IAS 17 Leases 2003*
IAS 18 Revenue 1993*
IAS 19 Employee Benefits 2011
Accounting for Government Grants and Disclosure of Government
IAS 20 1983
Assistance
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001

the list of 41 International Accounting Standards (IAS)
IAS 21 The Effects of Changes in Foreign Exchange Rates 2003*
IAS 22 Business Combinations 1998*
IAS 23 Borrowing Costs 2007*
IAS 24 Related Party Disclosures 2009*
IAS 25 Accounting for Investments 2004
IAS 26 Accounting and Reporting by Retirement Benefit Plans 1987
IAS 27 Separate Financial Statements 2011
IAS 27 Consolidated and Separate Financial Statements 2003
IAS 28 Investments in Associates and Joint Ventures 2011
IAS 28 Investments in Associates 2003
IAS 29 Financial Reporting in Hyperinflationary Economies 1989
Disclosures in the Financial Statements of Banks and Similar Financial
IAS 30 1990
Institutions
IAS 31 Interests In Joint Ventures 2003*
IAS 32 Financial Instruments: Presentation 2003*
IAS 33 Earnings Per Share 2003*
IAS 34 Interim Financial Reporting 1998
IAS 35 Discontinuing Operations 1998
IAS 36 Impairment of Assets 2004*
IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1998
IAS 38 Intangible Assets 2004*
IAS 39 Financial Instruments: Recognition and Measurement 2003*
IAS 40 Investment Property 2003*
IAS 41 Agriculture 2001
(2) Conceptual Framework for Financial Reporting
 The Conceptual Framework for Financial Reporting sets

cohesive set of interrelated concepts—a conceptual
framework—that will serve as tools for solving existing and
emerging problems in a consistent manner of F/R.
 For example, the objective of general-purpose financial
reporting discussed earlier is part of this Conceptual
Framework.

(3) International Financial Reporting Standards Interpretations
 Interpretations issued by the IFRS Interpretations Committee are also

considered authoritative and must be followed. The IFRS
Interpretations Committee has issued about 23 of these interpretations
to date (see this link https://www.iasplus.com/en/standards/ifric ).
 The IFRS Interpretations Committee helps the IASB in

many ways. For example, emerging issues often attract
public attention. If not resolved quickly, these issues can
lead to financial crises and shame. They can also undercut
public confidence in current reporting practices.

List of 23 IFRIC Interpretations of IFRS Interpretations
Committee
Sn Name Issued
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities 2004
IFRIC 2 Members' Shares in Co-operative Entities and Similar Instruments 2004
IFRIC 3 Emission Rights 2004
IFRIC 4 Determining Whether an Arrangement Contains a Lease 2004
Rights to Interests arising from Decommissioning, Restoration and Environmental
IFRIC 5 2004
Rehabilitation Funds
Liabilities Arising from Participating in a Specific Market - Waste Electrical and Electronic
IFRIC 6 2005
Equipment
Applying the Restatement Approach under IAS 29 Financial Reporting in Hyperinflationary
IFRIC 7 2005
Economies
IFRIC 8 Scope of IFRS 2 2006
IFRIC 9 Reassessment of Embedded Derivatives 2006
IFRIC 10 Interim Financial Reporting and Impairment 2006
IFRIC 11 IFRS 2: Group and Treasury Share Transaction 2006
IFRIC 12 Service Concession Arrangements 2006
IFRIC 13 Customer Loyalty Programs 2007
IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their
IFRIC 14 2007
Interaction
IFRIC 15 Agreements for the Construction of Real Estate 2008
IFRIC 16 Hedges of a Net Investment in a Foreign Operation 2008
IFRIC 17 Distributions of Non-cash Assets to Owners 2008
IFRIC 18 Transfers of Assets from Customers 2009
IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments 2009
IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine 2011
IFRIC
Sunday, 21 2023 Levies
June 18, Compiled by: Megersa H (MSc) 2013 31
IFRIC 22 Foreign Currency Transactions and Advance Consideration 2016
IFRIC 23 Uncertainty over Income Tax Treatments 2017
1.6 IASB conceptual Framework for F/R
 The Conceptual Framework for the Financial Reporting is a

basic document that sets objectives and the concepts for general
purpose financial reporting.
 It describes the basic principles for presentation and preparation
of financial statements in line with IFRS.
 Framework is not a standard itself. In cases, when there are no
specific rules for transaction and need to develop accounting
policy, then look to the Framework to its basic principles and
definitions.
 Sometimes, it may happen that the rules in that IFRS standard
will be contrary to what the Framework says, in this case, apply
the standard, not the Framework.

IASB’s Conceptual Framework for Financial

First Level: Basic Objective
 The objective of general-purpose financial reporting is to

provide financial information about the reporting entity
that is useful to present and potential equity investors,
lenders, and other creditors in making decisions about
providing resources to the entity.
 General-purpose financial reporting helps users who lack

the ability to demand all the financial information they
need from an entity and therefore must rely, at least
partly, on the information provided in financial reports.

Second Level: Fundamental Concepts
 The second level of IASB conceptual framework

deals with qualitative characteristics of accounting
information and basic elements of financial
statements.

(Hierarchy of Accounting Qualities)

Basic Elements of Financial Statements

Third Level: Recognition, Measurement, & Disclosure Concepts
 Here, we identify the concepts as basic assumptions,

principles, and a cost constraint.
 Five Basic Assumptions
 Economic Entity Assumption
 Going Concern Assumption
 Monetary Unit Assumption
 Periodicity Assumption
 Accrual Basis of Accounting

Four Basic Principles of Accounting
1) Measurement Principles (Historical cost or fair value)
2) Revenue Recognition Principle
3) Expense Recognition Principle
4) Full Disclosure Principle (foot notes to financial statements)
Cost Constraint
In providing information with the qualitative characteristics that
make it useful, companies must consider an overriding factor that
limits (constrains) the reporting. This is referred to as the cost
constraint. In order to justify requiring a particular measurement or
disclosure, the benefits perceived to be derived from it must exceed
the costs perceived to be associated with it.

1.7. IFRS-based Financial Statements (IAS1)
 IAS 1 refers to financial statements as “a structured

representation of the financial position and financial
performance of an entity”.
 IAS1-Prescribes the basis for presentation of general purpose
financial statements to ensure comparability within the entity and
with other entities.
 Sets out overall requirements for the presentation of financial
statements.
 provides guidelines for financial statements structure and
minimum requirements for their content.

Objective of IFRS financial statement
 As per IFRS, a financial statement form should present true and

fair picture of the business affairs of an organization. Since these
statements are used by different constituents of the
regulators/society, they are required to present the true view of
financial position of the organization.
 As per IFRS, the main qualitative characteristics required in its
main financial statement forms include:
 Understandability
 Relevance
 Reliability
 Comparability
Objective of Financial statements
 They are a principal means through which an entity

communicates its financial information to external
parties.
 They provide information about the financial
position, financial performance and cash flows of an
entity to a wide range of users in making economic
decisions.
 They also show the results of the management’s
stewardship of the resources entrusted to it.

Identification of financial statements:
IAS 1 also requires disclosure of :

1) Name of the reporting entity
 Whether the accounts cover the single entity or a

group of entities ( report type)
2) The date of the end of the reporting period or the
period covered by the financial statements (as
appropriate)
3) The presentation currency.
4) The level of rounding used in presenting amounts in
the financial statements(thousands, millions…)

Complete Set of Financial Statements:
IAS 1 defines a complete set of financial statements to be

comprised of the following:
A. Statement of financial position.
B. Statement of Comprehensive Income
C. Statement of changes in equity.
D. Statement of cash flows.
E. Notes to the financial statements.

Statement of financial position
 Cash and cash equivalents
 Assets classified as held for sale under IFRS 5
 Trade and other payables
 Provisions
 Financial liabilities
 Current tax liabilities and assets as in IAS 12
 Deferred tax liabilities and assets
 Liabilities included in disposal groups under IFRS 5
 Non-controlling interests
 Issued capital and reserves
 An entity can present additional line items, headings and subtotals in
Statement of Financial Position, provided such presentation will give
more relevant and reliable information to the users for their
understanding of the entity’s financial position.
The current/non-current distinction
• An entity must present current and non-current, assets and
Liabilities as separate classifications on the face of the statement of
financial position .
• However, if the entity is for example financial institutions,
presentation in the order of liquidity (decreasing order) but
product based companies presentation is in order of increasing
liquidity provides more reliable and relevant information than a
current/non-current presentation.
• whichever method of presentation is used, the entity should
disclose amounts expected to be recovered/settled within and after
more than twelve months of the reporting date (IAS 1.61).
• The distinction between current and non-current items depends on the length of
the entity’s operating cycle. However, when the entity’s normal operating cycle is
not clearly identifiable, it is assumed to be twelve months.

B) Statement of Comprehensive Income (Format)
 IAS 1 allows income and expense items to be presented

either:
 In a single statement of profit or loss and other
comprehensive income; or
 In two statements: a separate statement of profit or loss
and statement of other comprehensive income.
 The statement should also Shaw Profit or loss and
comprehensive income for the period attributable to:
 Non-controlling interests
 Owners of the parent

Elements Statement of comprehensive income
A. Profit or loss (Normal business operation continued/ discontinued)

B. item of other comprehensive income(OCI) which include:
 Revaluation surplus of PPE and intangible assets;
 Re-measurements on defined benefit plans
 Gains and losses arising from translating the financial statements
of a foreign operation
 Gains and losses on re-measuring available-for-sale financial
assets
 Gains and losses on re-measuring hedging instruments .
 Share of OCI of associates and joint ventures.
 Foreign exchange gains and losses arising from translations of
financial statements of a foreign operation (IAS 21)
C. Total comprehensive income.
= Profit or loss + Other comprehensive income
C) A statement of changes in equity for the reporting period
 This statement is meant to show the movement in equity during

the accounting period. It reflects various components of the
equity
 Distribution of total comprehensive income during the year to
various equity components
 Distribution of dividend to owners and other transaction with
owners like issue of shares.
 Effect of changes in accounting policies: this statement makes
reconciliation of balance of equity components at the beginning
and end of the accounting period if retrospective adjustments
and retrospective restatements are made to the opening balance
of retained earnings due to errors or change in accounting
policy.( Two periods statement of equity are presented)
Shareholders’ equity comprises the
following elements:
 Net profit or loss during the accounting period

attributable to shareholders
 Increase or decrease in share capital reserves
 Dividend payments to shareholders
 Gains and losses recognized directly in equity
 Effect of changes in accounting policies
 Effect of correction of prior period error

Statement of Changes in Equity according to IAS1
Items Share capital Retained Revaluation surplus Total equity
earnings
Reporting currency USD USD USD USD
Balance at 1 January 2019 100,000 30,000 - 130,000
Changes in accounting policy - - - -
Correction of prior period error - - - -
Restated balance 100,000 30,000 - 130,000
Changes in equity for the year
2019
Issue of share capital - - - -
Income for the year - 25,000 - 25,000
Revaluation gain - - 10,000 10,000
Dividends - (15,000) - (15,000)
Balance at 31 December 2019 100,000 40,000 10,000 150,000
Changes in equity for the year 2020
Issue of share capital - - - -

Income for the year - 30,000 - 30,000
Revaluation gain - - 5,000 5,000
Dividends - (20,000) - (20,000)
Balance at 31 December 2020 100,000 50,000 15,000 165,000
54
Sunday, June 18, 2023 Compiled by: Megersa H (MSc)
Opening Balance
 This represents the balance of shareholders’
equity reserves at the start of the comparative
reporting period as reflected in the prior period’s
statement of financial position. The opening
balance is unadjusted in respect of the correction
of prior period errors rectified in the current period
and also the effect of changes in accounting
policy implemented during the year as these are
presented separately in the statement of changes
in equity.

Effect of Changes in Accounting Policies
 Since changes in accounting policies are applied

retrospectively, an adjustment is required in stockholders’
reserves at the start of the comparative reporting period
to restate the opening equity to the amount that would be
arrived if the new accounting policy had always been
applied.

Effect of Correction of Prior Period Error
 The effect of correction of prior period errors must be

presented separately in the statement of changes in equity
as an adjustment to opening reserves.
 The effect of the corrections may not be netted off against
the opening balance of the equity reserves so that the
amounts presented in current period statement might be
easily reconciled and traced from prior period financial
statements.

Restated Balance
 This represents the equity attributable to stockholders at
the start of the comparative period after the adjustments in
respect of changes in accounting policies and correction of
prior period errors as explained above.
Changes in Share Capital
 Issue of further share capital during the period must be added in
the statement of changes in equity whereas redemption of shares
must be deducted therefrom. The effects of issue and redemption
of shares must be presented separately for share capital reserve
and share premium reserve.

Dividends
 Dividend payments issued or announced during the

period must be deducted from shareholder equity as
they represent distribution of wealth attributable to
stockholders.
 Income / Loss for the period
 This represents the profit or loss attributable to
shareholders during the period as reported in the
income statement.

Changes in Revaluation Reserve
 Revaluation gains and losses recognized during the

period must be presented in the statement of changes in
equity to the extent that they are recognized outside the
income statement.
 Revaluation gains recognized in income statement due to

reversal of previous impairment losses however shall not
be presented separately in the statement of changes in
equity as they would already be incorporated in the profit
or loss for the period.

Other Gains & Losses
 Any other gains and losses not recognized in the income

statement may be presented in the statement of changes in
equity such as actuarial gains and losses arising from the
application of IAS 19 Employee Benefit.
 Closing Balance
 This represents the balance of shareholders’ equity reserves
at the end of the reporting period as reflected in the
statement of financial position.

Purpose & Importance of Statement of changes in equity
 Statement of changes in equity helps users of financial statement to identify the

factors that cause a change in the owners’ equity over the accounting periods.
Whereas movement in shareholder reserves can be observed from the balance
sheet, statement of changes in equity discloses significant information about
equity reserves that is not presented separately elsewhere in the financial
statements which may be useful in understanding the nature of change in equity
reserves.
 Examples of such information include share capital issue and redemption

during the period, the effects of changes in accounting policies and correction
of prior period errors, gains and losses recognized outside income statement,
dividends declared and bonus shares issued during the period.

d) Statement of Cash Flows
 Statement of Cash Flows, also known as Cash Flow

Statement, presents the movement in cash flows over
the period as classified under operating, investing and
financing activities.
 Example
Following is an illustrative cash flow statement presented
according to the indirect method suggested in IAS 7
Statement of Cash Flows:

Statement of Cash Flows for the year ended 31 December 2020
figures in USD
Years 2020 2019
Cash flows from operating activities
Profit before tax 40,000 35,000
Adjustments for:
+Depreciation 10,000 8,000
+Amortization 8,000 3,000
+Impairment losses 12,000 3,000
+Bad debts written off 500 -
+Interest expense 800 1,000
-Gain on revaluation of investments (21,000) -
-Interest income (11,000) (9,500)
-Dividend income (3,000) (2,500)
-Gain on disposal of fixed assets (1,200) (1,850)
Cash balance till now 35,100 40,650
Working Capital Changes:
Increase in inventory (1,000) 550
Decrease in trade receivables 3,000 1,400
Increase in trade payables 2,500 (1,300)
Cash generated from operations 39,600 41,300
Dividend paid (8,000) (6,000)
Income tax paid (12,000) (10,000)
Net cash from operating activities (A) 19,600 (25,300)
Statement of Cash Flows ………………
Items 2020 2019
(B)Cash flows from investing activities
Capital expenditure- (100,000) (85,000)
Purchase of investments- (25,000) -
Dividend received 5,000 3,000
Interest received 3,500 1,000
Proceeds from disposal of fixed assets 18,000 5,500
Proceeds from disposal of investments 2,500 2,200
Net cash used in investing activities (B) (96,000) (73,300)
(C)Cash flows from financing activities
Issuance of share capital+ 1,000,000 -

Bank loan received+ - 100,000
Repayment of bank loan- (100,000) -
Interest expense- (3,600) (7,400)
Net cash from financing activities (C) 896,400 92,600
Net increase in cash & cash equivalents (A+B+C) 820,000 44,600
Cash and cash equivalents at start of the year 77,600 33,000
Cash and cash equivalents at end of the year to 897,600 77,600
the statement of financial position
Basis of Preparation
 Statement of Cash Flows presents the movement in cash and cash
equivalents over the period.
 Cash and cash equivalents generally consist of the following:
 Cash in hand.
 Cash at bank.
 Short term investments that are highly liquid and involve very low risk of
change in value (therefore usually excludes investments in equity
instruments).
 Bank overdrafts in cases where they comprise an integral element of the
organization’s treasury management (e.g. where bank account is allowed
to float between a positive and negative balance (i.e. overdraft) as
opposed to a bank overdraft facility specifically negotiated for financing a
shortfall in funds (in which case the related cash flows will be classified
under financing activities).

Basis of Preparation
 As income statement and balance sheet are prepared

under the accruals basis of accounting, it is necessary
to adjust the amounts extracted from these financial
statements (e.g. in respect of non cash expenses) in
order to present only the movement in cash inflows and
outflows during a period.
 All cash flows are classified under operating, investing

and financing activities as discussed below.

a) Operating Activities
 Cash flow from operating activities presents the movement

in cash during an accounting period from the primary
revenue generating activities of the entity.
 For example, operating activities of a hotel will include cash
inflows and outflows from the hotel business (e.g. receipts
from sales revenue, salaries paid during the year etc), but
interest income on a bank deposit shall not be classified as
such (i.e. the hotel’s interest income shall be presented in
investing activities).
 Profit before tax as presented in the income statement could
be used as a starting point to calculate the cash flows from
operating activities.

Operating Activities
 Following adjustments are required to be made to the profit before tax
to arrive at the cash flow from operations:
1) Elimination of non-cash expenses (e.g. depreciation, amortization,
impairment losses, bad debts written off, etc).
2) Removal of expenses to be classified elsewhere in the cash flow
statement (e.g. interest expense should be classified under financing
activities).
3) Elimination of non-cash income (e.g. gain on revaluation of
investments).
4) Removal of income to be presented elsewhere in the cash flow
statement (e.g. dividend income and interest income should be
classified under investing activities unless in case of for example an
investment bank).
5) Working capital changes (e.g. an increase in trade receivables must
be deducted to arrive at sales revenue that actually resulted in cash
inflow during the period).
b) Investing Activities
 Cash flow from investing activities includes the movement in
cash flow as a result of the purchase and sale of assets other
than those which the entity primarily trades in (e.g. inventory).
So for example, in case of a manufacturer of cars, proceeds
from the sale of factory plant shall be classified as cash flow
from investing activities whereas the cash inflow from the sale
of cars shall be presented under the operating activities.
 Cash flow from investing activities consists primarily of the
following:
 Cash outflow expended on the purchase of investments
and fixed assets.
 Cash inflow from income from investments.
 Cash inflow from disposal of investments and fixed assets.
c) Financing activities
 Cash flow from financing activities includes the movement
in cash flow resulting from the following:
 Proceeds from issuance of share capital, debentures & bank loans

were considered as Cash inflow
 Cash outflow expended on the cost of finance (i.e. dividends and

interest expense).
 Cash outflow on the repurchase of share capital and repayment of

debentures & loans.

Purpose & Importance
 Statement of cash flows provides important insights about

the liquidity and solvency of a company which are vital for
survival and growth of any organization.
 It also enables analysts to use the information about historic

cash flows to form projections of future cash flows of an
entity (e.g. in NPV analysis) on which to base their economic
decisions.
 By summarizing key changes in financial position during a

period, cash flow statement serves to highlight priorities of
management.
Purpose & Importance
 For example, increase in capital expenditure and

development costs may indicate a higher increase in
future revenue streams whereas a trend of excessive
investment in short term investments may suggest lack
of viable long term investment opportunities.
 Furthermore, comparison of the cash flows of different
entities may better reveal the relative quality of their
earnings since cash flow information is more objective
as opposed to the financial performance reflected in
income statement which is susceptible to significant
variations caused by the adoption of different
accounting policies.

Individual Assignment I (15%)
 List and write brief note on the following
 17 IFRSs
 23 IFRIC Interpretations
 41 IASs
Submission date: after one week (21/03/2014 E.C)

Chapter 2: Fair Value & Impairment
measurement
Learning objectives
 Fair Value measurement
 Impairment measurement
1
2.1 Fair value measurement
 Definition of fair value

 IFRS 13 defines fair value as the price that would be received
to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date (an exit price).
 IPSAS 17, defines fair value as 'the amount for which an
asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm's length transaction
2
Measurement of fair value
 Fair value measurement assumes that the transaction to
sell the asset or transfer the liability takes place in the
principal market for the asset or liability or, in the
absence of a principal market.
 IFRS 13 applies to all transactions and balances (whether
financial or non-financial), with the exception of: share-
based payment transactions accounted for under IFRS 2,
share-based payment, and leasing transactions within the
scope of IAS 17, Leases.
3
Fair value at initial recognition
 IFRS 13 indicates that an entity must determine the following to
arrive at an appropriate measure of fair value:
 (i) the asset or liability being measured (consistent with its unit of
account);
 (ii) the principal (or most advantageous) market in which an
orderly transaction would take place for the asset or liability;
 (iii) for a non-financial asset, the highest and best use of the asset
and whether the asset is used in combination with other assets or
on a stand-alone basis.
 (iv) the appropriate valuation technique(s) for the entity to use
when measuring fair value, focusing on inputs a market participant
would use when pricing the asset or liability; and
 (v) those assumptions a market participant would use when pricing
the asset or liability. 4
Fair Valuation techniques
IFRS 13 describes three valuation techniques that an entity might use
to determiner fair value as follows:
(i) the market approach. Uses the prices associated with actual
market transactions for similar or identical assets and liabilities to
derive a fair value. For example, the prices of securities held can be
obtained from a national exchange on which these securities are
routinely bought and sold.
(ii) the income approach. The income approach to fair value
measurement estimates the fair value of an entity, intangible assets, or
other assets and liabilities by calculating the present value of future
cash flows that the entity or asset is expected to generate over its
lifetime
(iii) The cost approach: reflects the amount that would be required
currently to replace the service capacity of an asset. This approach is
often referred to as current replacement cost and is typically used5 to
measure the fair value of tangible assets such as plant and equipment.
Fair value hierarchy
 Fair value measurements are categorized into a three-level

hierarchy as follows:
 Level 1: assets include listed stocks, bonds, funds, or any
assets that have a regular mark-to-market mechanism for
setting a fair market value. These assets are considered to have
a readily observable, transparent prices, and therefore a reliable
fair market value.
 Level 2: assets are financial assets and liabilities that do not
have regular market pricing, but whose fair value can be
determined based on other data values or market prices.
 Level 3: assets are financial assets and liabilities that are considered to be
the most illiquid and hardest to value. Assets and liabilities measured at fair
value on a recurring basis using significant unobservable inputs. Examples
of Level 3 assets include mortgage-backed securities (MBS), private equity
shares, complex derivatives, foreign stocks, and distressed debt. 6
Fair Value Disclosure
 IFRS 13 requires an entity to disclose information that

helps users of its financial statements assess both of the
following: [IFRS 13:91]
 for assets and liabilities that are measured at fair value on
a regular basis in the statement of financial position after
initial recognition, the valuation techniques and inputs
used to develop those measurements.
 for fair value measurements using significant
unobservable inputs (Level 3), the effect of the
measurements on profit or loss or other comprehensive
income for the period.
 Total gain/loss on in relation to fair value
 Purchase or sales of derivative securities at fair value
 the fair value measurement at the end of the reporting
period 7
2.2. Impairment: Definition
 The core principle in IAS 36 is that an asset must not be
carried in the financial statements at more than the highest
amount to be recovered through its use or sale. If the
carrying amount exceeds the recoverable amount, the
asset is described as impaired.
 IPSAS 21 and 26 define impairment as a loss in the future
economic benefits or service potential of an asset, over and
above the systematic recognition of the loss of the asset's
future economic benefits or service potential through
depreciation.
 In practice, assets are considered impaired when the book
value, or net carrying value, exceeds expected future cash
flows. This occurs if a business spends money on an asset,
but changing circumstances caused the purchase to
8
become a net loss.
Impairment Application exception
 IAS 36 applies to all assets except:

1) assets arising from construction contracts (-IAS 2)
2) deferred tax assets (-IAS 12)
3) assets arising from employee benefits (IAS 19)
4) financial assets (IAS 39)
5) investment property carried at fair value (IAS 40)
6) agricultural assets carried at fair value (IAS 41)
7) insurance contract assets (- IFRS 4)
8) non-current assets held for sale (-IFRS 5)
9
Impairment Application
 Therefore, IAS 36 applies to (among other assets):

1. land
2. Buildings
3. Machinery and equipment
4. investment property carried at cost
5. intangible assets
6. goodwill
7. investments in subsidiaries, associates, and joint
ventures carried at cost
8. assets carried at revalued amounts under IAS 16
and IAS 38
10
Key concepts
 In general, asset impairment indicates that an asset costs more to a business

than it is worth.
 Impairment loss: the amount by which the carrying amount of an asset
or cash-generating unit exceeds its recoverable amount
 Carrying amount: the amount at which an asset is recognized in the
balance sheet after deducting accumulated depreciation and
accumulated impairment losses
 Recoverable amount: the higher of : (a) the fair value less costs to sell
and (b) the value in use (i.e., the present value of future cash flows
expected to be derived from the CGU).
 Value in use: the present value of the future cash flows expected to be
derived from cash-generating unit or assets.
 Cash-generating Unit: is the smallest group of assets that includes the
asset and generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets.
11
Indications of impairment
 External sources:  Internal sources:

 market value declines  obsolescence or
 negative changes in physical damage
technology, markets,  asset is idle, part of a
economy, or laws restructuring or held
 increases in market for disposal
interest rates  worse economic
 net assets of the performance than
company higher than expected
market capitalization 12
Example on recoverable amount
For machinery, the details are given below.

a)Open market value of the machinery=$62,000.
b) The disposal cost (costs to sell) of machinery is
ignored.
c) The cash inflows will accrue to an amount of
$23,000 in the future for three years. The appropriate
discount rate is 10%.
Required: what is the recoverable amount of the
machinery?
13
Solution:
 Fair value = $62,000
 Calculation of Value in use will be –
 Value in Use = Regular cash flow*(PVFOA

@r=10%, n=3)
Value in uses= 23,000*2.48685
= $57,198
 Thus, the recoverable amount of the machinery shall be
higher of the FVLCTS ($62,000) and Value in Use ($57,
198).
 Accordingly, the recoverable amount comes to be
FVLCTS, i.e., $62,000, being higher of the two amounts
14
Reversal of impairment
 Reversal of impairment is a situation where a company can
declare an asset to be valuable where it has previously been
declared a liability.
 An impairment loss may only be reversed if there has
been a change in the estimates used to determine
the asset's recoverable amount since the last
impairment loss had been recognized. If this is the
case, then the carrying amount of the asset shall be
increased to its recoverable amount.
15
Disclosure impairment
 Disclosure by class of assets: [IAS 36.126]
 impairment losses recognized in profit or loss
 impairment losses reversed in the statement of
comprehensive income
 impairment losses on revalued assets
 impairment losses on revalued assets reversed
in other comprehensive income
 Events causes impairment losss
16
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Intermediate Financial Acct I CH 1-5

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Chapter 3: Cash and Cash

(IAS 7 and IFRS 9)

 Overview of Financial Instruments

Examples of financial liabilities:

 Equity Investments unless they are, in

Could you mention examples of trade receivables? What

• The entry to record the provision would be:

and the Cost Formulas to be used to

1.IAS 2 – Inventories represent:

 Net Realizable Value – the amount that is

 Items owned by an entity that are held on

 Comparison of cost with net realizable value

 [I.e. 100 units x (500 Birr list Price less 20% of

 The cost of the inventory is 1,654,000 Birr

2. MOH costs that are incurred in

 The amount of fixed overhead allocated to

 Rules for Calculation of C.C (Continued)

↑How much fixed OH cost should EEU allocates to

↑ The allocated Fixed Production OHs would

 An entity shall use the same cost formula for

 For inventories with a d/t nature or use,

 If quantities specified in the contract are for less

Inventories are written down

Inventories are not to be carried

 The write down amount:

RMs & other Supplies held for use in the

Inventories are written down to NRV:

Loss on Inventory Valuation xx

Units Raw Attributable Attribut Expected

 The amount of the write down is reversed

 The cost of perishable produce is calculated

 The Weighted Average or Specific

 Selling costs are excluded from the cost of

• Acquisition and Disposition of Property, Plant, and

Topic List Standards

An item of inventory is accounted for as an item of PP&E

a) For Items of PP&E not consumed in the production process

 Cost incurred for Environmental protection and

• Bearer plants (for example the root part of

• A very large number of minor items of PP&E such

•As per our country land policy, all Lands are

• Cost incurred for the project research activity

• If the payment for an item of PPE deferred (postponed) for a later

• We will recognize the machine Initially:

E=D X 5% F=D + E G=I H=G1/5 I=G - H

1 - 519,538 25,976.90 545,514.90 779,538.00 (155,907.60) 623,630.40

2 120,000 98,724.25 425,514.90 21,275.75 446,790.65 623,630.40 (155,907.60) 467,722.80

3 120,000 103,660.47 326,790.65 16,339.53 343,130.18 467,722.80 (155,907.60) 311,815.20

4 120,000 108,843.49 223,130.18 11,156.51 234,286.69 311,815.20 (155,907.60) 155,907.60

5 120,000 103,000.00 114,286.69 5,714.35 120,000.00 155,907.60 (155,907.60) 0.00

10 120,000 0 0 0 0 0.00 (779,538.00 0

a) Capitalized If The additional Expenditure incurred

 In general, the carrying amount of PPE shall be derecognized

• Our entity had constructed a 66 KV substation with an estimated useful

• Assuming that the damaged transformer returned to our store, the

Initial Deprecation 100,000.00 100,000.00

Depreciation expense adjustment amount to be made for

Fair value less cost Value In

Internal sources External sources

 How to determine the carrying value of PPE at year end

Fair value less cost of sale = 450,000.00

• Accumulated Depreciation 120,000 120,000-30,000= 450,000/4 = 112,500

 During Initial Revaluation