IFRS 7,9, IAS-32, 12, 21,19, 37, IFRS-16-trainee

Welcome to the Training on IFRS
By: Wogayehu W. & Tel : 0977

0977--24
24--44
44--34/
Tewodros E. 0911--40
0911 40--19
19--94
2
IAS 12
Income Tax
MATED Management Institute, Addis Ababa, Ethiopia
Objective
3
� The objective of this Standard is to prescribe the

accounting treatment for income taxes
taxes.
� The principal issue in accounting for income taxes is
how to account for the current and future tax
consequences of:
a) the future recovery (settlement
(settlement) of the carrying
amount of assets (liabilities
(liabilities) that are recognized in
an entity’s statement of financial position
position; and
b) transactions and other events of the current period
that are recognized in an entity’s financial statements

Scope
4
� This Standard shall be applied in accounting

for income taxes
taxes.
� For the purposes of this standard, income taxes
include all domestic and foreign taxes which

are based on taxable profits
profits.
� Income taxes also include taxes, such as
withholding taxes
taxes, which are payable by a
subsidiary, associate or joint venture on
subsidiary
distributions to the reporting entity
entity.
Definitions
5
� Let’s see some key terms.

1. Income tax - All domestic & foreign tax based on taxable profit profit.
2. Accounting profit - is profit or loss for a period before deducting
tax expense based on IFRS
IFRS.
3. Taxable profit (loss
loss)) - is the profit (loss) for a period, determined
in accordance with the tax rules/laws established upon which
income taxes are payable (recoverable)
recoverable)..
4. Tax expense ( income
income) - The aggregate amount included in the
determination of net profit
profit//loss for the period in respect of
current tax and deferred tax tax.
� It comprises current tax expense (current
current tax income
income) and
deferred tax expense (deferred
deferred tax income
income)
Definitions
6
5. Tax base of an asset or liability - is the amount attributed

to that asset or liability for tax purposes . It is the amount
that will be deductible for tax purposes against any taxable
economic benefits that will flow to an entity when it
recovers the carrying amount of the asset. If those economic
benefits will not be taxable, the tax base of the asset is
equal to its carrying amount
amount..
6. Tax based on revenue ≠ income tax
� Sales tax, VAT, tax on capital, and social security tax ≠
income tax /direct
direct tax
7. Income tax = tax rate x taxable profit
Definitions
7
8. Current tax - is the amount of income taxes payable

(recoverable
recoverable) in respect of the taxable profit (tax loss
loss) for a
period. It is liability for any tax payable on current or prior
taxable profit
profit.. It is measured using tax law enacted or
substantively enacted at reporting date
9. Deferred tax liabilities -are the amounts of income
ncome taxes
payable in future periods in respect of taxable temporary
differences.
differences
10. Deferred tax assets - are the amounts of income taxes
recoverable in future periods in respect of:
a) deductible temporary differences;
differences
b) the carry-forward of unused tax losses;
losses and
c) the carry-forward of unused tax credits.
credits
Definitions
8
11. Temporary differences - are differences between the carrying

amount of an asset or liability in the SFP and its tax base base.
Temporary differences may be either:
a) taxable temporary differences - which are temporary
differences that will result in taxable amounts in determining
taxable profit (tax loss
loss) of future periods when the carrying
amount of the asset or liability is recovered or settled; or
b) deductible temporary differences - which are temporary
differences that will result in amounts that are deductible in
determining taxable profit (tax loss
loss) of future periods when the
carrying amount of the asset or liability is recovered or settled.

Income tax in Ethiopia
9
� Includes all taxes that are based on taxable income

� “Taxable
Taxable Income shall mean the amount of income
Income"
subject to tax after deduction of all expenses and
other deductible items allowed under Income Tax
Proclamation No
No.. 979
979//2016
� IAS 12 excludes taxes that are not based on income tax
tax..

Temporary vs. Permanent differences
10
� Temporary differences
� They have deferred tax consequence and
reverse in future periods.
� Deferred tax is an accounting measure rather
than a tax levied by government used to match
the tax effects of transactions with their
accounting impact and thereby produce less
distorted results
results.

11
� Temporary differences also occur from:

� Differences in depreciation method for Financial
reporting & for tax purpose (effect is shown on P/L
statement)
� Provisions recorded for litigation, (effect is shown on
P/L statement)
� Bad debt expenses (effect is shown on P/L statement)
� Unrealized gains/losses resulted from(effect is shown
on OCI)
� Revenues collected in advance
12
� Permanent differences
differences::
� Some items of revenue and expense that a
corporation reports for financial accounting
purposes are never reported for income tax
purposes.
purposes
� They don’t have deferred tax consequence and
they never reverse in a later accounting period.
� Example : Entertainment expense
Recognition & Measurement of current tax
13
� Current Tax:
Tax
1. Liability for any tax payable on current or
prior taxable profit;
2. Asset if overpayment is recoverable
recoverable;
3. Measured using tax law enacted or
substantively enacted at reporting date;
4. Current period expense or income , but if
current tax relates to an item of OCI
OCI, that tax
is presented as part of OCI
OCI..
Measurement Current tax liabilities (assets
assets))
14
� Current tax liabilities (assets

assets) for the current and
prior periods shall be measured:
� at the amount expected to be paid to
(recovered
recovered from
from) the taxation authorities,
� using the tax rates (and tax laws laws) that have
been enacted or substantively enacted by the
end of the reporting period.

Measurement Current tax liabilities (assets
assets))
15
� Current tax liabilities (assets

assets) for the current and
prior periods shall be measured:
� at the amount expected to be paid to
(recovered
recovered from
from) the taxation authorities,
� using the tax rates (and tax laws laws) that have
been enacted or substantively enacted by the
end of the reporting period.

Recognition & Measurement of deferred tax
16
� Recognize :
� Deferred tax liability for all temporary
differences that will increase taxable
profit in the future
� Deferred tax asset for all temporary
differences that will reduce taxable profit
in the future

Recognition & Measurement of Current & Deferred Tax
17
� Example-1: Calculate Current & Deferred Tax

Example-
� Accounting profit 150,000, tax rate 30%.
� 20,000 royalty income is tax exempt. (p/d)
� 5,000 meals expense is not deductible. (p/d)
� Bad debt expense 2,500 included 500 estimate
not deductible until write-off. (t/d)
� Tax depreciation (accelerated) is 43,000, book
depreciation is 35,000. (t/d)
Required : Compute current & deferred tax expense
expense?

18
� Example-1: Calculate Current Tax (cont’d)

Example-
Taxable profit:
Accounting profit 150,000
Less nontaxable royalty (20,000)
Plus nondeductible meals 5,000
Plus nondeductible bad debts 500
Less add’l tax depreciation (8,000)
Taxable Profit 127,500
Current tax = 30% x 127,500 = 38,250
19
� Example-1: Calculate Deferred Tax (cont’d)

Example-
� Deferred tax asset – non deductible bad debt:
500 x 30% = 150 (Refundable
Refundable)
� Deferred tax liability – accelerated depreciation
8,000 x 30% = 2,400 (payable payable))
� Same jurisdiction, right of offset
� Deferred tax expense = 2,400 – 150 = 2,250 (net net))
� Deferred tax liability = 2,250
� Total tax expense = 38,250 + 2,250 = 40,500

20
� Example-1: Journal entry (reflects the last

Example-
two examples)
Income tax expense 40,500

Taxes currently payable 38,250
Deferred tax liability 2,250

21
� Example-2: Current & Deferred Tax

Example-
� On December 31, 2013 a company buys a machine for Br
500,000.
� Accounting:
Accounting
– depreciate machine on straightstraight--line method over 5 years
to nil residual value
– accounting profit = Br 300 300,,000 per year (i.e. Br 400,000
less Br 100,000 machine depreciation)
� Tax information
information:
– corporate tax rates: 30 30% % on taxable profit (accounting
profit less tax depreciation)
– depreciate machine on straight straight--line method over 24
months (2 yrs
yrs)) to nil residual value
value.
22
Tax base Deferred tax

Carrying (i.e. future tax Temporary Deferred tax expense
Date amount deductions) difference liability (30%) (income)
31/12/2013
500,000 500,000 - - -
31/12/2014
400,000 250,000 150,000 45,000 45,000
31/12/2015
300,000 - 300,000 90,000 45,000
31/12/2016
200,000 - 200,000 60,000 (30,000)
31/12/2017
100,000 - 100,000 30,000 (30,000)
31/12/2018
- - - - (30,000)
23
Deferred tax Deferred tax Taxable Current tax

Date liability expense1 profit2 expense3 Tax expense 4
31/12/2014
45,000 45,000 150,000 45,000 90,000
31/12/2015
90,000 45,000 150,000 45,000 90,000
31/12/2016
60,000 (30,000) 400,000 120,000 90,000
31/12/2017
30,000 (30,000) 400,000 120,000 90,000
31/12/2018
- (30,000) 400,000 120,000 90,000
1 change in the deferred tax liability in the year
2 Br400,000 accounting profit before accounting depreciation minus tax depreciation of Br250,000 in 2014 & 2015)
3 30% of taxable profit
4 current tax expense + deferred tax expense (absent permanent differences etc = 30% of Br300,000 accounting profit)
24
1 change in the deferred tax liability in the year

(increase
increase in liability = expense
expense; decrease in
liability = income
income)
2 $400,000 accounting profit before accounting
depreciation minus tax depreciation of $250,000

in 2014 & 2015)
3 30% of taxable profit
4 current tax expense + deferred tax expense
(absent permanent differences etc = 30% of

$300,000 accounting profit)
25
Journal entry: End of 2014

Income Tax Expense ……………….90,000
Income Taxes Payable ……………….………..45,000
Deferred Tax Liability …………………………..45,000
Journal entry: End of 2015
Income Tax Expense ……………….90,000
Income Taxes Payable ……………….………..45,000
Deferred Tax Liability ………………………….45,000
Journal entry: End of 2016/2017/2018
Income Tax Expense …………..………...90,000
Deferred Tax Liability …………….……30,000
Income Taxes Payable ……………………...120,000
Of the 120,000 tax payable, 30,000 belongs to prior period
(Reversal of the temporary difference)
Accounting For Operating Losses
26
� An operating loss is used to offset either the

Taxable Future Income or Taxable Past Income
(Carried
Carried Backward and Carried Forward
Forward).
� An operating loss occurs for tax purposes in a year
when tax deductible expenses exceed/greater than
the taxable revenues (long
long term projects/
projects/%%completion
method).
method
� Loss Carry Backward and Carry forward can create a
difference in taxable income and accounting income
income.

Example-3 : Operating Loss Carry
Carry--forward…
27
�Y Company reports a pretax operating loss of Br

60,,000 in 2007 for both financial repor ting and income
60
tax purposes
purposes. The income tax rate is 30 30%% and no
change in the tax rate has been enacted for future years.
The deferred tax asset is calculated to be Br 18,000 (Br
Br
60,,000 x 0.30
60 30) and recorded as:
Deferred Tax Asset ……………………. 18,000

Income Tax Benefit From
Operating Loss Carry-
Carry-forward
forward……………
……………18,000
18,000
Example -3: Operating Loss Carry
Carry--forward…
28
� How do you report Operating Loss Carried Foreword in 2007 &

2008 if the firm reports income of 100,000 in 2008 ?
Case 1: Old Ethiopian Practice

2007 2008
Pretax Operating loss/Income (60,000) 100,000
Less: Loss carried foreword/Loss Set off 0 (60,000)
Adjusted Pretax Operating Income/loss (60,000) 40,000
Less : Income Tax (30%) 0 (12,000)
Net Income/loss (60,000) 28,000
Example-3: Operating Loss Carry
Carry--forward…
29
� How do you report Operating Loss Carried Foreword in 2007 &

2008 if the business reports income of 100,000 in 2008 ?
Case 2: New IFRS Practice
2007 2008
Pretax Operating loss/Income (60,000) 100,000
Less: Loss carried foreword/Loss Set off 0 (42,000)
Adjusted Pretax Operating Income/loss (60,000) 58,000
Less : Income tax benefit/ expense from 18,000 (17,400)
operating loss carry-forward (30%)
Net Income/loss (42,000) 40,600
Example--4: Operating Loss Carry-
Example Carry-back
back…
…
30
�X Co reports a pretax operating loss of Br 90

90,,000 in 2007 for
both financial reporting and income tax purposes
purposes, and that
reported taxable income for the previous 2 years (2005 2005 &
2006) had been Br 40
2006 40,,000 and Br 50
50,,000 respectively.
2005 Br 40,000 x 0.30 =$12,000

=$12,000
2006 Br 50,000 x 0.30 =15,000
=15,000
$27,000
Income Tax Refund Receivable

Receivable………….
…………. 27,000
Income Tax Benefit From
Operating Loss Carry back ……………………… 27,000
Example--4: Operating Loss Carry
Example Carry--back
31
� An operating loss is reduced by the

benefit, not by the total carry back
back.
Pretax operating loss Br (90,000)
Less: Income tax benefit from
operating loss carry back
$40,000 x 30% + $50,000 x 30% 27,000
Net loss Br (63,000)

Example 5: Recognition of deferred tax
32
• On 1/1/20 20X X1 acquire machine for Birr

Birr100
100,,000
• Accounting estimates made in accordance with
IAS 16 Property, Plant and Equipment
• Straight
Straight--line depreciation
• Useful life = 5 years
• Residual value = nil

Example 6: Deferred tax….
tax…. continued
33
� Relevant income tax information

information:
• tax depreciation on machine = straight straight--line
historical cost over 2 years
years;;
• when entity sells machine, government recoups
(gets back) past tax depreciation to the extent
that the selling price exceeds the tax base
• substantively enacted tax rates:
� operating profits/losses taxed at 20 20% %;
� capital gains/losses (e.g. proceeds from sale
in excess of historical cost) taxed at 10
10%%;
Example 6: Deferred tax
34
� On 31/12/20X2 when carrying amount was Birr 60,000

machine is revalued to Birr 120,000
� Calculate deferred tax liability at 31/12/20X2
• Carrying amount = Birr120,000
• Tax basis = nil (no future tax deductions)
• Taxable temporary difference = Birr120,000
• Deferred tax liability = Birr 24,000 (i.e. Birr120,000 ×
20% ) This is because it is expected to recover through
use, i.e. profit on sale of the machine)

Example 6: Deferred tax …….continued
35
� Journal entry for revaluation Debit

31/12/X2 of machine Credit
Asset—PPE (machine) 60,000
Income(OCI) 48,000
Liability—deferred tax 12,000

Presentation
36
� Classification:
� All deferred tax assets and liabilities as non-
current.
� Offsetting:
� Do not offset current tax assets and liabilities
or deferred tax assets and liabilities unless
entity has legal right to offset and it intends
either to settle net or simultaneously

Disclosure
37
� Disclose major components of tax expense:

expense:
� Current tax expense (income)
� Adjustments to current tax of prior periods
� Deferred tax expense (income) relating to:
� New or reversing temporary differences
� Changes in tax rates or new taxes
� Tax expense relating to changes in accounting policies or errors
� Other disclosures:
disclosures
� Current and deferred tax relating to items of OCI
� Explanation of significant differences in amounts in P&L and
amounts reported to tax authorities
� Changes in tax rates
38
IAS 21
The Effects of Changes in
Foreign Exchange Rates

1.Objective
39
� The objective of this Standard is to prescribe

how to include foreign currency transactions
and foreign operations in the F/S of an entity
and how to translate financial statements into a
presentation currency
currency.
� The principal issues are which exchange rate(s)
to use and how to report the effects of changes

in exchange rates in the F/S
F/S.

2. Scope
40
� This standard shall be applied:

a) in accounting for transaction
transactionss and balances in foreign
oreign
currencies, except for those derivative transactions and
currencies
balances that are within the scope of IFRS 9 : Financial
Instruments;
Instruments
b) in translating the results and financial position of foreign
operations that are included in the financial statements
of the entity by consolidation or the equity method
method; and
c) in translating an entity’s results and financial position
into a presentation currency
currency.
3. Foreign Activities
41
� Transactions in foreign currencies

currencies;
� Foreign operations
operations;;
� Subsidiaries
� Associates
� JVs
� Branches
� Entity may present its financial statements in

foreign currency
currency..
4. Definitions
42
� Foreign currency
currency. A currency other than the
functional currency of the entity.
� Functional currency
currency. The currency of the primary
economic environment in which the entity
operates.
� Presentation/Reporting currency
currency. The currency in
which the financial statements are presented.
� Exchange rate
rate. The ratio of exchange for two
currencies.
currencies
4. Definitions
43
� Exchange/Conversion difference ( gain/loss)gain/loss). The

difference resulting from translating a given number of
units of one currency into another currency at different
exchange rates
rates.
� Closing rate
rate. The spot exchange rate at the year end
date.
� Spot exchange rate rate. The exchange rate for immediate
delivery.
� Monetary itemsitems. Units of currency held and assets and
liabilities to be received or paid in a fixed or
determinable number of units of currency.
5. Foreign currency transactions
44
� There are two distinct types of foreign

currency transactions
transactions:
1) Conversion/Exchange
Conversion/Exchange-- is the process of
exchanging one currency for another &
2) Translation - is the restatement of the
value of one currency in another
currency.
5.1. Repor ting foreign currency transactions in
the Functional Currency - initial recognition
45
�IAS 21 states that :

� Recognize foreign currency transaction at the
rate at the transaction date
date;
� An average rate for a period (e.g. week or
month) may be used if exchange rates don’t
fluctuate significantly.
- Average rates not reliable if currency
fluctuates significantly;
- In accounting policy note in FS, disclose the
policy. e.g. that rates at transaction dates
are used;
the Functional Currency : Subsequent Measurement
46
� Monetary Assets:
� Cash
� Cash equivalents
� Debt securities
� Accounts receivable
� Notes receivable
Items that will be received in a fixed or

determinable amount of cash
5.2 Repor ting foreign currency transactions in
47
� Non-monetary Assets:
� Inventory
� Prepaid expenses
� Equity securities
� Investment property
� Property, plant, and equipment
� Intangible assets (e.g. goodwill)
Items that will not be received in a fixed
or determinable amount of cash
48
� Monetary Liabilities:
� Accounts payable
� Notes payable
� Bonds payable
� Leases payable
� Accruals
� Deferred tax (usual classification)
Items that will be paid in a fixed or

determinable amount of cash
49
� Non - monetary Liabilities:

� Deferred income
� Government grant
Items that will not be paid in a

fixed or determinable amount of
cash
50
Monetary Non - monetary Revalued

Items Items at historical non-monetary
cost items
Rate at the Rate at the date of Rate at the

reporting date Transaction date of
(closing rate)
rate) (historical rate)
rate) valuation
6. Recognition of Exchange gains and losses
51
� Exchange differences/gains & losses - occur when there is

a change in the exchange rate between the transaction
date and the date of settlement of monetary items arising
from a foreign currency transaction
transaction.
� Exchange differences/gains & losses arising on the
settlement of monetary items (receivables,
receivables, payables,
loans, cash in a foreign currency
currency) or on translating an
entity's monetary items at rates different from those at
which they were translated initially, or reported in
previous financial statements, should be recognized in
SP/L in the period in which they arise.
52
Monetary Assets – Exchange

gains and losses
Realised Unrealised
Exchange Exchange
differences differences
Recognised in P/L (both

gains and losses)
53
Non – monetary assets – Exchange gains and losses
Underlying income / expense Underlying income / expense

recognized in P/L recognized in OCI
e.g. Depreciation expense e.g. Revaluation surplus
Exchange component Exchange component

Recognised in P/L Recognised in OCI

54
� For example
example, suppose an Ethiopian company buys a large
consignment of goods from a supplier in Germany
Germany. The
order is placed on May 1, and the agreed price is
€124
124,,250
250. At the time of delivery, the rate of foreign
exchange was €3.50 to ETB 1. The Ethiopian Company
would record the amount owed in its books as follows.
Date Description Debit Credit
May 1 Inventory account (124,250 ÷ 3.5) 35,500
Payables account 35,500

55
� When the Ethiopian Company comes to pay the

supplier, it needs to obtain some foreign currency.
� By this time, however, if the rate of exchange has
altered to €3.55 to ETBETB1
1, the cost of raising €124
124,,250
would be (÷ 3.55) ETB 35 35,,000
000. The company would
need to spend only ETB 35 35,,000 to settle a debt for
inventories 'costing‘ ETB 35
35,,500
500.
� Since it would be administratively difficult to alter the
value of the inventories in the company's books of
account, it is more appropriate to record a profit on
conversion of ETB 500
500.
56

DD/MM/YY Payables account 35,500
Cash 35,000
Profit on conversion 500
� Profits ( losses ) on conversion would be included in SP/L

for the year in which conversion (whether payment or
receipt) takes place.

57
� Suppose that another home company/Ethiopia sells

goods to a Chinese company
company, and it is agreed that
payment should be made in Chinese Yuan at a price of
Y116
116,,000
000. We will further assume that the exchange
rate at the time of sale is Y10
10..75 to ETB 1, but when the
debt is eventually paid, the rate has altered to Y10
10..8 to
ETB1
ETB 1.The company would record the sale as follows.
DD/MM/YY Receivables account 10,800
(116,000 ÷ 10.75)
Sales account 10,800
58
� When the Y116116,,000 are paid, the local company will

convert them into ETB , to obtain (÷ 10.8) ETBETB10
10,, 750
750. In
this example, there has been a loss on conversion of ETB
50 which will be written off to profit of loss for the year:
DD/MM/YY Cash 10,750
Loss on conversion 50
Receivables account 10,800
� There are no accounting difficulties concerned with foreign
currency conversion gains or losses, and the procedures
described above are uncontroversial.
59
� Ethiopian Co
Co, whose year end is December 31, buys some
goods from France Company on 30 September. The invoice
value is €4040,,000 and is due for settlement in equal
installments on November 30 and January 31 31. The
exchange rate moved as follows.
€= ETB 1
30 September 1.60
30 November 1.80
31 December 1.90
31 January 1.85
Required : State the accounting entries in the books of Ethiopian Co.

60
� The purchase will be recorded in the books of

Ethiopian Co using the rate of exchange ruling on
September 3030. Being the ETB cost of goods purchased
for €40
40,,000 (€40,000 divided €1.60 60/ETB
/ETB1
1)
September 30 Purchases 25,000
Trade payables 25,000

61
� On November 30 30, Ethiopian Co must pay €20,000.

This will cost €20,000 divided by €1.80/ETB1 = ETB
11,111 and the company has therefore made an
exchange gain of ETB12,500 – 11,111 = ETB 1,389
389.
November 30 Trade payables 12,500

Exchange gains
gains:: (P/L) 1,389
Cash 11,111

62
� On December 31 31, the year end, the outstanding liability

will be recalculated using the rate applicable to that date:
€20,000 divided by €1.90/ ETB1 = ETB 10,526. A further
exchange gain of ETB 1,974 has been made and will be
recorded as follows.
December 31 Trade payables 1,974
Exchange gains
gains:: (P/L) 1,974
� The total exchange gain of ETB 3,363 will be included in

the operating profit for the year ending on December 31
63
� On 31 January, Ethiopian Co must pay the second

installment of €20,000. This will cost them ETB10,811
(€20,000 divided by €1.85/ETB1).

DD/MM/YY Trade payables 10,526
Exchange losses
losses:: (P/L) 285
Cash 10,811
� When a gain/loss on a non

non--monetary item is recognized in
OCI (for example, where property is revalued
revalued), any related
exchange differences should also be recognized in OCI
OCI.
7. Foreign currency translation
64
� Foreign currency translation - as distinct from

conversion doesn’t involve the act of exchanging
one currency for another.
� It is required at the end of an accounting period
when a company still holds assets or liabilities in
its SFP which were obtained or incurred in a
foreign currency
currency.
� If a company trades overseas
overseas, it will buy or sell
assets in foreign currencies
currencies..

65
� There has been great uncertainty about the

method which should be used to translate the
following.
a) Value of assets and liabilities from a foreign
currency into ETB for the year end SFP
SFP;
b) Profits of an independent foreign branch or
subsidiary into ETB for the annual SP/L & OCI
OCI.

66
� Suppose, for example, that a Belgian subsidiary purchases a

piece of property for €2,100
100,,000 on December 31 31,, 20
20XX7. The
rate of exchange at this time was €70 to ETB
ETB11. During 20
20XX8, the
subsidiary charged depreciation on the building of €16 16,,800
800, so
that at December 31
31,, 20
20XX8, the subsidiary recorded the asset as
follows.
December 31, 20X8 €
Property at cost 2,100,000
Less: accumulated depreciation 16,800
Net book value 2,083,200
At this date, the rate of exchange has changed to €60 to ETB 1.
1
67
� The local holding company/Ethiopia must translate the

asset's value into ETB
ETB, but there is a choice of exchange
rates.
rates
a) Should the rate of exchange for translation be the rate
which existed at the date of purchase
purchase, which would give
a net book value of 2,083,200 ÷ 70 = ETB 29 29,,760
760?
b) Should the rate of exchange for translation be the rate
existing at the end of 20X8 (the closing rate of €60 to
ETB1
ETB 1)? This would give a net book value of ETB 34 34,,720
720.
� Similarly, should depreciation be charged to group profit
or loss at the rate of €70 to ETB ETB11 (the historical rate
rate),
€60 to ETB
ETB11 (the closing rate
rate), or at an average rate for
the year (say, €64 to ETB
ETB1
1)?
7.1. Re
Re--measurement into the Functional Currency
68
� Remeasurement - is a process of converting the accounting

records of an entity maintained in a currency other than
functional currency into the functional currency
currency;
� Non--monetary assets
Non assets,, liabilities
liabilities,, and related income and
expenses - use historical exchange rate ;
� Monetary assets, liabilities
liabilities,, and related income and expenses –
use current exchange rate
� If entity’s functional currency is the reporting currency of

the enterprise, rere--measurement obviates translation
translation.
� If entity’s functional currency is different from the enterprise’s
reporting currency
currency, re
re--measurement into the entity’s functional
currency is followed by translation into the reporting currenc
currency.
7.2. Translation to the Presentation Currency
69
Assets and liabilities Rates at reporting date
Rate at date of transaction

Income and expenses rate)
(or average rate)
All resulting exchange differences classified as a separate

component of equity (OCI
OCI))
Reclassify to P/L
on disposal
7.3. Foreign Currency Translation Adjustments
70
� Do not affect cash flows

flows::
� Are reported (net net of taxtax) as a separate
component of equity (in OCI
OCI)
� Are recognized in earnings when realized (i.e.
when investment in subsidiary is sold or
liquidated)
liquidated
� At which time, reclassify proportionately to
gain/loss on sale or liquidation of net assets
of subsidiary
8. Disclosures
71
� Significant Disclosures:
� Exchange rate differences included in:
� P/LL (except for financial instruments

measured at FV)
� Other comprehensive income
� In accounting policy note disclose that P/L
items are translated at rate at
transaction dates
8. Disclosures
72
� Additional disclosures
� Reasons (if applicable):
� Why there has been a change in the
functional currency
� Why the presentation and functional currency
are different
� If entity’s presentation currency is different
from its functional currency, its financial
statements should only be described as
compliant with IFRSs if all the requirements of
IAS 21 are applied
8. Disclosures
73
� Additional disclosures :
� If entity’s additional financial information is displayed in
a currency different from either its functional or its
presentation currency and all the requirements of IAS 21
have not been met:
� Clearly identify such information as supplementary
� Disclose the currency of the supplementary
information
� Disclose the entity’s functional currency and the
method of translation used as a basis for presenting
the supplementary information
�Activity
74
1) What is the difference between conversion and

translation?
translation
2) Define 'monetary' items according to IAS 2121.
3) How should foreign currency transactions be
recognized initially in an individual enterprise's
accounts?
4) When can an entity's functional currency be
changed?
75
IAS 19
Employee benefits

Objective
76
� The objective of this standard is to prescribe the

accounting and disclosure for employee benefits, i.e.:
1. When the cost of employee benefits should be
recognized as a liability or an expense.
2. The amount of the liability or expense that should be
recognized
� Employee benefits - are all forms of consideration
given by an entity in exchange for service rendered
by employees or for the termination of employment.
Scope
77
� This standard shall be applied by an employer

in accounting for all employee benefits, except
those to which IFRS 2 Share
Share--based Payment
applies.
� It is a long & complex standard covering both
shor t-term and long-term (postemployment)
benefits.

Categories of Employee Benefits
78
� There are four categories of employee benefits that

need a different accounting treatment for each.
1. Shor t-
t-term employee benefits – are expected to be
settled wholly before twelve months after the end of
the annual reporting period.
� Example: Wages and salaries, Social security
contributions, Paid annual leave, Paid sick leave,
Paid maternity/paternity leave, Profit shares and
bonuses, Non-monetary benefits, e.g. medical care,
housing, cars, free or subsidized goods, etc.
79
2. Termination benefits – they are provided in

exchange for the termination of an employee’s
employment as a result of either:
a) an entity's decision to terminate an employee's
employment before the normal retirement date, or
b)an employee's decision to accept an offer of benefits
in exchange for the termination of employment.
� Example: early retirement payments & redundancy
payments.
80
3. Post -employment benefits - are employee benefits

Post-
(other than termination benefits & short-term
employee benefits) that are payable after the
completion of employment.
� Example: Pensions & Post-employment medical care &
insurance.
4. Other long
long--term employee benefits - are all
employee benefits other than short-term, post-
employment & termination benefits.
� Example: Sabbatical leave, Long-service & long-term
disability benefits, etc.
� Such benefits include items such as the following, if not

expected to be settled wholly before 12 months:
a) Long-term paid absences such as long-service or
sabbatical leave;
b) Jubilee/anniversary or other long-service benefits;
c) long-term disability benefits;
d) profit-sharing & bonuses; and
e) deferred remuneration.

81
Recognition & Measurement
82
1. Short-term employee benefit costs

Short- costs.
� simply recognized as an expense in the
employer's F/S of the current period.
� Unpaid short-term employee benefits at
the end of an accounting period should be
recognized as an accrued expense.
� Any short-term benefits paid in advance
should be recognized as a prepayment (i.e.
reduction in future payments or a cash
refund).
refund
�Short-term compensated absences
absences:
� Recognize a cost and liability = the undiscounted
amount of benefits expected to be paid
� Some benefits accumulate
� Accrue as employee provides services (e.g., paid
vacation leave)
� Some do not accrue
� (e.g., Sick Leave, Maternal/paternal leave)
� Recognize cost and liability when event occurs that
obligates the entity to provide the benefit
83

� Profit--sharing & bonus plans
Profit plans:
� Recognize cost & liability only when
�a legal or constructive obligation exists, &
� amount can be reasonably estimated
To reasonably estimate, must have one of
the following:
� plan has formal terms including a formula
� amount is known before F/S are authorized for
release
� past practice provides clear evidence of amount 84
� An entity has 5 employees and each is entitled to 20

days paid vacation per year, at a rate of Br.50 per day.
Unused vacation is carried forward to the ff year.
� All 5 employees work for the entity throughout the year
and are therefore entitled to their 20 days of vacation.
An expense should be recognized in P/L for:
5 employees x 20 days x CU50 = CU5,000
� 4 of the employees use their complete entitlement for
the year & the other, having used 16 days, is permitted
to carry forward the remaining 4 days to the following
period.
� A liability will be recognised at EOY for:
1 employee x 4 days x CU50
85
= CU200
�Activity
Activity
86
� Ex : Profit sharing or bonus plans. ABC Co pays 3% of

year’s profit (before profit sharing) to employees who serve
throughout the current year & who will continue to serve
throughout the following year. ABC Co expects to save 10%
through staff turnover. The bonus will be paid on 31/12/20X2.
Profit for 20X1 before profit sharing = $1,000,000.
� Liability at 31/12/20X1 & Expense = $27,000 (i. e 3% ×
$1,000,000 × 90%)

87
2. Deferred employee benefits costs.

� much more difficult because of the large
amounts involved, as well as the long time
scale, complicated estimates and
uncer tainties.
tainties

88
� Termination Benefits:
� Recognize liability and expense at the earlie
earlier of:
a) The date the entity can no longer withdraw the
benefit or offer
b) The date the entity recognizes restructuring costs
under IAS 3737.
� If termination benefits settled wholly before 12
months from reporting date, apply requirements for
short--term employee benefits
short benefits.
� If termination benefits are not settled wholly before
12 months from reporting date, apply requirements
for other long term employee benefits
benefits.
89
� Other Long Term Employee Benefits:

� Statement of financial position
a) Carrying amount of liability = PV of obligation (-) Fair Value
of any plan assets;
assets;
b) Actuarial gains & losses & past service costs are recognized
immediately in OCI and SP/L respectively in the Statement of
Comprehensive Income
Income.
� Statement of comprehensive income
� Recognize the net total of : Current service cost (+) Net interest
on net defined benefit liability/(asset) (+) re
re--measurement of the
net defined benefit liability/(asset).
liability/(asset)
Other Long term EB Expenses
=
Current Service Cost + Int. Cost – Expected Return on ANY
plan Asset + Actuarial Gains or losses + All Past Service
Costs
Other Long term EB Liab

Liab.
=
PV of DBO – Fair Value of Any Plan Assets
90
Post--employment benefits
Post
91

Post
92
� Two types of post-employment benefit plan:

A. Defined contribution plans – are post-employment
benefit plans that an entity pays:
1. fixed contributions into a separate entity (a fund) &
2. no further liability to pay and
3. no exposure to risks if the fund does not hold
sufficient assets to pay all employee benefits relating
to employee service in the current and prior periods.
� They are simple to account for as the benefits.
Recognition & Measurement - Defined contribution plan
93
� Example: Defined contribution plan would be where

the employee and employer agreed to contribute an
amount of 7 % and 11 % of basic salary
respectively into a post-employment plan.
1. The obligation is measured by the amounts to be
contributed for that period.

2. There are no actuarial assumptions to make.
3. If the obligation is settled in the current or next
period, there is no requirement for discounting.

period
Recognition & Measurement - Defined contribution plan
94
� IAS 19 requires the following accounting treatment

Defined contribution plans.
1. Contributions to a defined contribution plan should be
recognized as an expense in the period they are
payable.
2. Any liability for unpaid contributions that are due as
at the end of the period should be recognized as a
liability (accrued expense).
3. Any excess contributions paid should be recognized as
an asset (prepaid expense).
Post
95
B. Defined benefit plans are post-employment benefit plans

other than defined contribution plans that an entity pays:
1. fixed contributions into a separate entity ( fund).
2. further liability to pay and
3. exposure to risks if the fund/plan assets are insufficient
to meet the plan liabilities to pay pensions in future, the
entity will have to make up any deficit.
� They are difficult to deal with.

Recognition & Measurement - Defined benefit plans
96
� Accounting for defined benefit plans is much more

complex because of:
1. The future benefits (arising from employee service in
the current or prior years) cannot be measured
exactly but the liability should be recognized now.
� To measure these future obligations, it is necessary to
use actuarial assumptions.

97
2. The obligations payable in future years should be

valued, by discounting, on a present value basis. This is
because the obligations may be settled in many years'
time.
3. If actuarial assumptions change change, the amount of
required contributions to the fund will change, and there
may be actuarial gains or losses.
� A contribution into a fund in any period will not equal
the expense for that period, due to actuarial gains or

losses.MATED Management Institute, Addis Ababa, Ethiopia
Actuarial gains/losses
gains/losses:
� recognize all actuarial gains/losses in
OCI when they occur, and then directly to
RE – not through P&L
98

Accounting building blocks:

blocks
� PV of a defined benefit obligation – the discounted PV
of the expected future payments required to settle an
entity’s obligation resulting from employee service
accumulated to date.
� Plan assets – assets held by the longlong--term employee
benefit fund that exists solely to pay employee benefits
as they fall due.
99

Changes in the PV of the defined benefit obligation (DBO

DBO):
based on projected salaries:
salaries
PV of the obligation ( beg. of period)

period
+ Current period’s service cost
+ Interest cost on the outstanding obligation for
+/- Past service costs from plan amendments in the period
- Benefits paid under the plan in the period
+/- Actuarial gains (-) & losses (+) in the period
100
= Present value of the obligation ( End of Year)
Year
Disclosure
101
� IAS 19 requires extensive disclosures in respect

of defined benefit plans including narrative
descriptions of:
� the regulatory framework;
� funding arrangements;
� potential (non-) financial risks;
� and/or asset ceiling tests.
� etc
�Activity
Activity
102
1. Differentiate among the four categories

of employee benefits given by IAS 19?
2. Distinguish between the two kinds of
post-employment benefits.
3. Recognize the model of the necessary
journal entries related to employment
benefits in Ethiopia.
4. Which kind of post-employment benefit
is applicable in Ethiopia?
Activity : Ethiopian Payroll Accounting based on IAS 19
103
Assume that a newly established district of an organization

has five employees. Both employees and employer
contribute to Pension Fund as per the new legislation of the
country. The organization also pays 1 % of Basic Salary as
bonus to all employees per month. The employees promised
to contribute one month salary for Renaissance Dam to be
deducted equally over one year. They also save 10% of
their Basic Salary in saving and Credit Association. The
organization expects employees to work 8 hrs/day, 5
days/wk, 4 wks/month & entirely 160hrs/ month. All
employees worked what is expected of them during the
month. The data for the month of Hamle, 2008 E.C are
presented below.
Activity : Ethiopian Payroll Accounting based on IAS 19
104

Required : Prepare the “Payroll Register” in the order of the
following headings & pass the necessary journal entries
entries..
105
� Employee Id � Income Tax

� Employee Name � Pension Contribution
of Employees
� Salary
� Abay deduction
� Allowance Taxable
� Credit Association
� Allowance Non
Taxable � Other deductions
� Bonus � Total deductions
� Net Pay
� OT
� Gross Earnings

Employment Income Tax Schedule
106
� The newly issued Proclamation 979/2016 gives the

following rates
TB Income Rate Ded EIT Calculation
1 0 – 600 0% 0.00 No Tax Payment
2 601 – 1,650 10% 60.00 EIT = TEI @ 10% – 60
3 1,651– 3,200 15% 142.50 EIT = TEI @ 15% – 142.50
4 3,201 – 5,250 20% 302.50 EIT = TEI @ 20% – 302.50
5 5,250 – 7,800 25% 565.00 EIT = TEI @ 25% – 565.00
6 7,800 – 10,900 30% 955.00 EIT = TEI @ 30% – 955.00
7 Over 10,900 35% 1,500.00 EIT= TEI@ 35% - 1,500.00
107
IFRS 16
Leases
1.Definition
108
� Lease : a contract, or part of a contract, that

conveys the right to use an asset (the underlying
asset) for a period of time in exchange for
asset
consideration.
consideration

2. Objective
109
� It sets out the principles for the

recognition, measurement, presentation
and disclosure of leases
leases.
� An entity shall apply this standard
consistently to contracts with similar
characteristics and in similar circumstances
circumstances.

2. Scope
110
� IFRS 16 is substantially unchanged in most

respects from IAS 17
17..
� An entity shall apply this Standard for annual
reporting periods beginning on/after January 1,

2019.
2019
� Earlier application is permitted for entities but
the fact shall be disclosed
disclosed..

3. Scope
111
� IFRS 16 covers the accounting under lease

transactions for both :
1. Lessor - an entity that provides the right to
use an underlying asset for a period of time in

exchange for consideration.
2. Lessee - an entity that obtains the right to use
an underlying asset for a period of time in
exchange for consideration.

3. Scope
112
� IFRS 16 requires a lessor to classify a lease either as

an operating lease or a finance lease.
1. Finance lease - lease that transfers substantially
all the risks & rewards incidental to ownership of an
asset.
� Title may or may not eventually be transferred.
� It is very similar to purchasing an asset using a
loan repayable over the primary period. (lessee)

� The lessee has all of the benefits & responsibilities
of ownership.
3. Scope
113
2. Operating lease – is a lease that does not transfer

substantially all the risks and rewards incidental to
ownership of an underlying asset.
� For example, a businessman may decide to hire (lease)
a car while his own is being repaired.
� A lease of this nature is for a short period of time
compared with the car's useful life and the lessor will
expect to lease it to many different lessees during that
life.
� Furthermore, the lessor rather than the lessee will be
responsible for maintenance.
3. Scope
114
Lease Agreement Leases that DO NOT meet any of the

four criteria are accounted for as
Operating Leases.

115
Lessee
�
Accounting
4. Lessee Accounting for Finance Leases
116
� Initial Recognition :
� A lessee will recognize at lease commencement
a right
right--of
of--use asset and a lease liability
liability.
� The commencement date of a lease is defined
in the standard as the date on which a lessor
makes an underlying asset available for use
by a lessee.

4. Lessee Accounting for Finance Leases
117
� Initial Measurement :
� At the commencement date of a lease, the
lease liability and right
right--of
of--use asset comprise :

118

4.1. Lease Liability – Initial Recognition
119
� As outlined in the diagram above, the initial

measurement of the lease liability has several
components.
� The lease payments should include the following items:
a) Fixed Payments : these payments include the set
payments outlined in the lease contract less any lease
incentives receivable from the lessor.
b) Variable Payments : these payments can take multiple
forms that may be indexed to a rate such as inflation
inflation,
or the consumer price index
index, or be linked to the
performance of the asset itself at the commencement
date.
Example : Variable Payment
120
Company W leases a production line. The lease

payment depend on the number of operating
hours of the production line i.e. Company W has
to pay Birr
Birr1000
1000 per hour of use use. The annual
minimum payment is Birr 1000 1000,,000
000. Expected
usage per year is 1,500 hours
hours.
Required: Identify the amount of fixed and
variable payment.

Example : Variable Payment
121
� Company Y rents an office building. The initial

annual rental payment is Birr 2,500
500,,000
000. The
rent will be reviewed every year and increased
by the change in the consumer price index
(CPI
CPI). Assume during the first year CPI increase
by 5%,what will be the lease liability at the
end of the first year?
Required: Identify the amount of fixed and
variable payment.
4.1. Lease Liability – Initial Recognition
122
c) Residual Value Guarantees : these include any

amounts that a lessee expects to be required to pay
for residual value guarantees are included in the lease
liability. These are included to create incentive for the
lessee to maintain the asset properly and provide
regular maintenance and upkeep.
d) Termination Costs/ Exercise price of a purchase option
option: if
the lessee is reasonably certain to exercise that option; &
e) Payments of penalties for terminating the lease : if
the lease term reflects the lessee exercising an option
to terminate the lease.
4.2. Discount Rate on Initial Recognition
123
� All the components of the lease liability as

described before are required to be discounted
to reflect the expected timing of the payments.
� The rate is required to be the rate implicit in the
lease, unless it cannot readily be determined, in
which case the lessee’s incremental rate of
borrowing is to be used.

4.3. Right-
Right-of
of--Use Asset – Initial Recognition
124
� The right
right--of
of--use asset’s value is initially linked to the
calculated value of the financial liability with several
additional adjustments.
1. Initial Direct Costs : These are incremental costs of
obtaining a lease that would not have been incurred if the
lease had not been obtained. Example: finder’s fees,
commissions to agents for establishing the lease and up-
front fees.
2. Removal and Restoration Costs : Some leases contain
requirements for lessees to return assets in a specified
condition, such that the lessee would be required to incur
costs to restore it. Example: Transportation and removal
costs to return them to the lessor as specified in the lease
agreement at the commencement date of a lease or as a
consequence of usingInstitute,
MATED Management an underlying asset.
Addis Ababa, Ethiopia
Example : Initial Recognition of a Lease
125
� DX Company (the lessee) enters into a 10-year lease

of a floor of a building, with an option to extend for 5
years. Lease payments are $ 50,000 a year during the
initial term and $ 55,000 per year during the optional
period, all payable at the beginning of each year. To
obtain the lease, lessee incurs initial direct costs of $
20,000 ($ 15,000 to the former tenant occupying the
floor and $ 5,000 for real estate commissions). The
lessor agrees to reimburse the lessee the real estate
commission of $ 5,000 and provide $ 7,000 for
leasehold improvements
improvements.
126
� At the commencement date, the lessee concludes that it

is not reasonably certain to exercise the option to
extend the lease. Therefore the lease term is 10
years. The rate implicit in the lease is not readily
determinable. The lessee’s incremental rate of
borrowing is 5% per annum
annum. This rate reflects the fixed
rate at which the lessee could borrow an amount similar
to the value of the right-of-use asset, in the same
currency, for a 10
10--year term
term, with similar collateral.

127
� Assessment :
� The entries required to record this transaction are as
follows (see corresponding superscripts for notes
reconciling each component of the entry):
� To record the initial value of the lease asset and liability:
DD/MM/YY Right-of-use asset 405,391
Lease liability 355,391
Cash 50,000

128
� To record the initial direct costs:

DD/MM/YY Right-of-use asset 20,000
Cash 20,000
� To record lease incentive relating to the lease:

DD/MM/YY Cash 5,000
Right-of-use asset 5,000

Example : Classifying leases payments
129
� On January 1, 2015 an Entity enters as lessee into

a 5 year non
non--cancellable lease over a machine
when the machine’s cash cost = ETB
ETB1
1,000
000,,000
000.
� Assume straight line depreciation method
� Terms of the lease:
� 5 equal annual lease payments of ETB 263 263,,797

starting on 31
31//12
12//2015 @ 10
10%% per annum
annum..
� The lease amortisation table is set out on the next
slide…
130
Liability at Finance cost Payment on Payment of Liability at

1-Jan for the year 31 December Lease liability 31-Dec
2015 1,000,000 100,000 (263,797.49) 163,797.49 836,202.51
2016 836,202.51 83,620.25 (263,797.49) 180,177.24 656,025.27
2017 656,025.27 65,602.53 (263,797.49) 198,194.96 457,830.31
2018 457,830.31 45,783.03 (263,797.49) 218,014.46 239,815.85
2019 239,815.85 23,981.58 (263,797.49) 239,815.85 0.00

318,987.39 1,318,987.39

131
� On January 1, 2015 Entity enters as lessee into a 5

year non
non--cancellable lease over a photocopier when
the photocopier’s cash cost = Br 10
10,,000
000.
� Terms of the lease
lease:
� 5 equal annual lease payments of Br 2 , 638 starting on
31//12
31 12//2015 @ 1010%% per annum
� upon paying the final lease payment legal ownership of the
photocopier transfers from the lessor to Entity.
� The lease amortisation table is set out on the next
slide…
132
Liability at Finance Payment Liability at

1 January cost for on 31 31
the year December December
2015 10,000 1,000 (2,637.97) 8,362.03

2016 8,362.03 836.20 (2,637.97) 6,560.26
2017 6,560.26 656.03 (2,637.97) 4,578.32
2018 4,578.32 457.83 (2,637.97) 2,398.18
2019 2,398.18 239.82 (2,638.00) 0
3,189.88 13,189.88
4.4. Lease Liability – Subsequent Measurement
Measu
133
� Interest on the lease liability is recognized in profit or

loss, unless it is included in the carrying amount of an
asset as required by another standard.

4.5. Right
Right--of
of--Use Asset – Subsequent Measurement
134
� Subsequent to initial recognition, an entity may apply

three potential models to account for right right--of
of--use
assets,, depending on accounting policy choice and
assets
facts and circumstances:

4.5. Right
Right--of
135
A. Cost Model:
Model
� To follow the cost model, an entity measures a
right--of
right of--use asset at cost
cost:
a) Less accumulated amortization and accumulated
impairment losses
losses;
b) Adjusted for re re--measurements
measurements;
� In determining the period to calculate amortization
expense,, an entity uses the lease term
expense term.
� If the initial recognition contemplates purchase
options - utilize is the useful life of the asset
asset.
4.5. Right
Right--of
Measure
136
B. Revaluation Model
� If right
right--of
of--use assets relate to a class of property, plant
and equipment that an entity applies the revaluation
model to under IAS 16 16, a lessee may elect to also
apply the revaluation model to right right--of
of--use assets of
the same class.
� Carry the asset at a Revalued amount/ FV at the date
of the revaluation (-) any subsequent A/Amor tization
& Impairment Losses.
� An entity must be consistent in its classification of a
class of right-of-use assets.
4.5. Right
Right--of
137
C. Fair Value Model

� If an entity applies the FV value model in IAS 40
Investment Property
Property, the same classification must
also be applied to right - ofof-- use assets that meet
the definition of investment property.
� After initial recognition, an entity that chooses the
FV model should measure all of its right - of of-- use
assets at FV.
� A gain or loss arising from a change in the FV of
an investment property should be recognized in net
profit or loss (SP/L) for the period in which it
arises.
4.6. Re
Re--measurement of Leases
138
� Initial assessment may need to be revisited if certain

events occur that modify the originally assessed
assumptions used to calculate the lease balances
balances.
� Recognizes the effects of these re re--measurements as an
adjustment to the carrying value of the lease liability
and right
right--of
of--use asset as at the time of re-measurement;
prior period figures are not adjusted
adjusted.
� If the carrying value of the asset is less than the amount
of an adjustment
adjustment, the carrying value is reduced to zero
with any further reductions being recognized in P & L.
4.6. Re
Re--measurement of Leases
139
� Situations requiring re
re--measurement and their impact are:
1. Change in original assessment of lease term or
Purchase/termination
Purchase termination options
� Revise lease using new assumptions
� Unchanged discount rate
2. Change in estimate of residual guarantee and Change
in index or rate affecting payments

� Revise lease using new assumptions
� Revised discount rate

4.7. Lease Modifications
4.7
140
� Lease modifications arise when there is a change

in the legal form of the lease agreement, i.e.
changes to the underlying contract
� The accounting for the modification is dependent
on:
a) whether the modified terms increase/decrease the
scope of the lease
lease, and
b) whether increases in scope require consideration
commensurate with a ‘standalone standalone price price’ for the new
scopeMATED
of the lease.
lease
Management Institute, Addis Ababa, Ethiopia
4.7.1. Modifications – Separate Leases
141
� A lease modification is accounted for as a separate lease

if both
both:
a) The modification increases the scope of the lease by
adding the right to use one or more underlying assets;
and
b) The consideration for the lease increases by an amount
commensurate with the standalone price for the increase
in scope.
� If both criteria are met, a lessee would follow the previous
guidance in this publication on the initial recognition and
measurement of lease liabilities and right right--of
of--use assets
assets.
Example : Lease Modification that is a Separate Lease
142
Lessee enters into a 1010--year lease for 2,000 square metres

of office space. At the beginning of Year 6, Lessee and
Lessor agree to amend the original lease for the remaining
five years to include an additional 3,000 square metres of
office space in the same building. The additional space is
made available for use by Lessee at the end of the second
quarter of Year 6. The increase in total consideration for the
lease is commensurate with the current market rate for the
new 3,000 square metres of office space, adjusted for the
discount that Lessee receives reflecting that Lessor does not
incur costs that it would otherwise have incurred if leasing the
same space to a new tenant (for example, marketing costs).
4.7.2. Modifications – Not Separate Leases
143
� If a lease modification fails the test above

(e.g. additional assets are added
added, but not
at a standalone price
price) or
� the modification is of any other type (e.g.
a decrease in scope from the original
contract), the lessee must modify the
initially recognized components of the
lease contract.
5. Presentation
144
� IFRS 16 has extensive presentation and

disclosure requirements for lessees in both
qualitative and quantitative form.

5. Presentation
145
� Statement of Financial Position

� Right-of
Right-of--use assets:
assets separate from other assets or same line as
underlying asset type and disclose.
� Lease liabilities separate from other liabilities or disclose line
item.
� Statement of Profit and Loss
� Interest cost with other finance costs per IAS 1.
1
� Amortization of right-of-use assets.
� Statement of Cash Flows
� Cash payments of lease liabilities as financing activities.
activities
� Cash payments for interest in accordance with IAS 7
requirements for interest paid.paid
� Short-term, low-value and variable lease payments within
operating activities
activities.
6. Disclosure
146
� IFRS 16 has extensive disclosure requirements for lessees in both

� Quantitative Disclosure Requirements
� Additions to right-of-use assets.
� Carrying value of right-of-use assets at the end of the reporting
period by class.
� Depreciation for assets by class.
� Interest expense on lease liabilities.
� Short-term leases expensed.
� Low-value leases expensed.
� Variable lease payments expensed.
� Income from subleasing.
� Gains or losses arising from sale and leaseback transactions.
� Total cash outflow for leases.
6. Disclosure
147
� Other disclosure requirements also include:

� Commitments for short-term leases if the current period
expense is dissimilar to future commitments.
� For right-of-use assets that meet the definition of
investment property, the disclosure requirements of IAS
40, with a few exclusions.
� For right-of-use assets where the revaluation model has
been applied, the disclosure requirements of IAS 16.
� Entities applying the short-term and/or low-value
lease exemptions are required to disclose that fact.
6. Disclosure
148
� A summary of the nature of the entity’s leasing activities;

� Potential cash outflows the entity is exposed to that are
not included in the measured lease liability, including:
� Variable lease payments;
� Extension options and termination options;
� Residual value guarantees; and
� Leases not yet commenced to which the lessee is

committed.
� Restrictions or covenants imposed by leases; and
� Sale and leaseback transaction information.

7.. Lessee Accounting for Operating Lease
149
� It requires that the rentals under operating

leases should be written off as an expense
on a straight line basis over the lease
term.
DD/MM/YY Lease / Rent Expense
Rent/Lease Payable (Cash)

8. Presentation and Disclosure
150

disclosure requirements for lessees in
both qualitative and quantitative form.

151
� Lessor
Accounting
Lessor Accounting
152
� IFRS 16 is substantially unchanged in most

respects from IAS 17 for lessor;
� Leases that transfer substantially all of the risks
and rewards are finance leases
leases; all other leases
are operating
operating;
� For operating leases (from the perspective of
the lessor), both the lessee and the lessor will
recognize an asset
asset;

Example : Finance Vs Operating lease
153
Lessor L enters into a non cancelable lease contract

with company X under which X leases non specialized
equipment for 5 years
years. The economic life of the
equipment is estimated to be 15 years and the legal
title will remain with L. The lease contract contains no
purchase, renewal or early termination options
options. The fair
value of the equipment is Birr Birr1
1,000
000,,000 and the
present value of the lease payments amounts to Birr
500,,000
500 000. Required : is the lease contract Finance or
Operating lease
lease?
9. Lessor Accounting for Finance leases
154
� Initial Recognition :
� A lessor is required to recognize at the
commencement date assets held under a
finance lease in its SFP and present them
as a receivable at an amount equal to the
net investment in the lease.

9. Lessor Accounting for Finance leases
155
� Initial Measurement :
� The net investment in the lease will be measured as the
sum of both of the following:
a) the lease receivable measured at the present value of
the lease payments
payments; and
b) the residual asset
asset, measured at the present value of any
residual value accruing to the lessor.
� Subsequently, a lessor is required to recognise finance
income over the lease term, based on a pattern
reflecting a constant periodic rate of return on the
lessor’s net investment in the lease.
Accounting by the Lessor
156
Ex: DX Leasing Company (Lessor) signs an agreement

on January 1, 2010, to lease equipment to ABC Company
(Lessee).The following information relates to this agreement.
1. The term of the non
non--cancelable lease is 6 years with no
renewal option. The equipment has life of 6 yrs.
2. The Cost and FV of the asset at January 1, 2010, is £
343,000.
3. The asset will revert to the lessor at the end of the lease
term, at which time the asset is expected to have a
residual value of £ 61,071, none of which is guaranteed.
4. ABC Company assumes all executory costs.
5. The agreement requires equal annual rental payments,
beginning
MATEDon January
Management 1, Addis
Institute, 2010.
Ababa, Ethiopia
157
Computation: Assuming the lessor desires a 10% rate of return

on its investment, calculate the amount of the annual rental
payment required.
Residual value £ 61,071
PV of single sum (i=10%, n=6) x 0.56447
£
PV of residual value 34,473
£
Fair market value of leased equipment 343,000
-
Present value of residual value (34,473)
Amount to be recovered through lease payment 308,527
÷
PV factor of annunity due (i=10%, n=6) £ 4.79079
Annual payment required 64,400
158
Amortization schedule for the lessor is as follows.

159
�Journal entries for the lessor for 2010 & 2011.

1/1/10 Lease Receivable 343,000
Equipment 343,000
1/1/10 Cash 64,400
Lease Receivable 64,400
12/31/10 Interest Receivable 27,860
Interest Revenue 27,860

160
�Journal entries for the lessor for 2010 and 2011.

1/1/11 Cash 64,400

Lease Receivable 36,540
Interest Rec. 27,860
12/31/11 Interest Receivable 24,206
Interest Revenue 24,206

10. Lessor Accounting for Operating Leases
161
� Recognition and Measurement :

� A lessor is required to recognise lease payments
from operating leases as income on either a
straight-line basis or another systematic basis.
DD/MM/YY Lease/Rent Receivable( Cash) xxxx
Rental/Lease Revenue xxxx

162

disclosure requirements for lessees in both

163
Quantitative Disclosure Requirements

� Finance leases
� Selling profit or loss;

� Finance income on the net investment;
� Income from variable lease payments;
� Qualitative and quantitative explanation of changes in the net investment; and
� Operating leases
� Lease income, separately disclosing variable lease payments;
� Disclosure requirements of IAS 16 for leased assets, separating leased assets
from non-leased assets;
� Other applicable disclosure requirements based on the nature of the
underlying asset (eg. IAS 36, 38, 40, 41); and
164
Qualitative Disclosure Requirements

� Information about its leasing activities
� This disclosure would include the nature of the lessor’s
leasing activities and how the lessee manages risks

associated with those activities,
� risk management strategies including:
� Buy-back agreements;
� Residual value guarantees;
� Variable lease payments for excess use; and
� Any other risk management strategies.
165
IAS 37
Liabilities – Provisions, Contingent
Assets and Liabilities

IAS 37: Provisions, Contingent Liabilities & Assets
166
� It aims to ensure that appropriate :

1. recognition criteria and measurement bases are
applied to provisions, contingent liabilities and
assets and
2. that sufficient information is disclosed in the notes
to the financial statements to enable users to
understand their nature, timing and amount.

IAS 37 : Recognition of Provisions
167
� It should be recognized when:

1. An entity has a present obligation - legal/constructive.
2. It is probable that a transfer of resources embodying
economic benefits will be required to settle it.
3. A reliable estimate can be made of its amount.
� It is viewed as a liability
liability.
� A provision is a liability of uncertain timing or amount.
� A liability is a present obligation of the entity arising from

past events, the settlement of which is expected to result in
an outflow from the entity of resources embodying
economic benefits.
IAS 37 : Meaning of Constructive Obligation
168
� It is an obligation that derives from an entity's

actions where:
1. by an established pattern of past practice,
published policies or a sufficiently specific current
statement the entity has indicated to other parties
that it will accept cer tain responsibilities; and
2. as a result, the entity has created a valid
expectation on the part of those other parties that
it will discharge those responsibilities.'
IAS 37 : Probable transfer of resources
169
� A transfer of resources embodying economic benefits

is regarded as 'probable' if the event is more likely
than not to occur.
� This indicates a probability of more than 50%
50%..

IAS 37 : Measurement of provisions
170
The amount recognized as a provision should be the

best estimate of the expenditure required to settle the
present obligation at the end of the reporting period.
1. The estimates will be determined by the judgment of
the entity's management supplemented by the
experience of similar transactions.
2. Where the effect of the time value of money is
material, the amount of a provision should be the PV
of the MATED
expenditure required
Management Institute, toEthiopia
Addis Ababa, settle the obligation.
IAS 37 : Future events
171
� They are reasonably expected to

occur (e. g. new legislation, changes
in technology
technology) may affect the amount
required to settle the entity's
obligation and should be taken into
account.

IAS 37 : Expected disposal of assets
172
Gains from the expected

�
disposal of assets should not be
taken into account in measuring
a provision.

IAS 37 : Reimbursements
173
� Some or all of the expenditure needed to settle a provision may

be expected to be recovered from a third party should be
recognized only when it is virtually certain that reimbursement
will be received if the entity settles the obligation.
� They should be treated as a separate asset asset, and the amount
recognized should not be greater than the provision itself.
� The provision and the amount recognized for reimbursement may
be netted off in SP/L.

IAS 37 : Changes in provisions
174
� Provisions should be reviewed at the end

of each reporting period and adjusted to
reflect the current best estimate.
� If it is no longer probable
probable,, that a transfer
of resources will be required to settle the
obligation, the provision should be
reversed.
reversed

IAS 37 : Costs to be included within a restructuring provision
182
� A restructuring provision should include only the

direct expenditures arising from the restructuring,
which are those that are both:
1. Necessarily entailed by the restructuring; and
2. Not associated with the ongoing activities of

the entity.

IAS 37 : Contingent liabilities
183
� IAS 37 defines a contingent liability as:

1. A possible obligation that arises from past events and whose
existence will be confirmed only by the occurrence or non-
occurrence of one or more uncer tain future events not wholly
within the control of the entity; or
2. A present obligation that arises from past events but is not
recognized because:
� It is not probable that an outflow of resources embodying
economic benefits will be required to settle the obligation; or
� The amount of the obligation cannot be measured with
sufficient reliability.
� As a rule of thumb, probable means more than 50% likely.
� If an obligation is probable, it is not a contingent liability –

instead, a provision is needed.
IAS 37 : Contingent Liabilities
184
� They should not be recognized in F/S but they

should be disclosed unless they are remote
remote.
� The required disclosures are:
1. A brief description of the nature of the
contingent liability.
2. An estimate of its financial effect.
3. An indication of the uncer tainties that exist.
4. The possibility of any reimbursement.

IAS 37 : Contingent Assets
185
� They are possible ass assets

ets that arises from past events
and whose existence will be confirmed by the
occurrence or non-occurrence of one or more
uncertain future events not wholly within control of the
entity.
� They must not be recognized but only when the
realization of the related economic benefits is
vir tually cer tain should recognition take place. At that
point, it is no longer a contingent asset!

IAS 37 : Example of Contingent Asset & Liability
186
� A legal dispute which the outcome is not yet known, a number

of possibilities arise:
1. It expects to have to pay about $100,000. A provision is
recognized.
2. Possible damages are $100,000 but it is not expected to
have to pay them. A contingent liability is disclosed.
3. The company expects to have to pay damages but is unable
to estimate the amount. A contingent liability is disclosed.
4. The company expects to receive damages of $100,000 and
this is virtually certain
certain. An asset is recognized.
5. The company expects to probably receive damages of
$100,000. A contingent asset is disclosed.
6. The company thinks it may receive damages, but it is not
probable.
probable No disclosure.
IAS 37 : Disclosure of Provisions
187
� Disclosures for provisions fall into two parts.

1. Disclosure of details of the change in carrying
value of a provision from the beginning to the end
of the year.
2. Disclosure of the background to the making of the
provision and the uncertainties affecting its outcome.

IAS 37: Flow chart : Provisions & Contingent Liabilities
188
� It is a good summary of its requirements

concerning provisions and contingent liabilities

Flow char t: Provisions & Contingent Liabilities
189

Self Assessment Questions (SAQs)
190
1 . Provision

Self Assessment Questions (SAQs)
191
2. In which of the following circumstances might a provision

be recognized?
a. On 13 December 20X9 the board of an entity decided to
close down a division. The accounting date of the
company is 31 December. Before 31 December 20X9 the
decision was not communicated to any of those affected
and no other steps were taken to implement the decision.
b. The board agreed a detailed closure plan on 20
December 20X9 and details were given to customers and
employees.
c. A company is obliged to incur clean up costs for
environmental damage (that has already been caused).
d. A company intends to carry out future expenditure to
operate in a particular way in the future.
Self Assessment Questions (SAQs).
192
3) During 20X0 SK Co gives a guarantee of certain

borrowings of PK Co, whose financial condition at that
time is sound. During 20X1, the financial condition of PK Co
deteriorates and at 30 June 20X1 PK Co files for
protection from its creditors. What accounting treatment is
required?
a) At 31 December 20X0?
b) At 31 December 20X1?
4) Warren Co gives warranties at the time of sale to

purchasers of its products. Under the terms of the warranty
the manufacturer undertakes to make good, by repair or
replacement, manufacturing defects that become apparent
within a period of three years from the date of the sale.
Should a provision be recognized?
Self Assessment Questions (SAQs).
193
5) After a wedding in 20X0 ten people died, possibly as a result of

food poisoning from products sold by CD Co. Legal proceedings
are started seeking damages from CD but it disputes liability. Up
to the date of approval of the financial statements for the year to
31 December 20X0, CD's lawyers advise that it is probable that it
will not be found liable. However, when Callow prepares the
financial statements for the year to 31 December 20X1 its
lawyers advise that, owing to developments in the case, it is
probable that it will be found liable. What is the required
accounting treatment:
a) At 31 December 20X0?
b) At 31 December 20X1?
Key to SAQs
194
1. The cost is found using 'expected values' (75% × $nil) +

(20% × $1.0m) + (5% × $4.0m) = $400,000.
2. Differentiation
a. No provision would be recognized as the decision has not
been communicated.
b. A provision would be made in the 20X9 financial
statements.
c. A provision for such costs is appropriate.
d. No present obligation exists and under IAS 37 no
provision would be appropriate. This is because the
entity could avoid the future expenditure by its future
actions, maybe by changing its method of operation.
Key to SAQs
195
3) Accounting treatment
(a) At 31 December 20X0
There is a present obligation as a result of a past obligating
event. The obligating event is the giving of the guarantee,
which gives rise to a legal obligation. However, at 31
December 20X0 no transfer of resources is probable in
settlement of the obligation. No provision is recognized. The
guarantee is disclosed as a contingent liability unless the
probability of any transfer is regarded as remote.
(b) At 31 December 20X1
As above, there is a present obligation as a result of a past
obligating event, namely the giving of the guarantee. At 31
December 20X1 it is probable that a transfer of resources
will be required to settle the obligation. A provision is
thereforeMATED Management Institute, Addis Ababa, Ethiopia
recognized for the best estimate of the obligation.
Key to SAQs
196
4) Recognition of provision
� Warren Co cannot avoid the cost of repairing or replacing
all items of product that manifest manufacturing defects in
respect of which warranties are given before the end of the
reporting period, and a provision for the cost of this should
therefore be made
made.
� Warren Co is obliged to repair or replace items that fail
within the entire warranty period. Therefore, in respect of
this year's sales, the obligation provided for at the end of
the reporting period should be the cost of making good items
for which defects have been notified but not yet processed,
plus an estimate of costs in respect of the other items sold for
which there is sufficient evidence that manufacturing defects
will manifest themselves during their remaining periods of
warranty cover.
Key to SAQs
197
5)Accounting treatment
a) At 31 December 20X0
On the basis of the evidence available when the financial

statements were approved, there is no obligation as a
result of past events. No provision is recognized. The
matter is disclosed as a contingent liability unless the
probability of any transfer is regarded as remote.
b) At 31 December 20X1
On the basis of the evidence available, there is a present

obligation. A transfer of resources in settlement is
probable. A provision is recognized for the best estimate
of the amount needed to settle the present obligation.
198
IFRS 7, 9, & IAS 32

Financial Instruments

Introduction
199
The relevant IASs/IFRSs are:

� IAS 32 Financial Instruments: Presentation
� FRS 7 Financial Instruments: Disclosures
� IFRS 9 Financial Instruments: Recognition and
Measurement)

Financial Instruments : Definitions
200
� Financial instrument :
� This is a contract that gives rise to a financial asset of one entity
and a financial liability or equity instrument of another entity.
� Financial asset :
� This is any asset that is:
� cash
cash;
� an equity instrument of another entity;
� a contractual right
right:
� to receive cash or another financial asset from another entity;
or
� to exchange financial assets or financial liabilities with another
entity under conditions that are potentially favorable to the
entity; or
Financial Instruments : Definitions
201
� Financial liability :
This is any liability that is:
� a contractual obligation
obligation:
� to deliver cash or another financial asset to another
entity; or
� to exchange financial assets or financial liabilities with
another entity under conditions that are potentially
unfavourable to the entity; or
� a contract that will or may be settled in the entity’s own
equity instruments.
� Equity instrument :
This is any contract that evidences a residual interest in the
assets of an entity after deducting all of its liabilities.
Equity instrument or Financial liability
202
� A financial instrument should be classified as

either an equity instrument or a financial liability
according to the substance of the contract, not
its legal form
form.
� An entity must make this decision at the time the
instrument is initially recognised and the
classification cannot be subsequently revised
based on changed circumstances

203
� A financial instrument is an equity instrument only if

if:
� the instrument includes no contractual obligation to
deliver cash or another financial asset to another

entity
� If an instrument has terms such that there is an
obligation on the enterprise to transfer financial assets

to redeem the obligation then it is a liability
instrument regardless of its legal nature.

204
� A Preference shares are the main instrument where in

substance they could be liabilities but legally are
equity.
equity
� For a preference shares to be treated as a liability
liability:
� annual dividends are compulsory
� the share provides for mandatory redemption by the issuer at
a fixed or determinable amount at a future fixed or
determinable date
� the share gives the holder the option to redeem upon the
occurrence of a future event that is highly likely to occur

Equity Instrument or Financial Liability
205
� A contractual obligation to receive or deliver a

number of its own shares or other equity instruments
that varies so that the fair value of the entity’s own
equity instruments to be delivered equals the fixed
monetary amount of the contractual obligation is a
financial liability
liability.

Measurement Of Financial Assets
206
In accordance with IFRS 9, financial assets may be

classified under the following three headings:
1. Financial assets measured at FVTP
FVTPLL
2. Financial assets measured at fair value through other
comprehensive income (FVTOCI
FVTOCI)
3. Financial assets measured at amortised cost
� Classification is made at the time the financial asset is
initially recognised
recognised, namely when the entity becomes
a party to the contractual provisions of the
instrument.
Classification of Financial Assets
207 Business Business Other
model model Business
Holding Both
assets in models
collecting (trading,
order to contractual
collect maximizing
cash flows &
contractual selling
cash flow
cash financial through
flows assets sale, etc)
Cash flows
are solely
Amortised
payments of FVOCI* FVTPL
cost
principal and
interest (SP
SPPI)
Other types
FVTPL FVTPL FVTPL
of cash flows
*Excludes investments in equity instruments (see later slides). An entity can

elect to present FV changes in OCI.
1.. Financial assets measured at FVTPL
208
� Initially measured at fair value

value, with transaction costs
being expensed as incurred in arriving at SP/L in the
period
� Re -measurement to fair value takes place at each
Re-
reporting date, with any movement in fair value
taken to SP/L in the year (i.e. measured at FVTPL
FVTPL),
which effectively incorporates an annual impairment
review.

Example 1:
1: Initial measurement – held for trading
209
� An entity bought 100 held for trading bonds for Br1000 each. It
incurred total transaction costs of Br 5,000. It measures the bonds at
FVTPL because the conditions for using amortized cost model and
FVTOCI are no not satisfied; i.e. the bonds are not ‘held
held to collect
collect’ or
‘held
held to collect or sell
sell’. The bonds are held for trading
trading. Therefore, the
bonds are measured at fair value and the transaction costs are
expensed.
� Journal entries:
entries
� To record the purchase price of bonds
Financial assets at FVTPL (100x1000) 100,000
Cash 100,000
� To record the transaction costs
Bond acquisition costs (P/L
P/L) 5,000
Cash 5,000
Example 2:
2 Financial asset at FVTPL
210
An entity acquires for cash 1,000 shares at Br 2,000 per share and can designate
them as at FVTPL . At the year end December 31, 2015, the quoted price increases
to Br2,600. It sells the shares at Br3.1 million on 31 January 2016.
Initial recognition
recognition:
Financial assets at FVTPL 2,000,000
Cash 2,000,000
December 3131,, 2015

2015:
Financial assets at FVTPL 600,000
Gain in FV of Financial assets– P/L 600,000
January 31
31,,2016
2016:
Cash 3,100,000
Financial MATED
assetsManagement
at FVTPL Institute, Addis Ababa, Ethiopia 2,600,000
Gain on sale of financial assets– P/L 500,000
2. Financial Assets measured at Amor tised Cost
211
� Amortised cost - is the cost of an asset or liability adjusted to

achieve a constant effective interest rate over the life of the asset or
liability
� Amortised cost - is calculated using the effective interest method.
� FAs carried at amortised cost are subject to an annual impairment
FA
test. Any impairment identified must be charged in full in P/L
test P/L..
� This classification applies only to debt instruments and must be
designated upon initial recognition. In this instance, the financial
assets are initially measured at fair value plus transaction costs
costs.
� A debt instrument that meets the following two tests may be
measured at amortised cost (net of any write-down for
impairment):
� The business model test
� The cash flow characteristics
Example – Financial asset measured at Amortized Cost
212
On Jan 1, 2015, A company bought 5-year bonds for Br900 million,
transaction cost = Br50 million, cash interest = Br40 million/year,
mandatory redemption at 1.1 billion at Dec 31, 2019.
Year Carrying Int. income Cash Carrying amt

amount at 6.9584%* inflow ending
beginning
2015 950.00 66.10 (40) 976.11
2016 976.11 67.92 (40) 1,004.03
2017 1,004.03 69.86 (40) 1,033.89
2018 1,033.89 71.94 (40) 1,065.83
2019 1,065.83 74.16 (40) 1,100.00
*6.9584% is Management
MATED the rate that exactly
Institute, discounts
Addis Ababa, Ethiopia the cash flows to 950.00
Example : Measurement of
of Financial Asset at
FVTPL & Amor tised Cost
213
An entity purchased a five-year bond on 1 January

2015 at a cost of Br5m with annual interest of 5%, which is
also the effective rate, payable on 31 December annually.
At the reporting date of 31 December 2015 interest has
been received as expected and the market rate of interest
is now 6%.
Requirement
Account for the financial asset on the basis that it is classified to be
measured as:
(a) FVTPL; and
(b) amortised cost.
Example: Measurement of Financial Asset
Example: at
FVTPL & Amor tised Cost
214
Solution
(a) If classified as FVTPL
The FV of the bond is measured based upon expected future cash flows
discounted at the current market rate of interest of 6% as follows:
Year Expected cash flows 6% discount factor PV Br.m
31 December 2016 Br5m x 5% = Br0.25m 0.9434 0.2358
31 December 2017 Br0.25m 0.8900 0.2225
31 December 2018 Br0.25m 0.8396 0.2099
31 December 2019 Br0.25m + Br5m 0.7921 4.1585
4.8267
Therefore, at the reporting date of 31 December 2015, the financial
asset will be stated at a fair value of Br4.8267m, with the fall in fair
value amounting to Br0.1733m taken to profit or loss in the year.
Interest received will be taken to profit or loss for the year
amountingMATED
to Br0.25m.
Example: Measurement of Financial Asset at
FVTPL & Amortised Cost
215
(b) If classified to be measured at amortised cost

This requires that the fair value of the bond is measured based upon expected future
cash flows discounted at the original effective rate of 5%. This will continue to be at
Br5m as illustrated below:
Year Expected cash flows 5% discount factor PV Br.m
31 December 2016 Br5m x 5% = Br0.25m 0.9524 0.2381
31 December 2017 Br0.25m 0.9070 0.2267
31 December 2018 Br0.25m 0.8638 0.2160
31 December 2019 Br0.25m + Br5m 0.8227 4.3192
5.000
In addition, interest received during the year of Br0.25m will be taken to

profit or loss for the year.
3. Financial assets measured at FVTOCI
216
� Can be used for both debt and equity instruments.

instruments
� A debt instrument that meets the following two conditions must
be measured at FVTOCI
� Business model:
model Held to collect and sell
� Cash flow characteristics:
characteristics Cash flows are SPPI
� If an equity investment is not held for trading
trading, an entity can
make an irrevocable election at initial recognition to measure it
at FVTOCI with only dividend income recognized in profit or
loss.
loss
� An instrument that meets the conditions for measurement at
amortized cost or FVTOCI has FVTPL option to avoid accounting
mismatch between measurement of the asset and the liability to
which it relates.
Subsequent measurement of Financial Asset measured
at FVTOCI : Debt Instruments
217
SFP P/L OCI

Interest revenue Fair value change
using effective other than those
interest method recognized in profit
or loss
Impairment for
Fair value credit losses
(amounts
accumulated are
Foreign exchange recycled to P&L
gains & losses upon de-recognition)

Example : Subsequent measurement of Financial Asset:
Ddebt instrument measured at FVOCI
218
� FV of debt instrument = Br1,000 on 15 December 2015

(measured at FVOCI).
� 5% interest rate over the contractual term of 10 years.
� Effective interest rate = 5%.
Debit Credit
Financial asset – FVOCI Br1,000
Cash Br1,000
To recognise the debt instrument measured at its fair value

Example : Subsequent measurement of Financial Asset:
Debt instrument measured at FVOCI
FVOCI))
219
� 31 December 2015 (the reporting date) – FV decreased to Br 950

as a result of changes in market interest rates rates. The entity
determines that there has not been a significant increase in credit
risk since initial recognition and that expected credit losses should
be measured at an amount equal to 12-month expected credit
losses (ECL
ECL), which amounts to Br 30
Debit Credit
Impairment loss (profit or loss) Br30
Other comprehensive income Br20

Financial asset - Br50
FVOCI
To recognise fair value changes
Example : Subsequent measurement of Financial Asset :
Debt instrument measured at FVOCI
220
� January 1, 2016: the entity sells the debt instrument for Br 950, which
is its FV at that date.
Debit Credit
Cash Br950
Financial asset—FVOCI Br950
Profit or loss Br20
Other comprehensive Br20
income
To derecognise the FVOCI asset and ‘recycle’ amounts
accumulated in OCI to profit or loss.
Subsequent measurement of Financial Asset FVTOCI :
Investments
Investments in Equity Instruments
221
SFP SP/L OCI

Changes in fair value
and foreign
exchange component
Fair value Dividends
(amounts accumulated
never recycled to P&L
→ may be transferred
within equity
equity)

Reclassification of Financial Assets
222
� For Financial Assets

Assets, reclassification is required between FVTPL
and Amortised cost
cost, or vice versa, if and only if the entity’s
business model objective for its financial assets changes so that
its previous model assessment no longer applies.
� If reclassification is appropriate, it must be done prospectively
from the reclassification date. An entity does not restate any
previously recognised gains, losses or interest.
� IFRS 9 does not allow reclassification where the:
� OCI option has been exercised for a financial asset; or
� fair value option has been exercised in any circumstance for a
financial asset or financial liability.

Examples
223
1. An entity has a portfolio of commercial loans that it holds to sell

in the short term.
o The entity acquires a company that manages commercial loans
and has a business model that holds the loans in order to
collect the contractual cash flows.
o The portfolio of commercial loans is no longer for sale, and the
portfolio is now managed together with the acquired
commercial loans and all are held to collect the contractual
cash flows.
2. A financial services firm decides to shut down its retail
mortgage business - no longer accepts new business and the
financial services firm is actively marketing its mortgage loan
portfolio for sale.
De--recognition of a Financial Asset
De
224
� Once an entity has determined that the asset has

been transferred, it then determines whether or not it
has transferred substantially all of the risks and rewards
of ownership of the asset
� If substantially all the risks and rewards have been
transferred, the asset is derecognised;
transferred
� If substantially all the risks and rewards have been
retained, de-recognition of the asset is precluded;
retained

De
225
� If the entity has neither retained nor transferred

substantially all of the risks and rewards of the asset,
then the entity must assess whether it has relinquished
control of the asset or not;
� If the entity does not control the asset then de-
recognition is appropriate; however if the entity has
retained control of the asset, then the entity continues
to recognize the asset to the extent to which it has a
continuing involvement in the asset.

De
226
� On de-recognition of a financial asset in its entirety:

� the difference between carrying amount and
consideration received shall be recognised in profit or loss
� If transfer does not result in de-recognition, keep
transferred asset on books and recognize financial
liability for the consideration received
� Do not offset

De-recognition of Financial Assets : Evaluation of the transfer of
De-
risks and rewards of ownership
227
Examples transferred
Examples retained substantially all
substantially all risks and rewards the risks and rewards of ownership:
of ownership:
• Unconditional sale of a financial • Sale and repurchase transaction
asset; where the repurchase price is a
• Sale of a financial asset fixed price or the sale price plus a
together with an option to lender’s return;
repurchase at its fair value at • Sale of short-term receivables in
the time of repurchase; which the entity guarantees to
• Sale of short-term receivables in compensate the transferee for
which the entity continues to credit losses that are likely to
collect and remit to the occur.
transferee for a handling fee

Impairment of Financial Assets
228
� IFRS 9 effectively incorporates an impairment review for

financial assets that are measured at fair value , as any
fall in fair value is taken to profit or loss or OCI in the
period (depending upon the classification of the financial
asset)
� For financial assets designated to be measured at
amortised cost
cost, an entity must make an assessment at each
reporting date whether there is evidence of possible
impairment. For valuation at FVTOCI FVTOCI, the decrease in
carrying amount may be partially recorded as impairment.
� If impairment is identified, it is charged in arriving at profit
or loss immediately
IFRS 9 : Impairment Models
229
� IFRS 9 establishes a three stage impairment model model,

based on whether there has been a significant
increase in the credit risk of a financial asset since its
initial recognition
recognition.
� These three stages then determine the amount of
impairment to be recognized as expected credit
losses (ECL
ECL) (as well as the amount of interest revenue
to be recorded) at each reporting date:

IFRS 9 : Impairment Models
230
� Stage 1: Credit risk has not increased significantly

since initial recognition – recognize 12 months ECL ECL,
and recognize interest on a gross basis ;
� Stage 2 : Credit risk has increased significantly since
initial recognition – recognize lifetime ECL , and
recognize interest on a gross basis ;
� Stage 3: Financial asset is credit impaired – recognize
lifetime ECL , and present interest on a net basis (i.e.
on the gross carrying amount less credit
redit allowance
allowance).

12--month vs. Lifetime expected credit losses. When to recognise ?
12
231
� 12-month expected credit losses are calculated by

multiplying the probability of a default occurring in the
next 12 months with the total (lifetime) expected credit
losses that would result from that default, regardless of
when those losses occur.
� Therefore, 12-month expected credit losses represent a
financial asset’s lifetime expected credit losses that are
expected to arise from default events that are possible
within the 12 month period following origination of an
asset, or from each reporting date for those assets in
Stage 1.

Moving from Stage 1 to Stage 2
232
� The transition from Stage 1 to Stage 2 focuses on the

change in the risk of default during a period.
� A significant increase in credit risk (moving from Stage
1 to Stage 2)
2 can include:
– Changes in general economic and/or market conditions (e.g.
expected increase in unemployment rates, interest rates)
– Significant changes in the operating results or financial
position of the borrower
– Changes in the amount of financial support available to an
entity (e.g. from its parent)
– Expected or potential breaches of covenants
– Expected
MATEDdelay in payment
Stage 3
233
� Credit-impaired financial assets are those for which

Credit-
one or more events that have a detrimental effect on
the estimated future cash flows have already occurred
occurred.
� These financial assets would be in Stage 3 and lifetime
expected losses would be re-cognised.
� Indicators that an asset is credit-impaired would
include observable data about the following events:
� Actual breach of contract (e.g. default or delinquency in
payments)
� Granting of a concession to the borrower due to the borrower’s
financial difficulty
� Probable that the borrower will enter bankruptcy
Example – Applying the three
three--stage model
234
� Mr. A is a director of Bank A and is also the sole shareholder of

Company C. Company C is therefore a related party to Bank A.
� On 1 January 2014, Bank A provided a Br100 million loan to
Company C for four years at an annual interest rate of 10%
� On 31 December 2015, Company C is expected to have cash
flow problems due to a deterioration in economic conditions
� On 31 December 2016, the loan is extended for another three
years because Company C does not have enough cash to repay
the loan.
Question: How should the loan be accounted for under the three-
stage expected loss model?

three--stage model
235
� December 31, 2014

� Loan is in Stage 1
� Estimate the probability that the loan will default over
the next 12 months
� Assume there is a 1% probability of the loan defaulting in
the next 12 months and Bank A will get only 35% of the
amount back (35% loss)
� Recognize provision of Br 350,000 (1%X35%XBr100m)
� Re-cognise interest on the gross carrying amount of the

loan (Br100m X10%).
three--stage model
236
� December 31,2015
� Itis considered that credit risk has increased significantly
as Company C is expected to have cash flow problems
due to a deterioration in economic conditions
� Balance of provision is Br35m (35%xBr100m)
� Impairment loss is Br 34.65m
� Re-cognise interest on the gross carrying amount of
the loan (Br100m x 10%)

three--stage model
237
� December 31, 2016

� Due to liquidity problems, Company C is not able to repay the
loan and relies on an extension of the loan by three years. The
loan is therefore credit impaired
� Bank A estimates that it will get only 40% of the loan amount
back
� Balance of provision is Br60m (60%xBr100m)
� Impairment loss is Br Br25m
� Re-cognise interest on the net carrying amount of the loan

(Br40m x 10%) from the point at which the loan moves to Stage
3. MATED Management Institute, Addis Ababa, Ethiopia
Measurement of Financial Liabilities
238
IFRS 9 requires that financial liabilities

should be accounted for as follows:
1.Financial liabilities measured at FVTPL &
2.Financial liabilities at amortised cost.
cost

I. Financial liabilities measured at FVTPL
239
� Includes financial liabilities held for trading

and derivatives that are not part of a
hedging arrangement
arrangement;;
� All other financial liabilities are measured
at amortised cost unless the fair value
option is applied;
� Classification is made at the time the
financial liability is initially recognised.
2. Financial Liabilities measured at Amor tised Cost
240
� It includes all other financial liabilities unles the fair value

option is applied;
� Classification is made at the time the financial liability is
initially recognised.
� After initial recognition the amount initially recognised for a
liability is adjusted for:
� finance costs
costs: the accrual of interest and the accretion of a
discount or premium
� the fulfilment or settlement of the liability
� changes in estimates of future cash flows but not reflecting

subsequent changes in prices caused by other factors.
24
0
Amor tized cost
cost:: a liability Example
Example:: Bank Loan
241
� On 1 January 2014 an entity incurs Br10,000

transactions costs in borrowing Br1,010,000 from the
bank
� receive (net of transactions costs) ETB1,000,000 on
01/01/2014
� promise to pay ETB1,210,000 on 01/01/2016
� in other words, effective interest rate (IRR) = 10%
24 MATED Management Institute, Addis Ababa, Ethiopia
1
Amortized Cost:
Cost: a Liability journal entries example Bank Loan
242
Date Account (element: classification) Debit Credit
01/01/2014 Asset: cash 1,000,000
Liability: loan 1,000,000

31/12/2014 Expense: finance cost 100,000
Liability: loan 100,000
31/12/2015 Expense: finance cost 110,000
Liability: loan 110,000
01/01/2016 Liability: loan 1,210,000
Asset: cash 1,210,000

24 MATED Management Institute, Addis Ababa, Ethiopia
2
Amortized cost : Deep discount bonds
243
Coffee Limited issued debt with a nominal value of

Br400,000 on 1 January 2012, receiving proceeds of
Br315,526. The debt will be redeemed on 31
December 2016. The interest rate on the debt is 4%
and the internal rate of return is 9.5%.
Requirement
Based upon the information provided, show how the
debt should be accounted.

Amortized cost:
cost: Deep discount bonds
244
At Inception
Inception:
Cash Br315,526
Liability Br315,526
Annual interest expense
expense:: Br
4% x Br400,000 x 5 years 80,000
Deep discount (Br400,000 - Br315,526) 84,474
164,474
Year SOCI - P/L Interest Paid Discount accumulation SFP -
Charge Liability
Br* Br Br Br
2012 29,975 16,000 13,975 329,501
2013 31,303 16,000 15,303 344,804
2014 32,756 16,000 16,756 361,560
2015 34,348 16,000 18,348 379,908
2016 36,092 16,000 20,092 400,000
80,000 84,474
*Opening SFP liability x 9.5% [for example, 2012: Br315,526 x 9.5%]

De--recognition of a Financial Liability
De
245
� Only when extinguished, that is:

a. Discharged
b. Cancelled
c. Expired
• If existing debt is replaced with new one with
substantially different terms (or there is a significant
modification of terms):
� Treat as new liability and extinguishment of original
liability
� A gain or loss from extinguishment of the original financial
liability is recognized in P/L.
Disclosure Requirements
246
�An entity must group its financial

instruments into classes of similar
instruments
�The two main categories of disclosures
required are information about the:
1. significance of financial instruments
2. nature and extent of exposure to risks
arising from financial instruments
1. Significance of Financial Instruments
247
Statement of Financial Position

� Details of financial instruments measured at fair value
through profit/loss, reclassified, derecognised, pledged
as collateral and terms breached
SPLOCI and Equity
Items of income, expense, gains, and losses
Other Disclosures
� Accounting policies for financial instruments
� Information about hedge accounting
� Information about the fair values of each class of

financial asset and financial liability
2. Nature and extent of exposure to risks
arising from financial instruments
248
Qualitative Disclosures Quantitative

Disclosures
• Risk exposures for • Credit Risk
each type of financial
instrument • Liquidity Risk
• Management’s • Market Risk
objectives, policies, and
processes for
managing those risks
• Changes from the prior
period

�Thank You for Your Attention !
249
Question or Comment ?
The End

IFRS 7,9, IAS-32, 12, 21,19, 37, IFRS-16-trainee

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IFRS 7,9, IAS-32, 12, 21,19, 37, IFRS-16-trainee

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Welcome to the Training on IFRS

By: Wogayehu W. & Tel : 0977

� The objective of this Standard is to prescribe the

that are recognized in an entity’s financial statements

� This Standard shall be applied in accounting

include all domestic and foreign taxes which

� Let’s see some key terms.

5. Tax base of an asset or liability - is the amount attributed

8. Current tax - is the amount of income taxes payable

11. Temporary differences - are differences between the carrying

MATED Management Institute, Addis Ababa, Ethiopia

� Includes all taxes that are based on taxable income

MATED Management Institute, Addis Ababa, Ethiopia

MATED Management Institute, Addis Ababa, Ethiopia

� Temporary differences also occur from:

� Unrealized gains/losses resulted from(effect is shown

� Current tax liabilities (assets

MATED Management Institute, Addis Ababa, Ethiopia

� Current tax liabilities (assets

MATED Management Institute, Addis Ababa, Ethiopia

MATED Management Institute, Addis Ababa, Ethiopia

� Example-1: Calculate Current & Deferred Tax

MATED Management Institute, Addis Ababa, Ethiopia

� Example-1: Calculate Current Tax (cont’d)

� Example-1: Calculate Deferred Tax (cont’d)

MATED Management Institute, Addis Ababa, Ethiopia

� Example-1: Journal entry (reflects the last

Income tax expense 40,500

MATED Management Institute, Addis Ababa, Ethiopia

� Example-2: Current & Deferred Tax

Tax base Deferred tax

Deferred tax Deferred tax Taxable Current tax

1 change in the deferred tax liability in the year

depreciation minus tax depreciation of $250,000

(absent permanent differences etc = 30% of

Journal entry: End of 2014

� An operating loss is used to offset either the

MATED Management Institute, Addis Ababa, Ethiopia

�Y Company reports a pretax operating loss of Br

Deferred Tax Asset ……………………. 18,000

� How do you report Operating Loss Carried Foreword in 2007 &

Case 1: Old Ethiopian Practice

� How do you report Operating Loss Carried Foreword in 2007 &

�X Co reports a pretax operating loss of Br 90

2005 Br 40,000 x 0.30 =$12,000

Income Tax Refund Receivable

� An operating loss is reduced by the

MATED Management Institute, Addis Ababa, Ethiopia

• On 1/1/20 20X X1 acquire machine for Birr

MATED Management Institute, Addis Ababa, Ethiopia

� Relevant income tax information

� On 31/12/20X2 when carrying amount was Birr 60,000

MATED Management Institute, Addis Ababa, Ethiopia

� Journal entry for revaluation Debit

Asset—PPE (machine) 60,000

MATED Management Institute, Addis Ababa, Ethiopia

MATED Management Institute, Addis Ababa, Ethiopia

� Disclose major components of tax expense:

MATED Management Institute, Addis Ababa, Ethiopia

� The objective of this Standard is to prescribe

to use and how to report the effects of changes

MATED Management Institute, Addis Ababa, Ethiopia

� This standard shall be applied: