I

n
ter
n
ati
o
n
al
F
i
n
a
n
cial
R
e
p
o
rti
n
g

S
ta
n
d
ar
d
s

D
e
b
F
o

r
r
2
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e
1
0

E.
T
C
.
a
G
r
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a
d
o
u
a

rt
i
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v
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N
eSt
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rde
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1
 ‰SN ¥StêwQ
 ስም

 ከሥልጠናዉ ምን
ትጠብቃላችሁ?

2
B
r
a
i
n
s
t
o
r
m
i
n
g

Q
u
e
s
t
i
o
n
s

• What is Accounting?
• Why Accounting?
• What are the basic functions of accountants?
• How do you evaluate Ethiopian Accounting
Practice? (Evidence or experience based)

3
A
b
o
u
t

E
t
h
i
o
p
i
a

• World Bank and IMF Report, 2007

• Proclamation No. 847/2014
• Regulation No. 332/2014
• AABE IFRS Implementation Road Map

4
The proclamation requires:
• Commercial organizations to follow
 International Financial Reporting Standards
(IFRS), or
 International Financial Reporting Standards
for Small and Medium Enterprises (IFRS for
SME)
• Charities and societies to follow International
Public Sector Accounting Standards (IPSAS)
• Public auditors to follow International Standards
for Auditing.
5
• Public interest entity (PIE) should use the full IFRS.

• A PIE is a reporting entity that is of significant public

relevance because of the nature of its business, its
size, its number of employees.

• PIE also includes banks, insurance companies, and

any other financial institutions and public
enterprises.

6
• Accounting and Auditing Board of Ethiopia is
established by Regulation No. 332/2014
• It is an autonomous government organ accountable
to MOFEC.
• It is headed by the Director General
• It has 12-member Board of Directors

7
A
A
B
E

d
u
t
i
e
s

• Issue standards and directives relating to financial

reporting and auditing and ensure their
compliance.
• Receive and register financial statements of
reporting entities
• Review and monitor the accuracy and fairness of
FS to enforce compliance with the reporting
standards
• Register and license public auditors

8
A
A
B
E

d
u
t
i
e
s

• Oversee professional accountancy bodies

• Establish, publish and review a code of
professional conduct and ethics for certified
public accountants and certified auditors
• Conduct or arrange for the conduct of
professional examination for the purpose of
registering certified public accountants

9
A
A
B
E

R
O
A
D
-
M
A
P

IFRS implementation road map: 3 phase transition over 3 years:

• Phase 1: Significant Public Interest Entities (Financial
Institutions and public enterprises owned by Federal or
Regional Governments- Adoption of IFRS)
– starting at the start of EFY 2009 (i.e. specifically July 8, 2017);
• Phase 2: Other Public Interest Entities (ECX member
companies and reporting entities that meet PIE quantitative
thresholds) adoption of IFRS and for and IPSAS for Charities
and Societies- Adoption of IPSAS
– start adoption of the standards at the start of EFY 2010 (i.e
specifically July 8, 2018)
• Phase 3: Small and Medium-sized Entities adoption of the
IFRS for SMEs
– start adoption of the standards at the start of EFY 2011 (i.e
specifically
© Michael JC Wells July 8, 2019) 10
• Test your understanding
• Which of the following entities are required to
adopt IFRS/IPSAS in the second phase of IFRS
implementation road map of AABE?
A. Financial Institutions
B. Entities that doesn’t meet public interest entities
quantitative thresholds
C. Public Enterprises
D. Charities and societies

11
F
i
n
a
n
c
i
a
l

R
e
p
o
r
t
i
n
g

• General purpose financial reporting

– aims to provide useful financial information about the
reporting entity to primary users who cannot require the
reporting entity to provide information directly to them.
• Special purpose financial reporting
– responds to the requirements of users that have the
authority to require the reporting entity to provide the
information that they need for their purposes directly to
them. Examples include:
• prudential regulation reporting requirements
• tax reporting requirements

12
S
t
a
n
d
a
r
d

S
e
t
t
e
r
s

• International Financial Reporting Standards (IFRS) full

version
– standard-setter = International Accounting Standards Board
(IASB)
– For Profit-oriented entities (PIE)
• IFRS for Small and Medium-sized Entities (SMEs)
– standard-setter = International Accounting Standards Board
(IASB)
– For entities Not publicly accountable
• International Public Sector Accounting Standards (IPSAS)
– standard-setter = International Public Sector Accounting
Standards Board (IPSASB)
– For Public sector entities
13
W
h
a
t

i
s

I
F
R
S
?

• IFRS: International Financial Reporting Standards

– single-set of high quality
– globally accepted and enforced set of standards that
require
– high quality, transparent and Comparable information in
financial statements
• IFRSs are Issued by IASB [International Accounting
Standards Board]
• IFRS
– Standards that require Recognition, Measurement,
Presentation and Disclosure
14
W
h
y

I
F
R
S
?

• Global
– IFRS Primary Users are Investors and Creditors
– Capital providers are now playing at a global market
– National standards don’t work on a global market
– Cross boarder business is hindered by national standard
• Local
– There were no national standards
– Nor there were officially adopted standards
• GAAP was not defined
• US GAAP but not updated

15
I
F
R
S

F
u
l
l

V
e
r
s
i
o
n

• Intended to Public Interest Entities and includes:

Conceptual Framework for Financial Reporting:
Not a standard.
IFRS 1-16=16 Standards [Issued by IASB from
2001]
IAS 1-41=24 Standards [Issued by IASC 1973-
2001]
 IFRIC: IFRS Interpretation Committee’s interpretations.
IFRIC 1-21=21
SIC: IFRC Standing Interpretation Committee
interpretations: SIC 7-32=10 SICs 16
Conceptual Framework for
Financial Reporting

17
W
h
a
t
i
s
a
c
o
n
c
e
p
t
u
a
l
F
r
a
m
e
w
o
r
k
?

• A conceptual framework is
– a statement of generally accepted theoretical principles
which form the frame of reference for financial reporting.
• Therefore a conceptual framework will form the
theoretical basis for determining which events should
be accounted for, how they should be measured and
how they should be communicated to the user.
• It is the basis for the development of new accounting
standards and the evaluation of those already in
existence.

18
W
h
a
t
i
s
a
c
o
n
c
e
p
t
u
a
l
F
r
a
m
e
w
o
r
k
?

• Conceptual framework consists:

– the objective of general purpose financial
reporting
– qualitative characteristics and elements of
financial statements
– Recognition, Measurement, presentation and
disclosure

19
l

F
r
a
m
e
w
o
r
k

20
O
b
j
e
c
t
i
v
e
o
f
F
i
n
a
n
c
i
a
l
r
e
p
o
r
t
i
n
g

• The Conceptual Framework states that:

• 'The objective of general purpose financial reporting is
to provide information about the reporting entity that is
useful to existing and potential investors, lenders and
other creditors in making decisions about providing
resources to the entity.‘
• Those decisions involve buying, selling or
holding equity and debt instruments, and
providing or settling loans or other forms of
credit

21
O
b
j
e
c
t
i
v
e
o
f
F
i
n
a
n
c
i
a
l
r
e
p
o
r
t
i
n
g

• These users need information about:

– The economic resources of the entity
– The claims against the entity
– Changes in the entity's economic resources and
claims
• In order to assess the entity's
– Prospect of future cash flow/return
– liquidity and solvency and
– its likely needs for additional financing
– financial performance
22
h
a
r
a
c
t
e
r
i
s
t
i 23
• Relevance.
• Relevant information is capable of making a
difference in the decisions made by users.
– predictive value (input to process to predict
future cash flows)
– confirmatory value (confirm/disconfirm prior
cash flow expectations)

24
• Faithfully represent
• Faithful representation means that the numbers and
descriptions match what really existed or happened.

• To be a faithful representation information must be:

• Complete - including all necessary descriptions and
explanations
• Neutral - depiction is without bias in the selection or
presentation of financial information
• Free from error - means there are no errors or omissions
in the description of the phenomenon and in the process
by which the financial information was produced. 25
E
n
h
a
n
c
i
n
g

Q
u
a
l
i
t
a
t
i
v
e

c
h
a
r
a
c
t
e
r
i
s
t
i
c
s

• Distinguish more-useful information from less-

useful information.
• Comparability - that enables users to identify and
understand similarities in, and differences among,
items.
– Information about a reporting entity is more useful if it can
be compared with similar information about other entities
and with similar information about the same entity for
another period or date

• Verifiability - different knowledgeable and

independent observers could reach consensus that a
particular depiction is a faithful representation. 26
E
n
h
a
n
c
i
n
g

Q
u
a
l
i
t
a
t
i
v
e

c
h
a
r
a
c
t
e
r
i
s
t
i
c
s

• Timeliness - Timeliness means having

information available to decision-makers in
time to be capable of influencing their
decisions.
– Generally, the older information is the less useful
it is.

• Understandability Classifying, characterizing

and presenting information clearly and
concisely makes it understandable.
27
 • Discussion Issue
• Was our reports are decision useful?
• i.e.
– relevant
– faithfully represented/reliable
– Comparable
– Verifiable
– Timelines
– Understandable
• If so how? If not why?
28
 l

F
Recognition, Measurement, Presentation and Disclosure Concepts
r
a
m
e
w
o
r
k

29
E
l
e
m
e
n
t
s
o
f
f
i
n
a
n
c
i
a
l
s
t
a
t
e
m
e
n
t
s

• Financial statements represent the financial effects of

transactions and other events by grouping them into broad
classes according to their economic characteristics.
•
• These broad classes are termed the elements of financial
statements.

30
Ele
m
e
n
ts
o
f
f
i
n
a
n
cial
p
o
sit
i
o
n

(s
o
m
et
i
m
es
cale
d

el
m
e
n
ts
o
f
t
h
e
b
al
n
ce
s
h
et)

Element IASB (paragraph 4.4)

An asset “A resource controlled by the entity as a result of past events and

is… from which future economic benefits are expected to flow to the
entity.”

A liability “a present obligation of an entity arising from past events, the

is… settlement of which is expected to result in an outflow from the
entity of resources embodying economic benefits”

Equity = assets – liabilities

31
• Key attributes in the definitions of an
asset:
– controlled resource
– potential economic benefits
– a result of past events

32
I
d
e
n
t
i
f
y
i
n
g
a
n
e
n
t
i
t
y
’
s
a
s
s
e
t
s

What do you think?

• Is the public road to its factory an asset of the
manufacturer?

• Are Ethiopian wolves assets of Bale Mountains National

Park-based photographic safari operator?

• Are the hived bees assets of a Robe-based honey farmer?

• Is an unpatented but secret formula for a premium

product an asset of the knowing entity?
33
I
d
e
n
t
i
f
y
i
n
g
a
n
e
n
t
i
t
y
’
s
a
s
s
e
t
s

What do you think?

• Are Ethiopian coffee brands an asset?
• Company A owns 60% of Company B;
Company B owns 60% of Company C
– are the assets of Company C assets of Company
B?
– are the assets of Company C assets of Company
A?

34
W
h
a
t

i
s

l
i
a
b
i
l
i
t
y
?

• Key attributes in the definitions of a

liability:
– present obligation
– to transfer economic benefits
– Result of past events

35
I
d
e
n
t
ify
n
g
a
n

e
n
t
ity’s
lia
b
ilt
ies
at
3
1
/
1
2
/
2
0
1
5

d
o
es
t
h
e
e
n
t
ity
h
ave
lia
b
ilty?

• A computer manufacturer promises to make good any

manufacturing defects in the products it sells that are returned to
it within three years of the date of sale. At 31 December 2015
the entity had 100 defective computers over the past three years

• Following a catastrophic rupture of its tailings dam in 2015 a

mineral extractor has a legal obligation to clean-up the polluted
environment.
•
• Following a catastrophic rupture of its tailings dam in 2015 a
mineral extractor makes a public announcement that it will
clean-up the polluted environment even though in law (of that
jurisdiction) it is not required (has no legal obligation) to cleanup.
36
I
d
e
n
t
ify
n
g
a
n

e
n
t
ity’s
lia
b
ilt
ies
at
3
1
/
1
2
/
2
0
1
5

d
o
es
t
h
e
e
n
t
ity
h
ave
lia
b
ilty?

• At 31 December 2015 the reporting entity is the

defendant in a breach of patent lawsuit in which
the court is determining the extent of the
damages to be paid by the reporting entity (the
entity has admitted breaching the patent).

• At 31 December 2015 the reporting entity is the

defendant in a breach of patent lawsuit in which
the court is determining whether the entity
breached the patent holder’s rights.
© Michael JC Wells 37
W
h
a
t

i
s

l
i
a
b
i
l
i
t
y
?

• Obligations may be legally enforceable as a

consequence of a binding contract or
statutory requirement.

• Obligations also arise, however, from normal

business practice, custom and a desire to
maintain good business relations or act in an
equitable manner.
– Constructive obligation
© Michael JC Wells 38
Ele
m
e
n
ts
o
f
p
erf
o
r
m
a
n
ce
(s
o
m
et
i
m
es
cale
d

el
m
e
n
ts
o
f
t
h
e
i
n
c
o
m
e
stae
m
e
n
t)

Element IASB (paragraph 4.25)

Income “increases in economic benefits during the accounting

(revenue) is… period in the form of enhancements of assets or
decreases of liabilities that result in increases in equity,
other than those relating to contributions from equity
participants.”

An expense “decreases in economic benefits during the accounting

is… period in the form of outflows or depletions of assets or
incurrences of liabilities that result in decreases in
equity, other than those relating to distributions to
equity participants.”

39
Ele
m
e
n
ts
o
f
p
erf
o
r
m
a
n
ce
(s
o
m
et
i
m
es
cale
d

el
m
e
n
ts
o
f
t
h
e
i
n
c
o
m
e
stae
m
e
n
t)

• The relevance of income and expenses are

enhanced by separate presentation of:
– items that arise in the course of ordinary
operations (for example, revenue from
customers); and
– those that do not (for example, gains or losses
from incidental disposals of assets)
– (see paragraphs 4.27 and 4.28 of the IASB
Conceptual Framework)
40
 l

F
Recognition, Measurement, Presentation and Disclosure Concepts
r
a
m
e
w
o
r
k

41
R
ec
o
g
n
it
i
o
n

o
f
t
h
e
el
m
e
n
ts
o
f
f
i
n
a
n
cial
stae
m
e
n
ts

• Recognition. The process of recording and

incorporating an item in the statement of
financial position or statement of profit or
loss.
• Items which meet the definition of assets or
liabilities may still not be recognized in
financial statements because they must also
meet certain recognition criteria.

42
W
h
e
n

t
o

r
e
c
o
g
n
i
z
e

a
s
s
e
t
s

a
n
d

li
a
b
ilt
i
e
s
?

• IASB’s Conceptual Framework (see paragraph

4.38)
1. It is probable that any future economic benefits
associated with the item will flow to or from the entity;
(This must be judged on the basis of the characteristics of
the entity's environment and the evidence available when
the financial statements are prepared) and
• For example, when it is probable that a receivable
owed to an entity will be paid, it is then justifiable, in
the absence of any evidence to the contrary, to
recognize the receivable as an asset 43
W
h
e
n

t
o

r
e
c
o
g
n
i
z
e

a
s
s
e
t
s

a
n
d

li
a
b
ilt
i
e
s
?

2. The item has a cost or value that can be measured with

reliability (i.e complete, neutral and free from error)
– (Where no reasonable estimate can be made, the item should not be
recognized, although its existence should be disclosed in the notes, or
other explanatory material.)
• For example,
• the expected proceeds from a lawsuit may meet the
definitions of both an asset and income as well as the
probability criterion for recognition;
• however, if it is not possible for the claim to be measured
reliably, it should not be recognized as an asset or as income;
• the existence of the claim, however, would be disclosed in the
notes, explanatory material or supplementary schedules.
44
A
s
s
e
t
s
w
h
i
c
h
c
a
n
n
o
t
b
e
r
e
c
o
g
n
i
z
e
d

• Example:
• A skilled workforce is an undoubted asset but
workers can leave at any time so there can be
no certainty about the probability of future
economic benefits.
• A company may have come up with a new
name for its product which is greatly increasing
sales but, as it did not buy the name, the name
does not have a cost or value that can be
reliably measured, so it is not recognized. 45
R
e
c
o
g
n
i
t
i
o
n

• The recognition of an item as an asset requires

an entity to demonstrate that the item meets:
– (a) the definition of an asset; and
– (b) the recognition criteria.
• The recognition of assets depends on two
criteria:
– It is probable that future economic benefits
associated with the asset will flow to the entity
– The cost of the asset to the entity can be measured
reliably
46
M
eas
u
re
m
e
n
t
o
f
t
h
e
el
m
e
n
ts
o
f
f
i
n
a
n
cial
stae
m
e
n
ts

• Measurement is the process of determining

monetary amounts at which elements the
financial statements are to be recognized and
carried in the statement of financial position
and statement of profit or loss.
• Initial Measurement
– Historical Cost
– Fair value
– others

47
 M
eas
u
re
m
e
n
t
o
f
t
h
e
el
m
e
n
ts
o
f
f
i
n
a
n
cial
stae
m
e
n
ts

• Subsequent Measurement
• A number of different measurement bases are used in financial
statements. They include:
– Historical cost
– Cost model/modified historical cost
– Fair value
– Modified fair value/Revaluation model
– Net Realizable value
– Present value of future cash flows
– Value in use
• Consideration of
– the objective of financial reporting,
– the qualitative characteristics and
– the cost constraint is
likely to result in different measurement bases for different items. 48
 M
ixe
d

m
eas
u
re
m
e
n
t
m
o
d
el
s
o
u
rce
o
f
m
eas
u
re
m
e
n
t
b
ase
i
n
d
icate
d
:
IF
R
S

Assets IFRS measure Equity IFRS measure

Unimpaired land (PPE) Historical cost (HC) or fair Residual What does it
& indefinite life value (FV) (choice) (assets minus mean?
intangibles liabilities)

Other PPE, intangibles Modified (M)HC or modified Liabilities IFRS measure

and bearer plants FV (choice)
Investment property MHC or FV (choice) Bank loan Amortised cost (AC)

Biological assets FV less costs to sell Trade payable AC

Investments in Equity method Derivatives and others FV
associates when FV option is
used
Other financial MHC or FV (depends on cash Provisions Amount to settle
instruments flow characteristics and or transfer today
business model)

Inventories Lower of HC and net Defined benefit Projected unit

realisable value; exceptions employee benefits credit method
FV and NRV

TOTAL What does it mean? TOTAL What does it mean?

49
M
eas
u
re
m
e
n
t
o
f
t
h
e
el
m
e
n
ts
o
f
f
i
n
a
n
cial
stae
m
e
n
ts

• Historical Cost
– is the amount of cash or cash equivalents paid or
the fair value of the other consideration given to
acquire an asset at the time of its acquisition or
construction.

50
 M
e
a
s
u
r
e
m
e
n
t

• Cost includes all costs directly attributable to bringing an asset to the

location and condition necessary for it to be capable of operating as
intended by management, including:

• (a) its purchase price, including import duties and non-refundable

purchase taxes, after deducting trade discounts and rebates.

• (b) any costs directly attributable to bringing the asset to the location
and condition necessary for it to be capable of operating in the
manner intended by management.
– The cost of site preparation
– Initial delivery and handling costs
– Installation and assembly costs
– Testing (whether the asset is functioning properly)
51
– Professional fees (architects, engineers)
 M
e
a
s
u
r
e
m
e
n
t

• (c) obligations incurred for dismantling, removing

and restoring the site

• (d) qualifying borrowing costs (IFRS only; IFRS for SMEs

expense)

• (e) costs of converting raw material into finished goods

(including an allocation of fixed production overheads)

52
• Can have predictive and confirmatory value
– information about past sales, past costs and past margins can be used
as one input for predicting future sales, future costs and future
margins and provide feedback about previous estimates of margins.
However, current cost may sometimes have greater predictive value.
• Simpler and less expensive than alternatives. However, difficult
to determine when there is no observable transaction price.
• Generally well understood and, in many cases, verifiable.
However, similar assets and liabilities can be reported at very
different amounts.
• With the passage of time, cost-based measurements become
increasingly irrelevant. (paragraph BC33(b) of the Basis for
Conclusions on IAS 40 Investment Property).
© Michael JC Wells
The cost model
C
o
s
t

M
o
d
e
l

• Cost model: Carry the asset at its cost less depreciation and
any accumulated impairment loss.
 Cost model = Cost – Acc Depn – Acc Impairment

• After initial measurement the historical cost of an asset may

be modified to reflect, when relevant:
– the consumption of its service potential (called depreciation or, if
an intangible asset, amortisation); and
– that part of the historical cost of the asset is no longer recoverable
because of impairment due to, for example
• deterioration of the asset quality; or
• a decline in its economic value.

© Michael JC Wells 55
n

t
h• Depreciation/amortisation
e – represents the consumption of the asset’s service
potential
c
o
n
c
e
p
t
© Michael JC Wells 56
o
f
• As time passes, all plant assets with the exception of land lose their
P capacity to yield service.
• Accordingly, the cost of such assets should be transferred to the
l related expense accounts in an orderly manner during their
a expected useful life.
• This periodic cost expiration is called depreciation.
n
• Factors contributing to a decline in usefulness of an asset:
t
1. Physical depreciation: which includes wear from use and
deterioration from the action of the elements.
2. Functional depreciation: which includes
A
• Inadequacy: its capacity is not sufficient to meet the demands of
s increased production.
s
• Obsolescence: equipment may become obsolete due to changing
technology.
e© Michael JC Wells 57
o
f
• Two common misunderstandings exist about
P depreciation as used in accounting include:
l• 1. Depreciation does not measure a decline in
a the market value of a fixed asset.
n• Instead, is the process of allocating to expense
t the cost of a plant asset over its useful (service)
life in a rational and systematic manner.
A• 2. Depreciation is not a cash outflow.
s• The cash account is neither increased nor
s decreased by depreciation.
e© Michael JC Wells 58
g

D
e
p• Three factors determine the depreciation expense for a
r fixed asset. Such as:
e1. The asset’s initial cost: includes purchase price and all
c
i necessary expenditures incurred to get the asset in
a place and ready for use.
t2. The asset’s expected useful life: the total number of
i service units expected from the asset. May be
o
n measured in terms of years, miles, kilometers, units
produced etc.
E3. The asset’s estimated residual value: the estimated
x
market value of the asset at the time of its retirement.
p
e Also called salvage value, scrap value, disposal value.
n© Michael JC Wells 59
o
f
• The most common methods of computing
P depreciation for plant asset are as follows:
l
1. Straight-line depreciation method
a
n2. Units-of-production depreciation method
t3. Double-declining-balance depreciation
method
AManagement selects the method it believes best measures an
sasset’s contribution to revenue over its useful life.
s
e© Michael JC Wells 60
D
e
p
reciat
i
o
n

t
h
e
p
ri
n
ci
p
le
a
n
d

selct
d

a
p
p
lic
a
t
i
o
n

g
u
i
d
a
n
ce

• The principle: depreciation is the systematic allocation of

the depreciable amount of an asset over its useful life
• Application guidance:
– The depreciation method must closely reflect the pattern in
which the asset’s future economic benefits are expected to be
consumed by the entity.
– Significant parts (called components) of a depreciable item
with materially different consumption patterns must be
depreciated separately to more faithfully represent the
consumption of the asset’s service potential. (see, for example,
paragraph BC26 of the Basis for Conclusions on IAS16)

© Michael JC Wells 61
j
u
d
g
m• Allocating depreciation requires judgement to
e – determine the appropriate depreciation method
n – identify components of an item that must be
t depreciated separately
s – estimate the useful life of an item
– measure the residual value of an item
d
e
p
r
e© Michael JC Wells 62
Fair value IFRS 13
F
a
i
r
v
a
l
u
e
:
a
n
a
s
s
e
t
t
h
e
c
o
n
c
e
p
t

• The fair value of an asset is:

– the price that would be received to sell an asset (exit
price)
– in an orderly transaction (not a forced sale)
– between market participants (market-based view)
– at the measurement date (current price) (IFRS 13 Fair
Value Measurement)
• The market value of an asset is:
– the amount for which the asset could be exchanged
between knowledgeable, willing parties in an arm’s length
transaction
© Michael JC Wells 64
C
h
a
r
a
c
t
e
r
i
s
t
i
c
s
o
f
f
a
i
r
v
a
l
u
e

• a market value (not entity-specific value)

• an exit value
• reflects all changes that market participants
factor into pricing at the measurement date
• requires judgement to measure (especially
Level 3 measurements)
– determine the appropriate valuation technique/s
and inputs that market participants would use
when pricing the asset or liability
© Michael JC Wells 65
F
a
i
r
v
a
l
u
e
m
a
r
k
e
t
p
a
r
t
i
c
i
p
a
n
t
s

• Characteristics of market participants (ie buyers

and sellers in principal market (or most
advantageous market)):
– independent
– knowledgeable
– use all available information
– willing to transact for the asset or liability
– able to transact for the asset or liability
• Assumption: market participants act in their
economic best interest
© Michael JC Wells 66
Fair
val
u
e
h
ierac
h
y
a
p
p
licat
i
o
n

g
u
i
d
a
n
ce:Lvls
1
,
2

a
n
d

Is there a quoted price in an active market for an identical asset or

liability?

No
UseYesthis quoted
price to measure Replicate a market price through a valuation
fair value technique (maximize use of observable
(Level 1 inputs)
measurement)
No use of significant
unobservable inputs Use of significant
unobservable inputs
(Level 2
(Level 3 measurement)
measurement) 67
F
a
i
r

v
a
l
u
e
:

h
o
w

t
o

m
e
a
s
u
r
e

f
a
i
r

v
a
l
u
e

• To measure fair value determine:

– all characteristics of the asset or liability being measured
(exclude things that are not characteristics of the asset or
liability);
– for non-financial assets, the valuation premise and the highest
and best use;
– the principal (or most advantageous) market;
– the appropriate valuation technique/s and inputs that market
participants would use when pricing the asset or liability and
the level of the fair value hierarchy within which the inputs are
categorised.
• (see paragraph B2 of IFRS 13)
© Michael JC Wells 68
Fair
val
u
e:
c
h
a
r
a
cteris
ic
o
f
a
n

a
set
o
r
li
a
b
ilty

• Fair value measurement is for a particular asset or

liability
– it captures all characteristics of the asset or liability
being measured that market participants would take
into account when pricing the item
• location
• condition
• restrictions on use or sale that are a characteristic of the
item
– it excludes things that are not characteristics of the
asset or liability
© Michael JC Wells 69
Fair
val
u
e:
restic
i
o
n

o
n

u
se
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g

• You own land use rights to Plot A that is zoned ‘green belt’—
which prohibits the construction of buildings on that land.
• Similar neighbouring plots’ with the same land use rights and
subject to the same restrictions sold recently:
– for $950,000 on 30 October 2015 (Plot B); and
– for $30,000,000 on 31 December 2015 (Plot C).
• The difference in the selling price of Plots B and C is
attributable primarily to the press leaked confidential
government dossier setting out the government’s plans for
proposing an amendment to the law to allow for the
construction of high-rise buildings on some (but unspecified
which) green belt land.
© Michael JC Wells
Fair
val
u
e:
restic
i
o
n

o
n

u
se
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g

You employ a reputable property valuation expert to value the

land use rights to Plot A at 31 December 2015 under each of
the following hypothetical scenarios:
– Scenario 1: the land is rezoned allowing for the construction of a
high-rise building: $100,000,000
– Scenario 2: market participants believe there is no prospect of the
zoning laws changing: $1,000,000
What is the fair value of the land use rights to Plot A at 31
December 2015? Choose one of:
1) $950,000; 2) $1,000,000; 3) $30,000,000; 4) $100,000,000;
or
5) another amount.
© Michael JC Wells
• You recently won a tender to explore for gold in the
Northern Greenstone Belt of Ethiopia.
• On 30 November 2015 you:
– buy a mineral exploration rig for $20 million in the US
– incur buying agent commission of $2 million
– pay $1 million for the rig to be transported safely from
the US to your exploration site
• The seller of the drill incurs $2 million selling costs.
• The market at which you purchased the rig is your
principal market (should you choose to sell the rig).
© Michael JC Wells
What is the fair value of the rig at 31 December
2015?
Choose one of:
1) $25 million
2) $23 million
3) $22 million
4) $21 million
5) $20 million
6) $19 million
7) $17 million
© Michael JC Wells
F
a
i
r

v
a
l
u
e
:

w
h
i
c
h

m
a
r
k
e
t
?

Most advantageous market only when cannot identify

principal market.
• Principal market has the greatest volume and level of
activity for the asset or liability
• Most advantageous market
– maximises the amount that would be received to sell an asset
– minimises the amount that would be paid to transfer the liability
– after taking into account transactions costs and transport costs.
• Other considerations:
– reporting entity must have access to the market at the
measurement date

© Michael JC Wells 74
Fair
val
u
e:
w
h
ic
h

m
arket?
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
tr
a
n
s
a
ct
i
o
n
c
o
st

You have access to two active markets to sell an asset:

– Market (M)1: price = $100; transaction costs = $10
– M2: price = $95; transaction costs = $3.
What is the fair value of the asset? Choose one of:
1) $100 if M1 is the principal market, otherwise $95;
2) $90 if M1 is the principal market, otherwise $92;
3) $95 because the most advantageous market (M2) must
be the principal market;
4) $92 because the most advantageous market (M2) must
be the principal market.
© Michael JC Wells
Fair
val
u
e:
w
h
ic
h

m
arket?
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
tr
a
n
s
p
o
rt
c
o
st

You have access to two active markets to sell an asset:

– Market (M)1: price = $100; transport costs = $10
– M2: price = $95; transport costs = $3.
What is the fair value of the asset? Choose one of:
1) $100 if M1 is the principal market; otherwise $95
2) $90 if M1 is the principal market; otherwise $92
3) $95 because the most advantageous market (M2)
must be the principal market
4) $92 because the most advantageous market (M2)
must be the principal market
© Michael JC Wells
Fair
val
u
e
o
fa
n
o
n
-
f
i
n
a
n
cialset
a
p
p
lic
a
t
i
o
n

g
u
i
d
a
n
ce:
h
i
g
h
est
a
n
d

b
est
u
se

• Fair value measurement logically assumes that

a market participant would put a non-financial
asset to its highest and best use because that
maximises the value of the asset.
• The highest and best use must be
– physically possible
– legally permissible
– financially feasible

© Michael JC Wells 77
Fair
val
u
e
o
fa
n
o
n
-
f
i
n
a
n
cialset
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
ex
a
m
p
le
1

• Your factory is built on Plot 900 in a recently developed industrial

development zone on the outskirts of Addis Ababa where the
land that is divided into one hundred two acre plots that before
their further development were essentially homogenous.
Factories, like yours, are the highest and best use for the land
rights.
• On 31 December 2000 two of the plots adjoining your plot were
sold (ie sale of the land rights and the buildings, if any,
constructed thereon):
– Plot 901 sold for $30 million: land rights with a similar factory of the
same age, same condition and same floor area as yours.
– Plot 899 sold for $10 million because it is undeveloped (yet to be built
on).
© Michael JC Wells
Fair
val
u
e
o
fa
n
o
n
-
f
i
n
a
n
cialset
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
ex
a
m
p
le
1

On 31 December 2000 what is the fair value of your land

rights (ie excluding the factory building)?
• Choose 1 of:
1) $0; 2) $10 million; 3) $20 million; 4) $30 million; 5) $70
million; 6) $80 million; 7) $100; million; or 8) another amount
On 31 December 2000 what is the fair value of your
factory building (ie excluding the land rights)?
• Choose 1 of:
1) $0; 2) $10 million; 3) $20 million; 4) $30 million; 5) $70
million; 6) $80 million; 7) $100; million; or 8) another amount

© Michael JC Wells
Fair
val
u
e
o
fa
n
o
n
-
f
i
n
a
n
cialset
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
ex
a
m
p
le
2

• The facts are the same as Example 1, except

that in this example (fifteen years later), on 31
December 2015:
– high-rise commercial development is now the
highest and best use for your land rights because
the rapidly expanding financial district of Addis
Ababa has grown to the boundary of plots 899,
900 and 901.
– Consequently, on 31 December 2015 Plots 899
and 901 each sold for $100 million.
© Michael JC Wells
Fair
val
u
e
o
fa
n
o
n
-
f
i
n
a
n
cialset
tes
y
o
u
r
u
n
d
erst
a
n
d
i
n
g
:
ex
a
m
p
le
2

On 31 December 2015 what is the fair value of your land rights

(ie excluding the factory building)?
• Choose 1 of:
1) $0; 2) $10 million; 3) $20 million; 4) $30 million; 5) $70 million; 6)
$80 million; 7) $100; million; or 8) another amount
On 31 December 2015 what is the fair value of your factory
building (ie excluding the land rights)?
• Choose 1 of:
1) $0; 2) $10 million; 3) $20 million; 4) $30 million; 5) $70 million; 6)
$80 million; 7) $100; million; or 8) another amount
Does your estimate of the fair value of your factory building (ie
excluding the land rights) depend on which model you use for
© your land
Michael rights (cost model or revaluation model)?
JC Wells
• Measuring fair value in the absence of an
active market requires judgement
– making adjustments from recent transaction
prices for similar or identical items
– determining the appropriate valuation model and
the relevant inputs to that model

82
V
a
l
u
a
t
i
o
n

A
p
p
r
o
a
c
h
e
s

• Cost approach
• Income approach
• Market approach

83
The revaluation model
• Revaluation Model: Carry the asset at its fair
value at the date of the revaluation less any
subsequent accumulated depreciation and
subsequent accumulated impairment losses.
• Revaluation model = Fair Value – Acc Depn – Acc
Impairment
• the revaluation model is available only for items
whose fair value can be measured reliably

85
I
m
p
a
i
r
m
e
n
t
I
A
S

3
6
A
i
m
s

• Understand conceptual underpinnings for impairment testing

• Understand when to test particular assets for impairment
• Understand the unit of account for particular impairment
tests
– item-by-item
– cash-generating units
– goodwill
• Understand the measurement of impairment losses
– value in use
– fair value less costs to sell
– net realisable value
• The main aspects of IAS 36 to consider are:
•  Indications of impairment of assets
•  Measuring recoverable amount, as fair value
less costs of disposal or value in use
•  Measuring value in use
•  Cash generating units
•  Accounting treatment of an impairment loss,
for individual assets and cash generating units

88
I
m
p
a
i
r
m
e
n
t
s

• Impairment ‘concept’: an asset should not be measured at an

amount greater than the entity expects to recover from its sale
or use
• Impairment. A fall in the value of an asset, so that its
'recoverable amount' is now less than its carrying amount in the
statement of financial position.
• Impairment is determined by comparing the carrying amount of
the asset with its recoverable amount.
– This is the higher of its
– fair value less costs of disposal and
– its value in use (present value of estimated future cash flows (inflows
minus outflows) generated by the asset).
• Carrying amount. The net value at which the asset is included in
the statement of financial position (ie after deducting
accumulated depreciation and any impairment losses). 89
I
m
p
a
i
r
m
e
n
t
s

• The main accounting issues to consider are

therefore:
– (a) How is it possible to identify when an
impairment loss may have occurred?
– (b) How should the recoverable amount of the
asset be measured?
– (c) How should an 'impairment loss' be reported
in the accounts?

90
Which impairment test
applies to which assets
R
ec
o
vera
b
le
a
m
o
u
n
t
i
m
p
air
m
e
n
t
m
eas
u
re
m
e
n
t
w
h
ic
h

a
set?

Asset IFRS
(IAS 36)
Property, plant and equipment: cost model and
revaluation model ✔
Intangibles assets: revaluation model ✔
Intangibles assets: cost model ✔
Exploration for and evaluation of mineral resources ✔
Investment property: cost model only ✔
Investment in associates, joint ventures and
subsidiaries accounted for using the cost model or ✔
the equity method
N
et
realiz
b
le
val
u
e
i
m
p
air
m
e
n
t
m
eas
u
re
m
e
n
t
w
h
ic
h

a
set?

Asset IFRS
Inventory ✔IAS 2
Non-current assets held for sale ✔ IFRS 5
When to test non-financial
assets for impairment
• Inventory (Sections 13 & 27 of the IFRS for SMEs and IAS 2)
– at the end of each reporting period
– Other non-financial assets (Section 27 and IAS 36)
– at reporting date assess whether there is any indication that an
asset may be impaired
– if any such indication exists perform impairment test
• Note: The concept of materiality applies, and only material
impairment needs to be identified.
• Irrespective of whether there is any indication of
impairment: (paragraph 10 of IAS 36) test for impairment:
– at the same time each year (and whenever impairment is
indicated) goodwill, indefinite life intangible asset and
– such assets must be tested for impairment in the year of their
acquisition.
© Michael JC Wells
I
m
p
a
i
r
m
e
n
t

i
n
d
i
c
a
t
o
r
s

96

Consider, as a minimum: external and internal

sources of information
• External sources of information
– asset’s market value declined significantly > expected
– significant changes in the technological, market,
economic or legal environment
– market rates increased (for example, effect on discount
rate)
– carrying amount of the net assets > estimated fair
value of the entity
I
m
p
a
i
r
m
e
n
t

i
n
d
i
c
a
t
o
r
s

97

• Internal sources of information

– obsolete or physical damaged asset
– significant changes in the extent or manner in
which, an asset is (or is expected to be) used
• for example, idle assets, plans to discontinue or
restructure operation, plans to dispose before expected,
and reassessing the useful life from indefinite to finite
– internal reporting indicates that the economic
performance of an asset is, or will be, worse than
expected
 98

• Impairment indicators (paragraph 20 of IFRS 6)

(a) the period for which the entity has the right to explore in the specific
area has expired during the period or will expire in the near future,
and is not expected to be renewed.
(b) substantive expenditure on further exploration for and evaluation of
mineral resources in the specific area is neither budgeted nor planned.
(c) exploration for and evaluation of mineral resources in the specific area
have not led to the discovery of commercially viable quantities of
mineral resources and the entity has decided to discontinue such
activities in the specific area.
(d) sufficient data exist to indicate that, although a development in the
specific area is likely to proceed, the carrying amount of the
exploration and evaluation asset is unlikely to be recovered in full from
successful development or by sale.
What to test for
impairment
(unit of account)
I
m
p
air
m
e
n
t
tes
i
n
glev
I
A
S
2

a
n
d

Sect
i
o
n

1
3

ve
In
n
t
o
ry

1
0
Inventories
• Principle: test inventory for impairment item by
0
item
• Exception (a rule): impairment test a group of
items when:
– it is impracticable to determine net realizable value
(NRV) item by item; and
– the inventories relate to the same product line and
have similar purposes or end uses and are produced
and marketed in the same geographical area
© Michael JC Wells
I
m
p
air
m
e
n
t
tes
i
n
glev
I
A
S
3
6

a
n
d

Sect
i
o
n

2
7

excl
u
d
i
n
g

ve
in
n
t
o
ry

10
1

Other non-financial assets

• Principle—test for impairment at the individual asset level (ie
item-by-item)
• Application guidance is necessary for cash-generating units
• When it is not possible to calculate the recoverable amount of a
single asset, then that of its cash generating unit should be
measured instead.
• A cash-generating unit is the smallest identifiable group of
assets for which independent cash flows can be identified and
measured.

• An exception from the principle (a rule) is permitted for goodwill

• Recognition and measurement of an impairment loss
• If the recoverable amount of an asset is lower than the
carrying amount,
– The carrying amount should be reduced by the difference (ie
the impairment loss)
– The impairment loss should be charged as an expense in profit
or loss.
• After reducing an asset to its recoverable amount, the
depreciation charge on the asset should then be based on
– its new carrying amount, its estimated residual value (if any)
and its estimated remaining useful life.

102
I
m
p
a
i
r
m
e
n
t
s

• When an impairment loss is recognized for a cash- generating

unit, the loss should be allocated between the assets in the
unit in the following order.
– (a) First, to any assets that are obviously damaged or destroyed
– (b) Next, to the goodwill allocated to the cash generating unit
– (c) Then to all other assets in the cash-generating unit, on a pro rata
basis
• In allocating an impairment loss, the carrying amount of an
asset should not be reduced below the highest of:
• (a) Its fair value less costs of disposal
• (b) Its value in use (if determinable)
• (c) Zero
103
I
m
p
a
i
r
m
e
n
t
s

• A cash-generating unit comprises the following assets:

– Building 700,000
– Plant and equipment 200,000
– Goodwill 90,000
– Current assets 20,000
– Total 1,010,000
• One of the machines, carried at $40,000, is damaged and will
have to be scrapped. The recoverable amount of the cash-
generating unit is estimated at $750,000.
• What will be the carrying amount of the building when the
impairment loss has been recognized?

A. $597,000 C. $577,000
B. $594,000 D. $548,000 104
I
m
p
a
i
r
m
e
n
t
s

Solution

105
M
e
a
s
u
r
e
m
e
n
t

• Mixed Measurement
• Consideration of
– the objective of financial reporting,
– the qualitative characteristics and
– the cost constraint is
likely to result in different measurement bases for
different items.

106
 M
ixe
d

m
eas
u
re
m
e
n
t
m
o
d
el
s
o
u
rce
o
f
m
eas
u
re
m
e
n
t
b
ase
i
n
d
icate
d
:
IF
R
S

Assets IFRS measure Equity IFRS measure

Unimpaired land (PPE) Historical cost (HC) or fair Residual What does it
& indefinite life value (FV) (choice) (assets minus mean?
intangibles liabilities)

Other PPE, intangibles Modified (M)HC or modified Liabilities IFRS measure

and bearer plants FV (choice)
Investment property MHC or FV (choice) Bank loan Amortized cost (AC)

Biological assets FV less costs to sell Trade payable AC

Investments in Equity method Derivatives and others FV
associates when FV option is
used
Other financial MHC or FV (depends on cash Provisions Amount to settle
instruments flow characteristics and or transfer today
business model)

Inventories Lower of HC and net Defined benefit Projected unit

realizable value; exceptions employee benefits credit method
FV and NRV

TOTAL What does it mean? TOTAL What does it mean?

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• Most importantly, financial statements should present
fairly the financial position, financial performance
and cash flows of an entity. Compliance with IFRS is
presumed to result in financial statements that achieve
a fair presentation.

• Fair presentation requires the faithful representation of

the effects of transactions, other events and conditions
in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set
out in the Conceptual Framework.
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• Financial reporting includes

– Statement of financial position
– Statement of comprehensive income (this may be augmented
by a separate income statement)
– Statement of changes in equity
– Statement of cash flows
– Notes including significant accounting policies and
explanatory information
– Statement of financial position at the beginning of the
earliest comparative period when an entity applies an
accounting policy retrospectively or makes a retrospective
restatement

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• As regards presentation and disclosure as communication tools,

the proposed frame­work states that efficient and effective
communication of the information presented or disclosed in the
financial statements improves its relevance and contributes to a
faithful representation of the assets, liabilities, equity, income
and expenses.
• Efficient and effective communication includes classifying
information in a structured manner which reports similar items
together and dissimilar items separately, aggregating
information so that it is not obscured by unnecessary detail,
and using presentation and disclosure objectives and
principles instead of rules which could lead to purely
mechanistic compliance.

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• Information is material when its omission or misstatement

could influence the economic decisions of users made on
the basis of the financial statements.
• Materiality depends on the size and nature of the omission
or misstatement judged in the surrounding circumstances.
• An entity need not follow a requirement if the effect of
doing so would be immaterial. Applies to all requirements
including:
– recognition;
– measurement;
– presentation; and
– disclosure.

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• When information is provided, its benefits

must exceed the costs of obtaining and
presenting it.

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Thank You for Your Attention !

Question or Comment ?

The
The End
End
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