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This pdf download document includes all you need to study the Certificate
of International Reporting course while not at your computer.
However, you should note that some pages are not featured in this
printed pdf version. These are:
answers to questions
answers to exercises
mock assessment
You will see that, because of this, the page numbering in this document
does not match the page numbering in the online version of the course.
These pages require your interaction and can only be seen via the course
online.
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Welcome Certificate in International Financial Reporting
The course includes questions and interactive exercises which you should
complete before moving on. Avoid skimming the material in the hope that
you will glean the appropriate points - you wont, you must set aside time
to study the material fully.
.
If you do need to get in touch with the course administrator click here (NB.
Please do not alter the subject line of this email. For your enquiry to be
dealt with as quickly as possible it should read Certificate in International
Financial Reporting.)
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Welcome Certificate in International Financial Reporting
Course navigation
To move from page to page, click the next and previous buttons at To access external web pages, all you need to do is click the link
the top and bottom of each page. that appears within the text of the page. Off-page links always look
and behave like this (this will launch the ACCA home page). Here are
Once in the course, all you need to do is click course menu at the top of some tips for using external pages:
this page and select the module that you wish to study. Some external web pages are large, for example the Deloitte IAS
web site. For ease of navigation maximize your browser window
To navigate directly to any page within the current module, click using the maximize button (the centre button of the three at the top
module contents at the top of the page. right of the window frame).
When you have finished with the external page use your browsers
During exercises and activities you are invited to enter your answer and close button (or File Close) to close the window. The ACCA e-
review the answers of others within the course blog. qualification course will remain open in another window for you to
continue studying.
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Welcome Certificate in International Financial Reporting
You can work on this course whenever you like, 24 hours a day, The course contains the following modules:
seven days a week. Module 1 - The nature and operations of the IASB
Module 2 - The status and use of IAS/IFRS around the world
You decide when you want or need to learn; you decide just how long you Module 3 - Presentation and profit
will spend reviewing and revising a topic, and you decide when you are Module 4 - Accounting for assets and liabilities - part 1
ready to move on. Module 5 - Accounting for assets and liabilities - part 2
Module 6 - Group accounting
It should take you between 20 and 30 hours to complete, but you can take Module 7 - Disclosure standards
as long as you wish to complete the course, within the time limit of your Module 8 - Principal Differences between IFRS & UK GAAP/US GAAP
course licence. Module 9 - Forthcoming proposals for change
Mock Assessment
You can also download and print this course as an Acrobat Reader
document to use for study when you are not near a PC. If you do not have A number of pages in this course refer you to IAS Plus - a website
Adobe Acrobat Reader installed on your PC, click the Get Adobe dedicated to international financial reporting standards and to related
Reader button. current issues and developments. It is maintained by Deloitte Touche
Tohmatsu.
www.iasplus.com
To download the printable copy of this course click the file icon below.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
Module 1: What you will learn - the nature and operations of the IASB
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
Table of contents
Module 1: What you will learn - the nature and operations of the IASB
Formation of the IASB
Current IASB standards
The Conceptual Framework for Financial Reporting
Frequently asked questions
Quick Quiz
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The International Accounting Standards Committee (now IFRSF) was Accounting standards were set by a part-time, volunteer IASC Board
founded in 1973 after a conference in Sydney in 1972. The IASC was that had 13 country members and up to 3 additional organisational
formed through an agreement made by the professional accountancy members. Each member was generally represented by two
bodies from Australia, Canada, France, Germany, Japan, Mexico, the representatives and one technical advisor. The individuals came from
Netherlands, the United Kingdom with Ireland, and the United States of a wide range of backgrounds accounting practice, multinational
America. businesses, financial analysis, accounting education, and national
accounting standard-setting. The Board also had a number of observer
The accounting rule makers in these countries were often not members.
these professional accountancy bodies. In considering the
requirements for international accounting standards, it was regarded as The IASC concluded in 1997 that to continue to perform its role
too difficult for governments to reach agreement - so the accountancy effectively, there must be convergence between national accounting
bodies have worked together to try to devise a consistent set of global standards and practices and global accounting standards. The IASC
guidelines. saw, therefore, a need to change its structure. A new Constitution took
effect from 1 July 2000 under which was established a requirement for full
From 1973 to 2001 the number of accountancy bodies with constitutional review every five years. At this point the standards-setting
membership of the IASC increased to over 140. These accountancy body was renamed the International Accounting Standards Board (IASB).
bodies represented over 100 countries, including China, represented by
the Chinese accountancy body from 1997. On 1 April 2001, the new IASB took over from the IASC the
responsibility for setting International Accounting Standards.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The IASB sits under the wider parent body the IFRS Foundation
and is supported by a number of other groups and advisory panels.
Since its creation in 2000, there have been two full constitutional reviews.
The latest was completed in March 2010. The key elements of the
resulting structure, operational now, are illustrated in the diagram below
and discussed further on subsequent pages.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The Trustees act by simple majority vote except for amendments to the
Constitution, which require a 75% majority.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The IASB normally form Working Groups or other types The IFRS Interpretations Committee (Interpretations Committee)
of specialist advisory groups to give advice on major was known as the International Financial Reporting Interpretations
projects. The Board is required to consult the IFRS Committee (or IFRIC) until the latest constitutional review. The
Advisory Council on major projects, agenda decisions and Interpretations Committee has 14 members, appointed by the Trustees.
work priorities.
Its responsibilities are to:
The IFRS Advisory Council (Advisory Council) provides a forum for
organisations and individuals with an interest in international Interpret the application of International Financial Reporting
financial reporting with the objective of: Standards (IFRSs) and provide timely guidance on financial
Advising the Board on priorities in the Boards work reporting issues not specifically addressed in IFRSs or IASs
Informing the Board of the views of the organisations and Publish Draft Interpretations for public comment and consider
individuals on the Council on major standard-setting projects, and comments made within a reasonable period before finalising an
Giving other advice to the Board or to the Trustees Interpretation.
Under the constitution of the IFRS Foundation, the Advisory Council Approval of draft or final Interpretations requires that not more than four
should have a minimum of 30 voting members vote against the Draft or final Interpretation.
members.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The application dates of standards (i.e. when companies start to use the
guidance they contain) are normally somewhat after their date of
publication, e.g. these latest standards will all come into force for
accounting years beginning on or after January 1st 2013. Early
The above standards are examined in more detail in later modules. application is possible though.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
A major item in the list of publications is the Conceptual Framework The framework is particularly designed to be used by the Board
for Financial Reporting 2010 (the framework). This establishes the itself when preparing standards but is also addressed to companies and
purpose of financial statements and the major principles lying behind their auditors when preparing financial statements in accordance with IFRSs.
preparation.
One of the key components of the framework is the definition of the
The framework suggests that the main purpose of financial five main elements of financial statements. In the statement of
statements is to give information to users (particularly investors) so financial position, three elements can be found:
that they can make financial decisions. The most useful information An asset is a resource controlled by the enterprise as a result of
would therefore be that which enables the prediction of future cash flows. past events and from which future economic benefits are expected
It is clear from this that the purpose of financial statements is little to do to flow to the enterprise
with taxation or management accounting. The context is that companies A liability is a present obligation of the enterprise arising from past
and users are presumed to be living in an international world so that events, the settlement of which is expected to result in an outflow
comparisons need to be made across national borders. This also implies from the enterprise of resources embodying economic benefits
that national laws including tax laws have to be ignored when Equity is the residual interest in the assets of the enterprise after
international standards are being drafted. . deducting all its liabilities
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
The framework stresses the definitions of asset and liability such In this case, it could be argued that the expense relates to 2007. If
that the definitions of income and expense are secondary i.e. for this is the case, then at the end of financial year 2007, a debit has to
example, an expense is defined as an increase in a liability or a decrease appear in the accounts for the repair expense, and a credit as a provision
in an asset. This is different from conventional accounting in most for the repair. This will mean that the balance sheet on 31st December
countries where in practice accounting is focused on the definitions of 2007 will show a liability for the provision for repair.
income and expenses based upon the accruals concept.
While it is difficult to say that this way is wrong, it is certainly
To help explain this, lets take a look at an example. Imagine that a different from current practice. The framework suggests that you
business needs to repair a piece of equipment on the 20th February should ask the question Is there a liability? on the 31st December 2007.
2008. The company has a financial year running from 1st January to 31st The answer is no. Therefore there is no need for a double entry and so
December. no expense. This is clearer.
Is the repair bill an expense of financial year 2007 or of 2008? The application of the asset/liability framework underpins conventional
accounting practice.
Some accounting systems would treat this as an expense of 2007, as the
wear and tear that caused the equipment to breakdown was in 2007. Not
only this, but the repair is tax deductible in 2007 if so charged.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
International accounting guidance exists in the IASBs framework, The following hierarchy, in decreasing authority of guidance within
IFRS and Interpretations. The IASB published the framework to outline IFRS, is followed in developing and applying an accounting policy
the concepts that underlie the financial reporting process. The framework where no IFRS specifically deals with the transaction:
is used as a guide by both international and national standard setters to The requirements and guidance in the International
set consistent and logical accounting standards. It also assists preparers Financial Reporting Standards and IFRIC Interpretations dealing
and auditors in interpreting standards and dealing with issues that the with similar and related issues
standards do not cover. The framework
The most recent pronouncements from other
The Standards provide guidance for preparers to deal with the standard setting bodies that use a similar conceptual framework to
recognition, measurement, presentation and disclosure develop accounting standards, other accounting literature and
requirements for transactions and events. Most IFRS are intended for accepted industry practice to the extent that these do not conflict
application across industries. A second tier of guidance comes from the with (a) and (b) above.
Interpretations developed by the IFRIC. These pronouncements clarify or
interpret the standards where there is a need for improved guidance.
.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
Under the original understanding the aim was to achieve full convergence
In September 2009 the G20 leaders stated We call i.e. a set of common standards, by June 2011. Following concerns raised
on our international accounting bodies to redouble regarding the volume of draft standards due for issue in a short time
their efforts to achieve a single set of high quality, though, the IASB and FASB announced jointly in 2010 that the scope of the
global accounting standards within the context of project would be reduced. By June 2011 a converged solution would be
their independent standard setting process, and found for all the areas identified by the original MoU, plus for other issues
complete their convergence project by June 2011.. not in the MoU where a solution was urgently required.
This project has largely been completed on time. Still outstanding remains
final publication of new standards for leasing and revenue recognition, now
due in 2012.
Since publication of a memorandum of understanding (MoU) in 2006, The Securities and Exchange Commission (SEC) in the US is expected to
the IASB has been committed to a joint work programme with the announce towards the end of 2011 whether and how to incorporate IFRS
FASB (the board responsible for issuing accounting standards in the US) into the US financial system. In August 2011, in response to the SECs
to bring IFRS and US GAAP in line. request for comments, the American Institute of Certified Public Accountants
(AICPA) recommended that the SEC allow optional adoption of IFRS by US
public companies.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
1. Are International Financial Reporting Standards recognised in all 1. International Financial Reporting Standards (IFRSs) have
financial capital markets in the world? achieved recognition universally as a highly influential set of
2. What are accounting standards and what is the difference between accounting standards. The IASB says that over 100 countries have
IAS and IFRS? required or permitted the use of IFRSs since 2001.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
1. What is IOSCO, and what is its link with the IASB? 1. The International Organisation of Securities Commissions
2. How does the IASB decide what subjects to add to its agenda? (IOSCO) is the representative body of the worlds securities markets
3. Is the framework anything like the UKs Statement of Principles? regulators. High quality financial information is vital to the operation of
4. Are the IASBs standards always in line with the framework? an efficient capital market, and differences in the quality of the accounting
policies and their enforcement between countries leads to inefficiencies
between markets. IOSCO has been active in encouraging and promoting
the improvement and quality of IFRSs for over ten years.
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Module 1: The nature and operations of the IASB Certificate in International Financial Reporting
Quick Quiz
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Module 1 quick quiz Certificate in International Financial Reporting
Question 1
What is the role of the IFRS Interpretations Committee?
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Module 1 quick quiz Certificate in International Financial Reporting
Question 2
Which of the following is not one of the four enhancing qualitative
characteristics?
A. Understandability
B. Materiality
C. Comparability
D. Timeliness
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Module 1 quick quiz Certificate in International Financial Reporting
Question 3
The definition of an asset includes which of the following terms:
1. Control
2. Future economic benefits
3. Ownership
4. Past transaction
B. 1, 2, and 4
C. 2, 3, and 4
D. 1, 2, and 3
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Module 1 quick quiz Certificate in International Financial Reporting
Question 4
The principle of commercial substance over legal form is being applied
when:
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Module 1 quick quiz Certificate in International Financial Reporting
Question 5
The monitoring board is responsible for:
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
Module 2: What you will learn: the status and use of IFRSs around the world
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
Table of contents
Module 2: What you will learn: the status and use of IFRSs around the
world.
Introduction: Where have IFRSs been adopted
Growth of the IASB and IFRSs: a roadmap
IFRSs for Small and Medium Enterprises (SMEs)
IFRS for SMEs
The annual IASB bound volume and its use
Frequently asked questions
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
In many countries, stock exchange listing requirements or national On 27 August 2008, the US Securities and Exchange Commission
securities legislation permits foreign companies that issue voted to publish for public comment a proposed roadmap that
securities in those countries to prepare their consolidated financial could lead to the use of International Financial Reporting Standards
statements using IFRSs. The principal capital markets in this category (IFRSs) by US issuers beginning in 2014. Currently, US issuers must use
are Australia, Germany and the United Kingdom. From 1 January 2005, US GAAP, though foreign registrants (of which there are around 1,100
all publicly listed companies in the European Union were required to from 52 jurisdictions) may elect to use IFRSs. The proposal suggests
prepare their financial statements in conformity with IFRSs. From the mandatory adoption by US registrants could be phased in from 2014 to
same date, Australia adopted IFRSs as its national accounting standards. 2016 depending on company size:
New Zealand required IFRSs from 2007. Large accelerated filers in 2014
Accelerated filers in 2015
In 2007, Brazil, Canada, Chile, India, Japan and Korea all established Non-accelerated filers in 2016
timelines to adopt or converge with IFRSs. In the USA, the Securities
and Exchange Commission (SEC) removed the reconciliation requirement In 2011, the Commission will evaluate the progress of IFRSs against
for non-US companies reporting under IFRSs, and consulted on IFRSs for certain defined milestones and make a decision on whether to go ahead
domestic companies. with adoption starting in 2014, later, or not at all..
.
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
The IASB, the board responsible for issuing IFRSs, has come a long 1995
way since its inception in 1973. Here is a brief list of the major agreement between the IASC and IOSCO on list of core standards
developments that have marked the life of the IASB: 1998
laws to permit use of IASs in France, Germany and Italy and the
1973 IASC passes last major core standard (IAS 39, financial
the IASC was founded in by accountancy bodies from nine instruments)
countries 1999
1970s-80s the IASC decides on reform; welcomed by SEC, etc.
the codifying of best practice, including many national options 2000
1989 IOSCO recommends use of IAS to its members and the EU
publication of the first version of the Conceptual Framework for Commission proposes compulsory use of IAS for listed companies
Financial Reporting and initial discussions with IOSCO consolidated statements by 2005
1990s 2001
gradual adoption of IASs as national standards, particularly by European Commission presents legislation to require use of IASC
Commonwealth countries Standards for all listed companies no later than 2005
1993 Trustees bring new structure into effect 1 April 2001 IASC
ten revised standards, in force in 1995 now becomes IASB and assumes responsibility for setting
1994+ accounting standards, designated International Financial reporting
adoption of IASs by a number of continental companies for Standards (IFRSs).
consolidated statements.
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
In August 2009, the UK Accounting Standards Board announced a draft The result will be a three-tier approach:
policy for implementation of IFRS by non-publicly accountable UK
companies (publicly accountable companies are required to prepare 1. Publicly accountable entities prepare financial statements in
financial statements in accordance with full IFRS already). Under the accordance with full IFRS
latest draft of these proposals, the ASB will publish the Financial 2. Non-publicly accountable entities which are not small prepare
Reporting Standard for Medium Sized Entities (FRSME). This will be financial statements in accordance with the FRSME (based upon
based upon the IFRS for SMEs, modified as little as is feasible to ensure the IFRS for SMEs).
compliance with UK and EU legal requirements. 3. Small entities continue to comply with the UK FRSSE
UK GAAP will be phased out and non-publicly accountable companies will Any entity could choose to adopt the policy of a higher tier i.e. a small
be required to prepare financial statements in accordance with the company could choose to comply with the FRSME.
FRSME for accounting periods beginning on or after 1 July 2013.
http://www.iasplus.com/standard/ifrsforsmes.htm
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
This contains the text of the current international standards and the
interpretations. It also contains the text of the framework and a glossary
of terms used in IASB documents. From time to time, this course will
direct you towards particular standards to carry out short exercises.
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Module 2: The status and use of IFRSs around the world Certificate in International Financial Reporting
1. Which national standards are closest to the IASBs? 1.In terms of subjects covered and level of detail, the UKs
2. Is it necessary to adhere to all requirements of IFRS for financial standards used to be very close to IFRS, but since the roadmap for
statements to state compliance? convergence with US accounting there are now significant differences
3. What version of the English language is used by the IASB: British emerging..
or American?
2. Yes, in order to claim compliance with IFRSs, all the requirements
of the IFRS must be met. There are no exceptions. Use of local GAAP
and IFRS together is not allowed.
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Module 3: Presentation and profit Certificate in International Financial Reporting
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Module 3: Presentation and profit Certificate in International Financial Reporting
Table of contents
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Module 3: Presentation and profit Certificate in International Financial Reporting
The following represent the key points that you should take from the Under the revised IAS 1, published in September 2007 and effective
standard: for accounting periods beginning on or after 1 January 2009, a
complete set of financial statements should include: [IAS 1 para 10]
1. This standard contains several aspects taken from the framework, a. A statement of financial position at the end of the period,
including that the purpose of financial reporting is to give useful b. A statement of comprehensive income for the period,
information to investors for the purposes of making economic decisions. c. A statement of changes in equity for the period
d. A statement of cash flows for the period, and
2. The objective of general purpose financial statements is to e. Notes, comprising a summary of accounting policies and other
provide information about the financial position, financial explanatory notes.
performance, and cash flows of an entity that is useful to a wide range
of users in making economic decisions. To meet that objective, financial The revised IAS 1 introduced a change to the titles of the financial
statements provide information about an entitys: [IAS 1 para 7] statements as used in the IFRSs:
a. Assets. a. Balance sheet became statement of financial position
b. Liabilities. b. Income statement became statement of comprehensive income
c. Equity. c. Cash flow statement became statement of cash flows.
d. Income and expenses, including gains and losses.
e. Other changes in equity. Entities are not required to use the new titles in their financial statements,
f. Cash flows. but all existing Standards and Interpretations have been amended to
reflect the new terminology.
That information, along with other information in the notes, assists users
of financial statements in predicting the entitys future cash flows and, in
particular, their timing and certainty.
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Module 3: Presentation and profit Certificate in International Financial Reporting
3. In addition to changing the titles of the financial statements, the 4. The statement of changes in equity must be of the same status as
revised IAS 1 also requires that an entity must: the other three statements. The statement must show: (IAS1 para 106).
Present all non-owner changes in equity (that is, comprehensive total comprehensive income for the period
income see below) either in one statement of comprehensive for each component of equity, the effects of changes in accounting
income or in two statements (a separate income statement and a policies and corrections of errors recognised in accordance with
statement of comprehensive income). Components of IAS 8
comprehensive income may not be presented in the statement of for each component of equity, a reconciliation between the
changes in equity. carrying amount at the beginning and the end of the period
Present a statement of financial position (balance sheet) as at the
beginning of the earliest comparative period in a complete set of 5. IAS 1 requires that financial statements should present fairly the
financial statements when the entity applies an accounting policy financial position, performance, and cash flows of an enterprise. It is
retrospectively or makes a retrospective restatement. said that nearly always this will be achieved by compliance with the
Disclose income tax relating to each component of other requirements of the standards. However, in what are said to be extremely
comprehensive income. rare circumstances, it may be necessary to depart from such a
Disclose reclassification adjustments relating to components of requirement in order to achieve a fair presentation. IAS 1 requires
other comprehensive income. departure in such circumstances, but with extensive disclosures,
including the financial impact of the departure from the standard.
Comprehensive income for the period includes profit or loss for the period
plus other income recognised including changes in revaluation surplus,
actuarial gains and losses, and gains or losses from translating overseas
operations.
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Module 3: Presentation and profit Certificate in International Financial Reporting
6. The two main requirements of accounting information are that it 9. It is necessary to present assets and liabilities on the basis of the
should be relevant and reliable. As part of being reliable, financial distinction between current items and non-current items except
statements should: where a presentation based on liquidity is reliable and more relevant.
- represent faithfully the results and financial position,
- reflect economic substance and not merely legal form, 10. IAS 1 does not lay down particular formats for financial
- be free from bias, statements but does have minimum requirements for the presentation of
- be prudent, and items on the face of the financial statements.
- be complete in all material respects.
Several other principles are said to be normally required, such as going 11. In June 2011 an amendment to IAS 1 was issued to improve the
concern, accruals, consistency and materiality. consistency and clarity of the presentation of items in other comprehensive
income.
7. The off-setting of assets and liabilities is not allowed except
where another standard requires or permits it. Income and expense
items should not be offset except where a standard permits or requires it.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Should the going concern convention be dropped when a significant part Consider your answer to the question, when you are ready click next to
of the reporting entity is thought not to be a going concern? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Is consistency of accounting policies from year to year Consider your answer to the question, when you are ready click next to
required? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Can a loan which is expected to be paid back in four months be a non- Consider your answer to the question, when you are ready click next to
current liability? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Revenue - IAS 18
The following represent the key points that you should take from the 3. When the outcome of a process of revenue earning can be
standard: reliably measured, revenue should be recognised by stage of
completion, otherwise only to the extent of expenses recoverable
1. Revenue is to be measured at the fair value of the consideration (paragraphs 20 and 26).
received. This includes, where material, discounting, if the consideration
will be received in the future (paragraphs 9 and 11). 4. Where there are several components to a transaction (e.g. a
company sells goods and services together), then the revenue
2. Revenue arising from the sale of goods should be recognised recognition rules should be applied to each component separately
when all the following criteria have been satisfied (paragraph 14): i.e. revenue attributable to the sale of goods will be recognised
a. The seller has transferred to the buyer the significant risks and immediately whilst the revenue associated with provision of services will
rewards of ownership be deferred and recognised over the period during which the service is
b. The seller retains neither continuing managerial involvement to the performed (paragraph 13).
degree usually associated with ownership nor effective control over
the goods sold 5. There are also general rules for the recognition of interest,
c. The amount of revenue can be measured reliably royalties and dividends. None of these rules would be surprising in
d. It is probable that the economic benefits associated with the most countries (paragraph 30).
transaction will flow to the seller
e. The costs incurred or to be incurred in respect of the transaction
can be measured reliably.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Revenue - IAS 18
Revenue measurement a worked Example
IAS 18 states that if consideration will be received in the future then, Because the consideration is receivable in the future, it should be
where material, it should be discounted to present value. The following discounted back two years at 5% to find the revenue recognised:
example illustrates this point with some figures.
$1,000 x (1/1.052) = $907
Supersofas Limited, a furniture company, launches a promotional offer
that allows customers to buy now, pay two years later with no interest Supersofas will recognise revenue in the income statement and a
charged. receivable on the statement of financial position equal to $907.
On 31 August 2009 Supersofas Limited sell two sofas to Judy for $1,000. Over the two year period of interest-free credit, the discount unwinds, and
Judy takes advantage of the offer of interest-free credit and will pay in this will create investment income in the income statement and increase
August 2011. If interest rates are currently 5% per annum, how should the receivable on the statement of financial position.
this transaction be recorded by Supersofas Limited in the year ended 31
December 2009? In 2009, Supersofas will recognise investment income for four months
(September to December inclusive):
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Module 3: Presentation and profit Certificate in International Financial Reporting
The following represent the key points that you should take from the
standard:
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Module 3: Presentation and profit Certificate in International Financial Reporting
2. An entity shall select and apply its accounting policies 5. The general principle in IAS8 is that an entity must correct all
consistently for similar transactions, other events and conditions. material prior period errors retrospectively in the first set of
financial statements authorised for issue after their discovery by
3. An entity is permitted to change an accounting policy only if the (paragraph 42):
change: a. Restating the comparative amounts for the prior period(s)
a. Is required by a standard of interpretation; or presented in which the error occurred; or
b. Results in the financial statements providing reliable and more b. If the error occurred before the earliest prior period presented,
relevant information restating the opening balances of assets, liabilities and equity for
the earliest prior period presented.
4. The effect of a change in an accounting estimate shall be
recognised prospectively by including it in profit or loss in:
a. The period of the change, if the change affects that period only; or
b. The period of the change and future periods, if the change affects
both
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Module 3: Presentation and profit Certificate in International Financial Reporting
1. Click here to enter text Is there a true and fair override in IASs? 1. IAS 1 talks of fair presentation rather than true and fair view.
2. What is the status of interpretations? However, there is an override, which is said to be necessary only in very
3. Suppose that a company has entered into a binding contract to sell rare circumstances. Substantial disclosures are required.
an asset soon for a fixed amount. Can any implied gain be
recorded? 2. IAS 1 gives interpretations the same status as standards. That is,
they must be complied with.
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Module 3: Presentation and profit Certificate in International Financial Reporting
Quick Quiz
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Module 3: Presentation and profit Certificate in International Financial Reporting
Question 1
During the year to 30 September 2008, the following events occurred in
relation to Pipe, a limited liability company. All were material to the
companys accounts:
1. A claim for tax relief, submitted in 2005, was rejected by the Tax
authorities. No appeal will be made. The resulting liability of
$15,000 was not provided at 30 September 2007, since the
company had expected the claim to succeed.
2. The company had decided to include attributable overheads in its
inventory valuation for the first time in 2008. The effect at 30
September 2007 would have been $5,000.
3. A cut-off error on inventory at 30 September 2007 was discovered
which would have reduced the value of inventory by $24,000.
4. Obsolete inventory which had been written down to its estimated
net realisable value of $17,000 at 30 September 2007 was sold for
$7,000.
How much should be accounted for as a prior period adjustment in the
accounts to 30 September 2008?
A. $10,000
B. $19,000
C. $29,000
D. $34,000
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Module 3: Presentation and profit Certificate in International Financial Reporting
Question 2
Which of the following does not have to be included in the Statement of
Changes in Equity (SOCIE)?
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Module 3: Presentation and profit Certificate in International Financial Reporting
Question 3
Which item must be shown separately on the face of the SOFP?
A. Intangible assets
B. Work in progress
C. Trade receivables
D. Taxation
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Module 3: Presentation and profit Certificate in International Financial Reporting
Question 4
Balances under the following headings are extracted from the books of
Ego, a limited liability company:
1. Changes in inventories of finished goods and work in progress
2. Raw materials and consumables used
3. Consulting expense
The accountant wishes to use a Format 2 type of expenditure income
statement.
Which of the above balances may be included without further analysis on
the face of the income statement/ statement of comprehensive income?
A. 1 and 2
B. 1 and 3
C. 2 and 3
D. 1, 2 and 3
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Module 3: Presentation and profit Certificate in International Financial Reporting
Question 5
Does the Job Ltd, a software company, make a sale for $500,000 at the
end of their reporting period. The amount charged to the customer
includes $470,000 for software and $30,000 for support services for the
next two years. How much revenue should Does the job Ltd recognise in
the current reporting period?
A. $500,000
B. $485,000
C. Nil
D. $470,000
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Module 4: What you will learn: accounting for assets and liabilities part 1
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Table of contents
Select a topic to study or click next.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Introduction
The definition of asset is: a resource controlled by It should be noted that an asset is not necessarily something which
is owned but which is controlled. One example of an implication of this
the enterprise as a result of past events is that a lessee might treat an item as an asset even though it is not
and from which future economic benefits are owned by the lessee. Of course, for an item to be an asset at all, it must
expected to flow to the entity. produce some future benefit to the entity.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
An asset should initially be recognised at its cost, which includes all Revaluation gains and losses should be recorded in other
those costs of bringing it to its present condition and location, ready for comprehensive income and taken to equity under the heading of
productive use (paragraph 15). revaluation surplus. There are some special rules where a revaluation
loss occurs in cases where there has previously been a revaluation gain
Capitalisation of subsequent expenditure should occur when it is (paragraphs 39 and 40).
probable that the asset will produce future benefits in excess of the
originally assessed standard of performance. The carrying amount of an asset should be depreciated over its
useful life. The depreciable amount takes account of the residual value
Subsequently the entity can continue using cost (with depreciation, expected at the end of the useful life. This value should be measured at
see below) but assets may be revalued to fair value. This alternative the price level ruling when the cost or value of the asset was determined
must be used continually at each reporting date and must be applied to a (paragraphs 6).
whole class of assets rather than to an individual asset only. A class of
assets is a heading on a statement of financial position, such as land and The gain or loss on the disposal of an asset is calculated as the
buildings. Fair value is defined by IFRS 13 as the price that would be difference between the proceeds and the carrying amount. Since the
received to sell an asset or paid to transfer a liability in an orderly latter could be based on either cost or revaluation, the gain on sale would
transaction between market participants at the measurement date This is be lower if an asset had been revalued upwards.
different from net realisable value because that amount is net of various
items including cost of sale (paragraphs 29, 30 and 31).
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
A company bought some land for $15m in 2000, revalued it at various Consider your answer to the question, when you are ready click next to
dates up to $23m in 2007, and sold it for $21m in 2007, but did not enter it into the course blog.
receive any cash until 2008. Ignoring tax, the gain/loss recorded in 2007 You may wish to discuss this with a colleague before finally submitting it.
should be:
You can then review the ideas of other students on this subject.
a. zero
b. +$6m
c. -$2m
d. +$21m
You should refer to the text of the standard when answering all exercises.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
A company owns five properties, all capitalised and held at cost within Consider your answer to the question, when you are ready click next to
property, plant and equipment. Two of these properties are office enter it into the course blog.
buildings in central London. Market information suggests that these two You may wish to discuss this with a colleague before finally submitting it.
properties have increased in value significantly and management would
like to book a revaluation in the accounts to reflect this gain at the year You can then review the ideas of other students on this subject.
end. They believe this will provide more relevant information to
shareholders and others reviewing the financial statements. Would IAS 16
permit this treatment?
You should refer to the text of the standard when answering all exercises.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
As with any other asset, intangible items should be recognised In some countries items such as the legal and other expenses of
where there is a probable future benefit that can be measured setting up a company are capitalised, but this is not allowed under IAS
reliably (paragraph 21). With intangibles this may be more difficult than 38 because there is not an asset (paragraph 66).
for tangible assets. Certain items are therefore not recognised. For
example, internally generated goodwill cannot easily be traced back to a Just as tangible assets are allowed to be revalued by IAS 16, so
transaction and therefore the cost or value is difficult to measure; it is not intangibles may be revalued, but there are some restrictions.
even clear that the enterprise has control over it, consequently it is not to Intangibles can only be revalued with reference to an active market that
be recognised as an asset (paragraph 48). Also research expenditure involves many buyers and sellers and publicly available prices (paragraph
cannot be capitalised for similar reasons (paragraph 54). The same 75). This makes it difficult in practice to re-value most intangibles.
applies to several other internally generated assets, such as brands
(paragraph 63). Intangible assets are classified as (paragraph 88):
a. Indefinite life: no foreseeable limit to the period over which the
Development expenditure that meets certain criteria should be asset is expected to generate net cash inflows for the entity
capitalised. One of the conditions is that there is a technically feasible b. Finite life: a limited period of benefit to the entity.
project that can be separately measured (paragraph 57). .
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
The cost less residual value of an intangible asset with a finite An intangible asset with an indefinite useful life should not be
useful life should be amortised over that life (paragraph 97): amortised (paragraph 107). Its useful life should be reviewed each
a. The amortisation method should reflect the pattern of benefits reporting period to determine whether events and circumstances continue
b. If the pattern cannot be determined reliably, amortise by the to support an indefinite useful life assessment for that asset. If they do
straight line method not, the change in the useful life assessment from indefinite to finite
c. The amortisation charge is recognised in profit or loss unless should be accounted for as a change in an accounting estimate
another IFRS requires that it be included in the cost of another (paragraph 109). The asset should also be assessed for impairment in
asset accordance with IAS36 (paragraph 111).
The amortisation period should be reviewed at least annually (paragraph
104).
http://www.iasplus.com/standard/ias38.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Can brand names be capitalised? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Can development expenditure be revalued upwards? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
IAS 40 deals with investment property, which is property held to For those enterprises that choose the cost model, there must be
earn rentals or capital gain, rather than being owner occupied. disclosure in the notes of fair value (paragraph 75).
Paragraphs 8 and 9 expand on this definition by providing examples of
what would constitute investment property. The standard does not apply An entity must apply its chosen model to all its investment property.
to biological assets and mineral rights (paragraph 4).
In the fair value model, individual properties whose fair value cannot
be reliably measured should also be measured at cost (paragraph
53).
http://www.iasplus.com/standard/ias40.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
This standard applies to most assets, but not to inventories because The value in use is the discounted present value of the future net
they are already valued at the lower of cost and net realisable value, cash flows expected to relate to the asset or cash generating unit. A
which takes into account any loss of value (paragraph 1). cash generating unit is simply the smallest element of a company that
can independently generate revenue/cash flow (paragraph 6).
The process of applying this standard begins by looking at each
asset at the end of each reporting period for any indication of For many assets it may be impossible to measure specific cash
impairment such as physical damage or fall in selling price of the product flows relating to them, so it becomes necessary to do the exercise with
made with the asset (paragraph 9). the smallest group of assets for which independent cash flows can be
measured.
Normally one would expect no indication of impairment, but in cases This group of assets is called a cash generating unit (paragraph 6).
where there is, an entity must then test whether there is an impairment.
This involves comparing the carrying amount of the asset with its There is a series of rules on cash flow projections designed to stop
recoverable amount, which is the higher of its fair value less cost to sell an enterprise from being too optimistic (paragraphs 33, 39, 44, 50 and
and value in use. 52). The cash flows should, of course, be discounted and the discount
rate should be pre-tax and asset-specific (paragraph 55).
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
http://www.iasplus.com/standard/ias36.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Will an assets recoverable amount usually be fair value less costs to sell Consider your answer to the question, when you are ready click next to
or value in use? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
What sort of estimates are involved in impairment tests? Do you think that there is any incentive for management to overstate
or understate the impairment loss?
The impairment is being calculated under the rules of IAS 36, which
requires annual impairment review, followed by tests where there is The impairment loss for 2008 is so large in the context of the five
any indication of impairment. The test requires a comparison of year run of profits that analysts would probably have to ignore it on
carrying value with recoverable amount, which is the higher of fair value the grounds of unusual / abnormal / non-recurring. Once the
less costs to sell and value in use. The former is unlikely to be relevant management realises this, they might as well make the loss as big as
because there is no market and no intention to sell. It would normally be possible so that future depreciation expenses are lower and gains on
lower than the value in use, which is measured as the discounted disposal higher.
expected net cash flows. It is presumed here that the cash generating
unit is the pipeline system. This answer is written in the context of countries where impairment losses
are not treated as tax deductible expenses. Of course if they are tax
However, the estimates of value in use rely on knowing the life of the deductible, then a company would usually want to maximise them.
pipeline to the present owner, the disposal proceeds, the cash flows
in and out over the future life, and a suitable pre-tax discount rate.
IAS 36s discusses this, but there is still considerable room for
manoeuvre.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
This standard examines the issues of whether the costs of Where a business borrows specifically to fund a project, the
borrowing should be added to the capitalised cost of an asset. For borrowing costs that may be capitalised will be those actually
example, if an enterprise is constructing its own office building, what are incurred (paragraph 12). Where an entity borrows funds generally, the
the costs? It is clear from IAS 16 (above) that these costs would include amount that may be capitalised re the construction of a specific asset
the bricks, the labour to put the bricks on top of each other, the architects should be calculated by applying the weighted average cost of borrowing
fees, and so on. However, do they include the interest cost on money to the expenditure on that specific asset (paragraph 14).
borrowed to build the building?
IAS 23 contains detailed guidance around when an entity should
Borrowing costs that are directly attributable to the acquisition, commence and cease capitalising borrowing costs (paragraphs 17,
construction or production of a qualifying asset form part of the cost 20 and 22).
of that asset and, therefore, should be capitalised whilst other borrowing
costs are recognised as an expense (paragraph 8).
http://www.iasplus.com/standard/ias23.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
An enterprise has received a government grant relating to an asset which Consider your answer to the question, when you are ready click next to
is expected to last for ten years. It is highly probable that the conditions of enter it into the course blog.
the grant will continue to be met. Does the framework suggest the same You may wish to discuss this with a colleague before finally submitting it.
recognition requirement as IAS 20?
You can then review the ideas of other students on this subject.
You should refer to the text of the standard when answering all exercises.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Inventories - IAS 2
The objective of IAS 2 is to prescribe the The main elements of this standard are as follows:
accounting treatment for inventories. It provides IAS 2 requires the age-old rule of the lower of cost and net realisable
guidance for determining the cost of inventories and value (paragraph 9). Net realisable value (NRV) is the estimated selling
for subsequently recognising an expense, including price in the ordinary course of business less any estimated costs of
completion and sale (paragraph 6).
any write-down to net realisable value. It also
provides guidance on the cost formulas that are IAS 2 allows a choice of ways of determining cost where the specific
cost is not obvious. FIFO or weighted average are the recommended
used to assign costs to inventories.
treatments.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Inventories - IAS 2
Cost should include all: The LIFO formula, which had been allowed prior to the 2003 revision
a. costs of purchase (including taxes, transport, and handling) net of of IAS2, is no longer allowed.
trade discounts received
b. costs of conversion (including fixed and variable manufacturing The same cost formula should be used for all inventories with
overheads) and similar characteristics as to their nature and use to the enterprise.
c. other costs incurred in bringing the inventories to their present For groups of inventories that have different characteristics, different cost
location and condition. formulas may be justified.
Inventory cost should not include abnormal waste, storage costs or Any write-down to NRV should be recognised as an expense in the
administrative overheads unrelated to production. period in which the write-down occurs.
The standard cost and retail methods may be used for the
measurement of cost, provided that the results approximate actual cost.
http://www.iasplus.com/standard/ias02.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
http://www.iasplus.com/standard/ias11.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Buildahouse Ltd is a construction company that uses costs incurred to Consider your answer to the question, when you are ready click next to
date to measure stage of completion. At the end of the reporting period, enter it into the course blog.
the following information is available regarding project A: You may wish to discuss this with a colleague before finally submitting it.
Contract value $5,000,000 You can then review the ideas of other students on this subject.
Value of work certified to date $3,000,000
Costs incurred to date $2,600,000
Estimated costs to complete $1,400,000
Assuming that the outcome of the project can be estimated reliably, how
much revenue and profit should be recognised for project A in the current
reporting period?
You should refer to the text of the standard when answering all exercises.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Leases - IAS 17
IAS 17 applies to all leases other than lease The main elements of this standard are as follows:
agreements for minerals, oil, natural gas, and similar
regenerative resources and licensing agreements for IAS 17 requires the capitalisation of finance lease assets and
films, videos, plays, manuscripts, patents, liabilities at the lower of the fair value of the asset and the
discounted minimum lease payments (paragraph 20).
copyrights, and similar items.
A finance lease is one that transfers substantially all the risks and
rewards associated with the leased asset to the lessee (paragraph 4).
There are a number of suggestions about how it is possible to identify a
finance lease but no numerically based criteria of the proportion of value
or life.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Leases - IAS 17
Operating leases (i.e. those leases which are not finance leases)
should be treated as rentals. Operating lease rental payments should
be recognised on a straight-line basis over the life of the lease, even
where the lease is written with low rentals at the beginning and high
rentals later (paragraph 33).
http://www.iasplus.com/standard/ias17.htm
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Is the definition of a finance lease consistent with the Frameworks Consider your answer to the question, when you are ready click next to
definition of asset and liability? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.
You can then review the ideas of other students on this subject.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
IFRS 5 sets out the accounting treatment and disclosure requirements A disposal group is a group of assets, possibly with some
when part of a company is either for sale or has already been disposed. associated liabilities, which an entity intends to dispose of in a single
transaction.
In the statement of financial position IFRS 5 establishes a
classification for non-current assets held for sale. In general, the Immediately before the initial classification of the asset as held for
following conditions must be met for an asset (or disposal group) to be sale, the carrying amount of the asset should be measured in accordance
classified as held for sale (paragraphs 6-8): with applicable IFRSs (e.g. if the asset is held in PPE at revalued amount
a. management is committed to a plan to sell under IAS 16, then it should be revalued before applying IFRS 5).
b. the asset is available for immediate sale
c. an active programme to locate a buyer is initiated After classification as held for sale, non-current assets or disposal groups
d. the sale is highly probable, within 12 months of classification as that are classified as held for sale are measured at the lower of carrying
held for sale (subject to limited exceptions) amount and fair value less costs to sell (paragraph 15).
e. the asset is being actively marketed for sale at a sales price
reasonable in relation to its fair value
f. actions requires to complete the plan indicate that it is unlikely that
the plan will be significantly changed or withdrawn.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
If shares are sold such that a subsidiary becomes an associate, can that Consider your answer to the question, when you are ready click next to
be a discontinued operation? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all exercises.
You can then review the ideas of other students on this subject.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
1. Click here to enter text What is the difference between fair value 1. NRV is a market price net of selling costs. Fair value is a market
and net realisable value (NRV)? price with costs neither deducted or added. For some assets (e.g.
2. Because revaluation increases subsequent depreciation and buildings) in some countries, transaction costs could be a large
decreases gain on sale, would this not discourage revaluation? percentage.
3. IAS 16s rule on the calculation of the gain on revalued assets
seems to mean that some realised gains never appear as income. 2. It is not the IASBs intention to discourage the use of relevant
Can this be right?. current values. A transfer can be made from revaluation reserve to
accumulated reserves of the increase in the depreciation charge. This
maintains realised profits at the same level.
3. That is, indeed, the implication. However, the gain does appear in
the statement of comprehensive income which if the company
chooses can be published directly beneath the main income statement.
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Module 4: Accounting for assets and liabilities part 1 Certificate in International Financial Reporting
Quick Quiz
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Module 4 quick quiz Certificate in International Financial Reporting
Question 1
Sandy Limited enters into an operating lease agreement on 1 July 2009.
The lease term is 5 years. Annual rental payments in advance are $1,500.
To incentivise Sandy to enter into the lease, the lessor has agreed to a
six-month rent-free period, so that the first rental payment will be made on
1 January 2010. What should be recorded in the income statement for the
year ended 31 December 2009?
A. An expense of $750
B. An expense of $675
C. Income of $750
D. No income or expense
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Module 4 quick quiz Certificate in International Financial Reporting
Question 2
During the year Project Co constructed a new head office building costing
$2m. It took 6 months to complete and the work was funded from existing
loan finance:
A. $48,333
B. Nil
C. $42,500
D. $96,667
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Module 4 quick quiz Certificate in International Financial Reporting
Question 3
Crazy Constructing Plc are in the process of preparing year end accounts
and have the following information regarding a project to build a bridge:
The project is accounted for under IAS 11. What should be recorded in
the income statement for revenue and overall result for this project at the
year end?
Revenue Result
A. $7,000,000 Loss of $1,000,000
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Module 4 quick quiz Certificate in International Financial Reporting
Question 4
New Designs Limited is working on a groundbreaking piece of machinery
for use in toy manufacture. If successful the new machinery should
improve efficiency ten-fold, and New Designs are in no doubt that it would
be sought after by all of the major toy manufacturers.
They began work on the project on 1 February 2009. At this point they set
aside money to fund the project and set up a new laboratory where the
work would take place. By 31 July they had produced a prototype and by
30 September had completed successfully a rigorous testing process to
check the product conformed to safety requirements etc.
They launched the product onto the market on 1 December 2009. Costs
incurred on the project were as shown below:
$'000s $'000s
A. $100,000
B. $1,550,000
C. Nil
D. $300,000
2012 Association of Chartered Certified Accountants
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Module 4 quick quiz Certificate in International Financial Reporting
Question 5
Zone Ltd, a company specialising in provision of sports equipment,
purchase a property which they decide to rent out for two years to
Partition Limited for $5,000 per calendar month. Which of the following is
true?
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Module 5: What you will learn - Accounting for assets and liabilities part 2
This module deals with a number of IFRSs that give rise to the
recognition of liabilities:
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Table of contents
Select a topic to study or click next.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
IFRS 13 was published in May 2011 and established for the first time The key points from the standard are as follows:
a single source of guidance for fair value measurement of assets
and liabilities under IFRS. Fair value is defined by IFRS 13 as the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
It is effective for accounting periods beginning on or after 1 January between market participants at the measurement date (appendix A).
2013, with early application permitted. It should be applied prospectively
from the period in which it is adopted (i.e. there is no need for entities to In order to measure fair value the entity must determine (paragraph B2):
go back to prior periods and restate fair values for the new requirements
of IFRS 13). The asset or liability to be measured
The principal market for the asset or liability (i.e. the one with the
It does not prescribe when fair value should be used, only how to greatest volume and level of activity)
apply it when required by another standard. The appropriate valuation technique to use (to reflect the
assumptions market participants would use when valuing the asset
This standard is applicable to all transactions and balances or liability)
requiring measurement at fair value under another standard, with the For a non-financial asset, the highest and best use
exception of share-based payments accounted for under IFRS 2 and
leases falling within the scope of IAS 17.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Fair value measurement should then IFRS 13 outlines three valuation techniques that may be applied
(paragraph 62):
Take account of any characteristics that might be relevant to a
market participant (e.g. condition and location of an asset) 1. Market approach uses prices and other relevant information
Assume an orderly transaction between market participants at the generated by market transactions involving identical or similar assets
measurement date under current market conditions or liabilities
Assume the transaction takes place in the principal market (or 2. Cost approach current replacement cost
failing this the most advantageous market) 3. Income approach discounted future cash flows or income and
Take account of highest and best use re a non financial asset expenses
(even if this is not its current use)
Assume transfer of a liability or own equity instrument (i.e. assume Either one, or where appropriate a combination, of these valuation
the liability remains outstanding but is passed to a 3rd party, not techniques should be selected and consistently applied..
that the liability is paid off or settled)
Reflect non-performance risk where a liability is concerned
(including the entitys own credit risk).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Inputs used to measure fair value are divided into three categories, with
each fair value measurement fitting into the category of the lowest level
input that is significant to the overall measurement in that case.
http://www.iasplus.com/standard/ifrs13.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
The topic of financial instruments is sufficiently complicated that it
was necessary to split it into three standards. Originally these were:
IAS 32 dealing with presentation issues (i.e. where to record items IFRS 9 is not yet complete. However in response to requests that the
in the income statement and statement of financial position). accounting for financial instruments be improved quickly, the IFRS 9 project
IAS 39 dealing with recognition and measurement issues (i.e. has been split into phases. As each phase is completed the relevant
when to record an item in the financial statements and at what portions of IAS 39 are deleted and chapters in IFRS 9 are created.
value)
IFRS 7 looking at disclosures (all the extra information that should So far, the IASB has issued the chapters of IFRS 9 relevant to all areas
be supplied about financial instruments in addition to the numbers except impairment and hedging. These sections will follow with the aim that
that appear in the primary financial statements). IAS 39 will be replaced in its entirety in 2012.
Following the key definitions on the next page, IAS 32, IFRS 7, IFRS 9 and
the relevant remaining chapters of IAS 39 will each be covered in turn.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
Definitions
Key elements of definitions are provided below. For full definitions refer to
paragraph 11 of IAS 32.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IAS 32 - Presentation
Financial instruments of an issuer should be classified Offsetting of financial assets against financial liabilities is only
on the basis of whether their substance is that they are allowed when there is a legally enforceable right of set off which the
equity or liability. For example, if an enterprise has issued enterprise intends to use..
some preference shares that contain elements that fit the
definition of liability (the shares could be redeemable on a
specified date such that the entity has an obligation to deliver
cash) then the share is to be treated as a liability despite its
legal classification.
http://www.iasplus.com/standard/ias32.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IAS 32 - Presentation
Liability component:
Date Cash Flow Discount Factor Present value
31 Dec 20X9 $30,000 (w) 1/1.07 $28,037
2
31 Dec 20Y0 $30,000 (w) 1/1.07 $26,203
3
31 Dec 20Y1 $30,000 (w) 1/1.07 $24,489
4
31 Dec 20Y2 $30,000 (w) 1/1.07 $404,334
+ $500,000
Total value of
Liability $483,063
component:
(w) ($500,000 x 6%) = $30,000.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IFRS 7 - Disclosures
http://www.iasplus.com/standard/ifrs07.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IFRS 9 - Financial Instruments
The main elements of this standard are as follows: 4. A financial asset shall be measured at amortised cost if
both of the following conditions are met:
1. An entity shall recognise a financial asset or financial liability
when the entity becomes a party to the contractual provisions of the The asset is held within a business model whose objective is to hold
instrument (note this differs from the standard recognition criteria laid assets in order to collect contractual cash flows
down in the Conceptual Framework for Financial Reporting). The contractual terms of the financial asset give rise on specified
dates to cash flows that are solely payments of principal and interest
on the principal amount outstanding
2. All financial assets are initially measured at fair value plus 5. Financial assets not measured at amortised cost as
transaction costs with the exception of financial assets at fair value described in point 4 above shall be measured at fair
through profit or loss, which are held at fair value only (no transaction value.
costs).
6. Aside from the guidance as outlined in points 3 to 5
3. Subsequent measurement is determined by classification of the above, an entity may also, at initial recognition, decide to
financial asset either at amortised cost or fair value on the basis of: designate a financial asset as measured at fair value
through profit or loss if doing so eliminates or significantly
The entitys business model for managing the financial assets reduces a measurement or recognition inconsistency
The contractual cash flow characteristics of the financial asset (sometimes referred to as an accounting mismatch) that
would otherwise arise from measuring assets or liabilities or
recognising the gains and losses on them on different bases.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IFRS 9 - Financial Instruments
11. After initial recognition liabilities held for trading or those designated
at FVTPL are held at fair value. All other financial liabilities are held at For further information and a summary of this standard
amortised cost.. please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:
http://www.iasplus.com/standard/ifrs09.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Financial instruments
IAS 39: Recognition and measurement
Whilst IFRS 9 remains incomplete, IAS 39 offers the only guidance in 12. Hedge accounting constitutes an extra, special set of rules that
relation to impairment of financial assets and hedging rules..RS 9 remains can be applied to financial instruments when an entity enters a
incomplete, IAS 39 remains the only source of guidance relating to hedging arrangement. An entity can designate a hedging instrument so
impairment of financial assets and hedging rules. that its change in fair value is offset against the change in fair value of a
hedged item. For
A financial asset is only impaired where there is objective evidence example, if an enterprise has committed to pay an amount of
resulting from one or more events that occurred after the initial foreign currency in six months time, it might buy the currency
recognition of the asset. Such objective evidence could include the in advance in order to avoid the risk of the foreign currency
counterparty defaulting on repayments of interest or capital, or going into rising in value before the date of payment. Hedge accounting
liquidation, such that the full value of the financial asset may not be involves designating the advance purchase as designed to
recoverable. fulfil the future obligation. It is allowed when certain
conditions are met (e.g.. formal documentation, hedge is effective)..
Financial assets should be reviewed for objective evidence of
impairment at each reporting date and a full impairment review
performed where evidence is identified (paragraph 58).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
How can an auditor tell whether a financial asset should be held at fair Consider your answer to the question, when you are ready click next to
value through profit or loss or at amortised cost? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all
exercises.. You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Provision
A liability of uncertain timing or amount.
Liability
Present obligation as a result of past events
Settlement is expected to result in an outflow of resources
(payment)
Contingent liability
a possible obligation depending on whether some uncertain future
event occurs, or
a present obligation but payment is not probable or the amount
cannot be measured reliably
Contingent asset
a possible asset that arises from past events, and
whose existence will be confirmed only by the occurrence or non-
occurrence of one or more uncertain future events not wholly within
the control of the enterprise.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
A provision should be recognised in the statement of financial There should be no provision for future operating losses, but there
position when it meets the definition of a liability, where there is a may be provision for onerous contracts (paragraph 63).
probable outflow of resources and, the extra feature as usual for the
recognition of assets and liabilities, is that there should be a reliable There are a number of explanations about restructuring provisions
estimate (paragraph 14). in the context of this standard, but they make it clear that such
provision should not be set up unless there is an obligation at the
Once a provision has been recognised it should be measured at the reporting period end date (paragraph 72). .
best estimate of the future outflow. This means that it is also required
to discount the numbers where this would be material, at pre-tax discount
rates assuming that the provision is measured in pre-tax terms
(paragraphs 36,45 and 47).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
This is because they will probably not lead to an outflow or are not able to
be measured reliably (paragraph 10).
http://www.iasplus.com/standard/ias37.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
A provision can only be recognised when there is an obligation at the Consider your answer to the question, when you are ready click next to
reporting date. Should one recognise a provision for the possible loss of a enter it into the course blog.
law case? You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.. You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Basis of preparation of financial statements. The consolidated Obtaining clearance from the regulatory authorities caused a delay
financial statements of the Newberg Group are prepared in accordance in completing the transaction. These final clearances were received on
with International Financial Reporting Standards. 24 February 2009 and the purchase of the shares was completed on 10
March 2009.
Consolidation policy. The consolidated financial statements of the
Group include the parent and the companies which it controls The acquisition was accounted for under the purchase method of
(subsidiaries). Control is the power to govern the financial and operating accounting. Accordingly, the cost of the acquisition, including expenses
policies of an enterprise so as to obtain benefits from its activities. Control incidental thereto, was allocated to identifiable assets and liabilities and to
is normally evidenced when the Group owns, either directly or indirectly, in-process research and development based on their estimated fair
more than 50% of the voting rights of a companys share capital. values. The portion of the acquisition cost allocated to in-process
research and development was charged in full against income. This
Changes in group organisation. On 24 June 2008, a subsidiary of approach is consistent with the Groups accounting policy for research
Newberg entered into an agreement with the shareholders of Orange and development costs. After consideration of these items, the excess of
Limited to purchase all of the issued and outstanding common shares. the acquisition cost over the fair values was recorded as goodwill.
Completion of the transaction was not possible until certain regulatory
clearances had been obtained. In view of the overall materiality of the When you have studied the notes and table please go to the next page to
transaction and the advanced state of the integration planning, the see a question relating to the case study..
consolidated financial statements of the Group give effect to the
acquisition of Orange Limited from 31 December 2008..
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Do you think that a provision for restructuring costs should have been set Consider your answer to the question, when you are ready click next to
up at 31 December 2008? (Other questions on this case will be asked in enter it into the course blog.
Module 6). You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
The standard deals with two types of event that occur after the Whether or not an enterprise is a going concern should be assessed
reporting date. First, adjusting events, which are those that provide at the stage at which the financial statements are being prepared, which
information concerning conditions which did exist at the reporting date. is, of course, after the reporting date.
These should lead to recognition changes, that is changing the numbers
in the statement of financial position. The second type of events after theIf it is determined that an enterprise is not a going concern, then the
reporting date are non-adjusting events. These give information about accounts should be prepared on the break up basis (even if the
conditions that did not already exist at the reporting date and they shouldevents leading to the conclusion occurred after the reporting date).
not lead to changes to the numbers in the statement of financial position, This of course does not apply if only part of the enterprise is not a going
but, if material, to disclosures in the notes (paragraphs 3, 8 and 10). concern. The reporting unit is the whole of the enterprise and the status
of going concern should be assessed for that whole reporting enterprise
Examples of adjusting events are better information about the status (paragraph 14).
of customers at the reporting date, enabling an entity to measure the
size of its receivables more accurately. An example of a non-adjusting
event would be the destruction of some of an entity's assets accidentally,
perhaps by fire, after the reporting date (paragraph 22 for more
examples).
If dividends on ordinary shares are proposed, but not declared, after
the reporting date then these should not be recognised as liabilities For further information and a summary of this standard
(paragraph 12). please click on the following hyperlink to Deloittes IAS Plus
website where a summary of the standard can be accessed:
http://www.iasplus.com/standard/ias10.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Can proposed dividends be a liability? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
This standard applies to all employee benefits not just to pensions Defined benefit plans are much more complicated, and a large part
except those to which IFRS 2 Share Based Payment applies of the standard deals with them. Constructive obligations as well as
(paragraph2). written contractual ones should be accounted for (paragraph 61).
The standard deals with such issues as accounting for accumulating An entity recognises the net defined benefit liability in the statement of
paid absences and for bonus plans. In each case the standard requires financial position (paragraph 63).
an enterprise to establish whether there is a liability at the reporting date
and to account for any liability (paragraphs 16 and 19). Where an entity has a surplus in a defined benefit plan, the net
defined benefit asset can be recognised but there are limits on the size
In a country with special forms of employee benefit systems such as of this asset (paragraph 64). .
multi-employer plans and government plans, these should be
accounted for as other plans on the basis of their legal and institutional
arrangements (paragraphs 32 and 43).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
The Basic Principle of IAS 19: Actuarial gains and losses for retirement benefits are recognised in
The cost of providing employee benefits should full immediately through other comprehensive income (i.e. outside
profit or loss) (paragraph 57).
be recognised in the period in which the benefit
is earned by the employee, rather than when Past service costs, which are caused, for example, if the benefits in
it is paid or payable. the plan are increased, should be recognised in the period they were
granted, with no reference to vesting criteria (paragraph 103).
When calculating the value of the obligation, the projected unit credit
method should be used and a discount rate measured by reference to
interest rates on high quality corporate bonds (paragraphs 67 and 83).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Do possible future pay rises give rise to a present liability for pensions? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering all You may wish to discuss this with a colleague before finally submitting it.
exercises..
You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
When a defined benefit plan is enhanced, when should the cost of Consider your answer to the question, when you are ready click next to
improving the benefits for existing pensioners be recognised? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering all
exercises.. You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
This standard largely concerns accounting for deferred tax. It There are also special rules for investments in subsidiaries,
changed the basis of calculation to temporary differences, which are associates and joint ventures. They amount to saying that temporary
calculated by reference to the difference between the tax basis and the differences that are unlikely to reverse where the investor is in control of
financial reporting basis of assets and liabilities, instead of timing that process (for example, by being able to stop the payment of
differences, which are based on tax and book differences for revenues dividends) need not be accounted for (paragraphs 39 and 44).
and expenses (paragraph 5).
The measurement of deferred tax assets and liabilities should be
Deferred tax liabilities should be recognised for all temporary based on tax rates that are expected to apply, but that generally
differences, except those relating to non-deductible goodwill amortisation means current tax rates, although future rates can be used where they
and the initial recognition of certain assets and liabilities in transactions have been enacted (paragraphs 47 and 51).
that affect neither accounting profit nor taxable profit.
Deferred tax amounts should not be discounted. At first sight, this
Deferred tax assets should similarly be recognised assuming that seems surprising because other liabilities are required to be discounted
future taxable profit is probable. Deferred tax assets include, of course, (see IAS 37). However, discounting would require knowledge of when
those arising on tax loss carry forwards (paragraphs 24 and 34). temporary differences would reverse, which would require a large amount
of guesswork (paragraph 53).
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Temporary difference: The double entry for the creation of deferred tax assets and
A difference between the carrying amount of liabilities should be charged to profit or loss or directly in equity
(and disclosed in the statement of comprehensive income)
an asset or liability and its tax base.
(paragraphs 58 and 61).
Taxable temporary difference: Deferred tax assets should be presented on the statement of
financial position separately from deferred tax liabilities (paragraphs
A temporary difference that will result in taxable
69 and 74).
amounts in the future when the carrying amount
of the asset is recovered or the liability is settled.
http://www.iasplus.com/standard/ias12.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
A deferred tax liability is recognised on the revaluation of an asset that is Consider your answer to the question, when you are ready click next to
intended for continuing use in the business. Does this meet the enter it into the course blog.
frameworks definition of liability? You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises. You can then review the ideas of other students on this subject.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Suppose that a British company, Acrobat, applies IFRS. Consider your answer to the question, when you are ready click next to
It purchases a machine for $10,000 in early 2008. The machine is enter it into the course blog.
expected to last for ten years and to have no residual value. The You may wish to discuss this with a colleague before finally submitting it.
accounting year is the calendar year. The company is fairly small and is
able to claim 40% tax depreciation (capital allowances) in the year of You can then review the ideas of other students on this subject.
purchase. Suppose also, that Acrobat buys land at $3m in early 2008,
and revalues it to fair value of $5m at 31 December 2008. What are the
temporary differences in 2008?
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
A share-based payment is a transaction in which the company received For example, if a company grants a director 200 share options on 1
goods or services in exchange for share capital or a liability based on the January 2006, and these vest after two years, and assuming each option
companys shares, i.e. a cash payment based on the change in the has a value of $3 at the date of the grant, then at 31 December 2006, the
companys share price. Examples are share appreciation rights, accounting entry would be:
employee share purchase plans, employee share ownership plans and $
share option plans. Debit Share Option expense (1 year) 300
IFRS2 applies to all entities and there is no exemption for private or Credit Equity 300
small companies.
It is important to differentiate between shares issued to acquire a IFRS2 applies to all equity based payments granted after 7
company which is accounted for under IFRS3 Business Combinations November 2002 which was the date that the exposure draft was issued.
and shares issued for employee services accounted for under IFRS2. Thus any schemes set up earlier than that date are exempt from its
requirements.
The issue of shares or rights to acquire shares requires an increase
in equity and the debit entry will be an expense when the goods or
services are consumed. If the share issue is linked to past services,
then the value of the shares given to the employees will be expensed
immediately.
For further information and a summary of this standard
If the issue of shares relates to a future vesting period, then the value
please click on the following hyperlink to Deloittes IAS Plus
of the shares should be expensed over that period. .
website where a summary of the standard can be accessed:
http://www.iasplus.com/standard/ifrs02.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Agriculture - IAS 41
The main elements of this standard are as follows:
http://www.iasplus.com/standard/ias41.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
http://www.iasplus.com/standard/ifrs06.htm
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
1. If a companys board of directors has decided on a restructuring, 1. It depends on the facts. In some cases, a board decision does not
should the company not make a provision for the restructuring, create an obligation to a third party, and the board could change its mind.
redundancy costs, etc? In such cases, IAS 37 does not allow a provision. This may not be
2. Surely it gives useful information to the users of financial prudent but this is overridden by the need to comply with the
statements to show a proposed dividend as a liability? frameworks definition of a liability.
3. Can a deferred tax asset be shown in the financial statements if
the company is making losses? 2. IAS 10 is based on the idea that it is not useful to show something
as a liability that is not in accordance with the definition of a liability.
The information about the proposed dividend can be given in the notes,
and the amount can be shown separately in equity.
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Module 5: Accounting for assets and liabilities part 2 Certificate in International Financial Reporting
Quick Quiz
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Module 5: quick quiz Certificate in International Financial Reporting
Question 1
Dodo Ltd is preparing its financial statements to 31 December 20X3. The
accounts are due to be finalised by 31 March 20X4.
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Module 5: quick quiz Certificate in International Financial Reporting
Question 2
The management team at Super Safe Ltd try to be as prudent as possible
when preparing the annual financial statements. Under IAS 37 which of
the following can they provide in the financial statements:
A. The overall operating loss they expect the company to record in the
following financial year.
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Module 5: quick quiz Certificate in International Financial Reporting
Question 3
A company purchased an item of plant for $270,000 on 1 January 20X0.
The plant is depreciated in the financial statements straight line over 5
years. For tax purposes the plant is has a life of 3 years. What is the
deferred tax balance in respect of the plant on 31st December 20X1?
A. Liability of $10,800
B. Asset of $10,800
C. Liability of $21,600
D. Asset of $21,600
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Module 5: quick quiz Certificate in International Financial Reporting
Question 4
I C Ltd manufactures fridge freezers and with each one sold offers a free
guarantee. In one year the company expects to sell 30,000 fridge
freezers. Of these they expect 1% to be returned under the guarantee
requiring major repair work costing on average $300. They also expect
5% to be returned requiring minor repairs costing on average $100.
How should the company record this guarantee policy in their financial
statements?
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Module 5: quick quiz Certificate in International Financial Reporting
Question 5
Sha La La Ltd recently suffered a small fire in one corner of the
warehouse. They have placed a claim with their insurer for $220,000 to
cover the cost of repairing the damage. They have not had confirmation
yet but believe it is more likely than not that they will receive the payout.
How should the company treat this in the annual financial statements?
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Module 5: quick quiz Certificate in International Financial Reporting
Question 6
Under IFRS 9, which of the following financial assets should be held at
amortised cost:
B. 1 and 3
C. 1 only
D. 1 and 2
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Module 6: Group accounting Certificate in International Financial Reporting
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Module 6: Group accounting Certificate in International Financial Reporting
Table of contents
Select a topic to study or click next.
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Module 6: Group accounting Certificate in International Financial Reporting
IFRS 10 was published in May 2011 and supersedes SIC-12 A parent should start to consolidate from the date control is obtained
Consolidation and elements of IAS 27 Consolidated and Separate and cease when control is lost (paragraph 20). There is just one
Financial Statements. It is effective for annual periods beginning on or exemption available to this under IFRS 5. Consolidation is not required
after 1 January 2013. The main elements of this standard are as where temporary control is acquired because the subsidiary is held
follows: exclusively with a view to its subsequent disposal in the near future.
A subsidiary is defined as an entity controlled by another entity. An A partial disposal of an interest in a subsidiary in which the parent
investor controls an investee if they have ALL the following (paragraph 7): retains control, does not result in a gain or loss but an increase or
Power over the investee; decrease in equity. Purchase of some or all of the non-controlling interest is
Exposure, or rights, to variable returns from its involvement with the treated as a treasury share-type transaction and accounted for in equity.
investee; and
The ability to use its power over the investee to affect the amount of
the investors returns Once an investment ceases to fall within the definition of a
subsidiary, the parent company should derecognise the assets and
Note that an entity could have power over the investee without holding a liabilities of the subsidiary, derecognise the carrying amount of any non
majority of the voting rights. Returns could be either positive or negative and controlling interest and recognise the consideration received. Any
could include dividends, change in the value of the investment, management investment retained in the subsidiary should be recognised at fair value,
or service fees etc. and treated as an associate under IAS 28, as a joint arrangement IFRS
11 or as an investment under IFRS 9 as appropriate (paragraph B98).
A parent prepares consolidated financial statements applying uniform
accounting policies throughout (paragraph 19)
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Module 6: Group accounting Certificate in International Financial Reporting
Any difference between the reporting date of the parent and the
reporting date of a subsidiary should not exceed three months
(paragraph B93).
To coincide with publication of IFRS 10, IAS 27 has been revised such
that it now contains guidance for preparation by a parent company of
separate single entity financial statements (eg. where they are required by
local regulations or the parent company elects to do so).
http://www.iasplus.com/standard/ifrs10.htm
http://www.iasplus.com/standard/ias27_2011.htm
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Module 6: Group accounting Certificate in International Financial Reporting
How should one value a subsidiary that is about to be sold, when there is Consider your answer to the question, when you are ready click next to
already a binding sales contract? enter it into the course blog.
You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
Can non controlling interests be presented inside of shareholders funds? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
On 10 January 2008 the International Accounting Standards Board The identifiable assets acquired and the liabilities
(IASB) published revised IFRS 3 Business Combinations the output of assumed should be measured at their fair values (paragraph 18). In
one of the various joint projects undertaken by the IASB and FASB general the identifiable assets acquired
promoting convergence between IFRS and US GAAP. The main elements and liabilities assumed must meet the definition of assets and
of this standard are as follows: liabilities per the framework (paragraph 11).
A business combination is a transaction or other event in which an There are limited exceptions to the general recognition
acquirer obtains control of one or more businesses (appendix A). and measurement principles above, which will lead to
some items being recognised at an amount other than
All business combinations within the scope of IFRS 3 acquisition date fair value, and with results that differ from
must be accounted for using the acquisition method applying normal recognition principles and conditions
(paragraph 4). This requires identification of the acquirer and
(paragraphs 21 to 31). For example, the acquirer in a
determination of the acquisition date. The acquirer is the
business combination recognises a contingent liability
entity that obtains control.
assumed even if it is not probable that there will be an outflow
The acquirer recognises goodwill at the acquisition date, of economic resources, which is contrary to the guidance
measured as the excess of consideration transferred plus the given in IAS 37.
amount of any non-controlling interest in the acquiree over
amounts of identifiable assets acquired and liabilities Under the revised IFRS 3 more intangibles are expected
assumed (paragraph 32). to be recognised. For the purposes of a business
combination IFRS 3 eliminates the reliability of measurement
The consideration transferred shall be measured at fair value as a recognition condition and therefore requires the acquirer
(paragraph 37). to recognise identifiable assets acquired regardless of the
degree of probability of an inflow of economic benefits. This
will lead, for example, to recognition of internally generated
research and development as an asset that had been
previously been expensed by the acquiree for failing to meet
the recognition criteria laid down in IAS 38.
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Module 6: Group accounting Certificate in International Financial Reporting
http://www.iasplus.com/standard/ifrs03.htm
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Module 6: Group accounting Certificate in International Financial Reporting
Can goodwill be amortised under IFRS 3? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
When should negative goodwill be recognised immediately as income? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
Missile has acquired a subsidiary on 1 January 2008 for $2,145 million. Consider your answer to the question, when you are ready click next to
The fair value of the net assets of the subsidiary acquired were $2170 enter it into the course blog.
million. Missile acquired 70% of the shares of the subsidiary. The non You may wish to discuss this with a colleague before finally submitting it.
controlling interest was fair valued at $683 million. Calculate goodwill
based on the partial and full goodwill methods under IFRS 3. You can then review the ideas of other students on this subject.
You should refer to the text of the standard when answering exercises.
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Module 6: Group accounting Certificate in International Financial Reporting
This case study once again reviews Newberg and the details that
were presented to you in Module 5. The company, Newberg, is Consolidated statements of income (in billions Euro) 2007 2008
German. Its income statements for 2007 and 2008 are shown right. On Sales 32 38
the following page you can see some accounting policies and notes. Cost of goods sold (10) (12)
. ------ ------
Gross profit 22 26
Marketing and distribution (8) (10)
Research and development (5) (6)
Administrative (2) (2)
Other expenses (1) (1)
. ------ ------
Operating profit 6 7
Non-operating income 3 3
. ------ ------
Results before special charges and taxes 9 10
Special charges
Acquired in-process research and development - (9)
Restructuring - (6)
Taxes
On result before special charges (2) (2)
Benefit from special charges - 3
. ------ ------
7 (4)
Net income (loss)
------ ------
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Module 6: Group accounting Certificate in International Financial Reporting
Basis of preparation of financial statements. The consolidated Obtaining clearance from the regulatory authorities caused a delay
financial statements of the Newberg Group are prepared in accordance in completing the transaction. These final clearances were received on
with International Financial Reporting Standards. 24 February 2009 and the purchase of the shares was completed on 10
March 2009.
Consolidation policy. The consolidated financial statements of the
Group include the parent and the companies which it controls The combination was accounted for under the acquisition method of
(subsidiaries). Control is evidenced by power over the investee, exposure, accounting. Accordingly, the cost of the acquisition, including expenses
or rights, to variable returns from the investee and ability to use that power incidental thereto, was allocated to identifiable assets and liabilities and to
to affect the amount of return to the investor. Control is normally evidenced in-process research and development based on their estimated fair
when the Group owns, either directly or indirectly, more than 50% of the values. The portion of the acquisition cost allocated to in-process
voting rights of a companys share capital. research and development was charged in full against income. This
approach is consistent with the Groups accounting policy for research
Changes in group organisation. On 24 June 2008, a subsidiary of and development costs. After consideration of these items, the excess of
Newberg entered into an agreement with the shareholders of Orange the acquisition cost over the fair values was recorded as goodwill.
Limited to purchase all of the issued and outstanding common shares.
Completion of the transaction was not possible until certain regulatory When you have studied the notes and table please go to the next page to
clearances had been obtained. In view of the overall materiality of the see a question relating to the case study.
transaction and the advanced state of the integration planning, the
consolidated financial statements of the Group give effect to the
acquisition of Orange Limited from 31 December 2008.
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Module 6: Group accounting Certificate in International Financial Reporting
At what date did Newberg start consolidating Orange? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
Is Newbergs treatment of purchased R&D in line with IFRSs? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
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Module 6: Group accounting Certificate in International Financial Reporting
The standard defines an associate as an entity over which the The investment in an associate or joint venture (incorporating any
investor has significant influence. This could include the power to goodwill on acquisition is tested annually for impairment.
participate in policy making process, representation on the Board of
directors, or interchange of management personnel or provision of Unrealised profits and losses should be eliminated to the extent of the
essential technical information (paragraph 6/). This is presumed to exist investors interest in the associate.
where the investor owns twenty percent or more of the voting power in the
investee.
http://www.iasplus.com/standard/ias28_2011.htm
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Module 6: Group accounting Certificate in International Financial Reporting
A joint arrangement is one in which two or more parties have, by IFRS 11 requires interests in joint ventures to be equity accounted
contractual arrangement, joint control (paragraph 4 and 5). (eliminating the alternative proportionate consolidation method
allowed under IAS 31). Joint operators recognise their share of assets,
IFRS 11 envisages two types of joint arrangement. In a joint operation liabilities, revenues and expenses in accordance with applicable IFRSs
the joint operators have rights to the assets, and obligations for the liabilities,
relating to the arrangement (paragraph 15). In a joint venture the joint
venturers have rights to the net assets of the arrangement (paragraph 16)..
http://www.iasplus.com/standard/ifrs11.htm
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Module 6: Group accounting Certificate in International Financial Reporting
IFRS 12 was published in May 2011 alongside the other new standards The standard outlines detailed disclosure provisions in relation to
covering group accounting. It is effective for annual periods beginning on investments in each of subsidiaries, associates, joint arrangements, and
or after 1 January 2013 but entities are permitted to incorporate any of the unconsolidated structured entities.
new disclosures into their financial statements before that date. The main
elements of this standard are as follows:
http://www.iasplus.com/standard/ifrs12.htm
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Module 6: Group accounting Certificate in International Financial Reporting
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Module 6: Group accounting Certificate in International Financial Reporting
http://www.iasplus.com/standard/ias21.htm
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Module 6: Group accounting Certificate in International Financial Reporting
This standard should be applied by any enterprise that reports in the A gain or loss on the net monetary position should be included in
currency of a hyperinflationary economy. Hyperinflation is not net income and disclosed separately (paragraph 9)..
specifically defined, but an indication would be where there is a
cumulative inflation rate of one hundred percent or more over three years.
For most countries this would not apply at present. However, groups
might have a subsidiary in such a country, which is why this standard has
been included here in this module on group accounting.
http://www.iasplus.com/standard/ias29.htm
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Module 6: Group accounting Certificate in International Financial Reporting
1. When a European company adopts IFRSs for its consolidated 1. Possibly; in the UK the tax authorities allow IFRSs to be used for tax
statements, does this change its tax bills? purposes.
2. If a foreign subsidiary is using non-IFRS policies, what happens on
consolidation? 2. The policies have to be corrected for consolidation, usually by
3. What are reclassification adjustments (i.e. recycling) consolidation adjustments rather than by changing the foreign statutory
4. Do the parties to a joint venture each need to own exactly the accounts.
same proportion of shares?
3. Recycling often refers to the practice of reporting a profit in
equity in one period and then recycling or reporting it again in the
income statement in another period. An example of this is the reporting
of exchange differences on the translation of a foreign subsidiary again in
the income statement when it is sold.
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Module 6: Group accounting Certificate in International Financial Reporting
Quick Quiz
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Module 6: quick quiz Certificate in International Financial Reporting
Question 1
Netley, a limited liability company, purchased the whole of the share
capital of Orell, a limited liability company, for $2,500,000 cash.
Shareholders funds of the two companies at the date of the purchase
were as follows:
Netley Orell
$ $
Share capital 5,000,000 2,000,000
Retained earnings 600,000 250,000
The fair value of Orells tangible assets exceeded their book value by
$150,000. What balance should appear in the consolidated statement of
financial position of Netley for goodwill at acquisition?
A. $400,000
B. $100,000
C. $250,000
D. $500,000
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Module 6: quick quiz Certificate in International Financial Reporting
Question 2
One third of the shares, and also voting rights, in Snow White Limited are
held by each of Sneezy, Sleepy and Dopey. Which of the following
statements is true?
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Module 6: quick quiz Certificate in International Financial Reporting
Question 3
Harwich, a limited liability company, holds 70,000 $1 preference shares in
Sall, a limited liability company. These are non-voting but rank equally
with the ordinary shares in a winding-up.
$
100,000 preference shares of $1 each 100,000
30,000 ordinary shares of $1 each 30,000
130,000
B. Harwich
C. Felixstowe
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Module 6: quick quiz Certificate in International Financial Reporting
Question 4
What is disclosed in the statement of financial position of an investing
group under the equity method of accounting for associates?
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Module 6: quick quiz Certificate in International Financial Reporting
Question 5
Inveresk, a limited liability company, has equity shareholdings in three
other companies, as shown below, and has a seat on the board of each.
A. Raby only
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Module 7: Disclosure standards Certificate in International Financial Reporting
This module discusses the eight IASs that relate to disclosure and
presentation:
Statements of cash flow - IAS 7
Operating segments - IFRS 8
Related party disclosures - IAS 24
Earnings per share - IAS 33
Interim financial reporting - IAS 34
First-time adoption of international financial reporting standards
IFRS 1
Insurance contracts IFRS 4.
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Module 7: Disclosure standards Certificate in International Financial Reporting
Table of contents
Select a topic to study or click next.
Introduction
Statement of cash flow - IAS 7
IFRS 8 Operating segments
Exercise - IFRS 8 Question
Exercise - IFRS 8 Answer
Related party disclosures - IAS 24
Earnings per share - IAS 33
Interim financial reporting - IAS 34
Exercise - IAS 34 Question
Exercise - IAS 34 Answer
First-time adoption of international financial reporting standards - IFRS 1
Insurance Contracts - IFRS 4
Frequently asked questions
Quick Quiz
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Module 7: Disclosure standards Certificate in International Financial Reporting
Introduction
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Module 7: Disclosure standards Certificate in International Financial Reporting
This standard requires an enterprise to present cash flow Actual or average exchange rates should be used for cash flows
statements as an integral part of its financial statements (paragraph from a foreign subsidiary (paragraph 26).
1).
Cash flows from interest or dividends either received or paid can be
Cash flows should be reported classified into three main headings classified as either operating, investing or financing (paragraph 31).
(paragraph 10):
operating Non-cash transactions should not be included in the statement of
investing cash flows, but should be disclosed in the notes (paragraph 43).
financing activities
The statement should reconcile to cash and cash equivalents. Cash
equivalents are somewhat vaguely defined as short-term highly liquid
investments that are readily convertible to known amounts of cash, but
there is no exact limit on maturity dates on such investments.
http://www.iasplus.com/standard/ias07.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
This standard concerns note disclosures on a segmental basis. It is For each segment, the entity must report a measure of profit or loss
compulsory for those enterprises with securities that are publicly traded and total assets. A measure of liabilities, plus various other key figures
(paragraph 2), but is only required for consolidated financial statements in including revenue and interest expense, should be reported if regularly
those cases where parent and consolidated statements are in the same reviewed by the chief operating decision maker (paragraph 23).
document (paragraph 4).
In addition to the disclosures on operating segments described above, an
The standard requires entities to report financial information for entity should disclose revenue and non-current assets split by
those parts of the business whose operating results are regularly geographical area (paragraph 33)..
reviewed by the chief operating decision maker (paragraph 13). It is
intended that this management approach to identification of segments
will lead to entities reporting information that is used regularly internally
for evaluating segment performance and deciding how to allocate
resources to operating segments.
A segment must be reported if it comprises at least ten percent of
total revenue or total result or total assets (paragraph 13). In addition
the total revenue of all reported operating segments should constitute at
least 75% of the entitys total revenue (paragraph 15). Some operating
segments may therefore be added as reportable even if they do not meet
the ten percent threshold..
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Module 7: Disclosure standards Certificate in International Financial Reporting
http://www.iasplus.com/standard/ifrs08.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
How is a reportable segment defined under IFRS 8? Consider your answer to the question, when you are ready click next to
enter it into the course blog.
You should refer to the text of the standard when answering exercises.. You may wish to discuss this with a colleague before finally submitting it.
You can then review the ideas of other students on this subject.
Page | 7
Module 7: Disclosure standards Certificate in International Financial Reporting
http://www.iasplus.com/standard/ias24.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
Like IFRS 8, this standard is only mandatory for those enterprises Diluted earnings per share is calculated by dividing earnings by the
with publicly traded securities, and parent company reports can be number of shares adjusted for all dilutive potential ordinary shares
exempted (paragraphs 2 and 3). (paragraphs 26 to 29). Shares are dilutive when their conversion would
decrease net profit per share (paragraph 41).
Earnings is defined as the net profit from the income statement
but after deduction of dividends on preference shares (paragraph Earnings per share should be disclosed even if the amount is
11). negative (paragraph 69)..
http://www.iasplus.com/standard/ias33.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
This standard is not mandatory and no frequency of reporting is The same accounting policies are required in the interim reporting
prescribed (paragraph 1). The standard is designed to be used by those as for annual reporting, although changes in accounting policy might be
companies that are required by regulatory authorities or stock exchanges made at the interim stage rather than waiting for a year end. The
to present interim reporting on a half yearly or quarterly basis. If reporting frequency with which interim reporting is carried out must not be allowed
is to be described as in compliance with international standards then the to affect the annual result (paragraph 28).
rules of IAS 34 should be followed.
For interim reporting, the use of year end practices with respect to
IAS 34 requires condensed versions of all four primary statements whether items should be anticipated or deferred is required
(see IAS 1) to be disclosed, and earnings per share (paragraphs 8 and (paragraphs 37 and 39). That is, interim reports should largely be seen as
11). periods in their own right..
http://www.iasplus.com/standard/ias34.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
Once development expenditure has been expensed it cannot Consider your answer to the question, when you are ready click next to
subsequently be capitalised (see IAS 38). Does this fit with IAS 34, enter it into the course blog.
paragraph 29? You may wish to discuss this with a colleague before finally submitting it.
You should refer to the text of the standard when answering exercises.. You can then review the ideas of other students on this subject.
Page | 11
Module 7: Disclosure standards Certificate in International Financial Reporting
The company should recognise all assets and liabilities that are
required to be recognised by IFRS even if they were never
recognised under previous GAAP. For example, IAS 37 requires
The main elements of this standard are as follows: recognition of provisions as liabilities including a companys obligations
for restructurings, onerous contracts, decommissioning, etc.
IFRS 1 sets out the procedures that must be followed when a
company IFRSs for the first time. The company should reclassify previous GAAP opening statement
of financial position items into the appropriate IFRS classification.
A first-time adopter makes an explicit and unreserved statement that For example IAS 10 does not permit classifying dividends declared or
its general purpose financial statements comply with IFRSs for the proposed after the reporting date as a liability at that date. In the opening
first time. IFRS statement of financial position these would be reclassified as
retained earnings.
The company should eliminate previous GAAP assets and liabilities
from the opening statement of financial position if they do not qualify
for recognition under IFRSs.
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Module 7: Disclosure standards Certificate in International Financial Reporting
http://www.iasplus.com/standard/ifrs01.htm
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Module 7: Disclosure standards Certificate in International Financial Reporting
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Module 7: Disclosure standards Certificate in International Financial Reporting
Why did the IASB issue IFRS 4 Insurance Contracts?. Many insurance companies had accounting policies which were in
conflict with IFRSs. In order to ensure compliance with IFRS for the
purpose of the 2005 deadline, the IASB had to issue a stop-gap
standard which allowed insurance companies to follow more or less their
existing policies so that they could state compliance with IFRSs..
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Module 7: Disclosure standards Certificate in International Financial Reporting
Quick Quiz
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Module 7 quick quiz Certificate in International Financial Reporting
Question 1
In accordance with IFRS 8 Operating segments which of the following
must be disclosed for a reportable segment?
1. Revenue - external
2. Segment result
3. Total assets
4. Non-current assets
B. 2 and 3
C. 1, 3 and 4
D. 2, 3 and 4
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Module 7 quick quiz Certificate in International Financial Reporting
Question 2
In accordance with IFRS 8 Operating Segments which of the following
must be disclosed by geographical area?
1. Revenue - external
2. Segment result
3. Total assets
4. Non-current assets
B. 1, 2 and 3
C. 1 and 4
D. 2, 3 and 4.
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Module 7 quick quiz Certificate in International Financial Reporting
Question 3
A segment should be treated as reportable under IFRS 8 when its
reported internal and external revenue is what percentage of the
combined revenue (internal and external)?
A. 5% or more
B. 10% or more
C. 15% or more
D. 20% or more.
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Module 7 quick quiz Certificate in International Financial Reporting
Question 4
Which of the following would not be classed as a potential ordinary
share?
A. Convertible debt
C. Share options
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Module 7 quick quiz Certificate in International Financial Reporting
Question 5
A company, whose shares currently sell at $75 each, plans to make a
rights issue of one share at $60 for every four existing shares.
What is the theoretical ex-rights price of the shares after the issue?
A. $75.00
B. $72.00
C. 467.50
D. $63.00
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Module 7 quick quiz Certificate in International Financial Reporting
Question 6
On 1 January 2008 a company has 10m $1 ordinary shares in issue. On
1 April 2008 it issues a further 2m shares in a share for share exchange
deal.
A. 10m
B. 10.5m
C. 11.5m
D. 12m
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Module 7 quick quiz Certificate in International Financial Reporting
Question 7
At 31 December 2008 a company has 1200 share options in issue. The
exercise price of these options is $5 per share. The average fair value of
shares for the period was $6 per share.
What is the number of shares that will be added to the basic EPS share
figure for the diluted EPS calculation?
A. 200
B. 240
C. 1000
D. 1200
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Module 7 quick quiz Certificate in International Financial Reporting
Question 8
At 31 December 2008 a company has in issue 10% $1,000,000
convertible debenture stock. Income tax is at the rate of 30%.
By what amount will the profit figure increase in the diluted EPS
calculation?
A. Nil
B. $70,000
C. $100,000
D. $130,000
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Module 7 quick quiz Certificate in International Financial Reporting
Question 9
Which of the following may not be classed as a prior period error?
A. Mathematical mistake
C. Fraud
D. Estimate
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Module 7 quick quiz Certificate in International Financial Reporting
Question 10
Which of the following conditions is not required for an asset to be
classified as held for sale under IFRS 5?
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Module 7 quick quiz Certificate in International Financial Reporting
Question 11
How should a gain on the disposal of a non-current asset be shown in a
companys cash flow statement and the supporting notes?
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Module 7 quick quiz Certificate in International Financial Reporting
Question 12
Scaffold, a limited liability company, has increased its bad debts
provision by $25,000.
A
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
Decrease No change
B
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
Decrease Decrease
C
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
No change No change
D
Reconciliation of operating
profit to net cash inflow from
operating activities: increase in
receivables Increase in cash
No change Decrease
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Module 7 quick quiz Certificate in International Financial Reporting
Question 13
A company incurs expenditure on development during the year which is
capitalised.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Module 8: What you will learn - principal differences between IFRS and UK GAAP/US GAAP
Page | 1
Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Table of contents
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
ASB statement of principles for financial reporting: FRS 3 reporting financial performance:
Includes chapters on the reporting entity, presentation and Specifies certain exceptional items that must be presented on the
accounting for interests in other entities but there is no direct face of the profit and loss account after operating profit. IAS 1 does
equivalent in the framework not contain the concept of exceptional items
Measurement chapter is more detailed with an emphasis on the
deprival value model FRS 18 accounting policies:
The disclosure requirements for estimation techniques are not as
IAS 1 presentation of financial statements extensive
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
IAS7 statement of cash flow IAS 8 accounting policies, changes in accounting estimates, and
errors
FRS 1 cash flow statements:
Allows certain exemptions from preparing a cash flow statement for FRS 3 reporting financial performance:
subsidiaries and small companies. No exemptions in IAS 7 Comparative financial information is restated where a fundamental
The definition of cash is more restrictive and only includes cash prior period error has occurred which is more restrictive than IAS 8
and deposits repayable on demand (within 24 hours). IAS 7 uses which requires restatement for material prior period errors
the wider terminology of cash and cash equivalents
Cash flows are classified under eight standard headings rather FRS 18 accounting policies:
than three. There is less flexibility as to where certain cash flows, Impending changes to accounting policies are not required to be
such as interest paid are presented. disclosed
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
IAS 11 construction contracts IFRS 8 operating segments (superceded IAS 14 segment reporting
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Page | 6
Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
SSAP 21 accounting for leases and hire purchase contracts: There is no comprehensive UK accounting standard covering revenue.
SSAP 21 contains the 90% test presumption for determining the
classification of finance and operating leases IAS 19 employee benefits
IAS 17 specifically requires leases of land and buildings to be split
at inception as a separate lease of the land and a separate lease FRS 17 retirement benefits:
of the buildings. Under SSAP 21 they are considered together The scope of IAS 19 is wider and covers different types of
The net cash investment method is used for lessor accounting. IAS employee compensation
17 requires the net investment method IAS 19 allows a similar immediate recognition approach to
UK GAAP requires operating lease rental incentives to be spread actuarial gains and losses as FRS 17.
over the shorter of the lease term and the period until the next rent
review. IAS requires any incentives to be spread over the whole
lease term.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
IAS 20 accounting for government grants and disclosure of IAS 24 related party disclosures
government assistance
FRS 8 related party disclosures:
The Companies Act does not allow government grants to be deducted Unlike IAS 24, parent companys individual financial statements
from cost. Hence there is no option but to show them as deferred income. are exempt from providing disclosures when consolidated financial
statements are presented
IAS 23 borrowing costs Unlike IAS 24, UK subsidiaries are exempt from disclosing
transactions with the parent entity where 90% or over of the voting
FRS 15 tangible fixed assets: rights are controlled within the group
FRS 15 limits the capitalisation of borrowing costs to the finance Disclosure requirements differ. In general FRS 8 requires the
costs incurred on the expenditure incurred. disclosure of the name of the related party where a transaction has
occurred whereas IAS 24 does not
IAS 24 does not consider the materiality of related party
transactions. FRS 8 considers materiality from the perspective of
both the company and related party.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
FRS 2 accounting for subsidiary undertakings: FRS 9 associates and joint ventures:
Includes an exclusion of a subsidiary from consolidation on the Prescribes detailed format for equity accounting. IAS 28 does not
grounds of severe long-term restrictions. No exemption exists prescribe guidance for the income statement presentations.
under international standards However, IAS 1 provides limited guidance which uses a pre-tax
Under IFRS 10 the existence of potential voting rights should be presentation of the associates income after tax. FRS 9 prescribes
considered in assessing control. No consideration is required how the components of the investors share of associate income
under UK GAAP should be shown on the profit and loss account
Requires the minority interest (i.e. non-controlling interest using Requires investors to recognise their share of any interest in net
international terminology) to be presented separately from liabilities. IAS 28 only requires this where there is a legal or
shareholders funds. IFRS 10 requires it to be shown as a separate constructive obligation to make good those losses
component of equity.
For joint ventures requires the use of the gross equity method
rather than the equity method allowed by IFRS 11
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Page | 10
Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Page | 11
Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
The Conceptual Framework for Financial Reporting IAS 1 presentation of financial statements
No revaluations allowed by US GAAP except for some derivatives and Specific line items required by IAS 1
securities at fair value. One year comparative financial information required by IAS 1
Certain standards require specific presentation of certain items.
General approach Public companies are subject to SEC rules and regulations which
require specific line items under US GAAP
More rules-based standards with specific application guidance.. Three years information required for SEC registrants except
statement of financial position (2 years) under US GAAP.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Extraordinary items are prohibited by IAS 1 Classification of interest received and paid in the cash flow
Extraordinary items are permitted, but are restricted to items that statement:
are both infrequent in occurrence and unusual in nature. Negative May be classified as an operating, investing or financing activity
goodwill is an extraordinary item under US GAAP under IAS 7
Must be classified as an operating activity by US GAAP
IAS 2 inventories
Bank overdrafts included in cash if they form an integral part of an
LIFO is prohibited by IAS 2 entitys cash management:
LIFO is permitted by US GAAP. Excluded by US GAAP
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Classification of deferred tax assets and liabilities: IAS 16 says may use either revalued amount or historical cost
Always non-current under IAS 12 Generally required to use historical cost under US GAAP
Under US GAAP classification is split between current and non- US GAAP generally does not require the component approach for
current components based on the classification of underlying asset depreciation
or liability, or on the expected reversal of items not related to an There is no requirement for an annual review of residual values
asset or liability under US GAAP.
Other:
Deferred tax not recognised for taxable temporary differences that
arise from the initial recognition of certain assets and liabilities
under IAS 12
No similar exemption under US GAAP
Use enacted or substantively enacted tax rate under IAS 12
Use enacted tax rate under US GAAP.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Page | 15
Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
IAS 32 financial instruments: presentation Impairment is recorded when an assets carrying amount exceeds
the higher of the assets value-in-use (discounted present value of
Classification of convertible debt instruments: the assets expected future cash flows) and fair value less costs to
Split the instrument into its liability and equity components and sell under IFRS
measure the liability at fair value with the equity component Impairment is recorded when an assets carrying amount exceeds
representing the residual under IFRS the expected future cash flows to be derived from the asset on an
Classify the entire instrument as a liability under US GAAP undiscounted basis under US GAAP.
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Measurement of impairment loss for long-term assets other than IAS 38 intangible assets
goodwill that are subject to amortisation is:
Based on the recoverable amount (the higher of the assets value- Development costs are:
in-use and fair value less costs to sell) under IFRS Capitalised if certain criteria are met under IFRS, but
It is based on the fair value under US GAAP Expensed (except for certain website development costs and
Cash generating unit (CGU), the lowest level to which goodwill can certain costs associated with developing internal use software)
be allocated under IFRS under US GAAP
Reporting unit an operating segment of one organisational level
below is the lowest level under US GAAP IAS 38
Subsequent reversal of an impairment loss is required for all assets, other Revaluation of intangible assets is:
than goodwill, if certain criteria are met but under US GAAP is prohibited. Permitted only if the intangible asset trades in an active market
under IFRS (fairly uncommon)
Generally prohibited under US GAAP
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
IAS 41 agriculture
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
First time adoption: IFRS 4 addresses recognition and measurement in only a limited way. It
General principle is retrospective application of IFRSs in force at is an interim standard pending completion of a comprehensive project.
the time of adoption
No specific standard under US GAAP Several comprehensive pronouncements and other comprehensive
industry accounting guides have been published under US GAAP
IFRS 3 business combinations
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
1. Have the differences between the UK, US and IFRS requirements 1. On a number of recent standard-setting issues, there has been a
been growing or shrinking recently? concerted US/IFRS or UK/IFRS effort. For example, IAS 33 (earnings
2. What is the difference between incompatible and inconsistent? per share) was written jointly with the FASB; and IAS 37 (provisions) was
written jointly with the UK. Also, IAS 39 (financial instruments) and IAS 12
(income tax) are based closely on the US rules. The UK influenced the
IASB on IAS 36 (impairment) and IAS 38 (intangibles). However, because
IFRSs are becoming tighter (with fewer options), the incompatibilities
have been increasing. Also the differences between UK GAAP and IFRS
are growing because of the convergence of US GAAP and IFRS. An
example of this is IFRS 3 (Revised).
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Module 8: Principal differences between IFRS & UK GAAP/US GAAP Certificate in International Financial Reporting
Quick Quiz
Page | 21
Module 8 quick quiz Certificate in International Financial Reporting
Question 1
When preparing financial statements under UK GAAP rather than IFRS,
which of the following statements is true?
Page | 1
Module 8 quick quiz Certificate in International Financial Reporting
Question 2
When considering the differences between US and UK GAAP which of
the following statements is true?
A. 1 only
B. 2 and 3
C. 1 and 3
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Module 8 quick quiz Certificate in International Financial Reporting
Question 3
When preparing consolidated financial statements, which of the following
statements are true:
A. 3 only
B. 1 and 3
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
Table of contents
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
After their joint meeting in September 2002, the US Financial In 2010, the boards made a joint announcement that by June 2011
Accounting Standards Board (FASB) and the International they would reach a converged solution in those areas identified as
Accounting Standards Board (IASB) issued the Norwalk Agreement most urgent by the MoU. This deadline has largely been met, with only
in which they each acknowledged their commitment to the development of final publication of the new leasing and revenue recognition standards still to
high quality, compatible accounting standards that could be used for both come in 2012..
domestic and cross-border financial reporting. At that meeting, the FASB
and the IASB pledged to use their best efforts to make their existing In meeting this target they will assist the SEC, who have pledged to make
financial reporting standards fully compatible as soon as is practicable an announcement in the latter stages of 2011 concerning if and when IFRS
and to co-ordinate their future work programmes to ensure that once might be adopted in the US.
achieved, compatibility is maintained.
More recently the FASB and the IASB reaffirmed their commitment
to the convergence of US GAAP and IFRSs, following identification of
this work as a priority by the G20 leaders in September 2009.
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
The current financial reporting model in the UK is that some Companies qualifying as small under the Companies Act 2006 are
companies prepare accounts in accordance with IFRS and other the only exception; these entities will be able to continue to prepare
companies use UK GAAP. The use of two financial reporting financial statements in accordance with the UK FRSSE, which will
frameworks introduces additional cost and risk and results in a lack of remain in existence for the foreseeable future..
comparability between listed and unlisted companies.
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
From 1 January 2005, all publicly listed companies in the European Segmental reporting is one of the more controversial issues for
Union have prepared their financial statements in conformity with companies, having the potential to reveal commercially sensitive data to
IFRSs. Some trends have emerged upon review of the financial competitors and other stakeholders. Many companies have changed their
statements of companies that have undergone the transition to IFRS. segments in some way compared to previous years to come in line with
the requirements of IFRS.
One of the least surprising findings was the increased size of the
annual reports: over 50% longer on average with some annual reports Many companies took advantage of the IAS 19 amendment
(financial services institutions), more than doubling in size compared to regarding actuarial gains and losses, to allow such gains and losses to
previous years. Some of the increase in length can be attributed to IFRS go through other comprehensive income.
1 reconciliations.
82% opted to take the IFRS 1 exemption not to restate comparatives
Whilst IFRS includes broad guidelines for the presentation of under IAS 32/39.
financial statements, it has little to say regarding which line items
must be included and hence companies have had to decide on the best Many companies in the survey retained local GAAP for their parent
way of portraying their results. Many used either extra columns or boxes company accounts. IFRS at the parent level can impact the tax paid by
on the face of their income statements, separating out exceptional or the entity and its ability to pay dividends to shareholders.
special items, discontinued operations, acquisitions, re-measurements,
fair value adjustments or actuarial gains and losses.
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Module 9: Forthcoming proposals for change Certificate in International Financial Reporting
Course conclusion
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Conclusion Certificate in International Financial Reporting
Course Feedback
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questionnaire. Please remember to be open, honest and constructive in
your feedback.
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