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SBR BPP - Lecture notes 1-12

Corporate Reporting (University of Melbourne)

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Strategic฀Business฀Reporting฀
Workbook฀
For฀exams฀in฀September฀2018,฀
December฀2018,฀March฀2019฀
and฀June฀2019฀
฀
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฀ ฀

฀ ฀

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฀฀

First฀edition฀2018฀

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฀ ฀

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Contents

Contents
Page

Introduction to Strategic Business Reporting iv

Essential skills areas to be successful in Strategic Business Reporting viii
Introduction to the Supplementary Reading xv
Key to icons xvii
1 The financial reporting framework 1
2 Professional and ethical duty of the accountant 23
3 Non-current assets 45
4 Employee benefits 77
SKILLS CHECKPOINT 1: Approaching ethical issues 97
5 Provisions, contingencies and events after the reporting period 113
6 Income taxes 125
7 Financial instruments 147
8 Leases 177
9 Share-based payment 197
SKILLS CHECKPOINT 2: Resolving financial reporting issues 219
10 Basic groups 237
11 Changes in group structures: step acquisitions 263
12 Changes in group structures: disposals and group reorganisations 285
13 Non-current assets held for sale and discontinued operations 309
14 Joint arrangements and group disclosures 325
15 Foreign transactions and entities 335
16 Group statements of cash flows 355
SKILLS CHECKPOINT 3: Applying good consolidation techniques 381
17 Interpreting financial statements for different stakeholders 399
SKILLS CHECKPOINT 4: Performing financial analysis 435
18 Reporting requirements of small and medium-sized entities 451
19 The impact of changes and potential changes in accounting regulation 465
SKILLS CHECKPOINT 5: Creating effective discussion 487
Appendix 1 – Activity answers 505
Appendix 2 – Supplementary reading 571
Further question practice and solutions 783
Glossary 865
Bibliography 875
Mathematical tables 877
Index 879

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฀฀

Introduction฀to฀Strategic฀Business฀Reporting฀(SBR)฀
This฀Workbook฀is฀based฀on฀International฀Financial฀Reporting฀Standards฀only.฀An฀online฀supplement฀
will฀be฀available฀at฀www.bpp.com/learning-media฀for฀those฀sitting฀the฀UK฀GAAP฀variant฀of฀the฀
Strategic฀Business฀Reporting฀exam.฀The฀UK฀GAAP฀supplement฀covers฀UK฀accounting฀standards฀and฀
provides฀relevant฀illustrations฀and฀examples.฀

Overall฀aim฀of฀the฀syllabus฀
To฀discuss,฀apply฀and฀evaluate฀the฀concepts,฀principles฀and฀practices฀that฀underpin฀the฀preparation฀
and฀interpretation฀of฀corporate฀reports฀in฀various฀contexts,฀including฀the฀ethical฀assessment฀of฀
managements’฀stewardship฀and฀the฀information฀needs฀of฀a฀diverse฀group฀of฀stakeholders.฀

The฀syllabus฀
The฀broad฀syllabus฀headings฀are:฀

A฀ Fundamental฀ethical฀and฀professional฀principles฀
B฀ The฀financial฀reporting฀framework฀
C฀ Reporting฀the฀financial฀performance฀of฀a฀range฀of฀entities฀
D฀ Financial฀statements฀of฀groups฀of฀entities฀
E฀ Interpreting฀financial฀statements฀for฀different฀stakeholders฀
F฀ The฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀

Main฀capabilities฀
On฀successful฀completion฀of฀this฀exam,฀you฀should฀be฀able฀to:฀฀
A฀฀ Apply฀fundamental฀ethical฀and฀professional฀principles฀to฀ethical฀dilemmas฀and฀discuss฀
the฀consequences฀of฀unethical฀behaviour฀
B฀฀ Evaluate฀the฀appropriateness฀of฀the฀financial฀reporting฀framework฀and฀critically฀discuss฀
changes฀in฀accounting฀regulation฀
C฀฀ Apply฀professional฀judgement฀in฀the฀reporting฀of฀the฀financial฀performance฀of฀a฀range฀
of฀entities฀฀
฀ Note.฀The฀learning฀outcomes฀in฀Section฀C฀of฀the฀syllabus฀can฀apply฀to฀single฀entities,฀
groups,฀public฀sector฀entities฀and฀not-for-profit฀entities฀(where฀appropriate).฀
D฀฀ Prepare฀the฀financial฀statements฀of฀groups฀of฀entities฀
E฀฀ Interpret฀financial฀statements฀for฀different฀stakeholders฀
F฀฀ Communicate฀the฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀on฀
financial฀reporting฀

Links฀with฀other฀exams฀

Strategic฀Business฀ Advanced฀Audit฀
Reporting฀(SBR)฀ and฀Assurance฀
(AAA)฀

Financial฀
Reporting฀(FR)฀

Financial฀
Accounting฀(FA)฀

iv฀

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Introduction฀

The฀ diagram฀ shows฀ where฀ direct฀ (solid฀ line฀ arrows)฀ and฀ indirect฀ (dashed฀ line฀ arrows)฀ links฀ exist฀
between฀this฀exam฀and฀other฀exams฀preceding฀or฀following฀it.฀฀
The฀Strategic฀Business฀Reporting฀(SBR)฀syllabus฀assumes฀knowledge฀acquired฀in฀Financial฀Accounting฀
and฀Financial฀Reporting฀and฀develops฀and฀applies฀this฀further฀and฀in฀greater฀depth.฀฀

Achieving฀ACCA's฀Study฀Guide฀Learning฀Outcomes฀฀
This฀BPP฀Workbook฀covers฀all฀the฀SBR฀syllabus฀learning฀outcomes.฀The฀tables฀below฀show฀in฀which฀
chapter(s)฀each฀area฀of฀the฀syllabus฀is฀covered.฀
These฀materials฀are฀reviewed฀by฀the฀ACCA฀examining฀team.฀The฀objective฀of฀the฀review฀is฀to฀ensure฀
that฀the฀material฀properly฀covers฀the฀syllabus฀and฀study฀guide฀outcomes,฀used฀by฀the฀examining฀team฀
in฀setting฀the฀exams,฀in฀the฀appropriate฀breadth฀and฀depth.฀The฀review฀does฀not฀ensure฀that฀every฀
eventuality,฀combination฀or฀application฀of฀examinable฀topics฀is฀addressed฀by฀the฀ACCA฀Approved฀
Content.฀Nor฀does฀the฀review฀comprise฀a฀detailed฀technical฀check฀of฀the฀content฀as฀the฀Approved฀
Content฀Provider฀has฀its฀own฀quality฀assurance฀processes฀in฀place฀in฀this฀respect.฀
฀
A฀ Fundamental฀ethical฀and฀professional฀principles฀฀

A1฀ Professional฀behaviour฀and฀compliance฀with฀accounting฀standards฀ Chapter฀2฀

A2฀ Ethical฀requirements฀of฀corporate฀reporting฀and฀the฀consequences฀of฀ Chapter฀2฀

unethical฀behaviour฀
฀
B฀ The฀financial฀reporting฀framework฀

B1฀ The฀applications,฀strengths฀and฀weaknesses฀of฀an฀accounting฀ Chapter฀1฀

framework฀

C฀ Reporting฀the฀financial฀performance฀of฀a฀range฀of฀entities฀

C1฀ Revenue฀ Chapter฀1฀

C2฀ Non-current฀assets฀ Chapter฀3฀

C3฀ Financial฀instruments฀ Chapter฀7฀

C4฀ Leases฀ Chapter฀8฀

C5฀ Employee฀benefits฀฀ Chapter฀4฀

C6฀ Income฀taxes฀ Chapter฀6฀

C7฀ Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀ Chapter฀5฀

C8฀ Share-based฀payment฀ Chapter฀9฀

C9฀ Fair฀value฀measurement฀฀ Chapters฀3,฀7฀

C10฀ Reporting฀requirements฀of฀small฀and฀medium-sized฀entities฀(SMEs)฀ Chapter฀18฀

C11฀ Other฀reporting฀issues฀ Chapters฀1,฀3,฀8,฀

17฀

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฀฀

D฀ Financial฀statements฀of฀groups฀of฀entities฀

D1฀ Group฀accounting฀including฀statements฀of฀cash฀flows฀ Chapters฀10,฀13–

16฀

D2฀ Associates฀and฀joint฀arrangements฀ Chapters฀10,฀14฀

D3฀ Changes฀in฀group฀structures฀ Chapters฀11,฀12฀

D4฀ Foreign฀transactions฀and฀entities฀ Chapter฀15฀

E฀ Interpreting฀financial฀statements฀for฀different฀stakeholders฀

E1฀ Analysis฀and฀interpretation฀of฀financial฀information฀and฀measurement฀ Chapter฀17฀

of฀performance฀฀

F฀ The฀impact฀of฀changes฀and฀potential฀changes฀in฀accounting฀regulation฀

F1฀ Discussion฀of฀solutions฀to฀current฀issues฀in฀financial฀reporting฀ Chapter฀19฀

฀
Approach฀to฀examining฀the฀syllabus฀
The฀Strategic฀Business฀Reporting฀syllabus฀is฀assessed฀by฀a฀3฀hour฀15฀minute฀paper-based฀exam.฀The฀
pass฀mark฀is฀50%.฀All฀questions฀in฀the฀exam฀are฀compulsory.฀฀
It฀ examines฀ professional฀ competences฀ within฀ the฀ business฀ reporting฀ environment.฀ You฀ will฀ be฀
examined฀ on฀ concepts,฀ theories฀ and฀ principles,฀ and฀ on฀ your฀ ability฀ to฀ question฀ and฀ comment฀ on฀
proposed฀accounting฀treatments.฀
You฀ should฀ be฀ capable฀ of฀ relating฀ professional฀ issues฀ to฀ relevant฀ concepts฀ and฀ practical฀ situations.฀
The฀ evaluation฀ of฀ alternative฀ accounting฀ practices฀ and฀ the฀ identification฀ and฀
prioritisation฀of฀issues฀will฀be฀a฀key฀element฀of฀the฀exam.฀
You฀ will฀ need฀ to฀ exercise฀ professional฀ and฀ ethical฀ judgement,฀ and฀ integrate฀ technical฀
knowledge฀when฀addressing฀business฀reporting฀issues฀in฀a฀business฀context.฀
You฀ will฀ be฀ required฀ to฀ adopt฀ either฀ a฀ stakeholder฀ or฀ an฀ external฀ focus฀ in฀ answering฀
questions฀ and฀ to฀ demonstrate฀ personal฀ skills฀ such฀ as฀ problem฀ solving,฀ dealing฀ with฀
information฀and฀decision฀making.฀You฀will฀also฀have฀to฀demonstrate฀communication฀skills฀
appropriate฀to฀the฀scenario.฀
The฀ paper฀ also฀ deals฀ with฀ specific฀ professional฀ knowledge฀ appropriate฀ to฀ the฀ preparation฀ and฀
presentation฀ of฀ consolidated฀ and฀ other฀ financial฀ statements฀ from฀ accounting฀ data,฀ to฀
conform฀with฀accounting฀standards.฀
฀ ฀

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Introduction฀

Format฀of฀the฀exam฀ Marks฀

Section฀ Two฀compulsory฀scenario-based฀questions,฀totalling฀50฀marks฀ 50฀

A฀ Question฀1:฀฀ (incl.฀two฀
 Based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀extracts฀ professional฀
thereof฀(syllabus฀area฀D)฀ marks)฀
 Also฀likely฀to฀require฀consideration฀of฀some฀financial฀reporting฀
issues฀(syllabus฀area฀C)฀
 Numerical฀aspects฀of฀group฀accounting฀will฀be฀a฀maximum฀of฀
25฀marks
 Discussion฀and฀explanation฀of฀numerical฀aspects฀will฀be฀
required฀
Question฀2:฀
 Consideration฀of฀the฀reporting฀implications฀and฀the฀ethical฀
implications฀of฀specific฀events฀in฀a฀given฀scenario
Two฀professional฀marks฀will฀be฀awarded฀to฀the฀ethical฀issues฀question.฀

Section฀ Two฀compulsory฀25-mark฀questions฀ 50฀

B฀ Questions:฀ (incl฀2฀
 May฀be฀scenario,฀case-study,฀or฀essay฀based฀฀ professional฀
marks)฀
 Will฀contain฀both฀discursive฀and฀computational฀elements฀
 Could฀deal฀with฀any฀aspect฀of฀the฀syllabus฀฀
 Will฀always฀include฀either฀a฀full฀or฀part฀question฀that฀requires฀
the฀appraisal฀of฀financial฀and/or฀non-financial฀information฀
from฀either฀the฀preparer’s฀or฀another฀stakeholder’s฀perspective฀
Two฀professional฀marks฀will฀be฀awarded฀to฀the฀question฀that฀requires฀
analysis.฀

฀ ฀ 100฀

Current฀issues฀
The฀current฀issues฀element฀of฀the฀syllabus฀(Syllabus฀area฀F)฀may฀be฀examined฀in฀Section฀A฀or฀B฀but฀
will฀not฀be฀a฀full฀question.฀It฀is฀more฀likely฀to฀form฀part฀of฀another฀question.฀

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฀฀

Essential฀skills฀areas฀to฀be฀successful฀in฀Strategic฀
Business฀Reporting฀
We฀ think฀ there฀ are฀ three฀ areas฀ you฀ should฀ develop฀ in฀ order฀ to฀ achieve฀ exam฀ success฀ in฀ Strategic฀
Business฀Reporting:฀฀
(1)฀ Knowledge฀application฀ These฀ are฀ shown฀ in฀ the฀ diagram฀
(2)฀ Specific฀Strategic฀Business฀Reporting฀skills฀ below.฀฀
(3)฀ Exam฀success฀skills฀
฀

aging information
Man
An
sw
er
pl
t
en
manag ime

an
em
t

nin
Approaching Resolving financial Exam success skills
Good

g
ethical issues reporting issues
Specific SBR skills
Applying good

re q r p re t a t i o n
consolidation
Creating effective

m e nts
techniques
discussion
Eff d p
an

u ire
o f t i n te
e c re

Performing
ti v

e financial analysis
se w ri
c
r re

nt tin
Co

ati g
on
l
Efficient numerica
analysis
฀

Specific฀SBR฀skills฀
These฀are฀the฀skills฀specific฀to฀SBR฀that฀we฀think฀you฀need฀to฀develop฀in฀order฀to฀pass฀the฀exam.฀฀
In฀ this฀ Workbook,฀ there฀ are฀ five฀ Skills฀ Checkpoints฀ which฀ define฀ each฀ skill฀ and฀ show฀ how฀ it฀ is฀
applied฀in฀answering฀a฀question.฀A฀brief฀summary฀of฀each฀skill฀is฀given฀below.฀฀

Skill฀1:฀Approaching฀ethical฀issues฀
Question฀2฀in฀Section฀A฀of฀the฀exam฀will฀require฀you฀to฀consider฀the฀reporting฀implications฀and฀
the฀ethical฀implications฀of฀specific฀events฀in฀a฀given฀scenario.฀The฀two฀Section฀B฀questions฀could฀
deal฀with฀any฀aspect฀of฀the฀syllabus.฀Therefore,฀ethics฀could฀feature฀in฀this฀part฀of฀the฀exam฀too.฀฀
Given฀that฀ethics฀will฀feature฀in฀every฀exam,฀it฀is฀essential฀that฀you฀master฀the฀appropriate฀technique฀
for฀approaching฀ethical฀issues฀in฀order฀to฀maximise฀your฀mark.฀
BPP฀recommends฀a฀step-by-step฀technique฀for฀approaching฀questions฀on฀ethical฀issues:฀

STEP 1฀ Work฀out฀how฀many฀minutes฀you฀have฀to฀answer฀the฀question.฀
฀

STEP 2฀ ฀ Read฀the฀requirement฀and฀analyse฀it.฀

STEP 3฀ ฀ Read฀the฀scenario,฀identify฀which฀IAS฀or฀IFRS฀may฀be฀relevant,฀whether฀the฀
proposed฀accounting฀treatment฀complies฀with฀that฀IAS฀or฀IFRS,฀and฀any฀threats฀to฀
the฀fundamental฀ethical฀principles.฀

STEP 4฀ ฀ Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀requirements฀as฀headings.฀

STEP 5฀ ฀ Write฀up฀your฀answer฀using฀key฀words฀from฀the฀requirements฀as฀headings.฀

Skills฀Checkpoint฀1฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀฀

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Introduction฀

Skill฀2:฀Resolving฀financial฀reporting฀issues฀฀฀
Financial฀ reporting฀ issues฀ are฀ highly฀ likely฀ to฀ be฀ tested฀ in฀ both฀ sections฀ of฀ your฀ SBR฀ exam,฀ so฀ it฀ is฀
essential฀ that฀ you฀ master฀ the฀ skill฀ for฀ resolving฀ financial฀ reporting฀ issues฀ in฀ order฀ to฀ maximise฀ your฀
chance฀of฀passing฀the฀exam.฀
The฀basic฀approach฀BPP฀recommends฀for฀resolving฀financial฀reporting฀issues฀is฀very฀similar฀to฀the฀one฀
for฀ ethical฀ issues.฀ This฀ consistency฀ is฀ important฀ because฀ in฀ Question฀ 2฀ of฀ the฀ exam,฀ both฀ will฀ be฀
tested฀together.฀฀

STEP 1฀ Work฀out฀how฀many฀minutes฀you฀have฀to฀answer฀the฀question.฀
฀

STEP 2฀ ฀ Read฀the฀requirement฀and฀analyse฀it,฀identifying฀sub-requirements.฀

STEP 3฀ ฀ Read฀the฀scenario,฀identifying฀relevant฀IFRSs฀and฀how฀they฀should฀be฀applied฀to฀
the฀scenario.฀

STEP 4฀ ฀ Prepare฀an฀answer฀plan฀ensuring฀that฀you฀cover฀each฀of฀the฀issues฀raised฀in฀the฀
scenario.฀

STEP 5฀ ฀ Write฀up฀your฀answer,฀using฀separate฀headings฀for฀each฀item฀in฀the฀scenario.฀

Skills฀Checkpoint฀2฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀

Skill฀3:฀Applying฀good฀consolidation฀techniques฀฀
Question฀1฀of฀Section฀A฀of฀the฀exam฀will฀be฀based฀on฀the฀financial฀statements฀of฀group฀entities,฀or฀
extracts฀ thereof.฀ Section฀ B฀ of฀ the฀ exam฀ could฀ deal฀ with฀ any฀ aspect฀ of฀ the฀ syllabus฀ so฀ it฀ is฀ also฀
possible฀that฀groups฀feature฀in฀Question฀3฀or฀4.฀
Good฀ consolidation฀ technique฀ is฀ therefore฀ essential฀ when฀ answering฀ both฀ written฀ and฀ numerical฀
aspects฀of฀group฀questions.฀฀฀
Skills฀Checkpoint฀3฀focuses฀on฀the฀more฀challenging฀technique฀for฀correcting฀errors฀in฀group฀financial฀
statements฀that฀have฀already฀been฀prepared.฀
A฀step-by-step฀technique฀for฀applying฀good฀consolidation฀techniques฀is฀outlined฀below.฀฀

STEP 1฀ Work฀out฀how฀many฀minutes฀you฀have฀to฀answer฀the฀question.฀
฀

STEP 2฀ ฀ Read฀the฀requirement฀for฀each฀part฀of฀the฀question฀and฀analyse฀it,฀identifying฀฀
sub-requirements.฀

STEP 3฀ ฀ Read฀the฀scenario,฀identify฀exactly฀what฀information฀has฀been฀provided฀and฀what฀
you฀need฀to฀do฀with฀this฀information.฀Identify฀which฀consolidation฀
workings/adjustments฀may฀be฀required.฀

STEP 4฀ ฀ Draw฀up฀a฀group฀structure.฀Make฀notes฀in฀the฀margins฀of฀the฀question฀as฀to฀which฀
consolidation฀working,฀adjustment฀or฀correction฀to฀error฀is฀required.฀Do฀not฀
perform฀any฀detailed฀calculations฀at฀this฀stage.฀

STEP 5฀ ฀ Write฀up฀your฀answer฀using฀key฀words฀from฀the฀requirements฀as฀headings฀(if฀
preparing฀narrative).฀Perform฀calculations฀first,฀then฀explain.฀Remember฀that฀marks฀
will฀be฀available฀for฀a฀discussion฀of฀the฀principles฀underpinning฀any฀calculations.฀

Skills฀Checkpoint฀3฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀฀

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Skill฀4:฀Performing฀financial฀analysis฀
Section฀B฀of฀the฀SBR฀exam฀will฀contain฀two฀questions,฀which฀may฀be฀scenario฀or฀case-study฀or฀essay฀
based฀and฀will฀contain฀both฀discursive฀and฀computational฀elements.฀Section฀B฀could฀deal฀with฀any฀
aspect฀of฀the฀syllabus฀but฀will฀always฀include฀either฀a฀full฀question,฀or฀part฀of฀a฀question฀that฀requires฀
appraisal฀ of฀ financial฀ or฀ non-financial฀ information฀ from฀ either฀ the฀ preparer’s฀ and/or฀ another฀
stakeholder's฀perspective.฀Two฀professional฀marks฀will฀be฀awarded฀to฀the฀question฀in฀Section฀B฀that฀
requires฀analysis.฀
Given฀ that฀ appraisal฀ of฀ financial฀ and฀ non-financial฀ information฀ will฀ feature฀ in฀ Section฀ B฀ of฀ every฀
exam,฀ it฀ is฀ essential฀ that฀ you฀ have฀ mastered฀ the฀ appropriate฀ technique฀ in฀ order฀ to฀ maximise฀ your฀
chance฀of฀passing฀the฀SBR฀exam.฀
A฀step-by-step฀technique฀for฀performing฀financial฀analysis฀is฀outlined฀below.฀฀

STEP 1฀ Work฀out฀how฀many฀minutes฀you฀have฀to฀answer฀the฀question.฀
฀

STEP 2฀ ฀ Read฀and฀analyse฀the฀requirement.฀

STEP 3฀ ฀ Read฀and฀analyse฀the฀scenario.฀

STEP 4฀ ฀ Prepare฀an฀answer฀plan.฀

STEP 5฀ ฀ Write฀up฀your฀answer.฀

Skills฀Checkpoint฀4฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀฀

Skill฀5:฀Creating฀effective฀discussion฀฀
More฀ marks฀ in฀ your฀ SBR฀ exam฀ will฀ relate฀ to฀ written฀ answers฀ than฀ numerical฀ answers.฀ It฀ is฀ very฀
tempting฀to฀only฀practise฀numerical฀questions,฀as฀they฀are฀easy฀to฀mark฀because฀the฀answer฀is฀right฀
or฀ wrong,฀ whereas฀ written฀ questions฀ are฀ more฀ subjective฀ and฀ a฀ range฀ of฀ different฀ answers฀ will฀ be฀
given฀credit.฀Even฀when฀attempting฀written฀questions,฀it฀is฀tempting฀to฀write฀a฀brief฀answer฀plan฀and฀
then฀ look฀ at฀ the฀ answer฀ rather฀ than฀ writing฀ a฀ full฀ answer฀ to฀ plan.฀ Unless฀ you฀ practise฀ written฀
questions฀in฀full฀to฀time,฀you฀will฀never฀acquire฀the฀necessary฀skills฀to฀tackle฀discussion฀questions.฀
The฀basic฀five฀steps฀adopted฀in฀Skills฀Checkpoint฀4฀should฀also฀be฀used฀in฀discussion฀questions.฀฀
Steps฀2฀and฀4฀are฀particularly฀important฀for฀discussion฀questions.฀You฀will฀definitely฀need฀to฀spend฀a฀
third฀ of฀ your฀ time฀ reading฀ and฀ planning.฀ Generating฀ ideas฀ at฀ the฀ planning฀ stage฀ to฀ create฀ a฀
comprehensive฀answer฀plan฀will฀be฀the฀key฀to฀success฀in฀this฀style฀of฀question.฀฀
Skills฀Checkpoint฀5฀covers฀this฀technique฀in฀detail฀through฀application฀to฀an฀exam-standard฀question.฀฀

Exam฀success฀skills฀฀
Passing฀ the฀ SBR฀ exam฀ requires฀ more฀ than฀ applying฀ syllabus฀ knowledge฀ and฀ demonstrating฀ the฀
specific฀ SBR฀ skills;฀ it฀ also฀ requires฀ the฀ development฀ of฀ excellent฀ exam฀ technique฀ through฀ question฀
practice.฀฀
We฀ consider฀ the฀ following฀ six฀ skills฀ to฀ be฀ vital฀ for฀ exam฀ success.฀ The฀ Skills฀ Checkpoints฀ show฀ how฀
each฀of฀these฀skills฀can฀be฀applied฀in฀the฀exam.฀฀

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Introduction฀

Exam฀success฀skill฀1฀

Managing฀information฀
Questions฀ in฀ the฀ exam฀ will฀ present฀ you฀ with฀ a฀ lot฀ of฀ information.฀ The฀ skill฀ is฀ how฀ you฀ handle฀ this฀
information฀ to฀ make฀ the฀ best฀ use฀ of฀ your฀ time.฀ The฀ key฀ is฀ determining฀ how฀ you฀ will฀ approach฀ the฀
exam฀and฀then฀actively฀reading฀the฀questions.฀฀

Advice฀on฀developing฀Managing฀information฀฀
Approach฀
The฀exam฀is฀3฀hours฀15฀minutes฀long.฀There฀is฀no฀designated฀'reading'฀time฀at฀the฀start฀of฀the฀exam,฀
however,฀one฀approach฀that฀can฀work฀well฀is฀to฀start฀the฀exam฀by฀spending฀10–15฀minutes฀carefully฀
reading฀through฀all฀of฀the฀questions฀to฀familiarise฀yourself฀with฀the฀exam฀paper.฀฀
Once฀ you฀ feel฀ familiar฀ with฀ the฀ exam฀ paper฀ consider฀ the฀ order฀ in฀ which฀ you฀ will฀ attempt฀ the฀
questions;฀always฀attempt฀them฀in฀your฀order฀of฀preference.฀For฀example,฀you฀may฀want฀to฀leave฀to฀
last฀the฀question฀you฀consider฀to฀be฀the฀most฀difficult.฀
If฀you฀do฀take฀this฀approach,฀remember฀to฀adjust฀the฀time฀available฀for฀each฀question฀appropriately฀–฀
see฀Exam฀success฀skill฀6:฀Good฀time฀management.฀
If฀ you฀ find฀ that฀ this฀ approach฀ doesn’t฀ work฀ for฀ you,฀ don't฀ worry฀ –฀ you฀ can฀ develop฀ your฀ own฀
technique.฀฀
Active฀reading฀
You฀ must฀ take฀ an฀ active฀ approach฀ to฀ reading฀ each฀ question.฀ Focus฀ on฀ the฀ requirement฀ first,฀
underlining฀ key฀ verbs฀ such฀ as฀ 'prepare',฀ 'comment',฀ 'explain',฀ 'discuss',฀ to฀ ensure฀ you฀ answer฀ the฀
question฀ properly.฀ Then฀ read฀ the฀ rest฀ of฀ the฀ question,฀ underlining฀ and฀ annotating฀ important฀ and฀
relevant฀information,฀and฀making฀notes฀of฀any฀relevant฀technical฀information฀you฀think฀you฀will฀need.฀
Exam฀success฀skill฀2฀

Correct฀interpretation฀of฀the฀requirements฀฀฀฀
The฀ active฀ verb฀ used฀ often฀ dictates฀ the฀ approach฀ that฀ written฀ answers฀ should฀ take฀ (eg฀ 'explain',฀
'discuss',฀ 'evaluate').฀ It฀ is฀ important฀ you฀ identify฀ and฀ use฀ the฀ verb฀ to฀ define฀ your฀ approach.฀ The฀
correct฀interpretation฀of฀the฀requirements฀skill฀means฀correctly฀producing฀only฀what฀is฀being฀
asked฀for฀by฀a฀requirement.฀Anything฀not฀required฀will฀not฀earn฀marks.฀฀

Advice฀on฀developing฀correct฀interpretation฀of฀the฀requirements฀฀฀฀
This฀skill฀can฀be฀developed฀by฀analysing฀question฀requirements฀and฀applying฀this฀process:฀
Step฀1฀ Read฀the฀requirement฀
Firstly,฀read฀the฀requirement฀a฀couple฀of฀times฀slowly฀and฀carefully฀and฀highlight฀the฀
active฀ verbs.฀ Use฀ the฀ active฀ verbs฀ to฀ define฀ what฀ you฀ plan฀ to฀ do.฀ Make฀ sure฀ you฀
identify฀any฀sub-requirements.฀฀

Step฀2฀ Read฀the฀rest฀of฀the฀question฀
By฀reading฀the฀requirement฀first,฀you฀will฀have฀an฀idea฀of฀what฀you฀are฀looking฀out฀
for฀ as฀ you฀ read฀ through฀ the฀ case฀ overview฀ and฀ exhibits.฀ This฀ is฀ a฀ great฀ time฀ saver฀
and฀ means฀ you฀ don't฀ end฀ up฀ having฀ to฀ read฀ the฀ whole฀ question฀ in฀ full฀ twice.฀ You฀
should฀do฀this฀in฀an฀active฀way฀–฀see฀Exam฀success฀skill฀1:฀Managing฀Information.฀

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Step฀3฀ Read฀the฀requirement฀again฀
Read฀the฀requirement฀again฀to฀remind฀yourself฀of฀the฀exact฀wording฀before฀starting฀
your฀ written฀ answer.฀ This฀ will฀ capture฀ any฀ misinterpretation฀ of฀ the฀ requirements฀ or฀
any฀missed฀requirements฀entirely.฀This฀should฀become฀a฀habit฀in฀your฀approach฀and,฀
with฀repeated฀practice,฀you฀will฀find฀the฀focus,฀relevance฀and฀depth฀of฀your฀answer฀
plan฀will฀improve.฀

Exam฀success฀skill฀3฀

Answer฀planning:฀Priorities,฀structure฀and฀logic฀฀฀฀
This฀ skill฀ requires฀ the฀ planning฀ of฀ the฀ key฀ aspects฀ of฀ an฀ answer฀ which฀ accurately฀ and฀ completely฀
responds฀to฀the฀requirement.฀฀฀

Advice฀on฀developing฀Answer฀planning:฀Priorities,฀structure฀and฀logic฀฀฀฀
Everyone฀will฀have฀a฀preferred฀style฀for฀an฀answer฀plan.฀For฀example,฀it฀may฀be฀a฀mind฀map,฀bullet-
pointed฀ lists฀ or฀ simply฀ annotating฀ the฀ question฀ paper.฀ Choose฀ the฀ approach฀ that฀ you฀ feel฀ most฀
comfortable฀with,฀or,฀if฀you฀are฀not฀sure,฀try฀out฀different฀approaches฀for฀different฀questions฀until฀you฀
have฀found฀your฀preferred฀style.฀฀
For฀a฀discussion฀question,฀annotating฀the฀question฀paper฀is฀likely฀to฀be฀insufficient.฀It฀would฀be฀better฀
to฀draw฀up฀a฀separate฀answer฀plan฀in฀the฀format฀of฀your฀choosing฀(eg฀a฀mind฀map฀or฀bullet-pointed฀
lists).฀ For฀ a฀ groups฀ question,฀ you฀ will฀ typically฀ spend฀ less฀ time฀ planning฀ than฀ for฀ a฀ discussion฀
question.฀ You฀ should฀ aim฀ to฀ draw฀ up฀ the฀ group฀ structure.฀ Then,฀ rather฀ than฀ drawing฀ up฀ a฀ formal฀
plan,฀ the฀ best฀ use฀ of฀ your฀ time฀ is฀ to฀ annotate฀ the฀ question฀ paper฀ margins฀ noting฀ which฀ group฀
working,฀adjustment฀or฀correction฀of฀error฀will฀be฀required.฀
Exam฀success฀skill฀4฀ ฀

Efficient฀numerical฀analysis฀฀฀฀
This฀skill฀aims฀to฀maximise฀the฀marks฀awarded฀by฀making฀clear฀to฀the฀marker฀the฀process฀of฀arriving฀
at฀your฀answer.฀This฀is฀achieved฀by฀laying฀out฀an฀answer฀such฀that,฀even฀if฀you฀make฀a฀few฀errors,฀
you฀can฀still฀score฀subsequent฀marks฀for฀follow-on฀calculations.฀It฀is฀vital฀that฀you฀do฀not฀lose฀marks฀
purely฀because฀the฀marker฀cannot฀follow฀what฀you฀have฀done.฀฀

Advice฀on฀developing฀Efficient฀numerical฀analysis฀
This฀skill฀can฀be฀developed฀by฀applying฀the฀following฀process:฀
Step฀1฀ Use฀a฀standard฀proforma฀working฀where฀relevant฀
If฀ answers฀ can฀ be฀ laid฀ out฀ in฀ a฀ standard฀ proforma฀ then฀ always฀ plan฀ to฀ do฀ so.฀ This฀
will฀help฀the฀marker฀to฀understand฀your฀working฀and฀allocate฀the฀marks฀easily.฀It฀will฀
also฀help฀you฀to฀work฀through฀the฀figures฀in฀a฀methodical฀and฀time-efficient฀way.฀

Step฀2฀ ฀ Show฀your฀workings฀
Keep฀ your฀ workings฀ as฀ clear฀ and฀ simple฀ as฀ possible฀ and฀ ensure฀ they฀ are฀ cross-
referenced฀to฀the฀main฀part฀of฀your฀answer.฀Where฀it฀helps,฀provide฀brief฀narrative฀
explanations฀to฀help฀the฀marker฀understand฀the฀steps฀in฀the฀calculation.฀This฀means฀
that฀ if฀ a฀ mistake฀ is฀ made฀ you฀ do฀ not฀ lose฀ any฀ subsequent฀ marks฀ for฀ follow-on฀
calculations.฀

Step฀3฀฀ Keep฀moving!฀
It฀ is฀ important฀ to฀ remember฀ that,฀ in฀ an฀ exam฀ situation,฀ it฀ is฀ difficult฀ to฀ get฀ every฀
number฀ 100%฀ correct.฀ The฀ key฀ is฀ therefore฀ ensuring฀ you฀ do฀ not฀ spend฀ too฀ long฀ on฀
any฀ single฀ calculation.฀ If฀ you฀ are฀ struggling฀ with฀ a฀ solution฀ then฀ make฀ a฀ sensible฀
assumption,฀state฀it฀and฀move฀on.฀฀

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Introduction฀

Exam฀success฀skill฀5฀

Effective฀writing฀and฀presentation฀฀฀฀
Written฀answers฀should฀be฀presented฀so฀that฀the฀marker฀can฀clearly฀see฀the฀points฀you฀are฀making,฀
presented฀in฀the฀format฀specified฀in฀the฀question.฀The฀skill฀is฀to฀provide฀efficient฀written฀answers฀with฀
sufficient฀breadth฀of฀points฀that฀answer฀the฀question,฀in฀the฀right฀depth,฀in฀the฀time฀available.฀

Advice฀on฀developing฀Effective฀writing฀and฀presentation฀฀฀฀
Step฀1฀ Use฀headings฀
Using฀the฀headings฀and฀sub-headings฀from฀your฀answer฀plan฀will฀give฀your฀answer฀
structure,฀order฀and฀logic.฀This฀will฀ensure฀your฀answer฀links฀back฀to฀the฀requirement฀
and฀is฀clearly฀signposted,฀making฀it฀easier฀for฀the฀marker฀to฀understand฀the฀different฀
points฀you฀are฀making.฀Underlining฀your฀headings฀will฀also฀help฀the฀marker.฀฀

Step฀2฀ ฀ Write฀your฀answer฀in฀short,฀but฀full,฀sentences฀
Use฀short,฀punchy฀sentences฀with฀the฀aim฀that฀every฀sentence฀should฀say฀something฀
different฀ and฀ generate฀ marks.฀ Write฀ in฀ full฀ sentences,฀ ensuring฀ your฀ style฀ is฀
professional.฀

Step฀3฀ ฀฀ Do฀your฀calculations฀first฀and฀explanation฀second฀฀
Questions฀often฀ask฀for฀an฀explanation฀with฀suitable฀calculations.฀The฀best฀approach฀
is฀to฀prepare฀the฀calculation฀first฀but฀present฀it฀on฀the฀bottom฀half฀of฀the฀page฀of฀your฀
answer,฀ or฀ on฀ the฀ next฀ page.฀ Then฀ add฀ the฀ explanation฀ before฀ the฀ calculation.฀
Performing฀the฀calculation฀first฀should฀enable฀you฀to฀explain฀what฀you฀have฀done.฀

Exam฀success฀skill฀6฀

Good฀time฀management฀฀฀฀
This฀skill฀means฀planning฀your฀time฀across฀all฀the฀requirements฀so฀that฀all฀tasks฀have฀been฀attempted฀
at฀the฀end฀of฀the฀3฀hours฀15฀minutes฀available฀and฀actively฀checking฀on฀time฀during฀your฀exam.฀This฀
is฀ so฀ that฀ you฀ can฀ flex฀ your฀ approach฀ and฀ prioritise฀ requirements฀ which,฀ in฀ your฀ judgement,฀ will฀
generate฀the฀maximum฀marks฀in฀the฀available฀time฀remaining.฀

Advice฀on฀developing฀Good฀time฀management฀
The฀ exam฀ is฀ 3฀ hours฀ 15฀ minutes฀ long,฀ which฀ translates฀ to฀ 1.95฀ minutes฀ per฀ mark.฀ Therefore฀ a฀฀
10-mark฀requirement฀should฀be฀allocated฀a฀maximum฀of฀20฀minutes฀to฀complete฀your฀answer฀before฀
you฀move฀on฀to฀the฀next฀task.฀At฀the฀beginning฀of฀a฀question,฀work฀out฀the฀amount฀of฀time฀you฀should฀
be฀ spending฀ on฀ each฀ requirement฀ and฀ write฀ the฀ finishing฀ time฀ next฀ to฀ each฀ requirement฀ on฀ your฀
exam฀paper.฀If฀you฀take฀the฀approach฀of฀spending฀10–15฀minutes฀reading฀and฀planning฀at฀the฀start฀
of฀the฀exam,฀adjust฀the฀time฀allocated฀to฀each฀question฀accordingly;฀eg฀if฀you฀allocate฀15฀minutes฀to฀
reading,฀then฀you฀will฀have฀3฀hours฀remaining,฀which฀is฀1.8฀minutes฀per฀mark.฀
Keep฀an฀eye฀on฀the฀clock฀
Aim฀to฀attempt฀all฀requirements,฀but฀be฀ready฀to฀be฀ruthless฀and฀move฀on฀if฀your฀answer฀is฀not฀going฀
as฀ planned.฀ The฀ challenge฀ for฀ many฀ is฀ sticking฀ to฀ planned฀ timings.฀ Be฀ aware฀ this฀ is฀ difficult฀ to฀
achieve฀in฀the฀early฀stages฀of฀your฀studies฀and฀be฀ready฀to฀let฀this฀skill฀develop฀over฀time.฀
If฀you฀find฀yourself฀running฀short฀on฀time฀and฀know฀that฀a฀full฀answer฀is฀not฀possible฀in฀the฀time฀you฀
have,฀ consider฀ recreating฀ your฀ plan฀ in฀ overview฀ form฀ and฀ then฀ add฀ key฀ terms฀ and฀ details฀ as฀ time฀
allows.฀ Remember,฀ some฀ marks฀ may฀ be฀ available,฀ for฀ example,฀ simply฀ stating฀ a฀ conclusion฀ which฀
you฀don't฀have฀time฀to฀justify฀in฀full.฀

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฀฀

Question฀practice฀฀
Question฀ practice฀ is฀ a฀ core฀ part฀ of฀ learning฀ new฀ topic฀ areas.฀ When฀ you฀ practice฀ questions,฀ you฀
should฀focus฀on฀improving฀the฀Exam฀success฀skills฀–฀personal฀to฀your฀needs฀–฀by฀obtaining฀feedback฀
or฀through฀a฀process฀of฀self-assessment.฀฀
฀

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Introduction฀

Introduction฀to฀the฀Supplementary฀Reading฀
This฀additional฀content,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook,฀has฀been฀
selected฀to฀enhance฀your฀studies฀and฀consists฀of฀revision฀materials฀and฀revision฀activities,฀
background฀reading฀to฀aid฀your฀understanding฀of฀topics,฀and฀additional฀activities฀and฀further฀
illustrations฀of฀complex฀areas.฀A฀summary฀of฀the฀content฀is฀given฀below.฀฀
฀
Chapter฀฀ Summary฀of฀Supplementary฀Reading฀content฀
1฀ The฀financial฀  IFRS฀examinable฀documents
reporting฀  Conceptual฀Framework฀–฀importance฀of฀a฀conceptual฀framework;฀
framework฀฀ the฀IASB฀Conceptual฀Framework฀including฀fundamental/enhancing฀
qualitative฀characteristics,฀underlying฀assumptions,฀elements฀of฀the฀
financial฀statements฀and฀measurement฀bases;฀Exposure฀Draft฀
ED/2015/3฀
 IAS฀1฀Presentation฀of฀Financial฀Statements฀illustrative฀guidance฀and฀
discussion฀on฀presentation฀and฀other฀aspects฀of฀IAS฀1฀
 IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀illustrative฀
examples฀and฀activity฀
2฀ Professional฀and฀  Influences฀on฀ethics; ethical฀theory
ethical฀duty฀of฀  Social฀responsibility฀and฀businesses฀
the฀accountant฀฀  Managing฀ethics฀within฀organisations:฀compliance฀based฀and฀
integrity฀based฀
 Activity฀on฀ethical฀issues฀
3฀ Non-current฀  IAS฀16฀Property,฀Plant฀and฀Equipment revision฀activities฀
assets฀  IAS฀36฀Impairment฀revision฀activities฀
 IAS฀38฀Intangible฀Assets฀revision฀and฀activity฀
 IAS฀40฀Investment฀Property฀revision฀and฀activity฀
4฀ Employee฀  Concepts฀and฀principles฀of฀employee฀benefits฀costs฀
benefits฀  Explanation฀and฀comparison฀of฀defined฀benefit,฀defined฀
contribution฀and฀multi-employer฀benefits฀plans฀
 Illustration฀of฀how฀to฀apply฀the฀asset฀ceiling฀test฀
5฀ Provisions,฀  Provisions฀recognition฀and฀measurement฀revision฀and฀activities฀
contingencies฀  IAS฀10฀Events฀After฀the฀Reporting฀Period฀examples฀
and฀events฀after฀  Exam-standard฀activity฀
the฀reporting฀
period฀
6฀ Income฀taxes฀  Current฀tax฀revision฀activities
 Deferred฀tax:฀tax฀base฀revision฀activities฀
 Deferred฀tax฀liabilities฀revision฀including฀revalued฀assets,฀
development฀costs,฀impairment฀and฀taxable฀temporary฀differences฀
in฀business฀combinations฀
 Further฀explanation฀on:฀฀
–฀ Deferred฀tax฀assets฀฀
–฀ Recognition฀of฀deferred฀tax฀
–฀ Measurement฀of฀deferred฀tax฀฀
7฀ Financial฀  Clarification฀of฀financial฀instruments฀definitions
instruments฀  Further฀explanation฀on฀derecognition,฀classification฀and฀
measurement฀of฀financial฀assets฀and฀liabilities.฀฀
8฀ Leases฀  Lessee฀accounting, including฀lease฀identification฀examples,฀
separating฀lease฀components,฀remeasurement฀and฀sale฀and฀
leaseback฀

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Chapter Summary of Supplementary Reading content

9 Share-based  Background to IFRS 2 Share-based Payment
payment  Further detail on share-based payments amongst group entities
 Activities on vesting conditions for further practice
10 Basic groups  Revision: measuring non-controlling interest at acquisition
 Revision: BPP's standard approach to consolidation
 Fair value practice activity
11 Changes in  Investment to associate step acquisitions
group structures:
acquisitions
12 Changes in  Group profit or loss on disposal where significant influence is lost
group structures:  Deemed disposals
disposals and  Group reorganisations
group
reorganisations
13 Non-current  Discontinued operations comprehensive activity
assets held for
sale and
discontinued
operations
14 Joint  Joint arrangements – contractual arrangements
arrangements
and group
disclosures
15 Foreign  Changes in an entity’s functional currency
transactions and
entities
16 Group statements  Revision of single entity statement of cash flows
of cash flows  Foreign currency translation
 Further activity involving the disposal of a subsidiary
 Summary of disclosure requirements
17 Interpreting  Revision of ratio calculations and explanations
financial  Revision of basic and diluted earnings per share, presentation and
statements for significance
different  Problems with financial performance indicators
stakeholders  Further detail on the Global Reporting Initiative guidelines
18 Reporting  Background to the IFRS for SMEs
requirements of  Consequences of the IFRS for SMEs
small and
medium-sized
entities
19 The impact of  Practical issues regarding managing the transition to IFRS
changes and  Disclosure Initiative – amendments to IAS 1 and IAS 7
potential  Classification issues
changes in  Definition of a business and accounting for previously held interests
accounting
regulation

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Introduction฀

Key฀to฀icons฀
The฀following฀icons฀appear฀in฀this฀Workbook.฀
฀

Key฀term฀฀
Key฀terms฀are฀definitions฀of฀important฀concepts.฀฀
Key฀term฀

Illustration฀
Illustrations฀demonstrate฀how฀to฀apply฀key฀knowledge฀and฀techniques.฀

Activity฀
Activities฀give฀you฀essential฀practice฀of฀techniques฀covered฀in฀the฀chapter.฀

Supplementary฀Reading
Links฀to฀the฀Supplementary฀Reading฀are฀given฀throughout฀the฀chapter.฀฀
฀ Knowledge฀diagnostic
฀ Summary฀of฀the฀key฀learning฀points฀from฀the฀chapter.

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฀
฀
฀
฀
฀
฀
The฀financial
reporting฀framework
฀
฀
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Discuss฀the฀importance฀of฀a฀conceptual฀framework฀in฀underpinning฀the฀production฀ B1(a)฀
of฀accounting฀standards.฀

Discuss฀the฀objectives฀of฀financial฀reporting,฀including฀disclosure฀of฀information,฀ B1(b)฀
that฀can฀be฀used฀to฀help฀assess฀management's฀stewardship฀of฀the฀entity's฀
resources฀and฀the฀limitations฀of฀financial฀reporting.฀

Discuss฀the฀nature฀of฀the฀qualitative฀characteristics฀of฀useful฀financial฀information.฀ B1(c)฀

Explain฀the฀roles฀of฀prudence฀and฀substance฀over฀form฀in฀financial฀reporting.฀ B1(d)฀

Discuss฀the฀high฀level฀of฀measurement฀uncertainty฀that฀can฀make฀financial฀ B1(e)฀
information฀less฀relevant.฀

Evaluate฀the฀decisions฀made฀by฀management฀on฀recognition,฀derecognition฀and฀ B1(f)฀
measurement.฀

Critically฀discuss฀and฀apply฀the฀definitions฀of฀the฀elements฀of฀financial฀statements฀ B1(g)฀
and฀the฀reporting฀of฀items฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income.฀

Discuss฀and฀apply฀the฀criteria฀that฀must฀be฀met฀before฀an฀entity฀can฀apply฀the฀ C1(a)฀
revenue฀recognition฀model.฀

Discuss฀and฀apply฀the฀five฀step฀model฀relating฀to฀revenue฀earned฀from฀a฀contract฀ C1(b)฀
with฀a฀customer.฀

Apply฀the฀criteria฀for฀recognition฀of฀contract฀costs฀as฀an฀asset.฀ C1(c)฀

Discuss฀and฀apply฀the฀recognition฀and฀measurement฀of฀revenue฀including฀ C1(d)฀
performance฀obligations฀satisfied฀over฀time,฀sale฀with฀a฀right฀of฀return,฀warranties,฀
variable฀consideration,฀principal฀versus฀agent฀considerations฀and฀non-refundable฀
upfront฀fees.฀

Outline฀the฀principles฀behind฀the฀application฀of฀accounting฀policies฀and฀ C11(c)฀
measurement฀in฀interim฀reports.฀

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฀฀

Discuss฀the฀impact฀of฀current฀issues฀in฀corporate฀reporting฀including.฀The฀ F1(c)฀
following฀examples฀are฀relevant฀to฀the฀current฀syllabus:฀฀
1.฀ The฀revision฀of฀the฀Conceptual฀Framework฀
2.฀ The฀IASB's฀Principles฀of฀Disclosure฀Initiative฀
3.฀ Materiality฀in฀the฀context฀of฀financial฀reporting฀
4.฀ Primary฀financial฀statements฀
5.฀ Management฀commentary฀
6.฀ Developments฀in฀sustainability฀reporting฀
Note.฀Only฀item฀(1)฀is฀covered฀in฀this฀chapter.฀The฀remaining฀items฀are฀covered฀
in฀Chapter฀17฀and฀Chapter฀19.฀

Exam฀context฀
This฀chapter฀begins฀with฀revision฀of฀the฀IASB's฀Conceptual฀Framework฀for฀Financial฀Reporting฀which฀
you฀saw฀in฀Financial฀Reporting.฀In฀Strategic฀Business฀Reporting฀(SBR),฀you฀are฀expected฀to฀apply฀the฀
underlying฀concepts฀in฀the฀Conceptual฀Framework฀to฀complicated฀transactions,฀as฀well฀as฀discussing฀
its฀usefulness.฀The฀IASB's฀proposed฀revisions฀to฀the฀Conceptual฀Framework฀are฀also฀examinable.฀You฀
need฀to฀be฀able฀to฀identify฀the฀effects฀of฀the฀proposed฀changes฀on฀accounting฀standards.฀฀
Linked฀ with฀ the฀ Conceptual฀ Framework฀ topics฀ are฀ related฀ issues฀ such฀ as฀ revenue฀ recognition฀ and฀
other฀ areas฀ driven฀ by฀ the฀ recognition฀ criteria฀ and฀ substance฀ over฀ form.฀ You฀ have฀ seen฀ IFRS฀ 15
Revenue฀from฀Contracts฀with฀Customers฀in฀Financial฀Reporting;฀however,฀it฀will฀be฀examined฀in฀more฀
depth฀in฀SBR.฀
Interim฀financial฀reporting฀is฀an฀area฀you฀have฀not฀seen฀before,฀although฀only฀overview฀knowledge฀is฀
expected฀to฀be฀examined฀here.฀

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1:฀The฀financial฀reporting฀framework฀

Chapter฀overview฀
฀
฀ The฀financial฀reporting฀฀
฀ framework฀
฀
฀
฀
฀ ฀ 2.฀Revenue฀
1.฀The฀accounting฀
recognition฀฀
framework฀
(IFRS฀15)฀

3.฀Interim฀financial฀
reporting฀(IAS฀34)

฀ Current฀
developments฀

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฀฀

1฀฀The฀accounting฀framework฀
1.1฀฀Fair฀presentation฀and฀compliance฀with฀IFRSs฀
'Fair฀ presentation'฀ is฀ the฀ term฀ used฀ in฀ IAS฀ 1฀ Presentation฀ of฀ Financial฀ Statements฀ equivalent฀ to฀ the฀
concept฀of฀'true฀and฀fair฀view'.฀
In฀order฀to฀achieve฀fair฀presentation,฀an฀entity฀must฀comply฀with฀(IAS฀1:฀para.฀15):฀
฀ International฀Financial฀Reporting฀Standards฀(IFRSs).฀These฀comprise฀(IAS฀1฀para.฀7):฀
–฀ International฀Financial฀Reporting฀Standards฀(IFRSs)฀
–฀ International฀Accounting฀Standards฀(IASs)฀
–฀ Interpretations฀of฀Standards;฀and฀
฀ The฀Conceptual฀Framework฀for฀Financial฀Reporting.฀

Supplementary฀reading฀
Chapter฀1฀Section฀1฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀
the฀ Workbook,฀ contains฀ a฀ full฀ reference฀ list฀ of฀ the฀ examinable฀ documents.฀ These฀ will฀ each฀ be฀
covered฀in฀turn฀through฀these฀materials.฀

1.2฀ The฀Conceptual฀Framework฀for฀Financial฀Reporting฀

Supplementary฀reading฀
This฀topic฀is฀revision.฀Chapter฀1฀Section฀2฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀
the฀digital฀edition฀of฀the฀Workbook,฀contains฀a฀full฀revision฀of฀the฀Conceptual฀Framework.฀

The฀Conceptual฀Framework฀for฀Financial฀Reporting฀is฀divided฀into฀chapters:฀
(1)฀ The฀objective฀of฀general฀purpose฀financial฀reporting฀
Objective,฀usefulness฀and฀limitations฀of฀general฀purpose฀financial฀reporting฀
'The฀objective฀of฀general฀purpose฀financial฀reporting฀is฀to฀provide฀financial฀information฀
about฀the฀reporting฀entity฀that฀is฀useful฀to฀existing฀and฀potential฀investors,฀lenders฀and฀
other฀ creditors฀ in฀ making฀ decisions฀ about฀ providing฀ resources฀ to฀ the฀ entity.฀ Those฀
decisions฀involve฀buying,฀selling฀or฀holding฀equity฀and฀debt฀instruments,฀and฀providing฀or฀
settling฀loans฀and฀other฀forms฀of฀credit.'฀(IASB฀Conceptual฀Framework฀(CF):฀para.฀OB2)฀
Information฀ about฀ a฀ reporting฀ entity's฀ economic฀ resources,฀ claims฀ against฀ the฀ entity฀ and฀
changes฀in฀resources฀and฀claims฀
Three฀aspects฀are฀relevant฀to฀the฀user฀of฀the฀financial฀statements฀here฀(CF:฀paras.฀OB17–21):฀
฀ Financial฀performance฀reflected฀by฀accrual฀accounting฀
฀ Financial฀performance฀reflected฀by฀past฀cash฀flows฀
฀ Changes฀ in฀ economic฀ resources฀ and฀ claims฀ not฀ resulting฀ from฀ financial฀
performance,฀eg฀a฀share฀issue.฀
(2)฀ The฀reporting฀entity฀
This฀section฀is฀to฀be฀added฀by฀the฀IASB฀at฀a฀later฀date.฀
฀ ฀

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1:฀The฀financial฀reporting฀framework฀

(3)฀ Qualitative฀characteristics฀of฀useful฀financial฀information฀

Fundamental฀ Enhancing฀qualitative฀ The฀cost฀constraint฀฀

qualitative฀ characteristics฀ on฀useful฀financial฀
characteristics฀ reporting฀

฀ Relevance฀ ฀ Comparability฀ ฀ Benefits฀of฀reporting฀

฀ Faithful฀representation฀ ฀ Verifiability฀ information฀should฀
justify฀the฀costs฀
(CF:฀paras.฀QC5–16)฀ ฀ Timeliness฀
(CF:฀para.฀QC35)฀
฀ Understandability฀
(CF:฀paras.฀QC19–32)฀

(4)฀ The฀ 1989฀ Framework฀ for฀ the฀ Preparation฀ and฀ Presentation฀ of฀ Financial฀
Statements:฀remaining฀text฀
These฀sections฀will฀be฀replaced฀as฀the฀IASB฀develops฀the฀new฀Conceptual฀Framework.฀
(i)฀ Underlying฀assumption฀
Financial฀statements฀are฀normally฀prepared฀on฀the฀assumption฀that฀an฀entity฀is฀a฀going฀
concern฀and฀will฀continue฀in฀operation฀for฀the฀foreseeable฀future฀(CF:฀para.฀4.1).฀฀
(ii)฀ The฀elements฀of฀financial฀statements฀

ASSET฀ INCOME฀
A฀resource฀controlled฀by฀the฀entity฀ Increases฀in฀economic฀benefits฀
as฀a฀result฀of฀past฀events฀and฀from฀ during฀the฀accounting฀period฀in฀the฀
which฀future฀economic฀benefits฀ form฀of฀inflows฀or฀enhancements฀
are฀expected฀to฀flow฀to฀the฀entity.฀ of฀assets฀or฀decreases฀of฀
liabilities฀that฀result฀in฀increases฀in฀
equity,฀other฀than฀those฀relating฀to฀
LIABILITY฀ contributions฀from฀equity฀
participants.฀
A฀present฀obligation฀of฀the฀entity฀
arising฀from฀past฀events,฀the฀
settlement฀of฀which฀is฀expected฀to฀
EXPENSE฀
result฀in฀an฀outflow฀from฀the฀entity฀
of฀resources฀embodying฀economic฀ Decreases฀in฀economic฀benefits฀
benefits.฀ during฀the฀accounting฀period฀in฀the฀
form฀of฀outflows฀or฀depletions฀of฀
assets฀or฀incurrences฀of฀
EQUITY฀
liabilities฀that฀result฀in฀decreases฀in฀
The฀residual฀interest฀in฀the฀assets฀ equity,฀other฀than฀those฀relating฀to฀
of฀the฀entity฀after฀deducting฀all฀its฀ distributions฀to฀equity฀
liabilities.฀ participants.฀
฀
฀ ฀ (CF:฀para฀4.4)฀ (CF:฀para฀4.25)฀

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฀฀

(iii)฀ Recognition฀of฀the฀elements฀of฀financial฀statements฀
An฀item฀that฀meets฀the฀definition฀of฀an฀element฀is฀recognised฀if฀(CF:฀para.฀4.38):฀
฀ It฀is฀probable฀that฀any฀future฀economic฀benefit฀associated฀with฀the฀item฀will฀
flow฀to฀or฀from฀the฀entity;฀and฀
฀ The฀item฀has฀a฀cost฀or฀value฀that฀can฀be฀measured฀with฀reliability.฀

(iv)฀ Measurement฀of฀the฀elements฀of฀financial฀statements฀
Different฀ bases฀ of฀ measurement฀ of฀ the฀ elements฀ of฀ financial฀ statements฀ can฀ be฀ used฀
including฀(CF:฀para.฀4.55):฀
฀ Historical฀cost;฀
฀ Current฀cost;฀
฀ Realisable฀(settlement)฀value;฀and฀
฀ Present฀value.฀
(v)฀ Concepts฀of฀capital฀and฀capital฀maintenance฀฀
This฀ section฀ discusses฀ alternative฀ capital฀ maintenance฀ concepts฀ and฀ determination฀ of฀
profit฀(CF:฀paras.฀4.59–4.65).฀

Tutorial฀note฀
The฀ Conceptual฀ Framework,฀ and฀ the฀ impact฀ of฀ the฀ revised฀ Conceptual฀ Framework฀ (discussed฀ in฀
Section฀1.4฀below)฀on฀existing฀IFRSs,฀is฀referred฀to฀in฀various฀chapters฀throughout฀this฀Workbook.฀฀

1.3฀ IAS฀1฀Presentation฀of฀Financial฀Statements฀฀

Supplementary฀Reading฀
Chapter฀1฀Section฀3฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀
the฀Workbook,฀contains฀a฀revision฀of฀the฀principles฀of฀IAS฀1.฀

1.4฀Current฀developments฀
In฀May฀2015฀the฀IASB฀issued฀an฀Exposure฀Draft฀(ED/2015/3)฀of฀the฀revised฀Conceptual฀Framework฀
for฀Financial฀Reporting฀with฀three฀objectives:฀
(a)฀ To฀fill฀gaps฀in฀the฀existing฀Conceptual฀Framework฀
(b)฀ To฀update฀existing฀guidance฀where฀appropriate฀
(c)฀ To฀clarify฀particular฀areas฀where฀more฀guidance฀would฀be฀helpful.฀
This฀follows฀a฀Discussion฀Paper฀issued฀in฀July฀2013,฀after฀the฀project฀had฀been฀put฀on฀hold฀in฀2010฀
so฀the฀IASB฀could฀deal฀with฀more฀urgent฀matters฀arising฀from฀the฀financial฀crisis.฀
The฀Exposure฀Draft฀covers฀the฀following฀areas.฀

Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

1฀ The฀objective฀of฀ ฀ Originally฀issued฀in฀2010฀
general฀purpose฀ ฀ Largely฀unchanged฀–฀emphasis฀on฀need฀for฀information฀to฀
financial฀reporting฀ assess฀management's฀stewardship฀of฀the฀entity's฀resources฀so฀
new฀section฀added฀on฀efficiency฀and฀effectiveness฀of฀the฀use฀
of฀the฀entity's฀resources฀(ED/2015/3:฀paras.฀1.22–1.23)฀

2฀ Qualitative฀ ฀ Originally฀issued฀in฀2010฀
characteristics฀of฀ ฀ Largely฀unchanged,฀but฀prudence฀explicitly฀stated฀and฀
useful฀financial฀ substance฀over฀form฀added฀to฀'faithful฀representation'฀
information฀ (ED/2015/3:฀para.฀2.18)฀

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1:฀The฀financial฀reporting฀framework฀

Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

3฀ Financial฀statements฀ ฀ Discusses฀the฀role฀of฀financial฀statements฀
and฀the฀reporting฀ ฀ Includes฀the฀going฀concern฀assumption฀
entity฀
฀ New฀definition฀of฀what฀constitutes฀a฀reporting฀entity:฀'an฀
entity฀that฀chooses,฀or฀is฀required,฀to฀prepare฀general฀
purpose฀financial฀statements'.฀฀Need฀not฀be฀a฀legal฀entity฀
(ED/2015/3:฀paras.฀3.11–3.12)฀
฀ Boundary฀of฀reporting฀entity:฀
–฀ Direct฀control:฀'unconsolidated'฀financial฀statements฀–฀
investments฀in฀subsidiaries฀reported฀as฀assets฀฀
(ED/2015/3:฀paras.฀3.19–3.20)฀
–฀ Both฀direct฀control฀and฀indirect฀control:฀'consolidated'฀
financial฀statements฀(ED/2015/3:฀para.฀3.21)฀

4฀ The฀elements฀of฀ ฀ Revised฀asset฀definition:฀'a฀present฀economic฀resource฀
financial฀ controlled฀by฀the฀entity฀as฀a฀result฀of฀past฀events'฀
statements฀ (ED/2015/3:฀para.฀4.5)฀
฀ Revised฀liability฀definition:฀'a฀present฀obligation฀of฀the฀entity฀
to฀transfer฀an฀economic฀resource฀as฀a฀result฀of฀past฀events'฀
(ED/2015/3:฀para.฀4.24)฀
฀ Economic฀resource:฀'a฀right฀that฀has฀the฀potential฀to฀produce฀
economic฀benefits'฀(ED/2015/3:฀para.฀4.6)฀
฀ Current฀definitions฀of฀income,฀expenses฀and฀equity฀retained฀
฀ Clarification:฀
–฀ More฀focus฀that฀an฀asset฀is฀a฀resource฀and฀a฀liability฀
is฀an฀obligation฀
–฀ That฀resources฀and฀obligations฀are฀not฀certain฀to฀result฀
in฀inflows฀and฀outflows฀of฀economic฀benefits,฀but฀have฀
the฀potential฀to฀do฀so฀(ED/2015/3:฀para.฀4.13)฀
฀ Consideration฀of฀role฀of฀uncertainty฀in฀definitions฀
(ED/2015/3:฀paras.฀5.15–5.16):฀
–฀ Notion฀that฀inflow/outflow฀of฀resources฀'expected'฀
removed฀
–฀ No฀probability฀threshold฀
–฀ Probability฀removed฀from฀recognition฀criteria฀
฀ Inclusion฀of฀definition฀of฀'unit฀of฀account'฀for฀measurement:฀
'the฀group฀of฀rights,฀the฀group฀of฀obligations฀or฀the฀group฀of฀
rights฀and฀obligations,฀to฀which฀recognition฀and฀
measurement฀requirements฀are฀applied',฀but฀determination฀
left฀to฀individual฀standards฀(ED/2015/3:฀para.฀4.57)฀

5฀ Recognition฀and฀ ฀ Recognise฀all฀assets฀and฀liabilities฀(and฀related฀income,฀
derecognition฀ expenses฀and฀equity)฀if฀such฀recognition฀provides฀users฀with฀
(ED/2015/3:฀para.฀5.9):฀
–฀ Relevant฀information฀about฀the฀element฀
–฀ A฀faithful฀representation฀of฀the฀element฀
–฀ Information฀that฀results฀in฀benefits฀exceeding฀the฀costs฀
of฀providing฀it฀

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฀฀

Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

฀ Derecognition฀(not฀covered฀by฀existing฀Conceptual฀
Framework)฀
฀ General฀approach฀(ED/2015/3:฀para.฀5.27):฀
–฀ Derecognise฀any฀assets฀or฀liabilities฀that฀have฀been฀
transferred,฀consumed,฀collected฀or฀fulfilled,฀or฀have฀
expired฀and฀recognise฀any฀resulting฀income฀or฀
expense;฀and฀
–฀ Continue฀to฀recognise฀any฀assets฀or฀liabilities฀retained฀
(the฀retained฀component),฀which฀become฀a฀separate฀
unit฀of฀account฀
If฀the฀retained฀component฀contains฀a฀disproportionate฀
exposure฀to฀economic฀benefits฀–฀three฀possibilities฀
(ED/2015/3:฀paras.฀5.31-32):฀
–฀ Derecognition฀supported฀by฀separate฀presentation฀of฀
retained฀component฀
–฀ Derecognition฀supported฀by฀explanatory฀disclosure฀of฀
retained฀component฀฀
–฀ Continue฀to฀recognise฀transferred฀component฀and฀
retained฀component฀(if฀separate฀presentation/disclosure฀
insufficient฀to฀faithfully฀represent฀the฀effect฀of฀the฀
transaction/event)฀
฀ Explicit฀linkage฀concept฀added฀(ED/2015/3:฀para.฀5.5):฀
฀ Opening฀statement฀of฀financial฀position฀(SOFP)฀฀
฀ (assets฀–฀liabilities฀=฀equity)฀
+฀ Income฀less฀expenses฀(from฀statement฀of฀financial฀
performance)฀
+฀ Contributions฀from฀holders฀of฀equity฀claims฀less฀
distributions฀to฀equity฀claims฀
=฀ Closing฀SOFP฀(assets฀–฀liabilities฀=฀equity)฀

6฀ Measurement฀ ฀ Little฀guidance฀in฀existing฀Conceptual฀Framework฀
฀ Revised฀measurement฀bases฀(ED/2015/3:฀para.฀6.4):฀

There฀are฀several฀areas฀
–฀ Historical฀cost฀฀
of฀debate฀about฀ –฀ Current฀value฀(ED/2015/3:฀para.฀6.20):฀
measurement.฀For฀
discussion฀of฀this฀please฀ (i)฀฀ Fair฀value฀(market฀participant฀perspective)฀
see฀the฀technical฀article฀
'Measurement'฀written฀ (ii)฀฀ Value฀in฀use฀for฀assets฀and฀fulfilment฀value฀for฀
by฀the฀SBR฀examining฀ liabilities฀(entity-specific)฀
team,฀available฀in฀the฀
P2฀Exam฀Resources฀ ฀ Factors฀to฀consider฀in฀selecting฀a฀measurement฀basis฀
section฀of฀the฀ACCA฀ (ED/2015/3:฀paras.฀6.48–6.65):฀
website.฀฀
–฀ Cost฀constraint฀
–฀ Relevance฀
–฀ Faithful฀representation฀
–฀ Enhancing฀qualitative฀characteristics฀
–฀ Factors฀specific฀to฀initial฀measurement฀
฀ Recognises฀that฀more฀than฀one฀measurement฀basis฀may฀
sometimes฀be฀relevant฀(ED/2015/3:฀para.฀6.74)฀

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Chapter฀ Title฀ Summary฀of฀issues฀addressed฀

7฀ Presentation฀and฀ ฀ Information฀provided฀in฀the฀notes฀to฀the฀financial฀statements฀
disclosure฀ (ED/2015/3:฀para.฀7.3):฀
–฀ Information฀about฀the฀nature฀of฀both฀recognised฀and฀
unrecognised฀elements฀and฀risks฀arising฀from฀them฀
–฀ Methods,฀assumptions฀and฀judgements฀(and฀changes฀in฀
them)฀that฀affect฀amounts฀presented฀or฀disclosed฀
฀ Use฀of฀presentation฀and฀disclosure฀as฀communication฀tools฀
includes฀(ED/2015/3:฀para.฀7.8):฀
–฀ Classifying฀information฀in฀a฀structured฀manner฀
–฀ Aggregating฀information฀so฀that฀it฀is฀not฀obscured฀by฀
unnecessary฀detail฀
–฀ Using฀presentation฀and฀disclosure฀objectives฀and฀
principles฀rather฀than฀mechanistic฀rules฀
฀ Purpose฀of฀statement฀of฀profit฀or฀loss฀(P/L)฀(primary฀source฀of฀
information฀about฀performance)฀is฀to฀(ED/2015/3:฀para.฀
7.20):฀
–฀ Depict฀the฀return฀that฀an฀entity฀has฀made฀on฀its฀
economic฀resources฀during฀the฀period;฀and฀
–฀ Provide฀information฀that฀is฀helpful฀in฀assessing฀
prospects฀for฀future฀cash฀flows฀and฀in฀assessing฀
management's฀stewardship฀of฀the฀entity's฀resources.฀
The฀view฀expressed฀by฀some฀
investors/users฀of฀financial฀ ฀ New฀principles฀for฀splitting฀information฀about฀financial฀
statements฀is฀that฀the฀current฀IFRS฀ performance฀into฀P/L฀and฀other฀comprehensive฀income฀
guidance฀on฀OCI฀is฀inconsistent,฀
(OCI):฀rebuttable฀presumption฀all฀items฀of฀income฀and฀
complex฀and฀difficult฀to฀understand.฀
The฀IASB฀has฀been฀asked฀to฀define฀ expenses฀are฀reported฀in฀P/L฀(ED/2015/3:฀para.฀7.23)฀
what฀financial฀performance฀is,฀
clarify฀the฀meaning฀and฀importance฀
฀ Can฀only฀be฀rebutted฀(and฀recognised฀in฀OCI)฀if฀
of฀OCI฀and฀how฀the฀distinction฀ (ED/2015/3:฀para.฀7.24):฀
between฀P/L฀and฀OCI฀should฀be฀
made฀in฀practice.฀ –฀ The฀income฀or฀expenses฀(or฀components฀of฀them)฀relate฀
Although฀the฀ED฀does฀not฀provide฀ to฀assets฀or฀liabilities฀measured฀at฀current฀values฀and฀
definitive฀guidance฀on฀what฀should฀ are฀not฀separately฀identifiable฀components฀that฀would฀
be฀reported฀in฀OCI,฀it฀is฀a฀step฀
forward฀compared฀to฀the฀current฀ still฀arise฀if฀the฀asset/liability฀was฀measured฀at฀historical฀
Conceptual฀Framework .฀฀
1
cost฀(eg฀interest);฀and฀
–฀ Excluding฀those฀income฀or฀expenses฀(or฀components)฀
from฀P/L฀would฀enhance฀the฀relevance฀of฀the฀
information฀for฀the฀period฀
฀ Rebuttable฀presumption฀that฀income฀and฀expenses฀reported฀
in฀OCI฀will฀be฀reclassified฀to฀P/L฀in฀a฀future฀period฀
providing฀doing฀so฀would฀enhance฀the฀information฀included฀
in฀P/L฀in฀the฀future฀period฀(ED/2015/3:฀para.฀7.26)฀

8฀ Concepts฀of฀capital฀ ฀ Capital฀maintenance฀concepts฀retained฀as฀before฀
and฀capital฀
maintenance฀
฀
1
Summary฀Report฀of฀the฀Joint฀Outreach฀Investor฀Event,฀p3,฀5฀
฀

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฀฀

Supplementary฀reading฀
Chapter฀1฀Section฀2.3฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀
of฀the฀Workbook,฀contains฀further฀detail฀on฀current฀developments.฀

2฀฀Revenue฀recognition฀(IFRS฀15)฀
2.1฀ Introduction฀
The฀ core฀ principle฀ of฀ IFRS฀ 15฀ Revenue฀ from฀ Contracts฀ with฀ Customers฀ is฀ that฀ an฀ entity฀ recognises฀
revenue฀to฀depict฀the฀transfer฀of฀promised฀goods฀or฀services฀to฀customers฀in฀an฀amount฀
that฀ reflects฀ the฀ consideration฀ to฀ which฀ the฀ entity฀ expects฀ to฀ be฀ entitled฀ in฀ exchange฀ for฀
those฀goods฀or฀services฀(IFRS฀15:฀para.฀IN7).฀

2.2฀ Key฀terms฀
There฀ are฀ a฀ number฀ of฀ key฀ terms฀ defined฀ in฀ IFRS฀ 15฀ which฀ you฀ need฀ to฀ be฀ aware฀ of.฀ It฀ is฀ not฀
necessary฀to฀read฀through฀all฀of฀these฀immediately,฀but฀you฀should฀refer฀back฀to฀them฀as฀you฀work฀
through฀this฀chapter.฀

Income:฀increases฀in฀economic฀benefits฀during฀the฀accounting฀period฀in฀the฀form฀of฀inflows฀or฀
enhancements฀of฀assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀an฀increase฀in฀equity,฀other฀than฀those฀
Key฀term฀
relating฀to฀contributions฀from฀equity฀participants.฀
Revenue:฀income฀arising฀in฀the฀course฀of฀an฀entity's฀ordinary฀activities.฀
Contract:฀an฀agreement฀between฀two฀or฀more฀parties฀that฀creates฀enforceable฀rights฀and฀
obligations.฀
Contract฀asset:฀an฀entity's฀right฀to฀consideration฀in฀exchange฀for฀goods฀or฀services฀that฀the฀entity฀
has฀transferred฀to฀a฀customer฀when฀that฀right฀is฀conditioned฀on฀something฀other฀than฀the฀passage฀of฀
time฀(for฀example฀the฀entity's฀future฀performance).฀
Receivable:฀an฀entity's฀right฀to฀consideration฀that฀is฀unconditional฀–฀ie฀only฀the฀passage฀of฀time฀is฀
required฀before฀payment฀is฀due.฀
Contract฀liability:฀an฀entity's฀obligation฀to฀transfer฀goods฀or฀services฀to฀a฀customer฀for฀which฀the฀
entity฀has฀received฀consideration฀(or฀the฀amount฀is฀due)฀from฀the฀customer.฀
Customer:฀a฀party฀that฀has฀contracted฀with฀an฀entity฀to฀obtain฀goods฀or฀services฀that฀are฀an฀output฀
of฀the฀entity's฀ordinary฀activities฀in฀exchange฀for฀consideration.฀
Performance฀obligation:฀a฀promise฀in฀a฀contract฀with฀a฀customer฀to฀transfer฀to฀the฀customer฀
either:฀฀
(a)฀฀ A฀good฀or฀service฀(or฀a฀bundle฀of฀goods฀or฀services)฀that฀is฀distinct;฀or฀
(b)฀฀ A฀series฀of฀distinct฀goods฀or฀services฀that฀are฀substantially฀the฀same฀and฀that฀have฀the฀same฀
pattern฀of฀transfer฀to฀the฀customer.฀
Stand-alone฀selling฀price:฀the฀price฀at฀which฀an฀entity฀would฀sell฀a฀promised฀good฀or฀service฀
separately฀to฀a฀customer.฀฀
Transaction฀price:฀the฀amount฀of฀consideration฀to฀which฀an฀entity฀expects฀to฀be฀entitled฀in฀
exchange฀for฀transferring฀promised฀goods฀or฀services฀to฀a฀customer,฀excluding฀amounts฀collected฀on฀
behalf฀of฀third฀parties.฀฀ ฀
฀ (IFRS฀15:฀Appendix฀A)฀

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2.3฀ Approach฀to฀revenue฀recognition฀
IFRS฀ 15฀ requires฀ an฀ entity฀ to฀ recognise฀ revenue฀ by฀ applying฀ the฀ five฀ steps฀ below฀ (IFRS฀ 15:฀฀
para.฀IN7):฀

(1)฀ Identify฀contract฀ The฀model฀applies฀where฀a฀contract฀(an฀agreement฀between฀two฀or฀

with฀the฀ more฀parties฀that฀creates฀enforceable฀rights฀and฀obligations)฀
customer฀ exists฀(IFRS฀15:฀para.฀10)฀and฀all฀of฀the฀following฀criteria฀are฀met฀
(IFRS฀15:฀para.฀9):฀
฀ The฀parties฀have฀approved฀the฀contract฀(in฀writing,฀orally฀or฀
implied฀by฀the฀entity's฀customary฀business฀practices)฀
฀ The฀entity฀can฀identify฀each฀party's฀rights฀
฀ The฀entity฀can฀identify฀payment฀terms฀
฀ The฀contract฀has฀commercial฀substance฀(risk,฀timing฀or฀amount฀of฀
future฀cash฀flows฀expected฀to฀change฀as฀result฀of฀contract)฀
฀ It฀is฀probable฀that฀entity฀will฀collect฀the฀consideration฀(customer's฀
ability฀and฀intention฀to฀pay฀that฀amount฀of฀consideration฀when฀it฀is฀
due).฀

(2)฀ Identify฀ At฀contract฀inception,฀an฀entity฀shall฀assess฀the฀goods฀and฀services฀

performance฀ promised฀in฀a฀contract฀with฀a฀customer฀and฀shall฀identify฀as฀a฀
obligation(s)฀ performance฀obligation฀each฀promise฀to฀transfer฀to฀the฀customer฀
฀ either฀(IFRS฀15:฀para.฀22):฀
฀ A฀good฀or฀service฀(or฀a฀bundle฀of฀goods฀or฀services)฀that฀is฀
distinct฀(ie฀the฀customer฀can฀benefit฀from฀good฀or฀service฀on฀its฀
own฀or฀together฀with฀other฀readily฀available฀resources฀and฀the฀
entity's฀promise฀is฀separately฀identifiable฀from฀other฀promises฀in฀the฀
contract);฀or฀
฀ A฀series฀of฀distinct฀goods฀or฀services฀that฀are฀substantially฀
the฀same฀and฀that฀have฀the฀same฀pattern฀of฀transfer฀to฀the฀customer.฀
Note.฀If฀a฀promised฀good฀or฀service฀is฀not฀distinct,฀an฀entity฀shall฀
combine฀that฀good฀or฀service฀with฀other฀promised฀goods฀and฀services฀
until฀it฀identifies฀a฀bundle฀of฀goods฀or฀services฀that฀is฀distinct.฀(IFRS฀15:฀
para.฀30)฀

(3)฀ Determine฀ The฀amount฀to฀which฀the฀entity฀expects฀to฀be฀'entitled'฀(IFRS฀15:฀฀

transaction฀ para.฀47).฀
price฀ Includes฀variable฀consideration฀if฀highly฀probable฀that฀significant฀
reversal฀of฀cumulative฀revenue฀will฀not฀occur฀(IFRS฀15:฀para.฀56).฀฀
Measure฀variable฀consideration฀at฀(IFRS฀15:฀para.฀53):฀
฀ Probability-weighted฀expected฀value฀(eg฀if฀large฀number฀of฀
contracts฀with฀similar฀characteristics);฀or฀฀
฀ Most฀likely฀amount฀(eg฀if฀only฀two฀possible฀outcomes).฀
Discounting฀is฀not฀required฀where฀consideration฀is฀due฀in฀less฀than฀one฀
year฀(where฀discounting฀is฀applied,฀present฀interest฀separately฀from฀
revenue)฀(IFRS฀15:฀para.฀63).฀

(4)฀ Allocate฀ Multiple฀deliverables:฀transaction฀price฀allocated฀to฀each฀separate฀

transaction฀ performance฀obligation฀in฀proportion฀to฀the฀stand-alone฀selling฀
price฀to฀ price฀at฀contract฀inception฀of฀each฀performance฀obligation.฀(IFRS฀15:฀
performance฀ para.฀73–75)฀
obligations฀฀

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(5)฀ Recognise฀revenue฀ A฀performance฀obligation฀is฀satisfied฀when฀the฀entity฀transfers฀a฀

when฀(or฀as)฀ promised฀good฀or฀service฀(ie฀an฀asset)฀to฀a฀customer฀(IFRS฀15:฀para฀31).฀
performance฀ An฀asset฀is฀considered฀transferred฀when฀(or฀as)฀the฀customer฀obtains฀
obligation฀ control฀of฀that฀asset฀(IFRS฀15:฀para฀31).฀
satisfied฀
Control฀of฀an฀asset฀refers฀to฀the฀ability฀to฀direct฀the฀use฀of,฀and฀
obtain฀substantially฀all฀of฀the฀remaining฀benefits฀from,฀the฀asset฀
(IFRS฀15:฀para฀33).฀
฀

Illustration฀1฀
Allocating฀transaction฀price฀to฀multiple฀deliverables฀
A฀company฀sells฀a฀car฀including฀servicing฀for฀2฀years฀for฀$21,000.฀฀The฀car฀is฀sold฀without฀servicing฀
for฀$20,520฀and฀annual฀servicing฀is฀sold฀for฀$540.฀
Required฀
How฀is฀the฀transaction฀price฀split฀over฀the฀different฀performance฀obligations?฀
Ignore฀discounting.฀
Solution฀
Performance฀obligation฀ Stand-alone฀selling฀price฀ %฀of฀total฀ Revenue฀allocated฀
Car฀ $20,520฀ 95%฀ $19,950฀(21,000฀×฀95%)฀
Servicing฀($540฀×฀2)฀ ฀฀฀$1,080฀ ฀฀฀฀฀5%฀ ฀฀฀$1,050฀(21,000฀×฀5%)฀
Total฀ ฀$21,600฀ ฀100%฀ ฀$21,000฀

Activity฀1:฀Revenue฀recognition฀ ฀
Jost฀ operates฀ in฀ the฀ telecommunications฀ sector.฀ On฀ 1฀ January฀ 20X1,฀ Claire,฀ a฀ new฀ customer,฀
telephones฀ the฀ customer฀ services฀ department฀ of฀ Jost฀ to฀ enter฀ into฀ a฀ new฀ 24฀ month฀ contract฀ for฀ a฀
mobile฀phone.฀The฀terms฀and฀conditions฀are฀agreed฀by฀telephone฀(after฀a฀credit฀check฀is฀carried฀out฀
on฀ Claire)฀ and฀ a฀ written฀ copy฀ is฀ then฀ emailed฀ and฀ posted฀ to฀ Claire.฀ Under฀ the฀ contract,฀ Claire฀
receives฀a฀'free'฀handset฀at฀the฀inception฀of฀the฀plan฀(ie฀no฀upfront฀cost)฀and฀then฀pays฀a฀monthly฀fee฀
of฀ $49฀ for฀ 24฀ months฀ for฀ unlimited฀ calls,฀ texts฀ and฀ data.฀ The฀ handset฀ is฀ due฀ to฀ be฀ delivered฀ by฀
courier฀within฀24฀hours฀(by฀evening฀of฀2฀January฀20X1).฀
Jost฀also฀sells฀the฀same฀high-end฀smartphone฀handsets฀for฀$700฀each฀and฀the฀same฀monthly฀payment฀
plans฀ without฀ the฀ handset฀ for฀ $25฀ per฀ month.฀ Jost฀ does฀ not฀ offer฀ call-only฀ contracts,฀ texts-only฀
contracts฀or฀data-only฀contracts฀–฀customers฀must฀buy฀the฀three฀services฀combined.฀
Required฀
Discuss,฀with฀suitable฀calculations,฀for฀the฀year฀ended฀31฀December฀20X1,฀how฀Jost฀should฀account฀
for฀the฀revenue฀from฀the฀contract฀with฀Claire฀in฀accordance฀with฀the฀five฀steps฀of฀IFRS฀15฀Revenue฀
from฀Contracts฀with฀Customers.฀
Note.฀The฀time฀value฀of฀money฀can฀be฀ignored฀in฀any฀calculations.฀

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2.4฀ Transfer฀of฀control฀of฀a฀good฀or฀service฀
Satisfaction฀of฀a฀performance฀obligation฀over฀time฀
An฀ entity฀ transfers฀ control฀ of฀ a฀ good฀ or฀ service฀ over฀ time฀ and,฀ therefore,฀ satisfies฀ a฀ performance฀
obligation฀ and฀ recognises฀ revenue฀ over฀ time฀ if฀ one฀ of฀ the฀ following฀ criteria฀ is฀ met฀ (IFRS฀ 15:฀฀
para.฀35):฀฀
(a)฀ The฀ customer฀ simultaneously฀ receives฀ and฀ consumes฀ the฀ benefits฀ provided฀ by฀ the฀
entity's฀performance฀as฀the฀entity฀performs;฀
(b)฀ The฀entity's฀performance฀creates฀or฀enhances฀an฀asset฀(eg฀work฀in฀progress)฀that฀the฀
customer฀controls฀as฀the฀asset฀is฀created฀or฀enhanced;฀or฀
(c)฀ The฀entity's฀performance฀ does฀not฀ create฀ an฀ asset฀ with฀ an฀ alternative฀ use฀to฀the฀
entity฀and฀the฀entity฀has฀an฀enforceable฀right฀to฀payment฀for฀performance฀completed฀to฀
date.฀
For฀ each฀ performance฀ obligation฀ satisfied฀ over฀ time,฀ revenue฀ should฀ be฀ recognised฀ by฀ measuring฀
progress฀towards฀complete฀satisfaction฀of฀that฀performance฀obligation฀(IFRS฀15:฀para.฀39).฀
Satisfaction฀of฀a฀performance฀obligation฀at฀a฀point฀in฀time฀
To฀ determine฀ the฀ point฀ in฀ time฀ when฀ a฀ customer฀ obtains฀ control฀ of฀ a฀ promised฀ asset฀ and฀ an฀ entity฀
satisfies฀a฀performance฀obligation,฀the฀entity฀would฀consider฀indicators฀of฀the฀transfer฀of฀control฀that฀
include,฀but฀are฀not฀limited฀to,฀the฀following฀(IFRS฀15:฀para.฀38):฀
(a)฀ The฀entity฀has฀a฀present฀right฀to฀payment฀for฀the฀asset;฀
(b)฀ The฀customer฀has฀legal฀title฀to฀the฀asset;฀
(c)฀ The฀entity฀has฀transferred฀physical฀possession฀of฀the฀asset;฀
(d)฀ The฀customer฀has฀the฀significant฀risks฀and฀rewards฀of฀ownership฀of฀the฀asset;฀and฀
(e)฀ The฀customer฀has฀accepted฀the฀asset.฀

2.5฀ Contract฀costs฀
Costs฀of฀obtaining฀a฀contract฀฀
Incremental฀ costs฀ of฀ obtaining฀ a฀ contract฀ are฀ recognised฀ as฀ an฀ asset฀ if฀ the฀ entity฀ expects฀ to฀
recover฀them฀(IFRS฀15:฀para.฀91).฀
Costs฀to฀fulfil฀a฀contract฀
If฀ the฀ costs฀ to฀ fulfil฀ a฀ contract฀ are฀ not฀ within฀ the฀ scope฀ of฀ another฀ standard฀ (eg฀ IAS฀ 2฀ Inventories,฀
IAS฀16฀Property,฀Plant฀and฀Equipment฀or฀IAS฀38฀Intangible฀Assets),฀they฀should฀be฀recognised฀as฀an฀
asset฀only฀if฀they฀meet฀all฀of฀the฀following฀(IFRS฀15:฀para.฀95):฀
(a)฀ The฀costs฀relate฀directly฀to฀a฀contract฀or฀an฀anticipated฀contract฀that฀the฀entity฀can฀specifically฀
identify;฀
(b)฀ The฀ costs฀ generate฀ or฀ enhance฀ resources฀ of฀ the฀ entity฀ that฀ will฀ be฀ used฀ in฀ satisfying฀ (or฀ in฀
continuing฀to฀satisfy)฀performance฀obligations฀in฀the฀future;฀and฀฀
(c)฀ The฀costs฀are฀expected฀to฀be฀recovered.฀
Amortisation฀and฀impairment฀of฀costs฀recognised฀as฀an฀asset฀
The฀asset฀should฀be฀amortised฀(to฀profit฀or฀loss)฀on฀a฀systematic฀basis฀consistent฀with฀the฀pattern฀of฀
transfer฀of฀the฀goods฀or฀services฀to฀which฀the฀asset฀relates฀(IFRS฀15:฀para.฀99).฀
For฀the฀costs฀of฀obtaining฀a฀contract,฀if฀the฀amortisation฀period฀is฀estimated฀to฀be฀one฀year฀or฀less,฀
the฀ costs฀ may฀ (as฀ a฀ practical฀ expedient)฀ be฀ recognised฀ as฀ an฀ expense฀ when฀ incurred฀ (IFRS฀ 15:฀฀
para.฀94).฀

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An฀ impairment฀ loss฀ should฀ be฀ recognised฀ in฀ profit฀ or฀ loss฀ to฀ the฀ extent฀ that฀ the฀ carrying฀ amount฀
exceeds฀(IFRS฀15:฀para.฀101):฀
(a)฀ The฀remaining฀amount฀of฀consideration฀that฀the฀entity฀expects฀to฀receive฀in฀exchange฀for฀the฀
goods฀or฀services฀to฀which฀the฀asset฀relates;฀less฀
(b)฀ The฀ costs฀ that฀ relate฀ directly฀ to฀ providing฀ those฀ goods฀ or฀ services฀ that฀ have฀ not฀ yet฀ been฀
recognised฀as฀expenses.฀

2.6฀ Presentation฀
When฀either฀party฀to฀a฀contract฀has฀performed,฀an฀entity฀shall฀present฀the฀contract฀in฀the฀statement฀of฀
financial฀position฀as฀a฀contract฀asset฀(eg฀if฀entity฀transfers฀goods฀or฀services฀before฀customer฀pays)฀
or฀as฀a฀contract฀ liability฀ (eg฀if฀customer฀pays฀before฀entity฀transfers฀goods฀or฀services)฀(IFRS฀15:฀
para.฀105).฀
Any฀ unconditional฀ rights฀ to฀ consideration฀ should฀ be฀ shown฀ separately฀ as฀ a฀ receivable฀ (IFRS฀ 15:฀
para.฀105).฀

2.7฀ Specific฀guidance฀

Type฀ Guidance฀

Sale฀with฀right฀of฀ ฀ Recognise฀all฀of฀(IFRS฀15:฀para.฀B21):฀
return฀ (a)฀ Revenue฀for฀the฀transferred฀products฀in฀the฀amount฀of฀
consideration฀to฀which฀the฀entity฀expects฀to฀be฀entitled฀(ie฀
revenue฀not฀recognised฀for฀products฀expected฀to฀be฀returned);฀
(b)฀ A฀refund฀liability;฀and฀
(c)฀ An฀asset฀(and฀corresponding฀adjustment฀to฀cost฀of฀sales)฀for฀its฀
right฀to฀recover฀products฀from฀customers฀on฀settling฀the฀refund฀
liability.฀

Warranties฀฀ ฀ If฀customer฀has฀the฀option฀to฀purchase฀a฀warranty฀separately,฀treat฀
as฀separate฀performance฀obligation฀under฀IFRS฀15฀(IFRS฀15:฀
para.฀B29).฀
฀ If฀customer฀does฀not฀have฀the฀option฀to฀purchase฀a฀warranty฀
separately,฀account฀for฀the฀warranty฀in฀accordance฀with฀IAS฀37฀
Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀(IFRS฀15:฀฀
para.฀B30).฀
฀ If฀a฀warranty฀provides฀the฀customer฀with฀a฀service฀in฀addition฀to฀the฀
assurance฀that฀the฀product฀complies฀with฀agreed-upon฀specifications,฀
the฀promised฀service฀is฀a฀performance฀obligation฀(IFRS฀15:฀฀
para.฀B32).฀

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1:฀The฀financial฀reporting฀framework฀

Type฀ Guidance฀

Principal฀versus฀ ฀ If฀the฀entity฀controls฀the฀specified฀goods฀or฀service฀before฀transfer฀to฀a฀
agent฀ customer,฀it฀is฀a฀principal฀(IFRS฀15:฀para.฀B35)฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀Revenue฀=฀gross฀amount฀of฀consideration฀฀
฀ If฀the฀entity฀arranges฀for฀goods฀or฀services฀to฀be฀provided฀by฀
the฀other฀party,฀it฀is฀an฀agent฀(IFRS฀15:฀para.฀B36)฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀Revenue฀=฀fee฀or฀commission฀
฀ Indicators฀that฀an฀entity฀controls฀the฀goods฀or฀services฀before฀transfer฀and฀
therefore฀is฀a฀principal฀include฀(IFRS฀15:฀para.฀B37):฀
(a)฀ The฀entity฀is฀primarily฀responsible฀for฀fulfilling฀the฀promise฀to฀provide฀
the฀specified฀good฀or฀service;฀
(b)฀ The฀entity฀has฀inventory฀risk;฀
(c)฀ The฀entity฀has฀discretion฀in฀establishing฀the฀price฀for฀the฀specified฀
good฀or฀service.฀

Non-refundable฀ ฀ If฀it฀is฀an฀advance฀payment฀for฀future฀goods฀and฀services,฀recognise฀
upfront฀fees฀ revenue฀when฀future฀goods฀and฀services฀provided฀(IFRS฀15:฀
para.฀B49)฀
฀

Supplementary฀reading฀
Chapter฀1฀Section฀4฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀
the฀Workbook,฀contains฀further฀examples฀of฀the฀application฀of฀IFRS฀15.฀

3฀ IAS฀34฀Interim฀Financial฀Reporting฀
3.1฀ Interim฀financial฀report฀

Interim฀financial฀report฀(IAS฀34):฀a฀financial฀report฀containing฀either฀a฀complete฀set฀of฀
financial฀statements฀(as฀described฀in฀IAS฀1)฀or฀a฀set฀of฀condensed฀financial฀statements฀(as฀
Key฀term฀
described฀in฀IAS฀34)฀for฀an฀interim฀period.฀

The฀minimum฀components฀of฀an฀interim฀financial฀report฀prepared฀in฀accordance฀with฀IAS฀34฀are:฀
฀ A฀condensed฀statement฀of฀financial฀position;฀
฀ A฀condensed฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income;฀
฀ A฀condensed฀statement฀of฀cash฀flows;฀
฀ A฀condensed฀statement฀of฀changes฀in฀equity;฀and฀
฀ Selected฀explanatory฀notes.฀
Condensed฀financial฀statements฀must฀include฀at฀least฀each฀of฀the฀headings฀and฀subtotals฀included฀in฀
the฀ entity's฀ most฀ recent฀ annual฀ financial฀ statements฀ and฀ limited฀ explanatory฀ notes฀ required฀ by฀ the฀
standard.฀
Interim฀ reports฀ are฀ voluntary฀ as฀ far฀ as฀ IAS฀ 34฀ is฀ concerned;฀ however฀ IAS฀ 34฀ applies฀ where฀ an฀
interim฀report฀is฀described฀as฀complying฀with฀IFRSs,฀and฀publicly฀traded฀entities฀are฀encouraged฀to฀
provide฀ at฀ least฀ half฀ yearly฀ interim฀ reports.฀ Regulators฀ in฀ a฀ particular฀ regime฀ may฀ require฀ interim฀
reports฀to฀be฀published฀by฀certain฀companies,฀eg฀companies฀listed฀on฀a฀regulated฀stock฀exchange.฀

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Reporting฀period฀and฀comparative฀figures฀

Interim฀statement฀ Current฀period฀ Comparative฀

Statement฀of฀financial฀ At฀end฀of฀current฀interim฀ At฀end฀of฀immediately฀preceding฀

position฀ period฀ financial฀year฀

Statement฀of฀profit฀or฀loss฀ Current฀interim฀period฀ Comparable฀interim฀period฀of฀

and฀other฀comprehensive฀ and฀ immediately฀preceding฀financial฀year฀
income฀ Comparable฀year-to-date฀period฀of฀
Cumulatively฀for฀current฀
financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀

Statement฀of฀changes฀in฀ Cumulatively฀for฀current฀ Comparable฀year-to-date฀period฀of฀

equity฀ financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀

Statement฀of฀cash฀flows฀ Cumulatively฀for฀current฀ Comparable฀year-to-date฀period฀of฀

financial฀year฀to฀date฀ immediately฀preceding฀financial฀year฀

Notes฀to฀the฀interim฀financial฀statements฀
Limited฀notes฀to฀the฀interim฀financial฀statements฀are฀required.฀They฀should฀include฀an฀explanation฀of฀
events฀ and฀ transactions฀ that฀ are฀ significant฀ to฀ an฀ understanding฀ of฀ the฀ changes฀ in฀
financial฀ position฀ and฀ financial฀ performance฀ since฀ the฀ end฀ of฀ the฀ last฀ annual฀ reporting฀ period,฀ eg฀
inventory฀write-downs,฀litigation฀settlements,฀etc.฀
Other฀disclosures฀are฀required฀(in฀the฀notes฀to฀the฀interim฀financial฀statements฀or฀cross-referenced฀to฀
another฀ statement฀ such฀ as฀ management฀ commentary)฀ such฀ as฀ comments฀ about฀ seasonality฀ of฀
interim฀operations,฀nature฀and฀amount฀of฀estimates฀and฀unusual฀items฀(due฀to฀their฀nature,฀size฀
or฀incidence),฀capital฀changes฀and฀limited฀segment฀data฀(for฀entities฀that฀apply฀IFRS฀8).฀
Recognition฀and฀measurement฀principles฀

Area฀ IAS฀34฀treatment฀

Accounting฀policies฀ Same฀as฀annual฀financial฀statements,฀except฀for฀accounting฀policy฀
changes฀made฀since฀the฀date฀of฀the฀most฀recent฀financial฀
statements฀

Revenues฀received฀seasonally,฀ Not฀anticipated฀or฀deferred฀if฀anticipation฀or฀deferral฀would฀not฀be฀
cyclically,฀or฀occasionally฀ appropriate฀at฀the฀year฀end฀

Costs฀incurred฀unevenly฀ Anticipated฀or฀deferred฀if,฀and฀only฀if,฀it฀is฀also฀appropriate฀to฀
anticipate฀or฀defer฀that฀type฀of฀cost฀at฀the฀year฀end฀

Estimates฀ Measurement฀principles฀must฀be฀designed฀to฀ensure฀that฀the฀
resulting฀information฀is฀reliable฀and฀that฀all฀relevant฀material฀
financial฀information฀is฀disclosed฀
Interim฀reports฀generally฀require฀greater฀use฀of฀estimation฀methods฀
than฀annual฀reports฀
฀
฀

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1:฀The฀financial฀reporting฀framework฀

Ethics฀note฀
Ethics฀is฀a฀key฀aspect฀of฀the฀syllabus฀for฀this฀paper.฀Ethical฀issues฀can฀be฀examined฀in฀any฀part฀of฀the฀
paper฀and฀at฀least฀one฀question฀will฀include฀ethical฀issues฀for฀discussion.฀A฀revision฀of฀ethical฀
principles฀from฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀is฀covered฀in฀Chapter฀2฀–฀Professional฀and฀
ethical฀duty฀of฀the฀accountant.฀You฀need฀to฀be฀alert฀for฀accounting฀treatments฀that฀may฀be฀being฀used฀
to฀achieve฀a฀particular฀accounting฀effect฀(such฀as฀overstating฀revenue,฀profit฀or฀assets).฀
In฀terms฀of฀this฀topic฀area,฀some฀potential฀ethical฀issues฀that฀could฀come฀up฀include:฀
฀ Misuse฀of฀'true฀and฀fair฀override'฀when฀it฀is฀not฀appropriate฀to฀use฀it฀
฀ Application฀of฀Conceptual฀Framework฀principles฀which฀result฀in฀a฀different฀accounting฀
treatment฀to฀that฀required฀by฀an฀IFRS฀(the฀IFRS฀treatment฀always฀takes฀precedence฀where฀there฀
is฀one)฀
฀ Application฀of฀Exposure฀Draft฀principles฀before฀they฀become฀effective฀where฀they฀contradict฀
current฀rules฀(they฀can฀only฀be฀applied฀from฀a฀new/revised฀standard's฀effective฀date,฀or฀earlier฀
if฀the฀new/revised฀standard฀transition฀rules฀allow)฀
฀ Manipulation฀of฀the฀revenue฀figure฀(and฀profit)฀through฀misapplication฀of฀the฀IFRS฀15฀
principles.฀

฀
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฀฀

Chapter฀summary฀
฀
The฀financial฀reporting฀฀
framework฀

1.฀The฀accounting฀framework฀ 2.฀Revenue฀recognition฀(IFRS฀15)฀
IASB฀Conceptual฀Framework฀ (1)฀ Identify฀contract฀with฀customer฀
Chapter฀1:฀Objective฀of฀general฀purpose฀FR฀ ฀ Contract฀=฀an฀agreement฀that฀creates฀
฀ 'To฀ provide฀ financial฀ information฀ about฀ the฀ reporting฀ enforceable฀rights฀and฀obligations฀
entity฀ that฀ is฀ useful฀ to฀ existing฀ and฀ potential฀ (2)฀ Identify฀performance฀obligation(s)฀
investors,฀ lenders฀ and฀ other฀ creditors฀ in฀ making฀ ฀ For฀distinct฀goods฀or฀services฀(ie฀can฀benefit฀on฀
decisions฀about฀providing฀resources฀to฀the฀entity.฀฀Those฀ own฀or฀with฀other฀readily฀available฀resources)฀
decisions฀ involve฀ buying,฀ selling฀ or฀ holding฀ equity฀ (3)฀ Determine฀transaction฀price฀
and฀debt฀instruments,฀and฀providing฀or฀settling฀loans฀and฀ ฀ Amount฀to฀which฀entity฀expects฀to฀be฀entitled฀
other฀forms฀of฀credit.'฀ ฀ –฀ Discount฀to฀PV฀(not฀required฀if฀<฀1฀year)฀
Chapter฀2:฀The฀reporting฀entity฀ ฀ –฀ Include฀variable฀consideration฀if฀highly฀
฀ Not฀yet฀finalised฀by฀IASB฀ probable฀significant฀reversal฀will฀not฀arise฀
Chapter฀ 3:฀ Qualitative฀ characteristics฀ of฀ useful฀ financial฀ (probability-weighted฀expected฀value฀or฀
most฀likely฀amount)฀
information฀
฀ Fundamental:฀ (4)฀ Allocate฀transaction฀price฀to฀
– Relevance฀ performance฀obligations฀
– Faithful฀representation฀ ฀ Based฀on฀stand-alone฀selling฀prices฀
฀ Enhancing:฀ (5)฀ Recognise฀revenue฀when฀(or฀as)฀
–฀ Comparability฀ –฀ Timeliness฀ performance฀obligation฀satisfied฀
–฀ Verifiability฀ –฀ Understandability฀ ฀ When฀good/service฀transferred฀(=฀when/as฀
฀ The฀cost฀constraint฀of฀FR฀ customer฀obtains฀control)฀
Chapter฀4:฀1989฀Framework฀ ฀
฀ Underlying฀assumption฀
Satisfaction฀of฀a฀performance฀obligation฀over฀time:฀
฀ –฀ Going฀concern฀
(a)฀ The฀customer฀simultaneously฀receives฀and฀
฀ The฀elements฀of฀FS฀
consumes฀the฀benefits฀provided;฀or฀
–฀ Asset฀
(b)฀ The฀performance฀creates/enhances฀an฀asset฀
฀ 'A฀resource฀controlled฀by฀the฀entity฀as฀a฀result฀of฀
that฀the฀customer฀controls฀as฀it฀is฀
past฀events฀and฀from฀which฀future฀economic฀ created/enhanced;฀or฀
benefits฀are฀expected฀to฀flow฀to฀the฀entity'฀ (c)฀ The฀performance฀does฀not฀create฀an฀asset฀with฀
฀ –฀ Liability฀ an฀alternative฀use฀and฀the฀entity฀has฀an฀
฀ 'A฀present฀obligation฀of฀the฀entity฀arising฀from฀ enforceable฀right฀to฀payment฀for฀performance฀
past฀events,฀the฀settlement฀of฀which฀is฀expected฀to฀ completed.฀
result฀in฀an฀outflow฀from฀the฀entity฀of฀resources฀ Satisfaction฀of฀a฀performance฀obligation฀at฀a฀point฀
embodying฀economic฀benefits'฀ in฀time:฀
฀ –฀ Income฀
Indicators฀of฀transfer฀of฀control฀of฀an฀asset:฀
฀ 'Increases฀in฀economic฀benefits฀during฀the฀accounting฀
(a)฀ Entity฀has฀a฀present฀right฀to฀payment฀
period฀in฀the฀form฀of฀inflows฀or฀enhancements฀of฀
(b)฀ Customer฀has฀legal฀title฀to฀the฀asset฀
assets฀or฀decreases฀of฀liabilities฀that฀result฀in฀
(c)฀ Entity฀has฀transferred฀physical฀possession฀
increases฀in฀equity,฀other฀than฀those฀relating฀to฀ (d)฀ Customer฀has฀the฀significant฀risks฀and฀rewards฀
contributions฀from฀equity฀participants'฀ of฀ownership฀
฀ –฀ Expense฀ (e)฀ The฀customer฀has฀accepted฀the฀asset฀
฀ 'Decreases฀in฀economic฀benefits฀during฀the฀
accounting฀period฀in฀the฀form฀of฀outflows฀or฀ ฀
depletions฀of฀assets฀or฀incurrences฀of฀liabilities฀ Incremental฀costs฀of฀obtaining฀a฀contract:฀
that฀result฀in฀decreases฀in฀equity,฀other฀than฀those฀
฀ Recognised฀as฀asset฀if฀expected฀to฀be฀
relating฀to฀distributions฀to฀equity฀participants'฀
recovered฀
฀ –฀ Equity฀
฀ 'The฀residual฀interest฀in฀the฀assets฀of฀the฀entity฀ Costs฀to฀fulfil฀a฀contract:฀
after฀deducting฀all฀its฀liabilities'฀ ฀ Recognised฀as฀an฀asset฀and฀amortised฀if฀costs:฀
฀ Recognition฀in฀FS฀ –฀ Can฀be฀specifically฀identified,฀
฀ –฀ Probable฀future฀economic฀benefits฀ –฀ Generate/enhance฀resources฀used฀to฀satisfy฀
฀ –฀ Value/cost฀measured฀reliably฀ performance฀obligation,฀and฀
–฀ Are฀expected฀to฀be฀recovered.฀
฀ Measurement฀in฀FS฀
฀ Capital/capital฀maintenance฀

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1:฀The฀financial฀reporting฀framework฀

Current฀developments฀
ED/2015/3:฀Conceptual฀Framework฀for฀Financial฀ 6.฀฀ Measurement฀฀
Reporting฀(May฀2015)฀  Revised฀measurement฀bases:฀
Objectives:฀ –฀ Historical฀cost฀฀
(1)฀ To฀fill฀gaps฀in฀the฀existing฀Conceptual฀Framework฀ –฀ Current฀value:฀
(2)฀ To฀update฀existing฀guidance฀where฀appropriate฀ (i)฀฀ Fair฀value฀(market฀participant฀perspective)฀
(3)฀ To฀clarify฀particular฀areas฀where฀more฀guidance฀would฀be฀ (ii)฀ Value฀in฀use฀(assets)฀and฀fulfilment฀value฀
helpful.฀ (liabilities)฀(entity-specific)฀

The฀Exposure฀Draft฀covers฀the฀following฀main฀ Factors฀to฀consider฀in฀selecting฀a฀measurement฀
areas:฀ basis/bases:฀
1.฀฀ The฀objective฀of฀general฀purpose฀financial฀reporting ฀ Cost฀constraint฀
 Largely฀unchanged฀ ฀ Relevance฀
 New฀section฀added฀on฀information฀about฀the฀ ฀ Faithful฀representation฀
efficiency฀and฀effectiveness฀of฀the฀use฀of฀the฀entity's฀ ฀ Enhancing฀qualitative฀characteristics฀
resources฀ ฀ Factors฀specific฀to฀initial฀measurement฀
2.฀฀ Qualitative฀characteristics฀of฀useful฀financial฀information 7.฀฀ Presentation฀and฀disclosure฀
 Largely฀unchanged,฀but฀prudence฀explicitly฀stated฀  Information฀provided฀in฀the฀notes฀to฀the฀FS:฀
and฀substance฀over฀form฀added฀to฀'faithful฀
–฀ Information฀about฀the฀nature฀of฀both฀recognised฀
representation'฀
and฀unrecognised฀elements฀and฀risks฀arising฀
3.฀฀ Financial฀statements฀and฀the฀reporting฀entity฀
from฀them฀
 New฀definition฀of฀reporting฀entity:฀'an฀entity฀that฀
chooses,฀or฀is฀required,฀to฀prepare฀general฀purpose฀ –฀ Methods,฀assumptions฀and฀judgements฀(and฀
financial฀statements'.฀฀Need฀not฀be฀a฀legal฀entity฀ changes฀in฀them)฀that฀affect฀amounts฀presented฀
or฀disclosed฀
 Boundary฀of฀reporting฀entity:฀
–฀ Direct฀control:฀'unconsolidated'฀financial฀  Use฀of฀presentation฀and฀disclosure฀as฀
statements฀–฀investments฀in฀subsidiaries฀ communication฀tools฀includes:฀
reported฀as฀assets฀ –฀ Classifying฀information฀in฀a฀structured฀manner฀
–฀ Both฀direct฀control฀and฀indirect฀control:฀ –฀ Aggregating฀information฀so฀that฀it฀is฀not฀
'consolidated'฀financial฀statements฀ obscured฀by฀unnecessary฀detail฀
4.฀฀ The฀elements฀of฀financial฀statements฀ –฀ Using฀presentation฀and฀disclosure฀objectives฀
 Revised฀definitions:฀ and฀principles฀rather฀than฀mechanistic฀rules฀
–฀ Asset:฀'a฀present฀economic฀resource฀controlled฀  Purpose฀of฀P/L฀(primary฀source฀of฀information฀about฀
by฀the฀entity฀as฀a฀result฀of฀past฀events'฀ performance)฀is฀to:฀
–฀ Liability:฀'a฀present฀obligation฀of฀the฀entity฀to฀ (a)฀ Depict฀the฀return฀that฀an฀entity฀has฀made฀on฀its฀
transfer฀an฀economic฀resource฀as฀a฀result฀of฀ economic฀resources฀during฀the฀period;฀and฀
past฀events'฀
(b)฀ Provide฀information฀that฀is฀helpful฀in฀assessing฀
–฀ Economic฀resource:฀'a฀right฀that฀has฀the฀
prospects฀for฀future฀cash฀flows฀and฀in฀assessing฀
potential฀to฀produce฀economic฀benefits'฀
management's฀stewardship฀of฀the฀entity's฀
 Definition฀of฀'unit฀of฀account'฀for฀measurement฀ resources.฀
added:฀
 Rebuttable฀presumption฀all฀items฀of฀income฀and฀
–฀ 'The฀group฀of฀rights,฀the฀group฀of฀obligations฀or฀
expenses฀are฀reported฀in฀P/L฀and฀only฀rebutted฀
the฀group฀of฀rights฀and฀obligations,฀to฀which฀
(and฀recognised฀in฀OCI)฀if:฀
recognition฀and฀measurement฀requirements฀are฀
applied',฀but฀determination฀left฀to฀individual฀ (a)฀ The฀income฀or฀expenses฀(or฀components฀of฀
standards฀ them)฀relate฀to฀assets฀or฀liabilities฀measured฀at฀
current฀values฀and฀are฀not฀separately฀
5.฀฀ Recognition฀and฀derecognition฀
identifiable฀components฀that฀would฀still฀arise฀if฀
 Recognise฀all฀assets฀and฀liabilities฀(and฀related฀ the฀asset/liability฀was฀measured฀at฀historical฀
income,฀expenses฀and฀equity)฀if฀provide฀users฀with:฀ cost฀(eg฀interest);฀and฀
(a)฀ Relevant฀information฀about฀the฀element฀
(b)฀ Excluding฀those฀income฀or฀expenses฀(or฀
(b)฀ A฀faithful฀representation฀of฀the฀element฀
components)฀from฀P/L฀would฀enhance฀the฀
(c)฀ Information฀that฀results฀in฀benefits฀exceeding฀
relevance฀of฀the฀information฀for฀the฀period฀
the฀costs฀of฀providing฀it฀
 Rebuttable฀presumption฀that฀income฀and฀expenses฀
 Derecognition฀principles฀added:฀
reported฀in฀OCI฀will฀be฀reclassified฀to฀P/L฀in฀a฀
–฀ Derecognise฀assets/liabilities฀that฀have฀been฀
future฀period฀(providing฀doing฀so฀would฀enhance฀
transferred,฀consumed,฀collected฀or฀fulfilled,฀or฀
the฀information฀included฀in฀P/L)฀
have฀expired฀and฀recognise฀any฀resulting฀
income฀or฀expense,฀and฀ 8.฀฀ Concepts฀of฀capital฀and฀capital฀maintenance฀
–฀ Continue฀to฀recognise฀assets/liabilities฀  Capital฀maintenance฀concepts฀retained฀as฀before฀
retained,฀which฀become฀a฀separate฀unit฀of฀ ฀
account฀
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3.฀ Interim฀financial฀reporting฀
(IAS฀34)฀
฀ Interim฀reports฀are฀voluntary,฀but฀must฀
฀
comply฀with฀IAS฀34฀if฀described฀as฀
฀
complying฀with฀IFRSs฀
฀
฀ Minimum฀components:฀
฀ Condensed฀SOFP,฀SPLOCI,฀
–฀
฀ SOCF,฀SOCIE฀
฀ Selected฀explanatory฀notes฀
–฀
฀ Accounting฀policies฀same฀as฀annual฀FS฀
฀
฀ Seasonal/cyclical฀revenue/costs฀only฀
฀
anticipated/deferred฀if฀also฀
฀
appropriate฀at฀year฀end฀
฀ ฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀
฀

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1:฀The฀financial฀reporting฀framework฀

Knowledge฀diagnostic฀

1.฀ The฀accounting฀framework฀
฀ The฀Conceptual฀Framework฀establishes฀the฀objectives฀and฀principles฀underlying฀financial฀
statements฀and฀underlies฀the฀development฀of฀new฀standards.฀
฀ The฀IASB฀is฀developing฀a฀new฀Conceptual฀Framework฀which฀will฀underlie฀future฀standard฀
development.฀
2.฀ Revenue฀recognition฀(IFRS฀15)฀
฀ IFRS฀15฀requires฀the฀following฀5฀steps฀to฀be฀applied:฀
฀ (i)฀ Identify฀contract฀with฀customer฀
฀ (ii)฀ Identify฀performance฀obligation(s)฀
฀ (iii)฀ Determine฀transaction฀price฀
฀ (iv)฀ Allocate฀transaction฀price฀to฀performance฀obligations฀
฀ (v)฀ Recognise฀revenue฀when฀(or฀as)฀performance฀obligation฀satisfied.฀

฀
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Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀question฀below฀from฀the฀Further฀question฀practice฀bank:฀
Q1฀Conceptual฀Framework฀฀

Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website฀written฀by฀members฀of฀the฀SBR฀examining฀team฀which฀are฀
relevant฀to฀the฀topics฀covered฀in฀this฀chapter฀and฀which฀would฀be฀useful฀to฀read:฀
Measurement฀
Revenue฀revisited฀–฀Parts฀1฀and฀2฀
What฀differentiates฀profit฀or฀loss฀from฀other฀comprehensive฀income?฀
Bin฀the฀clutter฀(Reducing฀disclosures)฀
www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles.html฀
฀

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฀
฀
฀
฀ Professional฀and
ethical฀duty฀of฀the
฀
฀
฀
฀
฀
accountant
Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Appraise฀and฀discuss฀the฀ethical฀and฀professional฀issues฀in฀advising฀on฀corporate฀ A1(a)฀
reporting.฀

Assess฀the฀relevance฀and฀importance฀of฀ethical฀and฀professional฀issues฀in฀ A1(b)฀
complying฀with฀accounting฀standards.฀

Appraise฀the฀potential฀ethical฀implications฀of฀professional฀and฀managerial฀ A2(a)฀
decisions฀in฀the฀preparation฀of฀corporate฀reports.฀

Assess฀the฀consequences฀of฀not฀upholding฀ethical฀principles฀in฀the฀preparation฀of฀ A2(b)฀
corporate฀reports.฀

Identify฀related฀parties฀and฀assess฀the฀implications฀of฀related฀party฀relationships฀in฀ A2(c)฀
the฀preparation฀of฀corporate฀reports.฀

Discuss฀and฀apply฀the฀judgements฀required฀in฀selecting฀and฀applying฀accounting฀ C11(d)฀
policies,฀accounting฀for฀changes฀in฀estimates฀and฀reflecting฀corrections฀of฀prior฀
period฀errors.฀

Exam฀context฀
Ethics฀ are฀ most฀ likely฀ to฀ be฀ considered฀ in฀ the฀ context฀ of฀ the฀ accountant's฀ role฀ as฀ adviser฀ to฀ the฀
directors.฀ For฀ example,฀ you฀ could฀ be฀ asked฀ why฀ a฀ deliberate฀ misrepresentation฀ in฀ the฀ financial฀
statements฀ was฀ unethical฀ or฀ why฀ directors฀ might฀ have฀ acted฀ unethically฀ in฀ adopting฀ accounting฀
policies฀ specifically฀ to฀ boost฀ earnings.฀ Ethical฀ issues฀ will฀ be฀ tested฀ in฀ Section฀ A฀ Question฀ 2,฀ which฀
will฀ cover฀ a฀ number฀ of฀ scenarios.฀ Two฀ professional฀ marks฀ are฀ allocated฀ to฀ this฀ question.฀ However,฀
ethics฀could฀also฀feature฀in฀any฀question฀in฀the฀exam.฀฀
฀
IAS฀ 24฀ Related฀ Party฀ Disclosures฀ aims฀ to฀ improve฀ the฀ quality฀ of฀ information฀ provided฀ by฀ published฀
accounts฀and฀also฀to฀strengthen฀their฀stewardship฀roles.฀Related฀parties฀could฀also฀come฀up฀outside฀
the฀context฀of฀ethics฀as฀part฀of฀a฀Section฀B฀scenario฀question.฀
฀
IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors฀was฀covered฀in฀your฀earlier฀
studies.฀However,฀given฀the฀importance฀of฀ethics฀to฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀we฀
set฀it฀in฀the฀context฀of฀ethical฀dilemmas฀in฀financial฀reporting.฀฀

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Chapter฀overview฀
฀
฀
฀
฀ Professional฀and฀ethical฀
฀ duty฀of฀the฀accountant฀
฀
฀ ฀
3.฀ Accounting฀
1.฀ Professional฀and฀ policies,฀estimates฀
2.฀ Related฀parties฀
ethical฀issues฀ and฀prior฀period฀
errors฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

1฀Professional฀and฀ethical฀issues฀
1.1฀฀What฀are฀ethics?฀
Ethics฀ are฀ a฀ code฀ of฀ moral฀ principles฀ that฀ people฀ follow฀ with฀ respect฀ to฀ what฀ is฀ right฀ or฀ wrong.฀
Ethical฀ principles฀ are฀ not฀ necessarily฀ enforced฀ by฀ law,฀ although฀ the฀ law฀ incorporates฀ moral฀
judgements.฀(Murder฀is฀wrong฀ethically,฀and฀is฀also฀punishable฀legally.)฀

1.2฀฀Ethical฀principles฀in฀corporate฀reporting฀
ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ identifies฀ the฀ fundamental฀ principles฀ most฀ relevant฀ to฀
accountants฀in฀business฀involved฀in฀corporate฀reporting฀(ACCA฀Rulebook,฀2017:฀p.278).฀

Principle฀ Explanation฀

Integrity฀ To฀be฀straightforward฀and฀honest฀in฀all฀professional฀and฀business฀relationships฀

Objectivity฀ Not฀to฀allow฀bias,฀conflict฀of฀interest฀or฀undue฀influence฀of฀others฀to฀override฀
professional฀or฀business฀judgements฀

Professional฀ To฀maintain฀professional฀knowledge฀and฀skill฀at฀the฀level฀required฀to฀ensure฀
competence฀and฀ that฀a฀client฀or฀employer฀receives฀competent฀professional฀service฀based฀on฀
due฀care฀ current฀developments฀in฀practice,฀legislation฀and฀techniques฀and฀act฀diligently฀
and฀in฀accordance฀with฀applicable฀technical฀and฀professional฀standards฀

Confidentiality฀ To฀respect฀the฀confidentiality฀of฀information฀acquired฀as฀a฀result฀of฀
professional฀and฀business฀relationships฀and,฀therefore,฀not฀disclose฀any฀
such฀information฀to฀third฀parties฀without฀proper฀and฀specific฀authority,฀unless฀
there฀is฀a฀legal฀or฀professional฀right฀or฀duty฀to฀disclose,฀nor฀use฀the฀information฀
for฀the฀personal฀advantage฀of฀the฀professional฀accountant฀or฀third฀parties฀

Professional฀ To฀comply฀with฀relevant฀laws฀and฀regulations฀and฀avoid฀any฀action฀that฀
behaviour฀ discredits฀the฀profession฀

1.3฀ Threats฀to฀the฀fundamental฀principles฀
ACCA's฀Code฀of฀Ethics฀and฀Conduct฀identifies฀the฀following฀categories฀of฀threats฀to฀the฀fundamental฀
principles฀(ACCA฀Rulebook,฀2017:฀p.280).฀

Threat฀ Explanation฀

Self-interest฀ A฀financial฀or฀other฀interest฀may฀inappropriately฀influence฀the฀accountant's฀
judgement฀or฀behaviour.฀

Self-review฀ The฀accountant฀may฀not฀appropriately฀evaluate฀the฀results฀of฀a฀previous฀judgement฀
made฀or฀activity฀or฀service฀performed฀by฀themselves฀or฀others฀within฀their฀firm.฀

Advocacy฀ A฀threat฀that฀the฀accountant฀promotes฀the฀client's฀or฀employer's฀position฀to฀the฀
point฀that฀their฀objectivity฀is฀compromised.฀

Familiarity฀ Due฀to฀a฀long฀or฀close฀relationship฀with฀a฀client฀or฀employer,฀the฀accountant฀may฀
be฀too฀sympathetic฀to฀their฀interests฀or฀too฀accepting฀of฀their฀work.฀

Intimidation฀ The฀accountant฀may฀not฀act฀objectively฀due฀to฀actual฀or฀perceived฀pressures.฀

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Where฀the฀above฀threats฀exist,฀appropriate฀safeguards฀must฀be฀put฀in฀place฀to฀eliminate฀or฀reduce฀
them฀to฀an฀acceptable฀level.฀Safeguards฀against฀breach฀of฀compliance฀with฀the฀ACCA฀Code฀include:฀
(a)฀ Safeguards฀created฀by฀the฀profession,฀legislation฀or฀regulation฀(eg฀corporate฀governance)฀
(b)฀ Safeguards฀within฀the฀client/the฀accountancy฀firm's฀own฀systems฀and฀procedures฀
(c)฀ Educational฀ training฀ and฀ experience฀ requirements฀ for฀ entry฀ into฀ the฀ profession,฀ together฀ with฀
continuing฀professional฀development.฀฀

1.4฀ Ethical฀considerations฀in฀financial฀reporting฀
In฀ preparing฀ financial฀ statements฀ or฀ advising฀ on฀ corporate฀ reporting,฀ a฀ variety฀ of฀ ethical฀ problems฀
may฀arise:฀
(a)฀ Professional฀ competence฀ is฀ clearly฀ a฀ key฀ issue฀ when฀ decisions฀ are฀ made฀ about฀
accounting฀ treatments฀ and฀ disclosures.฀ Company฀ directors฀ and฀ their฀ advisers฀ have฀ a฀ duty฀ to฀
keep฀up฀to฀date฀with฀developments฀in฀IFRSs฀and฀other฀relevant฀regulations.฀
Circumstances฀that฀may฀threaten฀the฀ability฀of฀accountants฀in฀these฀roles฀to฀perform฀their฀duties฀
with฀the฀appropriate฀degree฀of฀professional฀competence฀and฀due฀care฀include:฀
฀ Insufficient฀time฀
฀ Incomplete,฀restricted฀or฀inadequate฀information฀
฀ Insufficient฀experience,฀training฀or฀education฀
฀ Inadequate฀resources฀
(b)฀ Objectivity฀and฀integrity฀may฀be฀threatened฀in฀a฀number฀of฀ways:฀
฀ Financial฀interests,฀such฀as฀profit-related฀bonuses฀or฀share฀options฀
฀ Inducements฀to฀encourage฀unethical฀behaviour฀
(c)฀ ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ identifies฀ that฀ accountants฀ may฀ be฀ pressurised,฀ either฀
externally฀ or฀ by฀ the฀ possibility฀ of฀ personal฀ gain,฀ to฀ become฀ associated฀ with฀ misleading฀
information.฀ The฀ Code฀ clearly฀ states฀ that฀ members฀ should฀ not฀ be฀ associated฀ with฀ reports,฀
returns,฀communications฀or฀other฀information฀where฀they฀believe฀that฀the฀information:฀฀
฀ Contains฀a฀materially฀misleading฀statement;฀
฀ Contains฀statements฀or฀information฀furnished฀recklessly;฀
฀ Has฀been฀prepared฀with฀bias;฀or฀
฀ Omits฀or฀obscures฀information฀required฀to฀be฀included฀where฀such฀omission฀or฀obscurity฀
would฀be฀misleading.฀
IAS฀1฀and฀fair฀presentation฀
ACCA's฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ forbids฀ members฀ from฀ being฀ associated฀ with฀ 'misleading'฀
information,฀but฀IAS฀1฀Presentation฀of฀Financial฀Statements฀goes฀further,฀and฀requires฀that฀an฀entity฀
must฀ 'present฀ fairly'฀ its฀ financial฀ position,฀ financial฀ performance฀ and฀ cash฀ flows.฀ 'Present฀ fairly'฀ is฀
explained฀as฀representing฀faithfully฀the฀effects฀of฀transactions.฀In฀general฀terms฀this฀will฀be฀the฀case฀if฀
IFRS฀is฀adhered฀to.฀IAS฀1฀states฀that฀departures฀from฀international฀standards฀are฀only฀allowed:฀฀
฀ In฀extremely฀rare฀cases;฀or฀
฀ Where฀ compliance฀ with฀ IFRS฀ would฀ be฀ so฀ misleading฀ as฀ to฀ conflict฀ with฀ the฀ objectives฀ of฀
financial฀ statements฀ as฀ set฀ out฀ in฀ the฀ Conceptual฀ Framework,฀ that฀ is,฀ to฀ provide฀ information฀
about฀financial฀position,฀performance฀and฀changes฀in฀financial฀position฀that฀is฀useful฀to฀a฀wide฀
range฀of฀users.฀

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IAS฀1฀expands฀on฀this฀principle฀as฀follows:฀

฀ Compliance฀with฀IFRS฀should฀be฀disclosed.฀
฀ Financial฀statements฀can฀only฀be฀described฀as฀complying฀with฀IFRS฀if฀they฀comply฀with฀all฀the฀
requirements฀of฀IFRS.฀
฀ Use฀ of฀ inappropriate฀ accounting฀ policies฀ cannot฀ be฀ rectified฀ either฀ by฀ disclosure฀ or฀
explanatory฀material.฀
'Compliance'฀ is฀ necessary,฀ but฀ not฀ sufficient฀ for฀ fair฀ presentation.฀ 'Fairness'฀ is฀ an฀ ethical฀ concept,฀
directed฀at฀giving฀the฀users฀of฀financial฀statements฀the฀opportunity฀to฀see฀the฀full฀picture฀of฀an฀entity's฀
position฀and฀performance.฀

1.5฀ Framework฀for฀decisions฀
ACCA฀ has฀ developed฀ an฀ overall฀ framework฀ to฀ help฀ its฀ members฀ make฀ ethical฀ decisions฀ in฀ a฀ wide฀
range฀of฀circumstances:฀

What฀is฀the฀real฀issue?

Are฀there฀threats฀to฀compliance฀with฀
the฀fundamental฀principles?
Non-material฀
items฀would฀not฀
be฀significant.฀

Are฀the฀threats฀clearly฀significant?฀

Are฀there฀safeguards฀that฀will฀
eliminate฀the฀threats฀or฀reduce฀them฀
to฀an฀acceptable฀level?

Can฀you฀face฀yourself฀in฀the฀mirror?฀
฀
฀

Illustration฀1฀
Ethical฀issues฀
(a)฀ ACCA's฀Code฀of฀Ethics฀and฀Conduct฀identifies฀a฀number฀of฀threats฀to฀its฀fundamental฀ethical฀
principles.฀
฀ Jake฀has฀been฀put฀under฀significant฀pressure฀by฀his฀manager฀to฀change฀the฀conclusion฀of฀a฀
report฀he฀has฀written฀which฀reflects฀badly฀on฀the฀manager's฀performance.฀
฀ Required฀
฀ Which฀ethical฀threat฀is฀Jake฀facing?฀
(b)฀ Which฀of฀the฀following฀might฀(or฀might฀be฀thought฀to)฀affect฀the฀objectivity฀of฀providers฀of฀
professional฀accounting฀services?฀

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฀
฀ ฀

Failure฀to฀keep฀up฀to฀date฀with฀continuing฀professional฀development฀(CPD)฀ ฀

A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀ ฀

Being฀negligent฀or฀reckless฀with฀the฀accuracy฀of฀the฀information฀provided฀to฀ ฀
the฀client฀
฀
Solution฀
(a)฀ The฀answer฀is฀intimidation,฀as฀indicated฀by฀'significant฀pressure'.฀
(b)
฀ ฀

Failure฀to฀keep฀up฀to฀date฀with฀CPD฀ ฀

A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀ ฀

Being฀negligent฀or฀reckless฀with฀the฀accuracy฀of฀the฀information฀provided฀to฀ ฀
the฀client฀
฀
฀ A฀personal฀financial฀interest฀in฀the฀client's฀affairs฀will฀affect฀objectivity.฀Failure฀to฀keep฀up฀to฀
date฀on฀continuing฀professional฀development฀is฀an฀issue฀of฀professional฀competence,฀while฀
providing฀inaccurate฀information฀reflects฀upon฀professional฀integrity.฀

1.6฀฀Exam฀scenarios฀
The฀exam฀may฀present฀you฀with฀a฀scenario,฀typically฀containing฀an฀array฀of฀detail฀much฀of฀which฀is฀
potentially฀relevant.฀The฀problem,฀however,฀will฀be฀one฀or฀other฀of฀two฀basic฀types.฀
(a)฀ A฀ manager/superior฀ has฀ requested฀ an฀ employee/subordinate฀ to฀ perform฀ an฀ action฀ which฀ is฀
not฀justified฀by฀accounting฀standards฀or฀is฀not฀morally฀acceptable.฀
For฀ example,฀ the฀ Managing฀ Director฀ (A)฀ wants฀ the฀ Financial฀ Accountant฀ (B)฀ to฀ make฀ a฀ change฀ in฀
accounting฀policy฀(C),฀where฀this฀is฀not฀justified฀by฀IAS฀8฀(D).฀
(b)฀ Alternatively,฀ the฀ problem฀ may฀ be฀ that฀ the฀ Managing฀ Director฀ has฀ already฀ performed฀ an฀
action฀ which฀ is฀ not฀ justified฀ by฀ accounting฀ standards฀ or฀ is฀ not฀ morally฀ acceptable,฀ an฀
employee฀ or฀ external฀ auditor฀ has฀ discovered฀ this฀ action฀ and฀ is฀ now฀ required฀ to฀ respond฀
appropriately฀to฀the฀issue.฀

Illustration฀2฀
Takeover฀
Your฀Finance฀Director฀has฀asked฀you฀to฀join฀a฀team฀that฀is฀planning฀a฀takeover฀of฀one฀of฀your฀
company's฀suppliers.฀An฀old฀school฀friend฀works฀as฀an฀accountant฀for฀the฀supplier.฀The฀Finance฀
Director฀knows฀this,฀and฀has฀asked฀you฀to฀try฀and฀find฀out฀'anything฀that฀might฀help฀the฀takeover฀
succeed,฀but฀it฀must฀remain฀secret'.฀
Solution฀
There฀are฀three฀issues฀here.฀฀
First,฀you฀have฀a฀conflict฀of฀interest฀as฀the฀Finance฀Director฀wants฀you฀to฀keep฀the฀takeover฀a฀secret,฀
but฀you฀probably฀feel฀that฀you฀should฀tell฀your฀friend฀what฀is฀happening฀as฀it฀may฀affect฀their฀job.฀

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Second,฀the฀Finance฀Director฀is฀asking฀you฀to฀deceive฀your฀friend.฀Deception฀is฀unprofessional฀
behaviour฀and฀is฀in฀breach฀of฀your฀ethical฀guidelines.฀The฀situation฀is฀presenting฀you฀with฀two฀
conflicting฀demands.฀It฀is฀worth฀remembering฀that฀no฀employer฀can฀ask฀you฀to฀break฀your฀ethical฀
rules.฀
Finally,฀the฀request฀to฀break฀your฀own฀ethical฀guidelines฀constitutes฀unprofessional฀behaviour฀by฀the฀
Finance฀Director.฀You฀should฀weigh฀up฀whether฀blowing฀the฀whistle฀internally฀would฀prove฀effective;฀
if฀not,฀consider฀reporting฀them฀to฀their฀relevant฀professional฀body.฀

Activity฀1:฀Ethical฀issues฀฀ ฀ ฀
Kelshall฀ is฀ a฀ public฀ limited฀ company.฀ The฀ current฀ year฀ end฀ is฀ 31฀ December฀ 20X5.฀ The฀ Finance฀
Director฀ is฀ remunerated฀ with฀ a฀ profit-related฀ bonus฀ and฀ share฀ appreciation฀ rights.฀ (Share฀
appreciation฀rights฀mean฀that฀the฀director฀will฀become฀entitled฀to฀a฀future฀cash฀payment฀based฀on฀the฀
increase฀in฀the฀entity's฀share฀price฀from฀a฀specified฀level฀over฀a฀specified฀period฀of฀time.)฀
Kelshall฀ owns฀ a฀ significant฀ number฀ of฀ owner-occupied฀ properties฀ which฀ historically฀ have฀ been฀ held฀
under฀ the฀ revaluation฀ model.฀ Recently,฀ due฀ to฀ an฀ economic฀ downturn,฀ property฀ prices฀ have฀ been฀
falling.฀The฀Finance฀Director฀is฀proposing฀to฀switch฀from฀the฀revaluation฀model฀to฀the฀cost฀model.฀
Shortly฀ before฀ the฀ year฀ end,฀ the฀ CEO฀ of฀ Kelshall,฀ who฀ holds฀ a฀ large฀ number฀ of฀ share฀ options,฀
mentioned฀to฀the฀Finance฀Director฀that฀he฀was฀hoping฀to฀retire฀within฀the฀next฀year฀and฀was฀hoping฀
to฀maximise฀Kelshall's฀share฀price฀by฀his฀retirement฀date.฀
Required฀
(a)฀ Discuss฀the฀view฀that฀the฀board฀of฀directors฀should฀be฀remunerated฀with฀profit-related฀pay฀and฀
share-based฀payment฀to฀align฀directors'฀and฀stakeholders'฀interests.฀
(b)฀ Discuss฀ whether฀ the฀ Finance฀ Director฀ of฀ Kelshall฀ would฀ be฀ acting฀ ethically฀ if฀ he฀ revised฀ the฀
accounting฀policy฀for฀its฀properties฀from฀the฀revaluation฀model฀to฀the฀cost฀model.฀
(c)฀ Discuss฀whether฀the฀CEO's฀comment฀to฀the฀Finance฀Director฀is฀ethical฀and฀what฀action,฀if฀any,฀
the฀Finance฀Director฀should฀take.฀

Mention฀the฀theories฀
1.7฀฀The฀role฀of฀moral฀philosophy฀and฀theory฀in฀ethics฀ only฀if฀relevant฀in฀the฀
context฀of฀a฀practical฀
Ethical฀theories฀ answer.฀฀฀฀

(a)฀ Do฀ethics฀change฀over฀time฀and฀place?฀
•฀ Ethical฀relativism฀=฀YES฀(ethics฀vary฀between฀different฀ages฀&฀different฀communities)฀
•฀ Ethical฀absolutism฀=฀NO฀(some฀courses฀of฀action฀are฀always฀right,฀others฀are฀always฀
wrong)฀
For฀ example,฀ a฀ total฀ ban฀ on฀ meat-eating฀ would฀ be฀ ethically฀ absolutist,฀ while฀ allowing฀ it฀ where฀ the฀
animal฀has฀been฀reared฀in฀a฀'cruelty-free'฀environment฀would฀be฀ethically฀relativist.฀
(b)฀ Lawrence฀Kohlberg's฀thought฀processes฀people฀use฀when฀making฀ethical฀decisions฀
From฀less฀'ethically฀developed'฀individuals฀to฀more฀'ethically฀developed'฀individuals:฀
(i)฀ You฀should฀act฀ethically฀because฀you'll฀be฀punished฀if฀you฀don't.฀
(ii)฀ You฀should฀act฀ethically฀because฀your฀country's฀laws฀say฀you฀should.฀
(iii)฀ You฀ should฀ act฀ ethically฀ because฀ it's฀ always฀ right฀ to฀ do฀ so,฀ no฀ matter฀ what฀ the฀
consequences฀and฀costs฀are฀to฀you฀personally.฀
(Kohlberg,฀1981)฀

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Influences฀on฀ethics฀
(a)฀ Individual฀factors฀
฀ Age฀and฀gender฀
฀ National฀and฀cultural฀beliefs฀
฀ Education฀and฀employment฀
฀ Psychological฀factors฀
฀ How฀much฀influence฀individuals฀believe฀they฀have฀
฀ Personal฀integrity฀
฀ Moral฀imagination฀(level฀of฀awareness฀of฀variety฀of฀moral฀consequences฀of฀actions)฀
(b)฀ Situational฀factors฀
฀ Issue-related฀factors฀–฀nature฀of฀issue฀and฀how฀it฀is฀viewed฀in฀the฀organisation฀
฀ Context-related฀ factors฀ –฀ expectations฀ and฀ demands฀ that฀ will฀ be฀ placed฀ on฀ people฀
working฀in฀an฀organisation฀(eg฀systems฀of฀reward,฀authority,฀bureaucracy,฀work฀roles,฀
organisational฀culture).฀

Supplementary฀reading฀
See฀ Chapter฀ 2฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀influences฀on฀ethics.฀

Social฀responsibility฀and฀businesses฀
Some฀ argue฀ that฀ the฀ only฀ social฀ responsibility฀ of฀ a฀ business฀ is฀ to฀ maximise฀ shareholder฀ wealth฀
because:฀
฀ If฀ the฀ business฀ is฀ owned฀ by฀ the฀ shareholders฀ the฀ assets฀ of฀ the฀ company฀ are,฀ ultimately,฀ the฀
shareholders'฀property.฀It฀is฀for฀the฀shareholders฀to฀determine฀how฀their฀assets฀should฀be฀used,฀
and฀they฀would฀generally฀wish฀it฀to฀be฀used฀to฀maximise฀their฀returns.฀
฀ Maximising฀ wealth฀ is฀ the฀ best฀ way฀ that฀ society฀ can฀ benefit฀ from฀ a฀ business's฀ activities,฀ eg,฀
increasing฀tax฀revenue.฀
On฀the฀other฀hand,฀good฀corporate฀citizenship฀may฀be฀good฀for฀business฀performance฀because฀of฀
the฀attitude฀of฀other฀stakeholders:฀
฀ Customers฀may฀prefer฀to฀buy฀from฀a฀company฀that฀is฀perceived฀as฀being฀socially฀responsible.฀
฀ Employees฀may฀prefer฀to฀work฀for฀such฀a฀company.฀
฀ Investors฀may฀prefer฀such฀a฀company,฀as฀shown฀by฀the฀existence฀of฀ethical฀funds.฀
฀ Constructive฀engagement฀with฀the฀community/country฀in฀which฀a฀business฀operates฀may฀result฀
in฀it฀being฀seen฀as฀a฀good฀long-term฀investment.฀

Supplementary฀reading฀
See฀ Chapter฀ 2฀ Section฀ 2฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀social฀responsibility฀and฀businesses.฀

Ethics฀in฀organisations฀
Organisations฀contain฀a฀variety฀of฀ethical฀systems:฀
฀ Personal฀ethics฀(eg฀from฀upbringing,฀religious฀beliefs,฀political฀opinions,฀personality)฀
฀ Professional฀ethics฀(eg฀ACCA's฀Code฀of฀Ethics฀and฀Conduct)฀
฀ Organisational฀culture฀(eg฀'customer฀first')฀
฀ Organisation฀ systems฀ (eg฀ ethics฀ may฀ be฀ contained฀ in฀ a฀ formal฀ code฀ reinforced฀ by฀ 'values'฀
statement)฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

Approaches฀to฀managing฀ethics฀within฀organisations฀ Compliance-based฀is฀
becoming฀more฀common.฀
(a)฀ Compliance-based฀approach฀
This฀ ensures฀ that฀ the฀ company฀ acts฀ within฀ the฀ letter฀ of฀ the฀ law฀ and฀ that฀ violations฀ are฀
prevented,฀detected฀and฀punished.฀
(b)฀ Integrity-based฀approach฀
Wider฀ remit฀ than฀ compliance฀ based฀ approach.฀ This฀ combines฀ concern฀ for฀ the฀ law฀ with฀
emphasis฀on฀managerial฀responsibility฀for฀ethical฀behaviour.฀

Supplementary฀reading฀
See฀ Chapter฀ 2฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook,฀for฀more฀detail฀on฀managing฀ethics฀within฀organisations฀and฀an฀additional฀
question฀on฀ethical฀issues.฀

2฀฀Related฀parties฀
2.1฀฀Related฀parties฀
Related฀ party฀ relationships฀ and฀ transactions฀ are฀ a฀ normal฀ feature฀ of฀ business.฀ However,฀ there฀ is฀ a฀
general฀presumption฀that฀transactions฀reflected฀in฀financial฀statements฀have฀been฀carried฀out฀on฀an฀
arm's฀length฀basis,฀unless฀disclosed฀otherwise.฀
Arm's฀ length฀ means฀ on฀ the฀ same฀ terms฀ as฀ could฀ have฀ been฀ negotiated฀ with฀ an฀ external฀ party,฀ in฀
which฀each฀side฀bargained฀knowledgeably฀and฀freely,฀unaffected฀by฀any฀relationship฀between฀them.฀฀
Even฀if฀a฀transaction฀with฀a฀related฀party฀is฀at฀market฀value,฀the฀shareholders฀need฀to฀know฀if฀it฀is฀not฀
at฀arm's฀length,฀because฀the฀relationship฀could฀influence฀future฀transactions.฀฀

Identifying฀the฀related฀party฀relationship฀will฀be฀more฀important฀in฀your฀exam฀
than฀ long฀ lists฀ of฀ disclosures,฀ so฀ there฀ is฀ no฀ shortcut฀ to฀ learning฀ the฀ definition฀
of฀related฀party.฀
฀

Related฀party฀(IAS฀24):฀a฀person฀or฀entity฀that฀is฀related฀to฀the฀entity฀that฀is฀preparing฀its฀
financial฀statements฀(the฀'reporting฀entity').฀฀
Key฀term฀
(a)฀ A฀person฀or฀a฀close฀member฀of฀that฀person's฀family฀is฀related฀to฀a฀reporting฀entity฀if฀that฀
person:฀฀
฀ (i)฀ Has฀control฀or฀joint฀control฀over฀the฀reporting฀entity;฀฀
฀ (ii)฀ Has฀significant฀influence฀over฀the฀reporting฀entity;฀or฀฀
฀ (iii)฀ Is฀a฀member฀of฀the฀key฀management฀personnel฀of฀the฀reporting฀entity฀or฀of฀a฀
parent฀of฀the฀reporting฀entity.฀฀
(b)฀ An฀entity฀is฀related฀to฀a฀reporting฀entity฀if฀any฀of฀the฀following฀conditions฀apply:฀฀
฀ (i)฀ The฀entity฀and฀the฀reporting฀entity฀are฀members฀of฀the฀same฀group฀(which฀means฀
that฀each฀parent,฀subsidiary฀and฀fellow฀subsidiary฀is฀related฀to฀the฀others).฀฀
฀ (ii)฀ One฀entity฀is฀an฀associate*฀or฀joint฀venture*฀of฀the฀other฀entity฀(or฀an฀associate฀or฀
joint฀venture฀of฀a฀member฀of฀a฀group฀of฀which฀the฀other฀entity฀is฀a฀member).฀฀
฀ (iii)฀ Both฀entities฀are฀joint฀ventures*฀of฀the฀same฀third฀party.฀฀
฀ (iv)฀ One฀entity฀is฀a฀joint฀venture*฀of฀a฀third฀entity฀and฀the฀other฀entity฀is฀an฀
associate฀of฀the฀third฀entity.฀฀

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฀ (v)฀฀ The฀entity฀is฀a฀post-employment฀benefit฀plan฀for฀the฀benefit฀of฀employees฀of฀either฀
the฀reporting฀entity฀or฀an฀entity฀related฀to฀the฀reporting฀entity.฀
฀ (vi)฀ The฀entity฀is฀controlled฀or฀jointly฀controlled฀by฀a฀person฀identified฀in฀(a).฀฀
฀ (vii)฀ A฀person฀identified฀in฀(a)(i)฀has฀significant฀influence฀over฀the฀entity฀or฀is฀a฀member฀
of฀the฀key฀management฀personnel฀of฀the฀entity฀(or฀of฀a฀parent฀of฀the฀entity).฀฀
฀ (viii)฀ The฀entity,฀or฀any฀member฀of฀a฀group฀of฀which฀it฀is฀a฀part,฀provides฀key฀
management฀personnel฀services฀to฀the฀reporting฀entity฀or฀the฀parent฀of฀the฀
reporting฀entity.฀
฀ *including฀subsidiaries฀of฀the฀associate฀or฀joint฀venture฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀(IAS฀24:฀para.฀9)฀

Close฀ members฀ of฀ the฀ family฀ of฀ a฀ person฀ are฀ defined฀ (IAS฀ 24:฀ para.฀ 9)฀ as฀ 'those฀ family฀
members฀who฀may฀be฀expected฀to฀influence,฀or฀be฀influenced฀by,฀that฀person฀in฀their฀dealings฀with฀
the฀entity฀and฀include:฀
฀ That฀person's฀children฀and฀spouse฀or฀domestic฀partner;฀
฀ Children฀of฀that฀person's฀spouse฀or฀domestic฀partner;฀and฀
฀ Dependants฀of฀that฀person฀or฀that฀person's฀spouse฀or฀domestic฀partner.'฀
In฀ considering฀ each฀ possible฀ related฀ party฀ relationship,฀ attention฀ is฀ directed฀ to฀ the฀ substance฀ of฀ the฀
relationship,฀and฀not฀merely฀the฀legal฀form.฀฀
Is฀there฀control฀or฀influence฀
in฀practice?฀
2.2฀฀Not฀related฀parties฀
The฀following฀are฀not฀related฀parties฀(IAS฀24:฀para.฀11):฀
(a)฀ Two฀ entities฀ simply฀ because฀ they฀ have฀ a฀ director฀ or฀ other฀ member฀ of฀ key฀ management฀
personnel฀in฀common,฀or฀because฀a฀member฀of฀key฀management฀personnel฀of฀one฀entity฀has฀
significant฀influence฀over฀the฀other฀entity;฀
(b)฀ Two฀venturers฀simply฀because฀they฀share฀joint฀control฀over฀a฀joint฀venture:฀
(c)฀ (i)฀ Providers฀of฀finance;฀
(ii)฀ Trade฀unions;฀
(iii)฀ Public฀utilities;฀and฀
(iv)฀ Departments฀and฀agencies฀of฀a฀government;฀฀
simply฀ by฀ virtue฀ of฀ their฀ normal฀ dealings฀ with฀ an฀ entity฀ (even฀ though฀ they฀ may฀ affect฀ the฀
freedom฀of฀action฀of฀an฀entity฀or฀participate฀in฀its฀decision-making฀process);฀and฀
(d)฀ A฀customer,฀supplier,฀franchisor,฀distributor,฀or฀general฀agent฀with฀whom฀an฀entity฀transacts฀a฀
significant฀volume฀of฀business,฀simply฀by฀virtue฀of฀the฀resulting฀economic฀dependence.฀

2.3฀฀Disclosure฀
IAS฀24฀requires฀an฀entity฀to฀disclose฀the฀following:฀
(a)฀ The฀ name฀ of฀ its฀ parent฀ and,฀ if฀ different,฀ the฀ ultimate฀ controlling฀ party฀ irrespective฀ of฀
whether฀there฀have฀been฀any฀transactions.฀
(b)฀ Total฀key฀management฀personnel฀compensation฀(broken฀down฀by฀category)฀
(c)฀ If฀the฀entity฀has฀had฀related฀party฀transactions:฀
(i)฀ Nature฀of฀the฀related฀party฀relationship฀
(ii)฀ Information฀ about฀ the฀ transactions฀ and฀ outstanding฀ balances,฀ including฀
commitments฀ and฀ bad฀ and฀ doubtful฀ debts฀ necessary฀ for฀ users฀ to฀ understand฀
the฀potential฀effect฀of฀the฀relationship฀on฀the฀financial฀statements.฀
No฀ disclosure฀ is฀ required฀ of฀ intragroup฀ related฀ party฀ transactions฀ in฀ the฀ consolidated฀ financial฀฀
statements.฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

Items฀ of฀ a฀ similar฀ nature฀ may฀ be฀ disclosed฀ in฀ aggregate฀ except฀ where฀ separate฀ disclosure฀ is฀
necessary฀for฀understanding฀purposes.฀

2.4฀ Government-related฀entities฀
If฀the฀reporting฀entity฀is฀a฀government-related฀entity฀(ie฀a฀government฀has฀control,฀joint฀control฀
or฀ significant฀ influence฀ over฀ the฀ entity),฀ an฀ exemption฀ is฀ available฀ from฀ full฀ disclosure฀ of฀
transactions,฀ outstanding฀ balances฀ and฀ commitments฀ with฀ the฀ government฀ or฀ with฀ other฀ entities฀
related฀to฀the฀same฀government.฀
However,฀if฀the฀exemption฀is฀applied,฀disclosure฀is฀required฀of:฀
(a)฀ The฀name฀of฀the฀government฀and฀nature฀of฀the฀relationship฀
(b)฀ The฀nature฀and฀amount฀of฀each฀individually฀significant฀transaction฀(plus฀a฀qualitative฀or฀
quantitative฀ indication฀ of฀ the฀ extent฀ of฀ other฀ transactions฀ which฀ are฀ collectively,฀ but฀ not฀
individually,฀significant).฀
(IAS฀24:฀paras.฀24–26)฀

Illustration฀3฀
Related฀party฀issues฀
Fancy฀Feet฀Co฀is฀a฀UK฀company฀which฀supplies฀handmade฀leather฀shoes฀to฀a฀chain฀of฀high฀street฀
shoe฀shops.฀The฀company฀is฀also฀the฀sole฀importer฀of฀some฀famous฀high฀quality฀Greek฀stoneware฀
which฀is฀supplied฀to฀an฀upmarket฀shop฀in฀London's฀West฀End.฀
Fancy฀Feet฀Co฀was฀set฀up฀30฀years฀ago฀by฀Georgios฀Kostades.฀The฀company฀is฀owned฀and฀run฀by฀
Mr฀Kostades฀and฀his฀three฀children.฀
The฀shoes฀are฀purchased฀from฀a฀French฀company,฀the฀shares฀of฀which฀are฀owned฀by฀the฀Kostades฀
Family฀Trust฀(Monaco).฀
Required฀
Identify฀the฀financial฀accounting฀issues฀arising฀out฀of฀the฀above฀scenario.฀
Solution฀
Issues฀
(a)฀ The฀basis฀on฀which฀Fancy฀Feet฀trades฀with฀the฀Greek฀supplier฀and฀the฀French฀company฀owned฀
by฀the฀Kostades฀family฀trust.฀
(b)฀ Whether฀the฀overseas฀companies฀trade฀on฀commercial฀terms฀with฀the฀UK฀company฀or฀whether฀
the฀foreign฀entities฀control฀the฀UK฀company.฀
(c)฀ Who฀owns฀the฀Greek฀company:฀is฀this฀a฀related฀party฀under฀the฀provisions฀of฀IAS฀24?฀
(d)฀ If฀the฀nature฀of฀trade฀suggests฀a฀related฀party฀controls฀Fancy฀Feet฀Co,฀detailed฀disclosures฀will฀
be฀required฀in฀the฀accounts.฀

Activity฀2:฀Related฀parties฀(1)฀ ฀
Leoval฀is฀a฀private฀manufacturing฀company฀that฀makes฀car฀parts.฀It฀is฀90%฀owned฀by฀Cavelli,฀a฀listed฀
entity.฀Cavelli฀is฀a฀long-established฀company฀controlled฀by฀the฀Grassi฀family฀through฀an฀agreement฀
which฀pools฀their฀voting฀rights.฀
Leoval฀regularly฀provides฀parts฀at฀market฀price฀to฀another฀company฀in฀which฀Francesca฀Cincetti฀has฀
a฀ minority฀ (23%)฀ holding.฀ Francesca฀ Cincetti฀ is฀ the฀ wife฀ of฀ Roberto฀ Grassi,฀ one฀ of฀ the฀ key฀ Grassi฀
family฀shareholders฀that฀controls฀Cavelli.฀

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Leoval฀ advances฀ interest-free฀ loans฀ to฀ its฀ employees฀ in฀ order฀ for฀ them฀ to฀ purchase฀ annual฀ season฀
tickets฀ to฀ get฀ to฀ work.฀ The฀ loan฀ repayment฀ is฀ deducted฀ in฀ 12฀ instalments฀ from฀ the฀ employees'฀
salaries.฀
Cavelli฀ charges฀ Leoval฀ an฀ annual฀ management฀ services฀ fee฀ of฀ 20%฀ of฀ profit฀ before฀ tax฀ (before฀
accounting฀for฀the฀fee).฀
30%฀of฀Leoval's฀revenue฀comes฀from฀transactions฀with฀a฀major฀car฀maker,฀Piat.฀
Leoval฀ provides฀ a฀ defined฀ benefit฀ pension฀ plan฀ for฀ its฀ employees฀ based฀ on฀ 2%฀ of฀ final฀ salary฀ for฀
each฀year฀worked.฀The฀plan฀is฀currently฀overfunded฀and฀so฀Leoval฀has฀not฀made฀any฀contributions฀
during฀the฀current฀year.฀
Required฀
Explain฀ whether฀ disclosures฀ are฀ required฀ for฀ each฀ of฀ the฀ above฀ pieces฀ of฀ information฀ by฀ IAS฀ 24฀
Related฀Party฀Disclosures.฀

Activity฀3:฀Related฀parties฀(2)฀ ฀
Discuss฀ whether฀ the฀ following฀ events฀ would฀ require฀ disclosure฀ in฀ the฀ financial฀ statements฀ of฀ the฀฀฀฀฀฀฀฀฀฀฀฀฀
RP฀Group,฀a฀public฀limited฀company,฀under฀IAS฀24฀Related฀Party฀Disclosures.฀
The฀RP฀Group,฀merchant฀bankers,฀has฀a฀number฀of฀subsidiaries,฀associates฀and฀joint฀ventures฀in฀its฀
group฀structure.฀During฀the฀financial฀year฀to฀31฀October฀20X9฀the฀following฀events฀occurred:฀
(a)฀ RP฀agreed฀to฀finance฀a฀management฀buyout฀of฀a฀group฀company,฀AB,฀a฀limited฀company.฀In฀
addition฀ to฀ providing฀ loan฀ finance,฀ RP฀ has฀ retained฀ a฀ 25%฀ equity฀ holding฀ in฀ AB฀ and฀ has฀ a฀
main฀board฀director฀on฀the฀board฀of฀AB.฀RP฀received฀management฀fees,฀interest฀payments฀and฀
dividends฀from฀AB.฀฀
(b)฀ On฀ 1฀ July฀ 20X9,฀ RP฀ sold฀ a฀ wholly฀ owned฀ subsidiary,฀ X,฀ a฀ limited฀ company,฀ to฀ Z,฀ a฀ public฀
limited฀ company.฀ During฀ the฀ year฀ RP฀ supplied฀ X฀ with฀ second-hand฀ office฀ equipment฀ and฀ X฀
leased฀its฀factory฀from฀RP.฀The฀transactions฀were฀all฀contracted฀for฀at฀market฀rates.฀ ฀
(c)฀ The฀retirement฀benefit฀scheme฀of฀the฀RP฀is฀managed฀by฀another฀merchant฀bank.฀An฀investment฀
manager฀of฀the฀RP฀retirement฀benefit฀scheme฀is฀also฀a฀non-executive฀director฀of฀the฀RP฀Group฀
and฀ received฀ an฀ annual฀ fee฀ for฀ his฀ services฀ of฀ $25,000฀ which฀ is฀ not฀ material฀ in฀ the฀ group฀
context.฀RP฀pays฀$16m฀per฀annum฀into฀the฀scheme฀and฀occasionally฀transfers฀assets฀into฀the฀
scheme.฀ In฀ 20X9,฀ property,฀ plant฀ and฀ equipment฀ of฀ $10m฀ were฀ transferred฀ into฀ the฀ scheme฀
and฀a฀recharge฀of฀administrative฀costs฀of฀$3m฀was฀made.฀

3฀฀Accounting฀policies,฀estimates฀and฀prior฀period฀errors฀
3.1฀฀Accounting฀policies฀

Accounting฀policies฀(IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀Errors):฀the฀
specific฀principles,฀bases,฀conventions,฀rules฀and฀practices฀applied฀by฀an฀entity฀in฀preparing฀and฀
Key฀term฀
presenting฀financial฀statements฀(IAS฀8:฀para.฀5).฀

IAS฀ 8฀ requires฀ that฀ an฀ entity฀ selects฀ its฀ accounting฀ policies฀ by฀ applying฀ the฀ relevant฀ IFRS฀ (IAS฀ 8:฀
para.฀7).฀
Some฀standards฀permit฀a฀choice฀of฀accounting฀policies฀(eg฀cost฀and฀revaluation฀models).฀
In฀the฀absence฀of฀an฀IFRS฀covering฀a฀specific฀transaction,฀other฀event฀or฀condition,฀
management฀ uses฀ its฀ judgement฀ to฀ develop฀ an฀ accounting฀ policy฀ which฀ results฀ in฀

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information฀ that฀ is฀ relevant฀ to฀ the฀ economic฀ decision-making฀ needs฀ of฀ users฀ and฀
reliable,฀considering฀in฀the฀following฀order:฀
(a)฀ IFRSs฀dealing฀with฀similar฀and฀related฀issues;฀
(b)฀ The฀Conceptual฀Framework฀definitions฀of฀elements฀of฀the฀financial฀statements฀and฀recognition฀
criteria;฀and฀
(c)฀ The฀ most฀ recent฀ pronouncements฀ of฀ other฀ national฀ GAAPs฀ based฀ on฀ a฀ similar฀ conceptual฀
framework฀ and฀ accepted฀ industry฀ practice฀ (providing฀ the฀ treatment฀ does฀ not฀ conflict฀ with฀
extant฀IFRSs฀or฀the฀Conceptual฀Framework).฀
(IAS฀8:฀para.฀10)฀
A฀change฀in฀accounting฀policy฀is฀only฀permitted฀if฀the฀change฀(IAS฀18:฀para.฀14):฀
฀ Is฀required฀by฀an฀IFRS;฀or฀
฀ Results฀in฀financial฀statements฀providing฀reliable฀and฀more฀relevant฀information.฀
The฀accounting฀treatment฀for฀a฀change฀in฀accounting฀policy฀is฀(IAS฀18:฀para.฀19,฀22):฀

Prior฀period฀adjustment฀ •฀฀฀฀Adjust฀opening฀balance฀
(apply฀new฀policy฀ ฀฀฀฀฀฀of฀each฀affected฀
retrospectively฀unless฀ ฀฀฀฀฀฀component฀of฀equity
transitional฀provision฀of฀
IFRS฀specifies฀otherwise) •฀฀฀฀Restate฀comparatives
฀

3.2฀ Accounting฀estimates฀
As฀ a฀ result฀ of฀ the฀ uncertainties฀ inherent฀ in฀ business฀ activities,฀ many฀ items฀ in฀ financial฀ statements฀
cannot฀be฀measured฀with฀precision฀but฀can฀only฀be฀estimated.฀Estimation฀involves฀judgements฀based฀
on฀the฀latest฀reliable฀information.฀(IAS฀8:฀para.฀32)฀
For฀example,฀estimates฀may฀be฀required฀of฀(IAS฀8:฀para.฀32):฀
฀ Bad฀debts;฀
฀ Inventory฀obsolescence;฀
฀ The฀fair฀value฀of฀financial฀assets฀or฀financial฀liabilities;฀
฀ The฀ useful฀ lives฀ of,฀ or฀ expected฀ pattern฀ of฀ consumption฀ of฀ the฀ future฀ economic฀ benefits฀
embodied฀in,฀depreciable฀assets;฀and฀
฀ Warranty฀obligations.฀

Change฀in฀accounting฀estimate฀(IAS฀8):฀an฀adjustment฀of฀the฀carrying฀amount฀of฀an฀asset฀or฀a฀
liability,฀or฀the฀amount฀of฀periodic฀consumption฀of฀an฀asset,฀that฀results฀from฀the฀assessment฀of฀the฀
Key฀term฀
present฀status฀of,฀and฀expected฀future฀benefits฀and฀obligations฀associated฀with฀assets฀and฀liabilities.฀
฀ ฀ (IAS฀8:฀para.฀5)฀

'An฀estimate฀may฀need฀revision฀if฀changes฀occur฀in฀the฀circumstances฀on฀which฀the฀estimate฀
was฀ based฀ or฀ as฀ a฀ result฀ of฀ new฀ information฀ or฀ more฀ experience.฀ By฀ its฀ nature,฀ the฀ revision฀ of฀ an฀
estimate฀does฀not฀relate฀to฀prior฀periods฀and฀is฀not฀the฀correction฀of฀an฀error.'฀(IAS฀8:฀para.฀34)฀
The฀accounting฀treatment฀for฀a฀change฀in฀accounting฀estimate฀is฀(IAS฀8:฀para.฀36–38):฀

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฀฀

•฀฀฀฀Adjust฀in฀the฀period฀of฀
Apply฀the฀change฀ ฀฀฀฀฀฀change฀(and฀in฀future฀
prospectively ฀฀฀฀฀฀periods฀if฀the฀change฀
฀฀฀฀฀฀affects฀both)
•฀฀฀฀Restate฀comparatives
฀

3.3฀ Prior฀period฀errors฀

Prior฀period฀errors฀(IAS฀8):฀omissions฀from,฀and฀misstatements฀in,฀the฀entity's฀financial฀
statements฀for฀one฀or฀more฀prior฀periods฀arising฀from฀a฀failure฀to฀use,฀or฀misuse฀of,฀reliable฀
Key฀term฀
information฀that:฀
(a)฀ Was฀available฀when฀the฀financial฀statements฀for฀those฀periods฀were฀authorised฀for฀issue;฀and฀
(b)฀ Could฀reasonably฀be฀expected฀to฀have฀been฀obtained฀and฀taken฀into฀account฀in฀the฀
preparation฀and฀presentation฀of฀those฀financial฀statements.฀
฀(IAS฀8:฀para.฀5)฀

They฀may฀arise฀from:฀
(a)฀ Mathematical฀mistakes฀
(b)฀ Mistakes฀in฀applying฀accounting฀policies฀
(c)฀ Oversights฀
(d)฀ Misinterpretation฀of฀facts฀
(e)฀ Fraud฀
Accounting฀treatment฀
An฀ entity฀ corrects฀ material฀ prior฀ period฀ errors฀ retrospectively฀ in฀ the฀ first฀ set฀ of฀ financial฀ statements฀
authorised฀for฀issue฀after฀their฀discovery฀by:฀
(a)฀ Restating฀comparative฀amounts฀for฀each฀prior฀period฀presented฀in฀which฀the฀error฀occurred;฀
(b)฀ (If฀the฀error฀occurred฀before฀the฀earliest฀prior฀period฀presented)฀restating฀the฀opening฀balances฀
of฀assets,฀liabilities฀and฀equity฀for฀the฀earliest฀prior฀period฀presented;฀and฀
(c)฀ Including฀any฀adjustment฀to฀opening฀equity฀as฀the฀second฀line฀of฀the฀statement฀of฀changes฀in฀
equity.฀
Where฀it฀is฀impracticable฀to฀determine฀the฀period-specific฀effects฀or฀the฀cumulative฀effect฀of฀the฀error,฀
the฀entity฀corrects฀the฀error฀from฀the฀earliest฀period/date฀practicable฀(and฀discloses฀that฀fact).฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

3.4฀฀Creative฀accounting฀
Whilst฀ still฀ following฀ international฀ financial฀ reporting฀ standards,฀ there฀ is฀ scope฀ in฀ choice฀ of฀
accounting฀ policy฀ and฀ use฀ of฀ judgement฀ in฀ accounting฀ estimates฀ to฀ select฀ the฀ accounting฀ treatment฀
that฀presents฀the฀financial฀statements฀in฀the฀best฀light฀rather฀than฀focusing฀on฀the฀most฀relevant฀and฀
reliable฀accounting฀policy฀or฀estimate.฀
฀ Timing฀of฀transactions฀may฀be฀delayed/speeded฀up฀to฀improve฀results฀
฀ Profit฀smoothing฀through฀choice฀of฀accounting฀policy฀eg฀inventory฀valuation฀
฀ Classification฀of฀items฀eg฀expenses฀versus฀non-current฀assets฀
฀ Off฀ balance฀ sheet฀ financing฀ to฀ improve฀ gearing฀ and฀ return฀ on฀ capital฀ employed฀ eg฀
operating฀lease฀
฀ Revenue฀ recognition฀ policies฀ eg฀ through฀ adopting฀ an฀ aggressive฀ accounting฀ policy฀ of฀
early฀recognition.฀
When฀the฀directors฀select฀and฀adopt฀the฀accounting฀policies฀and฀estimates฀of฀an฀entity,฀they฀need฀to฀
apply฀the฀principles฀in฀ACCA's฀Code฀of฀Ethics฀and฀Conduct.฀฀

Activity฀4:฀Revising฀accounting฀policies฀and฀estimates฀ ฀
Required฀
Which฀ of฀ the฀ following฀ could฀ be฀ considered฀ unethical฀ reasons฀ for฀ revising฀ accounting฀ policies฀ or฀
estimates?฀
Tick฀the฀options฀which฀could฀be฀perceived฀to฀be฀unethical,฀giving฀reasons฀for฀your฀choice.฀

Unethical?฀ Revision฀to฀accounting฀policy฀or฀estimate฀and฀reason฀
(Tick)฀

฀ Increasing฀the฀useful฀life฀of฀an฀asset฀because฀large฀profits฀on฀disposal฀in฀recent฀
years฀indicate฀that฀the฀previous฀estimated฀life฀was฀too฀short฀

฀ Reducing฀the฀allowance฀for฀doubtful฀debts฀from฀5%฀to฀3%฀of฀trade฀receivables฀to฀
meet฀forecast฀profit฀targets฀

฀ Not฀equity฀accounting฀for฀an฀associate฀in฀the฀current฀year฀because฀the฀Finance฀
Director฀failed฀to฀realise฀a฀relationship฀of฀significant฀influence฀in฀the฀prior฀year฀

฀ Classifying฀redeemable฀preference฀shares฀as฀equity฀to฀meet฀the฀gearing฀and฀
interest฀cover฀loan฀covenants฀

฀ Reclassifying฀an฀expense฀from฀cost฀of฀sales฀to฀administrative฀expenses฀to฀align฀
the฀entity's฀accounting฀policy฀to฀other฀entities฀operating฀in฀the฀same฀industry฀
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฀฀

Ethics฀note฀
This฀chapter฀introduced฀the฀concept฀of฀ethical฀principles฀and฀illustrated฀some฀of฀the฀ethical฀dilemmas฀
you฀could฀come฀across฀in฀your฀exam฀and฀in฀practice.฀You฀are฀likely฀to฀meet฀ethics฀in฀the฀context฀of฀
manipulation฀of฀financial฀statements.฀Whereas฀in฀this฀chapter฀the฀issues฀were฀mainly฀limited฀to฀topics฀
you฀have฀covered฀in฀your฀earlier฀studies,฀you฀will฀come฀across฀ethical฀issues฀in฀connection฀with฀more฀
advanced฀topics,฀such฀as฀foreign฀subsidiaries.฀฀
The฀common฀thread฀running฀through฀each฀ethical฀dilemma฀is฀generally฀that฀someone฀with฀power,฀for฀
example฀a฀company฀director,฀wants฀you฀to฀deviate฀from฀IFRS฀in฀order฀to฀present฀the฀financial฀
statements฀in฀a฀more฀favourable฀light.฀The฀answer฀will฀always฀be฀that฀this฀should฀be฀resisted,฀but฀in฀
each฀case฀it฀must฀be฀argued฀with฀reference฀to฀the฀detail฀of฀the฀IFRS฀in฀question,฀not฀just฀in฀terms฀of฀
general฀principles.฀

฀ ฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

Chapter฀summary฀
฀
Professional฀and฀ethical฀
฀ duty฀of฀the฀accountant฀
฀
฀ 1.฀ Professional฀and฀
฀ 2.฀ Related฀parties฀
ethical฀issues฀ ฀

฀ Related฀parties฀ ฀ Disclosure฀
฀ Not฀related฀ (see฀next฀page)฀
parties฀

Ethical฀principles฀in฀ Complying฀with฀accounting฀ Morality฀and฀ethics฀

corporate฀reporting฀ standards฀ ฀ Ethical฀theory:฀
ACCA฀Code฀of฀Ethics฀and฀ Ethical฀problems฀on฀preparing฀FS/฀ Ethical฀relativism฀vs฀ethical฀absolutism฀
Conduct฀ advising฀on฀corporate฀reporting:฀ –฀ Ethics฀does฀vs฀does฀not฀change฀฀
฀ Objectivity฀ ฀ Duty฀of฀professional฀competence:฀ over฀time฀
–฀ Insufficient฀time฀ Kohlberg's฀ethical฀thought฀process:฀
฀ Integrity฀
(1)฀Act฀ethically฀because฀punished฀฀
฀ Professional฀ –฀ Incomplete/฀
if฀do฀not฀
competence฀and฀due฀ inadequate฀information฀ (2)฀Act฀ethically฀because฀law฀says฀so฀
care฀ –฀ Insufficient฀training/experience฀ (3)฀Act฀ethically฀because฀it฀is฀right฀to฀฀
฀ Confidentiality฀ –฀ Inadequate฀resources฀ do฀so฀
฀ Influences฀on฀ethics:฀
฀ Professional฀behaviour฀ ฀ Threats฀to฀fundamental฀principles:฀฀ ฀ –฀ Individual฀factors,฀eg฀age,฀education฀
–฀ Self-interest฀ ฀ –฀ Situational฀factors,฀eg฀entity฀culture฀
–฀ Self-review฀
–฀ Advocacy฀
Framework฀for฀  Social฀responsibility฀
–฀ Familiarity฀
decisions฀ –฀ Only฀focus฀on฀maximising฀
–฀ Intimidation฀
What฀is฀the฀real฀issue?฀ shareholder฀wealth฀for฀
฀ ฀ Prohibition฀of฀association฀with฀reports฀ both฀shareholders฀and฀
Are฀there฀threats฀to฀ that:฀ other฀stakeholders.฀
compliance฀with฀ –฀ Are฀materially฀misleading฀ –฀ Alternative฀view:฀business฀
fundamental฀principles?฀ –฀ Contain฀reckless฀information฀ performance฀can฀be฀
฀ enhanced฀by฀good฀
–฀ Are฀biased฀
Are฀the฀threats฀significant?฀ corporate฀citizenship฀
฀ –฀ Omit/obscure฀information฀ ฀ Ethical฀systems฀in฀
Are฀there฀safeguards฀that฀ ฀ organisations:฀
will฀eliminate฀them/฀ ฀ ฀ –฀ Personal฀ethics฀
reduce฀them฀to฀an฀ ฀ –฀ Professional฀ethics฀
acceptable฀level?฀ ฀ –฀ Organisational฀culture฀
฀ ฀ –฀ Organisation's฀systems฀
Can฀you฀face฀yourself฀in฀ ฀ Managing฀ethics฀in฀
the฀mirror?฀ organisations:฀
฀ ฀ –฀ Compliance-based฀
approach฀
฀ –฀ Integrity-based฀approach฀

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2.฀฀ Related฀parties฀
฀
Related฀party฀ ฀ Disclosure฀
฀
฀ A฀person฀(or฀close฀family฀member)฀if฀that฀ ฀
฀ Reasons฀for฀disclosure,฀to฀identify:฀
฀ person:฀฀ ฀
฀ Controlling฀party฀
฀ (i)฀
฀ Has฀control฀or฀joint฀control฀(over฀the฀ ฀ ฀ ฀ Transactions฀with฀directors฀
฀ reporting฀entity);฀฀ ฀ ฀ Group฀transactions฀that฀would฀not฀otherwise฀
฀ (ii)฀ Has฀significant฀influence;฀or฀฀ ฀ occur฀
฀ (iii)฀ Is฀key฀management฀personnel฀of฀the฀ ฀ Artificially฀high/low฀prices฀
฀
entity฀or฀of฀its฀direct฀or฀indirect฀parents฀฀ ฀ 'Hidden'฀costs฀(free฀services฀provided)฀
฀ ฀
฀ An฀entity฀if:฀฀ ฀
฀ (i)฀ A฀member฀of฀the฀same฀group฀(each฀ ฀
฀ parent,฀subsidiary฀and฀fellow฀subsidiary฀is฀
฀ ฀ Name฀of฀parent฀(and฀
฀ related)฀ ultimate฀controlling฀ ฀ Key฀management฀
฀ personnel฀
฀ (ii)฀ One฀entity฀is฀an฀associate*/joint฀ party)฀(irrespective฀of฀
venture*฀of฀the฀other฀ ฀ whether฀transactions฀ compensation฀
฀
฀ have฀occurred)฀
฀ (iii)฀ Both฀entities฀are฀joint฀ventures*฀of฀the฀
same฀third฀party฀ ฀
฀
(iv)฀ One฀entity฀is฀a฀joint฀venture*฀of฀a฀third฀ ฀ ฀ For฀transactions:฀
฀
entity฀and฀the฀other฀entity฀is฀an฀ ฀
฀ ฀ –฀ Nature฀of฀relationship฀
associate฀of฀the฀third฀entity.฀
฀ (v)฀฀ It฀is฀a฀post-employment฀benefit฀plan฀ ฀ ฀ –฀ Amount฀
฀ ฀ –฀ Outstanding฀balance฀(including฀
฀ for฀employees฀of฀the฀reporting฀
฀ commitments)฀
฀ entity/related฀entity฀ ฀ –฀ Bad฀&฀doubtful฀debts฀
฀ (vi)฀ It฀is฀controlled฀or฀jointly฀controlled฀by฀ ฀
฀ ฀ Similar฀items฀may฀be฀disclosed฀in฀
฀ any฀person฀identified฀above฀฀
aggregate฀except฀where฀separate฀
฀ (vii)฀ A฀person฀with฀control/joint฀control฀has฀ ฀
disclosure฀is฀necessary฀for฀
฀ significant฀influence฀over฀or฀is฀key฀ ฀ understanding฀
management฀personnel฀of฀the฀entity฀
฀ ฀
(or฀of฀a฀parent฀of฀the฀entity)฀ ฀ No฀disclosure฀req'd฀of฀intragroup฀
฀ ฀ transactions฀in฀consolidated฀FS฀(as฀are฀
(viii)฀It฀(or฀another฀member฀of฀its฀group)฀provides฀
฀ key฀management฀personnel฀ ฀ eliminated)฀
฀ services฀to฀the฀reporting฀entity฀(or฀to฀its฀ ฀ ฀ Government฀related฀entities฀(ie฀where฀a฀
฀ parent)฀ ฀ gov't฀has฀control/joint฀control฀or฀
฀ *฀including฀subs฀of฀the฀associate/joint฀venture฀ ฀ significant฀influence),฀for฀transactions฀
฀ ฀ with฀the฀government/฀entities฀related฀to฀
same฀government,฀only฀need฀to฀
฀
disclose:฀
฀
฀ –฀ Name฀of฀government฀
฀ ฀ –฀ Nature฀of฀relationship฀
Not฀related฀parties฀
฀ ฀ –฀ Nature฀and฀amount฀of฀each฀
฀
(a)฀ Two฀entities฀simply฀because฀they฀have฀a฀ ฀ individually฀significant฀transaction฀
฀ director/key฀manager฀in฀common฀
฀
(b)฀ Two฀venturers฀simply฀because฀they฀share฀joint฀
฀ control฀over฀a฀joint฀venture;฀
฀
(c)฀ (i)฀ Providers฀of฀finance;฀
฀
฀ (ii)฀ Trade฀unions;฀
฀
฀฀ (iii)฀ Public฀utilities;฀
฀฀ (iv)฀ Government฀departments฀and฀agencies;฀
฀ simply฀by฀virtue฀of฀their฀normal฀dealings฀
with฀the฀entity.฀
฀
(d)฀
฀ A฀customer,฀supplier,฀franchisor,฀distributor฀or฀
general฀agent฀with฀whom฀an฀entity฀transacts฀a฀
฀
significant฀volume฀of฀business,฀simply฀by฀virtue฀
฀ of฀the฀resulting฀economic฀dependence฀
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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

3.฀ Accounting฀
policies,฀estimates฀
฀ ฀
and฀prior฀period฀
errors฀

Accounting฀policies฀
Specific฀principles,฀bases,฀conventions฀
applied฀by฀an฀entity฀in฀
preparing/presenting฀financial฀
statements฀

To฀choose:฀
(1)฀Apply฀relevant฀IFRS฀(choice฀within฀
IFRS฀is฀a฀matter฀of฀accounting฀
policy)฀
(2)฀Consult฀IFRS฀dealing฀with฀similar฀
issues฀
(3)฀Conceptual฀Framework฀
(4)฀Other฀national฀GAAP฀

Change฀in฀policy:฀
Apply฀retrospectively฀unless฀
transitional฀provision฀of฀IFRS฀specifies฀
otherwise฀

Accounting฀estimates฀
Judgements฀based฀on฀latest฀reliable฀
information฀

Change฀in฀estimate฀
Apply฀prospectively฀ie฀adjust฀current฀and฀
future฀periods฀
Errors฀
Omissions฀and฀misstatements฀in฀for฀one฀or฀
more฀prior฀periods฀arising฀from฀a฀failure฀
to฀use,฀or฀misuse฀of,฀reliable฀information฀
Correct฀by฀restating฀the฀comparative฀
figures,฀or,฀if฀they฀occurred฀in฀an฀earlier฀
period,฀by฀adjusting฀opening฀reserves฀
฀

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฀฀

Knowledge฀diagnostic฀

1.฀ Professional฀and฀ethical฀issues฀
฀ ฀ In฀all฀areas฀of฀professional฀work,฀whether฀in฀practice฀or฀in฀business,฀ACCA฀members฀and฀
students฀must฀carry฀out฀their฀work฀with฀regard฀to฀the฀fundamental฀principles฀of฀professional฀
ethics.฀
฀ ฀ A฀person's฀moral฀standing,฀which฀can฀be฀influenced฀by฀a฀number฀of฀factors฀may฀be฀
relevant฀to฀their฀ethical฀behaviour.฀
฀ ฀ Two฀important฀ethical฀theories฀are฀ethical฀relativism฀(ethics฀change฀over฀time฀and฀place)฀
and฀ethical฀absolutism฀(some฀actions฀are฀always฀right,฀others฀always฀wrong).฀
฀฀฀ ฀ Ethical฀systems฀include:฀personal฀ethics,฀professional฀ethics฀(eg฀ACCA฀Code),฀
organisational฀culture฀and฀organisation฀systems฀
฀ ฀ The฀ACCA's฀fundamental฀ethical฀principles฀are:฀
฀ ฀ –฀ Integrity฀
฀ ฀ –฀ Objectivity฀
฀ ฀ –฀ Professional฀competence฀
฀ ฀ –฀ Confidentiality฀
฀ ฀ –฀ Professional฀behaviour฀
2.฀ Related฀parties฀
฀ ฀ Related฀parties฀
฀ ฀ –฀ IAS฀24฀identifies฀persons฀or฀entities฀as฀related฀where฀there฀is฀a฀close฀personal฀
relationship฀to฀the฀entity฀or฀a฀control,฀joint฀control฀or฀significant฀influence฀
relationship.฀
฀ ฀ –฀ In฀any฀case,฀the฀substance฀of฀the฀relationship฀is฀considered฀when฀deciding฀
whether฀parties฀are฀related.฀
฀ ฀ Not฀related฀parties฀
฀ ฀ –฀ IAS฀24฀identifies฀parties฀which฀are฀not฀related฀in฀their฀normal฀dealings฀with฀the฀
entity.฀
฀ ฀ Disclosure฀
฀ ฀ –฀ Disclosure฀is฀important฀so฀the฀user฀can฀estimate฀the฀effects฀of฀related฀party฀
transactions.฀฀IAS฀24฀requires฀disclosure฀of฀the฀entity's฀parent/ultimate฀parent,฀
benefits฀earned฀by฀key฀management฀personnel฀and฀transactions฀with฀
related฀parties.฀
฀
3.฀ Accounting฀policies,฀estimates฀and฀prior฀period฀errors฀
฀ ฀ Accounting฀policies:฀
฀ ฀ –฀ Specific฀principles,฀bases,฀conventions฀applied฀by฀an฀entity฀in฀preparing/presenting฀
financial฀statements฀
฀ ฀ –฀ Change฀in฀policy:฀apply฀retrospectively฀unless฀transitional฀provision฀of฀IFRS฀specifies฀
otherwise฀
฀ ฀ Accounting฀estimates฀
฀ ฀ –฀ Accounting฀estimates฀are฀judgements฀based฀on฀latest฀reliable฀information฀
฀ ฀ –฀ Change฀in฀accounting฀estimate:฀prospectively฀ie฀adjust฀current฀and฀future฀periods฀

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2:฀Professional฀and฀ethical฀duty฀of฀the฀accountant฀

฀ ฀ Prior฀period฀errors฀
฀ ฀ –฀ Omissions฀from,฀and฀misstatements฀in,฀the฀entity's฀financial฀statements฀for฀one฀or฀more฀
prior฀periods฀arising฀from฀a฀failure฀to฀use,฀or฀misuse฀of,฀reliable฀information฀
฀ ฀ –฀ Material฀prior฀period฀errors฀are฀corrected฀by฀restating฀the฀comparative฀figures,฀or,฀if฀
they฀occurred฀in฀an฀earlier฀period,฀by฀adjusting฀opening฀reserves฀

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฀฀

Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀questions฀below฀from฀the฀Further฀question฀practice฀bank.฀฀
Q2฀Fundamental฀Principles฀
Q3฀Ace฀

Further฀reading฀
The฀examining฀team฀for฀ACCA฀P2,฀the฀forerunner฀of฀SBR,฀have฀written฀an฀article฀about฀tackling฀ethics฀
questions฀in฀the฀exam,฀which฀gives฀some฀useful฀tips฀and฀examples,฀and,฀apart฀from฀references฀to฀the฀
number฀of฀marks,฀is฀still฀useful฀for฀SBR.฀
www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles/ethics.html฀
On฀the฀broader฀issue฀of฀ethical฀dilemmas,฀the฀following฀article฀gives฀some฀useful฀insights฀in฀the฀context฀of฀
digitisation:฀
www.accaglobal.com/uk/en/member/discover/cpd-articles/business-management/ethics-pathcpd.html฀
On฀related฀party฀disclosures,฀BPP฀recommends฀the฀following฀article฀in฀Accounting฀and฀Business฀
magazine.฀While฀it฀is฀written฀for฀Continuing฀Professional฀Development฀purposes,฀it฀is฀still฀useful฀for฀your฀
exam:฀
www.accaglobal.com/uk/en/member/discover/cpd-articles/corporate-reporting/holt-jul16.html฀

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฀
Non-current฀assets
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.

Discuss฀and฀apply฀the฀recognition,฀derecognition฀and฀measurement฀of฀฀ C2(a)฀
non-current฀assets฀including฀impairments฀and฀revaluations.฀

Discuss฀and฀apply฀the฀accounting฀treatment฀of฀investment฀properties฀including฀ C2(c)฀
classification,฀recognition,฀measurement฀and฀change฀of฀use.฀

Discuss฀and฀apply฀the฀accounting฀treatment฀of฀intangible฀assets฀including฀the฀ C2(d)฀
criteria฀for฀recognition฀and฀measurement฀subsequent฀to฀acquisition.฀

Discuss฀and฀apply฀the฀accounting฀treatment฀for฀borrowing฀costs.฀ C2(e)฀

Discuss฀and฀apply฀the฀definitions฀of฀'fair฀value'฀measurement฀and฀'active฀ C9(a)฀
market'.฀

Discuss฀and฀apply฀the฀'fair฀value฀hierarchy'.฀ C9(b)฀

Discuss฀and฀apply฀the฀principles฀of฀highest฀and฀best฀use,฀most฀advantageous฀ C9(c)฀
and฀principal฀market.฀ ฀

Explain฀the฀circumstances฀where฀an฀entity฀may฀use฀a฀valuation฀technique.฀ C9(d)฀

Discuss฀and฀apply฀the฀accounting฀for,฀and฀disclosure฀of,฀government฀grants฀and฀ C11(a)฀
other฀forms฀of฀government฀assistance.฀

Discuss฀and฀apply฀the฀principles฀behind฀the฀initial฀recognition฀and฀subsequent฀ C11(b)฀
measurement฀of฀a฀biological฀asset฀or฀agricultural฀produce.฀

Exam฀context฀
Non-current฀assets฀could฀be฀tested฀in฀any฀part฀of฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀either฀
as฀part฀of฀a฀question฀in฀Section฀A฀or฀B,฀or฀as฀a฀whole฀question฀in฀Section฀B.฀This฀chapter฀builds฀on฀
the฀knowledge฀of฀the฀standards฀relevant฀to฀non-current฀assets฀that฀you฀have฀already฀seen฀in฀your฀
earlier฀studies.฀However,฀questions฀on฀non-current฀assets฀in฀the฀SBR฀exam฀will฀be฀much฀more฀
challenging฀than฀those฀seen฀in฀your฀earlier฀studies฀and฀you฀will฀need฀to฀think฀critically฀and฀in-depth฀
about฀the฀application฀of฀the฀standards฀to฀the฀scenario.฀฀

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Chapter฀overview฀
฀

Non-current฀assets฀

1.฀ Property,฀plant฀ 2.฀ Impairment฀of฀ 3.฀ Fair฀value฀

and฀equipment฀ assets฀(IAS฀36)฀ measurement฀
(IAS฀16)฀ (IFRS฀13)฀

4.฀Intangible฀assets฀ 5.฀ Investment฀property฀ 6.฀ Government฀

(IAS฀38)฀ (IAS฀40)฀ grants฀(IAS฀20))฀

7.฀Borrowing฀costs฀(IAS฀23)฀ 8.฀Agriculture฀(IAS฀41)฀฀

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3:฀Non-current฀assets฀

1฀Property,฀plant฀and฀equipment฀(IAS฀16)฀
Property,฀ plant฀ and฀ equipment฀ are฀ tangible฀ assets฀ with฀ the฀ following฀ properties฀ (IAS฀ 16:฀฀
para.฀6):฀

(a)฀ Held฀by฀an฀entity฀for฀use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services,฀for฀rental฀to฀others,฀
or฀for฀administrative฀purposes฀฀
(b)฀ Expected฀to฀be฀used฀during฀more฀than฀one฀period฀฀
1.1฀Recognition฀
As฀with฀all฀assets,฀recognition฀depends฀on฀two฀criteria฀(IAS฀16:฀para.฀7):฀
(a)฀ It฀is฀probable฀that฀future฀economic฀benefits฀associated฀with฀the฀item฀will฀flow฀to฀the฀entity฀
(b)฀ The฀cost฀of฀the฀item฀can฀be฀measured฀reliably฀
These฀recognition฀criteria฀apply฀to฀subsequent฀expenditure฀as฀well฀as฀costs฀incurred฀initially.฀
IAS฀16฀provides฀additional฀guidance฀as฀follows฀(IAS฀16:฀paras.฀12–14):฀
•฀฀ Smaller฀items฀such฀as฀tools฀may฀be฀classified฀as฀consumables฀and฀ expensed฀
For฀further฀discussion฀ rather฀ than฀ capitalised.฀ Where฀ they฀ are฀ capitalised,฀ they฀ are฀ usually฀ aggregated฀
on฀this,฀refer฀to฀ and฀treated฀as฀one.฀
ACCA's฀article฀'IAS฀16฀
and฀componentisation'.฀ •฀฀ Large฀ and฀ complex฀ assets฀ should฀ be฀ broken฀ down฀ into฀ composite฀ parts฀ and฀
See฀Further฀Study฀
Guidance฀at฀the฀end฀of฀ each฀ depreciated฀ separately,฀ if฀ the฀ parts฀ have฀ differing฀ patterns฀ of฀ benefits฀
this฀chapter.฀ and฀the฀cost฀of฀each฀is฀significant.฀Expenditure฀to฀renew฀individual฀parts฀can฀then฀
be฀capitalised.฀

Supplementary฀reading฀
See฀ Chapter฀ 3฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀ of฀ the฀ Workbook,฀ for฀ further฀ discussion฀ of฀ the฀ requirements฀ in฀ IAS฀ 16฀ relating฀ to฀
componentisation฀and฀reconditioning฀of฀assets.฀฀

1.2฀Measurement฀at฀recognition฀
Property,฀ plant฀ and฀ equipment฀ should฀ initially฀ be฀ measured฀ at฀ cost,฀ which฀ includes฀ (IAS฀ 16:฀฀
para.฀15):฀

Directly฀attributable฀costs฀
Finance฀costs:฀
Purchase฀price,฀less฀trade฀ of฀bringing฀the฀asset฀to฀
discount/rebate
+ working฀condition฀for฀
+ capitalised฀for฀
qualifying฀assets฀(IAS฀23)
intended฀use฀

Including: Including: See฀Section฀7

•฀฀฀Import฀duties •฀฀฀Employee฀benefit฀costs
•฀฀฀Non-refundable฀ •฀฀฀Site฀preparation
฀฀฀฀฀purchase฀taxes
•฀฀฀Initial฀delivery฀and฀handling฀
฀฀฀฀฀costs
•฀฀฀Installation฀and฀assembly฀
฀฀฀฀฀costs
•฀฀฀Professional฀fees
•฀฀฀Costs฀of฀testing
•฀฀฀Site฀restoration฀provision฀
฀฀฀฀฀(IAS฀37),฀where฀not฀included฀
฀฀฀฀฀in฀cost฀of฀inventories฀produced ฀
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1.3฀Measurement฀after฀recognition฀
After฀recognition,฀entities฀can฀chose฀between฀two฀models,฀the฀revaluation฀model฀and฀the฀cost฀model฀
(IAS฀16:฀paras.฀30–31):฀

Cost฀model฀ Carry฀asset฀at฀cost฀less฀depreciation฀and฀any฀accumulated฀impairment฀
losses฀

Revaluation฀model฀ Carry฀asset฀at฀revalued฀amount,฀ie฀fair฀value฀less฀subsequent฀
accumulated฀depreciation฀and฀any฀accumulated฀impairment฀losses฀

1.4฀Revaluations฀
If฀the฀revaluation฀model฀is฀applied฀(IAS฀16:฀para.฀36):฀
(a)฀฀ Revaluations฀must฀be฀carried฀out฀regularly,฀depending฀on฀volatility.฀
(b)฀ The฀asset฀should฀be฀revalued฀to฀fair฀value,฀using฀the฀fair฀value฀hierarchy฀in฀IFRS฀13.฀฀
(c)฀ If฀one฀asset฀is฀revalued,฀so฀must฀be฀the฀whole฀of฀the฀rest฀of฀the฀class฀of฀assets฀at฀the฀same฀time.฀
(d)฀ An฀ increase฀ in฀ value฀ is฀ credited฀ to฀ other฀ comprehensive฀ income฀ (OCI)฀ (and฀ the฀ revaluation฀
surplus฀in฀equity).฀
(e)฀ A฀decrease฀is฀an฀expense฀in฀profit฀or฀loss฀after฀cancelling฀a฀previous฀revaluation฀surplus.฀

1.5฀Depreciation฀
An฀item฀of฀property,฀plant฀or฀equipment฀should฀be฀depreciated฀(IAS฀16:฀para.฀42).฀
(a)฀ Depreciation฀is฀based฀on฀the฀carrying฀amount฀in฀the฀statement฀of฀financial฀position.฀It฀must฀be฀
determined฀separately฀for฀each฀significant฀part฀of฀an฀item.฀
(b)฀ Excess฀ over฀ historical฀ cost฀ depreciation฀ can฀ be฀ transferred฀ to฀ realised฀ earnings฀ through฀
reserves.฀
(c)฀ The฀ residual฀ value฀ and฀ useful฀ life฀ of฀ an฀ asset,฀ as฀ well฀ as฀ the฀ depreciation฀ method,฀ must฀ be฀
reviewed฀at฀least฀at฀each฀financial฀year฀end.฀Changes฀are฀treated฀as฀changes฀in฀accounting฀
estimates฀and฀are฀accounted฀for฀prospectively฀as฀adjustments฀to฀future฀depreciation.฀
(d)฀ Depreciation฀ of฀ an฀ item฀ does฀ not฀ cease฀ when฀ it฀ becomes฀ temporarily฀ idle฀ or฀ is฀ retired฀ from฀
active฀use฀and฀held฀for฀disposal,฀unless฀it฀is฀classified฀as฀held฀for฀sale฀under฀IFRS฀5.฀

Supplementary฀reading฀
See฀ Chapter฀ 3฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀ of฀ the฀ Workbook,฀ for฀ further฀ discussion฀ of฀ the฀ requirements฀ in฀ IAS฀ 16฀ relating฀ to฀ residual฀
value.฀฀

1.6฀Retirements฀and฀disposals฀
Gains฀or฀losses฀are฀calculated฀by฀comparing฀net฀proceeds฀with฀the฀carrying฀amount฀of฀the฀asset฀and฀
are฀recognised฀as฀income/expense฀in฀profit฀or฀loss฀(IAS฀16:฀para.฀67).฀
When฀a฀revalued฀asset฀is฀disposed฀of,฀any฀revaluation฀surplus฀may฀be฀transferred฀directly฀to฀retained฀
earnings.฀Alternatively,฀it฀may฀be฀left฀in฀equity฀under฀the฀heading฀revaluation฀surplus.฀

1.7฀Exchanges฀of฀assets฀
Exchanges฀ of฀ items฀ of฀ property,฀ plant฀ and฀ equipment,฀ regardless฀ of฀ whether฀ the฀ assets฀ are฀ similar,฀
are฀ measured฀ at฀ fair฀ value฀ (IAS฀ 16:฀ para.฀ 24),฀ unless฀ the฀ exchange฀ transaction฀ lacks฀ commercial฀
substance฀or฀the฀fair฀value฀of฀neither฀of฀the฀assets฀exchanged฀can฀be฀measured฀reliably.฀฀

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3:฀Non-current฀assets฀

If฀the฀acquired฀item฀is฀not฀measured฀at฀fair฀value,฀its฀cost฀is฀measured฀at฀the฀carrying฀amount฀of฀the฀
asset฀given฀up.฀

Supplementary฀reading฀
See฀ Chapter฀ 3฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook,฀for฀revision฀activities฀to฀test฀your฀knowledge฀of฀this฀topic.฀

2฀Impairment฀of฀assets฀(IAS฀36)฀
The฀basic฀principle฀underlying฀IAS฀36฀Impairment฀of฀Assets฀is฀relatively฀straightforward.฀If฀an฀asset's฀
value฀ in฀ the฀ financial฀ statements฀ is฀ higher฀ than฀ its฀ realistic฀ value,฀ measured฀ as฀ its฀ 'recoverable฀
amount',฀the฀asset฀is฀judged฀to฀have฀suffered฀an฀impairment฀loss.฀It฀should฀therefore฀be฀reduced฀in฀
value,฀ by฀ the฀ amount฀ of฀ the฀ impairment฀ loss.฀ The฀ amount฀ of฀ the฀ impairment฀ loss฀ should฀ be฀
written฀off฀against฀profit฀immediately.฀
The฀main฀accounting฀issues฀to฀consider฀are:฀
(a)฀ How฀is฀it฀possible฀to฀identify฀when฀an฀impairment฀loss฀may฀have฀occurred?฀
(b)฀ How฀should฀the฀recoverable฀amount฀of฀the฀asset฀be฀measured?฀
(c)฀ How฀should฀an฀impairment฀loss฀be฀reported฀in฀the฀financial฀statements?฀
2.1฀Scope฀
IAS฀36฀applies฀to฀impairment฀of฀all฀assets฀other฀than฀(IAS฀36:฀para.฀2):฀
฀ Inventories฀
฀ Deferred฀tax฀assets฀
฀ Employee฀benefit฀assets฀
฀ Financial฀assets฀
฀ Investment฀property฀held฀under฀the฀fair฀value฀model฀
฀ Biological฀assets฀held฀at฀fair฀value฀less฀costs฀to฀sell฀
฀ Non-current฀assets฀held฀for฀sale฀

2.2฀Identifying฀a฀potentially฀impaired฀asset฀
The฀ entity฀ should฀ look฀ for฀ evidence฀ of฀ impairment฀ at฀ the฀ end฀ of฀ each฀ period฀ and฀ conduct฀ an฀
impairment฀ review฀ on฀ any฀ asset฀where฀ there฀ is฀ evidence฀ of฀ impairment.฀The฀following฀are฀
indicators฀of฀impairment฀(IAS฀36:฀para.฀12):฀

External Internal
(a)฀ Observable฀indications฀that฀the฀ (a)฀ Evidence฀of฀obsolescence฀or฀
asset's฀value฀has฀declined฀during฀ physical฀damage
the฀period฀significantly฀more฀than฀
(b)฀ Significant฀changes฀with฀an฀
expected฀due฀to฀the฀passage฀of฀
adverse฀effect฀on฀the฀entity*:
time฀or฀normal฀use
(i)฀ the฀asset฀becomes฀idle
(b)฀ Significant฀changes฀with฀an฀
adverse฀effect฀on฀the฀entity฀in฀the฀ (ii)฀ plans฀to฀
technological฀or฀market฀ discontinue/restructure฀the฀
environment,฀or฀in฀the฀economic฀or฀ operation฀to฀which฀the฀asset฀
legal฀environment belongs
(c)฀ Increased฀market฀interest฀rates฀or฀ (iii)฀ plans฀to฀dispose฀of฀an฀asset฀
other฀market฀rates฀of฀return฀ before฀the฀previously฀
affecting฀discount฀rates฀and฀thus฀ expected฀date
reducing฀value฀in฀use (iv)฀ reassessing฀an฀asset's฀useful฀
(d)฀ Carrying฀amount฀of฀net฀assets฀of฀ life฀as฀finite฀rather฀than฀
the฀entity฀exceeds฀market฀ indefinite
capitalisation. (c)฀ Internal฀evidence฀available฀that฀
asset฀performance฀will฀be฀worse฀
than฀expected
฀
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*Once฀the฀asset฀meets฀the฀criteria฀to฀be฀classified฀as฀'held฀for฀sale',฀it฀is฀excluded฀from฀the฀scope฀of฀
IAS฀ 36฀ and฀ accounted฀ for฀ under฀ IFRS฀ 5฀ Non-current฀ Assets฀ Held฀ for฀ Sale฀ and฀ Discontinued฀
Operations.฀
Annual฀ impairment฀ tests,฀ irrespective฀ of฀ whether฀ there฀ are฀ indications฀ of฀ impairment,฀ are฀
required฀for:฀
฀ Intangible฀assets฀with฀an฀indefinite฀useful฀life/not฀yet฀available฀for฀use฀
฀ Goodwill฀acquired฀in฀a฀business฀combination.฀

2.3฀Measuring฀the฀recoverable฀amount฀of฀the฀asset฀
Assets฀must฀be฀carried฀at฀no฀more฀than฀their฀recoverable฀amount.฀

Recoverable฀Amount
฀=฀Higher฀of

Fair฀value฀less฀costs฀
Value฀in฀Use
of฀disposal฀

(IAS฀36:฀para.฀6)฀

If฀the฀carrying฀amount฀of฀an฀asset฀is฀higher฀that฀its฀recoverable฀amount,฀the฀asset฀is฀impaired฀ and฀
should฀be฀written฀down฀to฀its฀recoverable฀amount.฀The฀difference฀between฀the฀carrying฀amount฀of฀the฀
impaired฀asset฀and฀its฀recoverable฀amount฀is฀known฀as฀an฀impairment฀loss.฀฀

Fair฀value฀less฀costs฀of฀disposal:฀the฀price฀that฀would฀be฀received฀to฀sell฀the฀asset฀in฀an฀
Key term
orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date฀(IFRS฀13฀definition฀of฀fair฀
value),฀less฀the฀direct฀incremental฀costs฀attributable฀to฀the฀disposal฀of฀the฀asset฀(IAS฀36:฀฀
para.฀6).฀฀฀

Examples฀ of฀ costs฀ of฀ disposal฀ are฀ legal฀ costs,฀ stamp฀ duty฀ and฀ similar฀ transaction฀ taxes,฀ costs฀ of฀
removing฀ the฀ asset,฀ and฀ direct฀ incremental฀ costs฀ to฀ bring฀ an฀ asset฀ into฀ condition฀ for฀ its฀ sale.฀ They฀
exclude฀finance฀costs฀and฀income฀tax฀expense.฀

Value฀in฀use฀of฀an฀asset:฀measured฀as฀the฀present฀value฀of฀estimated฀future฀cash฀flows฀(inflows฀
Key term
minus฀outflows)฀generated฀by฀the฀asset,฀including฀its฀estimated฀net฀disposal฀value฀(if฀any)฀at฀the฀end฀
of฀its฀expected฀useful฀life.฀
(IAS฀36:฀para.฀6)฀

Cash฀flow฀projections฀are฀based฀on฀the฀most฀recent฀management-approved฀budgets/forecasts.฀They฀
should฀ cover฀ a฀ maximum฀ period฀ of฀ five฀ years,฀ unless฀ a฀ longer฀ period฀ can฀ be฀ justified.฀ (IAS฀ 36:฀
paras.฀33–35).฀
The฀cash฀flows฀should฀include฀(IAS฀36:฀para.฀50):฀
(a)฀ Projections฀of฀cash฀inflows฀from฀continuing฀use฀of฀the฀asset฀
(b)฀ Projections฀of฀cash฀outflows฀necessarily฀incurred฀to฀generate฀the฀cash฀inflows฀from฀continuing฀
use฀of฀the฀asset฀
(c)฀ Net฀cash฀flows,฀if฀any,฀for฀the฀disposal฀of฀the฀asset฀at฀the฀end฀of฀its฀useful฀life฀
(d)฀ Future฀overheads฀that฀can฀be฀directly฀attributed,฀or฀allocated฀on฀a฀reasonable฀and฀consistent฀
basis฀
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3:฀Non-current฀assets฀

The฀cash฀flows฀should฀exclude:฀
(a)฀ Cash฀outflows฀relating฀to฀obligations฀already฀recognised฀as฀liabilities฀(to฀avoid฀double฀
counting)฀(IAS฀36:฀para฀43)฀
(b)฀ The฀effects฀of฀any฀future฀restructuring฀to฀which฀the฀entity฀is฀not฀yet฀committed฀(IAS฀36:฀฀
para.฀44)฀
(c)฀ Cash฀flows฀from฀financing฀activities฀or฀income฀tax฀receipts฀and฀payments฀(IAS฀36:฀para.฀50)฀฀
Discount฀rate฀
The฀ discount฀ rate฀ (or฀ rates)฀ should฀ be฀ a฀ pre-tax฀ rate฀ (or฀ rates)฀ that฀ reflect(s)฀ current฀ market฀
assessments฀of:฀
(a)฀ The฀time฀value฀of฀money;฀and฀
(b)฀ The฀risks฀specific฀to฀the฀asset฀for฀which฀future฀cash฀flow฀estimates฀have฀not฀been฀adjusted.฀฀
(IAS฀36:฀para.฀55)฀

Illustration฀1฀
Impairment฀loss฀
A฀company฀that฀extracts฀natural฀gas฀and฀oil฀has฀a฀drilling฀platform฀in฀the฀Caspian฀Sea.฀It฀is฀required฀
by฀legislation฀of฀the฀country฀concerned฀to฀remove฀and฀dismantle฀the฀platform฀at฀the฀end฀of฀its฀useful฀
life.฀Accordingly,฀the฀company฀has฀included฀an฀amount฀in฀its฀accounts฀for฀removal฀and฀dismantling฀
costs,฀and฀is฀depreciating฀this฀amount฀over฀the฀platform's฀expected฀life.฀
The฀company฀is฀carrying฀out฀an฀exercise฀to฀establish฀whether฀there฀has฀been฀an฀impairment฀of฀the฀
platform.฀
(a)฀ Its฀carrying฀amount฀in฀the฀statement฀of฀financial฀position฀is฀$3m.฀
(b)฀ The฀company฀has฀received฀an฀offer฀of฀$2.8m฀for฀the฀platform฀from฀another฀oil฀company.฀The฀
bidder฀would฀take฀over฀the฀responsibility฀(and฀costs)฀for฀dismantling฀and฀removing฀the฀platform฀
at฀the฀end฀of฀its฀life.฀
(c)฀ The฀present฀value฀of฀the฀estimated฀cash฀flows฀from฀the฀platform's฀continued฀use฀is฀$3.3m.฀
(d)฀ The฀carrying฀amount฀in฀the฀statement฀of฀financial฀position฀for฀the฀provision฀for฀dismantling฀and฀
removal฀is฀currently฀$0.6m.฀
Required฀
What฀should฀be฀the฀value฀of฀the฀drilling฀platform฀in฀the฀statement฀of฀financial฀position,฀and฀what,฀if฀
anything,฀is฀the฀impairment฀loss?฀

Solution฀

Fair฀value฀less฀costs฀of฀disposal฀฀ =฀ $2.8m
Value฀in฀use฀฀ =฀ Present฀value฀of฀cash฀flows฀from฀use฀less฀the฀
carrying฀amount฀of฀the฀provision/liability฀=฀$3.3m฀–฀
$0.6m฀=฀$2.7m฀
Recoverable฀amount฀฀ =฀ Higher฀of฀these฀two฀amounts,฀ie฀$2.8m฀
Carrying฀value฀ =฀ $3m
Impairment฀loss฀ =฀ $0.2m
฀
The฀carrying฀amount฀should฀be฀reduced฀to฀$2.8m.฀

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Activity฀1:฀Impairment฀ ฀

Shiplake฀ is฀ preparing฀ its฀ financial฀ statements฀ for฀ the฀ year฀ ended฀ 31฀ March฀ 20X2.฀ Shiplake฀ has฀
undertaken฀an฀impairment฀review฀which฀has฀identified฀an฀issue฀with฀an฀item฀of฀earth-moving฀plant,฀
which฀is฀hired฀out฀to฀companies฀on฀short-term฀contracts.฀The฀plant's฀carrying฀amount฀is฀$400,000.฀
The฀ estimated฀ selling฀ price฀ of฀ the฀ plant฀ is฀ only฀ $250,000,฀ with฀ associated฀ selling฀ expenses฀ of฀
$5,000.฀ A฀ recent฀ review฀ of฀ its฀ value฀ in฀ use฀ based฀ on฀ forecast฀ future฀ cash฀ flows฀ was฀ estimated฀ at฀
$500,000.฀ Since฀ this฀ review฀ was฀ undertaken฀ there฀ has฀ been฀ a฀ dramatic฀ increase฀ in฀ interest฀ rates฀
that฀has฀significantly฀increased฀the฀cost฀of฀capital฀used฀by฀Shiplake฀to฀discount฀the฀future฀cash฀flows฀
of฀the฀plant.฀฀
Required฀
Explain฀the฀effect฀of฀the฀above฀information฀on฀Shiplake's฀financial฀statements฀to฀31฀March฀20X2.฀

2.4฀Cash-generating฀units฀
Where฀ it฀ is฀ not฀ possible฀ to฀ estimate฀ the฀ recoverable฀ amount฀ of฀ an฀ individual฀ asset,฀ the฀ entity฀
estimates฀the฀recoverable฀amount฀of฀the฀cash-generating฀unit฀to฀which฀it฀belongs.฀

Cash-generating฀unit฀(IAS฀36):฀the฀smallest฀identifiable฀group฀of฀assets฀that฀generates฀cash฀
Key term
inflows฀that฀are฀largely฀independent฀of฀the฀cash฀inflows฀from฀other฀assets฀or฀groups฀of฀assets฀(IAS฀36:฀
para.฀6).฀

2.5฀Allocating฀goodwill฀to฀cash-generating฀units฀฀
Goodwill฀ does฀ not฀ generate฀ independent฀ cash฀ flows฀ and฀ therefore฀ its฀ recoverable฀ amount฀ as฀ an฀
individual฀asset฀cannot฀be฀determined.฀It฀is฀therefore฀allocated฀to฀the฀cash-generating฀unit฀(CGU)฀to฀
which฀it฀belongs฀and฀the฀CGU฀tested฀for฀impairment.฀
Goodwill฀ that฀ cannot฀ be฀ allocated฀ to฀ a฀ CGU฀ on฀ a฀ non-arbitrary฀ basis฀ is฀ allocated฀ to฀ the฀ group฀ of฀
CGUs฀to฀which฀it฀relates.฀

Illustration฀2฀
Allocating฀goodwill฀to฀CGUs฀

Goodwill฀on฀ P฀ Goodwill฀on฀
acquisition฀฀ acquisition฀฀
=฀$60m฀ =฀$50m
'Group฀of฀
S1฀ S2฀ CGUs'฀

CGU1฀ CGU2฀ CGU3฀ CGU4฀ CGU5฀

฀
Carrying฀amount฀ $140m฀ $160m฀ $180m฀ $220m฀ $260m฀

Allocated฀ $17.5m฀ $20m฀ $22.5m฀

goodwill฀at฀฀
acquisition฀

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3:฀Non-current฀assets฀

On฀acquisition฀of฀S1฀the฀goodwill฀can฀be฀allocated฀on฀a฀non-arbitrary฀basis฀to฀the฀three฀acquired฀
CGUs฀(in฀this฀case฀based฀on฀carrying฀amount฀of฀the฀acquired฀assets).฀Each฀CGU฀is฀tested฀for฀
impairment฀including฀the฀allocated฀goodwill.฀

On฀acquisition฀of฀S2,฀the฀nature฀of฀the฀CGUs฀and฀their฀risks฀is฀different฀such฀that฀the฀goodwill฀cannot฀
be฀allocated฀on฀a฀non-arbitrary฀basis.฀Instead,฀it฀is฀allocated฀to฀the฀group฀of฀CGUs฀to฀which฀it฀relates฀
and฀is฀tested฀for฀impairment฀as฀part฀of฀that฀group฀of฀CGUs฀(here,฀S2).฀

2.6฀Corporate฀assets฀
Corporate฀ assets฀ are฀ group฀ or฀ divisional฀ assets฀ such฀ as฀ a฀ head฀ office฀ building฀ or฀ a฀ research฀
centre.฀Corporate฀assets฀do฀not฀generate฀cash฀inflows฀independently฀from฀other฀assets;฀hence฀their฀
carrying฀amount฀cannot฀be฀fully฀attributed฀to฀a฀cash-generating฀unit฀under฀review.฀
Corporate฀assets฀are฀treated฀in฀a฀similar฀way฀to฀goodwill.฀
The฀CGU฀includes฀corporate฀assets฀(or฀a฀portion฀of฀them)฀that฀can฀be฀allocated฀to฀it฀on฀a฀'reasonable฀
and฀ consistent฀ basis'฀ (IAS฀ 36:฀ para.฀ 77).฀ Where฀ this฀ is฀ not฀ possible,฀ the฀ assets฀ (or฀ unallocated฀
portion)฀are฀tested฀for฀impairment฀as฀part฀of฀the฀group฀of฀CGUs฀to฀which฀they฀can฀be฀allocated฀on฀a฀
reasonable฀and฀consistent฀basis.฀

2.7฀Recognition฀of฀impairment฀losses฀in฀financial฀statements฀
An฀impairment฀loss฀should฀be฀recognised฀immediately.฀฀
The฀asset's฀carrying฀amount฀should฀be฀reduced฀to฀its฀recoverable฀amount,฀and฀for:฀
Assets฀carried฀at฀historical฀cost:฀ The฀impairment฀loss฀is฀charged฀to฀profit฀or฀loss.฀
Revalued฀assets:฀ The฀ impairment฀ loss฀ should฀ be฀ treated฀ under฀ the฀
appropriate฀rules฀of฀the฀applicable฀IFRS.฀฀
For฀ example,฀ property,฀ plant฀ and฀ equipment฀ (in฀
accordance฀ with฀ IAS฀ 16),฀ first฀ to฀ OCI฀ in฀ respect฀ of฀ any฀
revaluation฀surplus฀relating฀to฀the฀asset฀and฀then฀to฀profit฀
or฀loss.฀

2.8฀Allocation฀of฀impairment฀losses฀with฀a฀CGU฀
General฀rule฀
The฀impairment฀loss฀is฀allocated฀in฀the฀following฀order฀(IAS฀36:฀paras.฀59–63):฀

1฀Goodwill฀allocated฀to฀the฀CGU฀
2฀Other฀assets฀on฀a฀pro-rata฀basis฀based฀on฀carrying฀amount฀
The฀ carrying฀ amount฀ of฀ an฀ asset฀ cannot฀ be฀ reduced฀ below฀ the฀ higher฀ of฀ its฀ recoverable฀ amount฀ (if฀
determinable)฀and฀zero.฀

The฀amount฀of฀the฀impairment฀loss฀that฀would฀otherwise฀have฀been฀allocated฀to฀the฀asset฀is฀allocated฀
to฀the฀other฀assets฀on฀a฀pro฀rata฀basis.฀

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Allocation฀of฀loss฀with฀unallocated฀corporate฀assets฀or฀goodwill฀
Where฀not฀all฀assets฀or฀goodwill฀will฀have฀been฀allocated฀to฀an฀individual฀CGU฀then฀different฀levels฀
of฀impairment฀tests฀are฀performed฀to฀ensure฀the฀unallocated฀assets฀are฀tested.฀

(a)฀ Test฀of฀individual฀CGUs฀
Test฀the฀individual฀CGUs฀(including฀allocated฀goodwill฀and฀any฀portion฀of฀the฀carrying฀
amount฀of฀corporate฀assets฀that฀can฀be฀allocated฀on฀a฀reasonable฀and฀consistent฀basis).฀
(b)฀ Test฀of฀group฀of฀CGUs฀
Test฀the฀smallest฀group฀of฀CGUs฀that฀includes฀the฀CGU฀under฀review฀and฀to฀which฀the฀
goodwill฀can฀be฀allocated/a฀portion฀of฀the฀carrying฀amount฀of฀corporate฀assets฀can฀be฀
allocated฀on฀a฀reasonable฀and฀consistent฀basis.฀

Activity฀2:฀Impairment฀of฀CGU฀ ฀

The฀Satchell฀Group฀is฀made฀up฀of฀two฀cash-generating฀units฀(as฀a฀result฀of฀a฀combination฀of฀various฀
past฀100%฀acquisitions),฀plus฀a฀head฀office,฀which฀was฀not฀allocated฀to฀any฀given฀cash-generating฀
unit฀as฀it฀supports฀both฀divisions.฀

Due฀to฀falling฀sales฀as฀a฀result฀of฀an฀economic฀crisis,฀an฀impairment฀test฀was฀conducted฀at฀the฀year฀
end.฀The฀consolidated฀statement฀of฀financial฀position฀showed฀the฀following฀net฀assets฀at฀that฀date.฀

฀ Division฀ Division฀ Head฀ Unallocated฀ Total

A฀ B฀ office฀ goodwill฀
฀ $m $m $m $m฀ $m
Property,฀plant฀&฀equipment฀(PPE)฀ 780 620 90 –฀ 1,490
Goodwill฀ 60 30 – 10฀ 100
Net฀current฀assets฀ ฀ 180 ฀ 110 ฀ 20 ฀ ฀฀–฀ ฀ ฀฀฀310
฀ ฀1,020 ฀760 ฀110 ฀ 10฀ ฀1,900
The฀recoverable฀amounts฀(including฀net฀current฀assets)฀at฀the฀year฀end฀were฀as฀follows:฀

฀ £m฀ ฀
Division฀A฀ 1,000฀ ฀
Division฀B฀ 720฀ ฀
Group฀as฀a฀whole฀ 1,825฀ (including฀head฀office฀PPE฀at฀fair฀value฀less฀costs฀of฀disposal฀
of฀$85m)฀

The฀recoverable฀amounts฀of฀the฀two฀divisions฀were฀based฀on฀value฀in฀use.฀The฀fair฀value฀less฀costs฀of฀
disposal฀of฀any฀individual฀item฀was฀substantially฀below฀this.฀

No฀impairment฀losses฀had฀previously฀been฀necessary.฀

Required฀
Discuss,฀with฀suitable฀computations฀showing฀the฀allocation฀of฀any฀impairment฀losses,฀the฀accounting฀
treatment฀of฀the฀impairment฀test.฀Use฀the฀proforma฀below฀to฀help฀you฀with฀your฀answer.฀฀

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3:฀Non-current฀assets฀

Solution฀

Discussion:฀

Carrying฀amounts฀after฀impairment฀test:฀
฀ Division฀ Division฀ Head฀ Unallocated฀ Total
A฀ B฀ office฀ goodwill฀
฀ $m $m $m $m฀ $m
Property,฀plant฀&฀equipment฀ ฀
Goodwill฀ ฀
Net฀current฀assets฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀
฀ ฀ ฀ ฀ ฀฀฀฀฀฀฀฀฀฀ ฀฀฀฀
Workings฀

1฀ Test฀of฀individual฀CGUs:฀
฀ Division฀A Division฀B
฀ $m $m

Carrying฀amount
Recoverable฀amount฀ ฀ ฀
Impairment฀loss฀ ฀ ฀
฀
Allocated฀to:฀
฀฀Goodwill฀
฀฀Other฀assets฀in฀the฀scope฀of฀IAS฀36 ฀ ฀
฀ ฀ ฀

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2฀ Test฀of฀group฀of฀CGUs:฀
฀ $m

Revised฀carrying฀amount฀

Recoverable฀amount฀ ฀

Impairment฀loss฀ ฀

Allocated฀to:฀

฀฀Unallocated฀goodwill฀

฀฀Other฀unallocated฀assets฀ ฀

฀ ฀

2.9฀Impairment฀loss฀and฀non-controlling฀interest฀

Tutorial฀note฀
This฀section฀requires฀knowledge฀of฀basic฀groups฀which฀was฀covered฀in฀your฀earlier฀studies.฀If฀you฀are฀
unsure,฀work฀through฀the฀revision฀of฀basic฀groups฀in฀Chapter฀10,฀or฀look฀back฀to฀your฀earlier฀study฀
material.฀

Where฀non-controlling฀interests฀are฀measured฀at฀the฀date฀of฀acquisition฀at฀the฀proportionate฀share฀of฀
the฀ fair฀ value฀ of฀ the฀ acquiree's฀ identifiable฀ assets฀ acquired฀ and฀ liabilities฀ assumed฀ (ie฀ not฀ at฀ fair฀
value),฀part฀of฀the฀calculation฀of฀the฀recoverable฀amount฀of฀the฀CGU฀relates฀to฀the฀unrecognised฀
non-controlling฀interest฀share฀of฀the฀goodwill.฀

For฀ the฀ purpose฀ of฀ calculating฀ an฀ impairment฀ loss,฀ the฀ carrying฀ amount฀ of฀ the฀ CGU฀ is฀ therefore฀
notionally฀adjusted฀to฀include฀the฀non-controlling฀interests฀in฀the฀goodwill฀by฀grossing฀it฀up.฀

The฀resulting฀impairment฀loss฀calculated฀is฀only฀recognised฀to฀the฀extent฀of฀the฀parent's฀share.฀

This฀ adjustment฀ is฀ not฀ required฀ where฀ non-controlling฀ interests฀ are฀ measured฀ at฀ fair฀ value฀ at฀
acquisition.฀

Illustration฀3฀

Impairment฀loss฀and฀non-controlling฀interest฀
The฀Acetone฀Company฀is฀testing฀for฀impairment฀two฀subsidiaries฀which฀have฀been฀identified฀as฀
separate฀cash-generating฀units.฀

Some฀years฀ago฀Acetone฀acquired฀80%฀of฀The฀Dushanbe฀Company฀for฀$600,000฀when฀the฀fair฀
value฀of฀Dushanbe's฀identifiable฀assets฀was฀$400,000.฀As฀Dushanbe's฀policy฀is฀to฀distribute฀all฀
profits฀by฀way฀of฀dividend,฀the฀fair฀value฀of฀its฀identifiable฀net฀assets฀remained฀at฀$400,000฀on฀
31฀December฀20X7.฀The฀impairment฀review฀indicated฀Dushanbe's฀recoverable฀amount฀at฀
31฀December฀20X7฀to฀be฀$520,000.฀

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3:฀Non-current฀assets฀

Some฀years฀ago฀Acetone฀acquired฀85%฀of฀The฀Maclulich฀Company฀for฀$800,000฀when฀the฀fair฀
value฀of฀Maclulich's฀identifiable฀net฀assets฀was฀$700,000.฀Goodwill฀of฀$205,000฀($800,000฀–฀
($700,000฀×฀85%))฀was฀recognised.฀As฀Maclulich's฀policy฀is฀to฀distribute฀all฀profits฀by฀way฀of฀
dividend,฀the฀fair฀value฀of฀its฀identifiable฀net฀assets฀remained฀at฀$700,000฀on฀31฀December฀20X7.฀
The฀impairment฀review฀indicated฀Maclulich's฀recoverable฀amount฀at฀31฀December฀20X7฀to฀be฀
$660,000.฀

It฀is฀Acetone฀group฀policy฀to฀value฀the฀non-controlling฀interest฀using฀the฀proportion฀of฀net฀assets฀
method.฀

Required฀
Determine฀the฀following฀amounts฀in฀respect฀of฀Acetone's฀consolidated฀financial฀statements฀at฀
31฀December฀20X7฀according฀to฀IAS฀36฀Impairment฀of฀Assets.฀

(a)฀ The฀carrying฀amount฀of฀Dushanbe's฀assets฀to฀be฀compared฀with฀its฀recoverable฀amount฀for฀
impairment฀testing฀purposes฀

(b)฀ The฀carrying฀amount฀of฀goodwill฀in฀respect฀of฀Dushanbe฀after฀the฀recognition฀of฀any฀
impairment฀loss฀

(c)฀ The฀carrying฀amount฀of฀the฀non-controlling฀interest฀in฀Maclulich฀after฀recognition฀of฀any฀
impairment฀loss฀

Solution฀
(a)฀ $750,000฀
(b)฀ $96,000฀
(c)฀ $99,000฀

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Workings฀
(a)฀ ฀$฀฀฀฀฀
Carrying฀amount฀of฀Dushanbe's฀net฀assets 400,000฀
Goodwill฀recognised฀on฀acquisition ฀
$600,000฀–฀(80%฀×฀$400,000)฀ ฀280,000฀
Notional฀goodwill฀($280,000฀×฀20/80)฀ ฀฀฀70,000฀
฀ ฀750,000฀
฀
(b)฀ The฀impairment฀loss฀is฀the฀total฀$750,000฀less฀the฀recoverable฀amount฀of฀$520,000฀=฀
$230,000.฀Under฀IAS฀36฀this฀is฀firstly฀allocated฀against฀the฀$350,000฀goodwill.฀(As฀the฀
impairment฀loss฀is฀less฀than฀the฀goodwill,฀none฀is฀allocated฀against฀identifiable฀net฀assets.)฀As฀
only฀the฀goodwill฀relating฀to฀Acetone฀is฀recognised,฀only฀its฀80%฀share฀of฀the฀impairment฀loss฀
is฀recognised:฀
฀ ฀$฀฀฀฀฀
Carrying฀value฀of฀goodwill฀ ฀280,000฀
Impairment฀(80%฀×฀230,000)฀ ฀(184,000)฀
Revised฀carrying฀amount฀of฀goodwill฀ ฀฀฀฀96,000฀
฀
(c)฀
฀฀฀฀ ฀$฀฀฀฀฀
Carrying฀amount฀of฀Maclulich's฀net฀assets฀ ฀700,000฀
Recognised฀goodwill฀ ฀205,000฀
Notional฀goodwill฀(15/85฀×฀$205,000)฀ ฀฀฀฀36,176฀
฀ ฀941,176฀
Recoverable฀amount฀ ฀(660,000)฀
Impairment฀loss฀ ฀฀281,176฀

Allocated฀to:฀ ฀
Recognised฀and฀notional฀goodwill฀ ฀ 241,176 ฀
Other฀net฀assets฀ ฀40,000฀
฀
฀ Therefore฀the฀non-controlling฀interest฀is฀($700,000฀–฀$40,000)฀×฀15%฀=฀$99,000.฀฀
฀ As฀the฀non-controlling฀interests฀do฀not฀include฀goodwill,฀only฀the฀impairment฀allocated฀to฀other฀
net฀assets฀is฀included฀here.฀฀

2.10฀After฀the฀impairment฀review฀
The฀ depreciation/amortisation฀ is฀ adjusted฀ in฀ future฀ periods฀ to฀ allocate฀ the฀ asset's฀ revised฀ carrying฀
amount฀less฀its฀residual฀value฀on฀a฀systematic฀basis฀over฀its฀remaining฀useful฀life฀(IAS฀36:฀para.฀63).฀

2.11฀Reversal฀of฀past฀impairments฀
A฀reversal฀for฀a฀CGU฀is฀allocated฀to฀the฀assets฀of฀the฀CGU,฀except฀for฀goodwill,฀pro฀rata฀with฀the฀
carrying฀amounts฀of฀those฀assets.฀

However,฀the฀carrying฀amount฀of฀an฀asset฀is฀not฀increased฀above฀the฀lower฀of:฀
(a)฀ Its฀recoverable฀amount฀(if฀determinable);฀and฀
(b)฀ Its฀depreciated฀carrying฀amount฀had฀no฀impairment฀loss฀originally฀been฀recognised.฀฀
(IAS฀36:฀para.฀117)฀
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3:฀Non-current฀assets฀

Any฀amounts฀left฀unallocated฀are฀allocated฀to฀the฀other฀assets฀(except฀goodwill)฀pro฀rata.฀

The฀ reversal฀ is฀ recognised฀ in฀ profit฀ or฀ loss,฀ except฀ where฀ reversing฀ a฀ loss฀ recognised฀ on฀ assets฀
carried฀at฀revalued฀amounts,฀which฀are฀treated฀in฀accordance฀with฀the฀applicable฀IFRS.฀

For฀ example,฀ an฀ impairment฀ loss฀ reversal฀ on฀ revalued฀ property,฀ plant฀ and฀ equipment฀ reverses฀ the฀
loss฀ recorded฀ in฀ profit฀ or฀ loss฀ and฀ any฀ remainder฀ is฀ credited฀ to฀ OCI฀ (reinstating฀ the฀ revaluation฀
surplus)฀(IAS฀36:฀para.฀120).฀

Goodwill฀
Once฀recognised,฀impairment฀losses฀on฀goodwill฀are฀not฀reversed฀(IAS฀36:฀para.฀124).฀

Supplementary฀reading฀
See฀Chapter฀3฀Section฀2฀of฀the฀Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀
edition฀of฀the฀Workbook,฀for฀more฀activities฀to฀test฀your฀knowledge฀of฀this฀topic.฀

3฀Fair฀value฀measurement฀(IFRS฀13)฀
IFRS฀13฀Fair฀Value฀Measurement฀defines฀fair฀value฀and฀sets฀out฀a฀framework฀for฀measuring฀the฀fair฀
value฀of฀assets,฀liabilities฀and฀an฀entity's฀own฀equity฀instruments฀in฀a฀single฀IFRS.฀

It฀applies฀to฀all฀IFRSs฀where฀a฀fair฀value฀measurement฀is฀required฀except฀(IFRS฀13:฀para.฀6):฀

฀ Share-based฀payment฀transactions฀(IFRS฀2)฀
฀ Leasing฀transactions฀(IFRS฀16)฀
฀ Measurements฀which฀are฀similar฀to,฀but฀not฀the฀same฀as,฀fair฀value,฀eg:฀
–฀ Net฀realisable฀value฀of฀inventories฀(IAS฀2)฀
–฀ Value฀in฀use฀(IAS฀36).฀

Fair฀value฀(IFRS฀13):฀the฀price฀that฀would฀be฀received฀to฀sell฀an฀asset฀or฀paid฀to฀transfer฀a฀
Key term
liability฀in฀an฀orderly฀transaction฀between฀market฀participants฀at฀the฀measurement฀date.฀

(IFRS฀13:฀para.฀9)฀

Fair฀value฀measurements฀are฀based฀on฀an฀asset฀or฀a฀liability's฀unit฀of฀account,฀which฀is฀specified฀
by฀each฀IFRS฀where฀a฀fair฀value฀measurement฀is฀required.฀For฀most฀assets฀and฀liabilities,฀the฀unit฀of฀
account฀ is฀ the฀ individual฀ asset฀ or฀ liability,฀ but฀ in฀ some฀ instances฀ may฀ be฀ a฀ group฀ of฀ assets฀ or฀
liabilities฀(IFRS฀13:฀para.฀13).฀

Illustration฀4฀

Fair฀value฀
A฀premium฀or฀discount฀on฀a฀large฀holding฀of฀the฀same฀shares฀(because฀the฀market's฀normal฀daily฀
trading฀volume฀is฀not฀sufficient฀to฀absorb฀the฀quantity฀held฀by฀the฀entity)฀is฀not฀considered฀when฀
measuring฀fair฀value:฀the฀quoted฀price฀per฀share฀in฀an฀active฀market฀is฀used.฀

However,฀a฀control฀premium฀is฀considered฀when฀measuring฀the฀fair฀value฀of฀a฀controlling฀interest,฀
because฀the฀unit฀of฀account฀is฀the฀controlling฀interest.฀Similarly,฀any฀non-controlling฀interest฀discount฀
is฀considered฀where฀measuring฀a฀non-controlling฀interest.฀

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3.1฀Measurement฀
Fair฀ value฀ is฀ a฀ market-based฀ measure,฀ not฀ an฀ entity-specific฀ one.฀ Therefore,฀ valuation฀
techniques฀used฀to฀measure฀fair฀value฀maximise฀the฀use฀of฀relevant฀observable฀inputs฀and฀minimise฀
the฀use฀of฀unobservable฀inputs.฀
To฀ increase฀ consistency฀ and฀ compatibility฀ in฀ fair฀ value฀ measurements฀ and฀ related฀ disclosures,฀
IFRS฀13฀ establishes฀ a฀ fair฀ value฀ hierarchy฀ that฀ categorises฀ the฀ inputs฀ to฀ valuation฀
techniques฀into฀three฀levels:฀

Quoted฀prices฀(unadjusted)฀in฀active฀markets฀for฀identical฀assets฀or฀liabilities฀
Level฀1฀inputs฀฀ that฀the฀entity฀can฀access฀at฀the฀measurement฀date฀(IFRS฀13:฀para.฀76).฀

Inputs฀other฀than฀quoted฀prices฀included฀within฀Level฀1฀that฀are฀observable฀
for฀the฀asset฀or฀liability,฀either฀directly฀(ie฀prices)฀or฀indirectly฀(ie฀derived฀
Level฀2฀inputs฀ ฀ from฀prices).฀For฀example฀quoted฀prices฀for฀similar฀assets฀in฀active฀markets฀
or฀for฀identical฀or฀similar฀assets฀in฀non-active฀markets฀or฀use฀of฀quoted฀
interest฀rates฀for฀valuation฀purposes฀(IFRS฀13:฀para.฀81–82).฀

Unobservable฀inputs฀for฀the฀asset฀or฀liability,฀eg฀discounting฀estimates฀of฀
future฀cash฀flows฀(IFRS฀13:฀para.฀86).฀
Level฀3฀inputs฀ Level฀3฀inputs฀are฀only฀used฀where฀relevant฀observable฀inputs฀are฀not฀
available฀or฀where฀the฀entity฀determines฀that฀transaction฀price฀or฀quoted฀
price฀does฀not฀represent฀fair฀value.฀
฀

Active฀market:฀a฀market฀in฀which฀transactions฀for฀the฀asset฀or฀liability฀take฀place฀with฀sufficient฀
Key term
frequency฀and฀volume฀to฀provide฀pricing฀information฀on฀an฀ongoing฀basis.฀฀

(IFRS฀13:฀Appendix฀A)฀

A฀fair฀value฀measurement฀assumes฀that฀the฀transaction฀takes฀place฀either:฀
(a)฀ In฀the฀principal฀market฀for฀the฀asset฀or฀liability,฀or฀
(b)฀ In฀the฀most฀advantageous฀market฀(in฀the฀absence฀of฀a฀principal฀market).฀
The฀ most฀ advantageous฀ market฀ is฀ assessed฀ after฀ taking฀ into฀ account฀ transaction฀ costs฀ and฀
transport฀costs฀to฀the฀market.฀Fair฀value฀also฀takes฀into฀account฀transport฀costs,฀but฀excludes฀
transaction฀costs.฀
The฀fair฀value฀should฀be฀measured฀using฀the฀assumptions฀ that฀ market฀ participants฀ would฀
use฀ when฀pricing฀the฀asset฀or฀liability,฀assuming฀that฀market฀participants฀act฀in฀their฀best฀economic฀
interest.฀

Illustration฀5฀
Principal฀market฀v฀most฀advantageous฀market฀
An฀asset฀is฀sold฀in฀two฀different฀active฀markets฀at฀the฀following฀prices฀per฀item:฀
฀ European฀market฀ North฀American฀market฀
฀ $฀ $฀
Selling฀price฀ 53฀ 54฀
Transport฀costs฀to฀market฀ ฀฀(3)฀ ฀฀(6)฀
฀ 50฀ 48฀
Transaction฀costs฀ ฀฀(3)฀ ฀฀(2)฀
฀ ฀47฀ ฀46฀

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3:฀Non-current฀assets฀

The฀principal฀market฀(the฀one฀with฀the฀greatest฀volume฀and฀level฀of฀activity)฀is฀the฀North฀American฀
market.฀The฀company฀normally฀trades฀in฀the฀European฀market,฀but฀it฀can฀access฀both฀markets.฀

The฀fair฀value฀of฀the฀asset฀is฀therefore฀$48฀per฀item,฀ie฀the฀price฀after฀taking฀into฀account฀transport฀
costs฀in฀the฀principal฀market฀for฀the฀asset.฀

If,฀however,฀neither฀market฀were฀the฀principal฀market,฀the฀fair฀value฀would฀be฀measured฀
using฀the฀price฀in฀the฀most฀advantageous฀market.฀The฀most฀advantageous฀market฀is฀the฀
European฀market฀after฀considering฀both฀transaction฀and฀transport฀costs฀($47฀in฀European฀market฀v฀
$46฀in฀the฀North฀American฀market)฀and฀so฀the฀fair฀value฀measure฀would฀be฀$50฀per฀item฀(as฀fair฀
value฀is฀measured฀before฀transaction฀costs).฀

For฀ non-financial฀ assets,฀ the฀ fair฀ value฀ measurement฀ is฀ the฀ value฀ for฀ using฀ the฀ asset฀ in฀ its฀
highest฀ and฀ best฀ use฀ (the฀ use฀ that฀ would฀ maximise฀ its฀ value)฀ or฀ by฀ selling฀ it฀ to฀ another฀ market฀
participant฀that฀would฀use฀it฀in฀its฀highest฀and฀best฀use฀(IFRS฀13:฀paras.฀27–29).฀

The฀ highest฀ and฀ best฀ use฀ of฀ a฀ non-financial฀ asset฀ takes฀ into฀ account฀ the฀ use฀ that฀ is฀ physically฀
possible,฀legally฀permissible฀and฀financially฀feasible.฀

Illustration฀6฀

Highest฀and฀best฀use฀
An฀entity฀acquires฀control฀of฀another฀entity฀which฀owns฀land.฀The฀land฀is฀currently฀used฀as฀a฀factory฀
site.฀

The฀local฀government฀zoning฀rules฀also฀now฀permit฀construction฀of฀residential฀properties฀in฀this฀area,฀
subject฀to฀planning฀permission฀being฀granted.฀Apartment฀buildings฀have฀recently฀been฀constructed฀in฀
the฀area฀with฀the฀support฀of฀the฀local฀government.฀

Market฀values฀are฀as฀follows:฀

฀ $m
Value฀in฀its฀current฀use 20
Value฀as฀a฀development฀site฀(including฀uncertainty฀ 30
over฀whether฀planning฀permission฀would฀be฀granted)฀
Demolition฀costs฀to฀convert฀the฀land฀to฀a฀vacant฀site 2
฀
฀

The฀fair฀value฀of฀the฀land฀is฀$28m฀($30m฀–฀$2m)฀as฀this฀is฀its฀highest฀and฀best฀use฀because฀market฀
participants฀would฀take฀into฀account฀the฀site's฀development฀potential฀when฀pricing฀the฀land.฀

The฀ measurement฀ of฀ the฀ fair฀ value฀ of฀ a฀ liability฀ assumes฀ that฀ the฀ liability฀ remains฀
outstanding฀and฀the฀market฀participant฀transferee฀would฀be฀required฀to฀fulfil฀the฀obligation,฀rather฀
than฀it฀being฀extinguished฀(IFRS฀13:฀para.฀34).฀The฀fair฀value฀of฀a฀liability฀also฀reflects฀the฀effect฀of฀
non-performance฀risk฀(the฀risk฀that฀an฀entity฀will฀not฀fulfil฀an฀obligation),฀which฀includes,฀but฀may฀
not฀be฀limited฀to,฀an฀entity's฀own฀credit฀risk฀(ie฀risk฀of฀non-payment)฀(IFRS฀13:฀para.฀42).฀

Illustration฀7฀

Fair฀value฀of฀a฀liability฀
Energy฀Co฀assumed฀a฀contractual฀decommissioning฀liability฀when฀it฀acquired฀a฀power฀plant฀from฀a฀
competitor.฀

The฀plant฀will฀be฀decommissioned฀in฀10฀years'฀time.฀

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Assumptions฀made฀by฀Energy฀Co฀equivalent฀to฀those฀that฀would฀be฀used฀by฀market฀participants,฀
assuming฀Energy฀Co฀was฀allowed฀to฀transfer฀the฀liability,฀are:฀

฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀Estimated฀labour,฀material฀
฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀and฀overhead฀cost฀ Estimated฀probability฀
฀ $6m฀ 40%฀
฀ $8m฀ 50%฀
฀ $10m฀ 10%฀

Third฀party฀contractors฀typically฀add฀a฀20%฀mark-up฀in฀the฀industry฀and฀expect฀a฀premium฀of฀5%฀of฀
the฀expected฀cash฀flows฀(after฀including฀the฀effect฀of฀inflation)฀to฀take฀into฀account฀risk฀that฀cash฀flows฀
may฀be฀more฀than฀expected.฀

Inflation฀is฀expected฀to฀be฀3%฀annually฀on฀average฀over฀the฀10฀years.฀

The฀risk-free฀interest฀rate฀for฀a฀10฀year฀maturity฀is฀4%.฀

An฀appropriate฀adjustment฀to฀the฀risk-free฀rate฀for฀Energy฀Co's฀non-performance฀risk฀is฀2%฀(giving฀an฀
entity-specific฀discount฀rate฀of฀4%฀+฀2%฀=฀6%).฀

Calculation฀of฀the฀fair฀value฀of฀the฀decommissioning฀liability:฀
฀ $m฀
Expected฀cash฀flow฀[(6฀×฀40%)฀+฀(8฀×฀50%)฀+฀(10฀× 10%)] ฀ ฀7.400฀
Third฀party฀contractor฀mark-up฀(7.4฀×฀20%)฀ ฀ 1.480฀
฀ ฀8.880฀
Inflation฀adjustment฀((8.88฀×฀1.0310)฀–฀8.88)฀ ฀ ฀3.054฀
฀ ฀11.934฀
Risk฀premium฀(11.934฀× 5%)฀ ฀ ฀0.597฀
฀ ฀12.531฀
Fair฀value฀(present฀value฀of฀expected฀cash฀flow ฀
adjusted฀for฀market฀risk฀12.531฀×฀1/1.0610)฀ ฀6.997฀
฀
฀

4฀Intangible฀assets฀(IAS฀38)฀

Intangible฀asset:฀an฀identifiable฀non-monetary฀asset฀without฀physical฀substance.฀The฀asset฀must฀
Key term
be:฀

(a)฀ Controlled฀by฀the฀entity฀as฀a฀result฀of฀events฀in฀the฀past;฀and฀
(b)฀ Something฀from฀which฀the฀entity฀expects฀future฀economic฀benefits฀to฀flow.฀฀

(IAS฀38:฀para.฀8)฀

An฀asset฀is฀identifiable฀if:฀

(a)฀ It฀is฀separable,฀or฀
(b)฀ It฀arises฀from฀contractual/legal฀rights.฀฀

Supplementary฀reading฀
For฀revision฀of฀the฀detail฀of฀the฀definition฀of฀intangible฀assets,฀refer฀to฀Chapter฀3฀Section฀3.1฀of฀the฀
Supplementary฀Reading,฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

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3:฀Non-current฀assets฀

4.1฀Recognition฀
As฀with฀all฀assets,฀recognition฀depends฀on฀two฀criteria฀(IAS฀38:฀para.฀18):฀
(a)฀ It฀is฀probable฀that฀future฀economic฀benefits฀that฀are฀attributable฀to฀the฀asset฀will฀flow฀to฀the฀
entity.฀
(b)฀ The฀cost฀of฀the฀asset฀can฀be฀measured฀reliably.฀

4.2฀Measurement฀at฀recognition฀
Measurement฀at฀recognition฀depends฀on฀how฀the฀intangible฀asset฀was฀acquired฀or฀generated:฀

Acquired฀as฀ Internally฀
Internally฀ generated Acquired฀by฀
Separate฀ part฀of฀a฀
generated฀ intangible government฀
acquisition business฀
goodwill asset grant
combination

Cost,฀which฀is฀ Fair฀value฀as฀per Not฀recognised Recognised฀when฀ Asset฀and฀grant฀

purchase฀price IFRS฀3฀Business 'PIRATE'฀criteria฀ at฀fair฀value,฀or
Combinations met฀(see฀Section฀ nominal฀amount฀
4.3) plus฀expenditure฀
directly฀attributable฀
to฀preparation฀for฀use

4.3฀Internally฀generated฀intangible฀assets฀
Research฀and฀development฀
To฀ assess฀ whether฀ an฀ internally฀ generated฀ intangible฀ assets฀ meets฀ the฀ criteria฀ for฀ recognition,฀ an฀
entity฀classifies฀the฀generation฀of฀the฀asset฀into฀a฀research฀ phase฀and฀a฀development฀ phase฀
(IAS฀36:฀para.฀52).฀
(a)฀ During฀the฀research฀phase,฀all฀expenditure฀is฀recognised฀as฀an฀expense.฀฀
(IAS฀36:฀para.฀54)฀
(b)฀ During฀the฀development฀phase,฀internally฀generated฀intangible฀assets฀that฀meet฀all฀of฀the฀
following฀criteria฀must฀be฀capitalised:฀

•฀ Probable฀future฀economic฀benefits

•฀ Intention฀to฀complete฀and฀use/sell฀asset

•฀ Resources฀adequate฀and฀available฀to฀complete฀and฀use/sell฀asset

•฀ Ability฀to฀use/sell฀the฀asset

•฀ Technical฀feasibility฀of฀completing฀asset฀for฀use/sale

•฀ Expenditure฀can฀be฀measured฀reliably
฀
Expenditure฀not฀meeting฀all฀six฀criteria฀is฀treated฀as฀an฀expense.฀

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The฀ costs฀ allocated฀ to฀ an฀ internally฀ generated฀ intangible฀ asset฀ should฀ be฀ only฀ costs฀ that฀ can฀ be฀
directly฀ attributed฀ or฀ allocated฀ on฀ a฀ reasonable฀ and฀ consistent฀ basis฀ to฀ creating,฀
producing฀or฀preparing฀the฀asset฀for฀its฀intended฀use.฀The฀cost฀of฀an฀internally฀generated฀
intangible฀asset฀is฀the฀sum฀of฀the฀expenditure฀incurred฀from฀the฀date฀when฀the฀intangible฀asset฀first฀
meets฀the฀recognition฀criteria.฀

Other฀internally฀generated฀intangible฀assets฀
Expenditure฀ on฀ internally฀ generated฀ brands,฀ mastheads,฀ publishing฀ titles,฀ customer฀ lists฀ and฀ items฀
similar฀ in฀ substance฀ are฀ not฀ recognised฀ as฀ intangible฀ assets.฀ These฀ all฀ fail฀ to฀ meet฀ one฀ or฀ more฀ (in฀
some฀ cases฀ all)฀ the฀ definition฀ and฀ recognition฀ criteria฀ and฀ in฀ some฀ cases฀ are฀ probably฀
indistinguishable฀from฀internally฀generated฀goodwill฀(IAS฀38:฀para.฀63).฀

Similarly,฀ start-up,฀ training,฀ advertising,฀ promotional,฀ relocation฀ and฀ reorganisation฀ costs฀ are฀ all฀
recognised฀as฀expenses.฀

4.4฀Measurement฀after฀recognition฀
After฀ recognition,฀ entities฀ can฀ choose฀ between฀ two฀ models,฀ the฀ cost฀ model฀ and฀ the฀ revaluation฀
model.฀

Cost฀model฀ Carry฀asset฀at฀cost฀less฀accumulated฀amortisation฀and฀impairment฀losses฀
(IAS฀38:฀para.฀74)฀

Revaluation฀model฀ Carry฀asset฀at฀revalued฀amount,฀fair฀value฀amount฀less฀subsequent฀
accumulated฀amortisation฀and฀impairment฀losses฀(IAS฀38:฀para.฀75)฀

If฀the฀revaluation฀model฀is฀used:฀

(a)฀฀ Fair฀value฀must฀be฀able฀to฀be฀measured฀reliably฀with฀reference฀to฀an฀active฀market.฀

(b)฀ The฀entire฀class฀of฀intangible฀assets฀of฀that฀type฀must฀be฀revalued฀at฀the฀same฀time.฀฀
(c)฀ If฀an฀intangible฀asset฀in฀a฀class฀of฀revalued฀intangible฀assets฀cannot฀be฀revalued฀because฀there฀
is฀ no฀ active฀ market฀ for฀ this฀ asset,฀ the฀ asset฀ should฀ be฀ carried฀ at฀ its฀ cost฀ less฀ any฀
accumulated฀amortisation฀and฀impairment฀losses.฀
(d)฀ Revaluations฀should฀be฀made฀with฀such฀regularity฀ that฀the฀carrying฀amount฀does฀not฀differ฀
from฀that฀which฀would฀be฀determined฀using฀fair฀value฀at฀the฀year฀end.฀
There฀will฀ not฀ usually฀ be฀ an฀ active฀ market฀ in฀ an฀ intangible฀ asset;฀ therefore฀ the฀ revaluation฀
model฀will฀usually฀not฀be฀available฀(IAS฀38:฀para.฀78).฀A฀fair฀value฀might฀be฀obtainable฀however฀for฀
assets฀such฀as฀fishing฀rights฀or฀quotas฀or฀taxi฀cab฀licences.฀

Supplementary฀reading฀
For฀revision฀of฀the฀detail฀of฀the฀accounting฀required฀under฀the฀revaluation฀model,฀refer฀to฀Chapter฀3฀
Section฀ 3.2฀ of฀ the฀ Supplementary฀ Reading,฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀

4.5฀Amortisation฀
An฀intangible฀asset฀with฀a฀finite฀useful฀life฀should฀be฀amortised฀over฀its฀expected฀useful฀life.฀

(a)฀ The฀depreciable฀amount฀(cost/revalued฀amount฀–฀residual฀value)฀is฀allocated฀on฀a฀systematic฀
basis฀over฀the฀useful฀life.฀
(b)฀ The฀residual฀value฀is฀normally฀assumed฀to฀be฀zero.฀

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(c)฀ Amortisation฀begins฀when฀the฀asset฀is฀available฀ for฀ use฀(ie฀when฀it฀is฀in฀the฀location฀and฀

condition฀necessary฀for฀it฀to฀be฀capable฀of฀operating฀in฀the฀manner฀intended฀by฀management).฀
(d)฀ The฀useful฀life฀and฀amortisation฀method฀must฀be฀reviewed฀at฀least฀at฀each฀financial฀year฀
end฀and฀adjusted฀where฀necessary.฀
An฀intangible฀asset฀with฀an฀indefinite฀ useful฀ life฀should฀ not฀ be฀ amortised.฀IAS฀36฀requires฀
that฀such฀an฀asset฀is฀tested฀for฀impairment฀at฀least฀annually.฀

Supplementary฀reading฀
For฀ revision฀ of฀ the฀ detail฀ of฀ determining฀ an฀ intangible฀ asset's฀ useful฀ life฀ and฀ further฀ detail฀ on฀
acceptable฀ amortisation฀ methods,฀ refer฀ to฀ Chapter฀ 3฀ Sections฀ 3.3฀ and฀ 3.4฀ of฀ the฀ Supplementary฀
Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

Activity฀3:฀Intangible฀assets฀ ฀

Lambda฀ is฀ a฀ listed฀ entity฀ that฀ prepares฀ consolidated฀ financial฀ statements.฀ Lambda฀ measures฀ assets฀
using฀ the฀ revaluation฀ model฀ wherever฀ this฀ is฀ possible฀ under฀ IFRS.฀ During฀ its฀ financial฀ year฀ ended฀
31฀March฀20X9฀Lambda฀entered฀into฀the฀following฀transactions:฀

(a)฀ On฀ 1฀ October฀ 20X7฀ Lambda฀ began฀ a฀ project฀ to฀ investigate฀ a฀ more฀ efficient฀ production฀
process.฀Expenses฀relating฀to฀the฀project฀of฀$2m฀were฀charged฀in฀the฀statement฀of฀profit฀or฀loss฀
and฀other฀comprehensive฀income฀in฀the฀year฀ended฀31฀March฀20X8.฀Further฀costs฀of฀$1.5m฀
were฀ incurred฀ in฀ the฀ three-month฀ period฀ to฀ 30฀ June฀ 20X8.฀ On฀ that฀ date฀ it฀ became฀ apparent฀
that฀the฀project฀was฀technically฀feasible฀and฀commercially฀viable.฀Further฀expenditure฀of฀$3m฀
was฀ incurred฀ in฀ the฀ six-month฀ period฀ from฀ 1฀ July฀ 20X8฀ to฀ 31฀ December฀ 20X8.฀ The฀ new฀
process,฀which฀began฀on฀1฀January฀20X9,฀was฀expected฀to฀generate฀cost฀savings฀of฀at฀least฀
$600,000฀per฀annum฀over฀the฀10-year฀period฀commencing฀1฀January฀20X9.฀
(b)฀ On฀ 1฀ April฀ 20X8฀ Lambda฀ acquired฀ a฀ new฀ subsidiary,฀ Omicron.฀ The฀ directors฀ of฀ Lambda฀
carried฀out฀a฀fair฀value฀exercise฀as฀required฀by฀IFRS฀3฀Business฀Combinations฀and฀concluded฀
that฀ the฀ brand฀ name฀ of฀ Omicron฀ had฀ a฀ fair฀ value฀ of฀ $10m฀ and฀ would฀ be฀ likely฀ to฀ generate฀
economic฀ benefits฀ for฀ a฀ ten-year฀ period฀ from฀ 1฀ April฀ 20X8.฀ They฀ further฀ concluded฀ that฀ the฀
expertise฀of฀the฀employees฀of฀Omicron฀contributed฀$5m฀to฀the฀overall฀value฀of฀Omicron.฀The฀
estimated฀ average฀ remaining฀ service฀ lives฀ of฀ the฀ Omicron฀ employees฀ was฀ eight฀ years฀ from฀
1฀April฀20X8.฀
(c)฀ On฀1฀October฀20X8฀Lambda฀renewed฀its฀licence฀to฀extract฀minerals฀that฀are฀needed฀as฀part฀
of฀its฀production฀process.฀The฀cost฀of฀renewal฀of฀the฀licence฀was฀$200,000฀and฀the฀licence฀is฀
for฀a฀five-year฀period฀starting฀on฀1฀October฀20X8.฀There฀is฀no฀active฀market฀for฀this฀type฀of฀
licence.฀However,฀the฀directors฀of฀Lambda฀estimated฀that฀at฀31฀March฀20X9฀the฀fair฀value฀less฀
costs฀ to฀ sell฀ of฀ the฀ licence฀ was฀ $175,000.฀ They฀ further฀ estimated฀ that฀ over฀ the฀ remaining฀
54฀months฀ of฀ its฀ duration฀ the฀ licence฀ would฀ generate฀ net฀ cash฀ flows฀ for฀ Lambda฀ that฀ had฀ a฀
present฀value฀at฀31฀March฀20X9฀of฀$185,000.฀
Required฀
Explain฀how฀Lambda฀should฀treat฀the฀above฀transactions฀in฀its฀consolidated฀financial฀statements฀for฀
the฀year฀to฀31฀March฀20X9.฀(You฀are฀not฀required฀to฀discuss฀the฀goodwill฀arising฀on฀acquisition฀of฀
Omicron.)฀฀ ฀

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Activity฀4:฀Intangible฀assets฀and฀impairment฀ ฀

Kalesh฀is฀preparing฀its฀financial฀statements฀for฀the฀year฀to฀31฀March฀20X2.฀Kalesh฀is฀engaged฀in฀a฀
research฀ and฀ development฀ project฀ which฀ it฀ hopes฀ will฀ generate฀ a฀ new฀ product.฀ In฀ the฀ year฀ to฀
31฀March฀ 20X1฀ the฀ company฀ spent฀ $120,000฀ on฀ research฀ that฀ concluded฀ there฀ were฀ sufficient฀
grounds฀ to฀ carry฀ the฀ project฀ on฀ to฀ its฀ development฀ stage฀ and฀ a฀ further฀ $75,000฀ was฀ spent฀ on฀
development.฀At฀31฀March฀20X1,฀management฀had฀decided฀that฀they฀were฀not฀sufficiently฀confident฀
in฀the฀ultimate฀profitability฀of฀the฀project฀and฀wrote฀off฀all฀the฀expenditure฀to฀date฀to฀the฀statement฀of฀
profit฀or฀loss.฀In฀the฀current฀year฀further฀development฀costs฀have฀been฀incurred฀of฀$80,000฀and฀it฀is฀
estimated฀than฀an฀additional฀$10,000฀of฀development฀costs฀will฀be฀incurred฀in฀the฀future.฀Production฀
is฀expected฀to฀commence฀within฀the฀next฀few฀months.฀Unfortunately฀the฀total฀trading฀profit฀from฀sales฀
of฀the฀new฀product฀is฀not฀expected฀to฀be฀as฀good฀as฀market฀research฀data฀originally฀forecast฀and฀is฀
estimated฀at฀only฀$150,000.฀As฀the฀future฀benefits฀are฀greater฀than฀the฀remaining฀future฀costs,฀the฀
project฀will฀be฀completed฀but,฀due฀to฀the฀overall฀deficit฀expected,฀the฀directors฀have฀again฀decided฀to฀
write฀off฀all฀the฀development฀expenditure.฀

Required฀
Explain฀ how฀ Kalesh฀ should฀ treat฀ the฀ above฀ transaction฀ in฀ its฀ financial฀ statements฀ for฀ the฀ year฀ to฀
31฀March฀20X2.฀฀

5฀Investment฀property฀(IAS฀40)฀

Investment฀property฀(IAS฀40):฀property฀(land฀or฀building฀–฀or฀part฀of฀a฀building฀–฀or฀both)฀held฀
Key term
(by฀the฀owner฀or฀by฀the฀lessee฀as฀a฀right-of-use฀asset)฀to฀earn฀rentals฀or฀for฀capital฀appreciation฀
or฀both,฀rather฀than฀for:฀

(a)฀ Use฀in฀the฀production฀or฀supply฀of฀goods฀or฀services฀or฀for฀administrative฀purposes;฀or฀
(b)฀ Sale฀in฀the฀ordinary฀course฀of฀business.฀฀ ฀

(IAS฀40:฀para.฀5)฀

The฀following฀are฀not฀investment฀property฀(IAS฀40:฀para.฀9):฀

(a)฀ Property฀ held฀ for฀ sale฀ in฀ the฀ ordinary฀ course฀ of฀ business฀ or฀ in฀ the฀ process฀ of฀ construction฀ or฀
development฀for฀such฀sale฀
(b)฀ Owner-occupied฀property,฀including฀property฀held฀for฀future฀use฀as฀owner-occupied฀property,฀
property฀ held฀ for฀ future฀ development฀ and฀ subsequent฀ use฀ as฀ owner-occupied฀ property,฀
property฀occupied฀by฀employees฀and฀owner-occupied฀property฀awaiting฀disposal฀
(c)฀ Property฀leased฀to฀another฀entity฀under฀a฀finance฀lease฀

5.1฀Recognition฀
Investment฀property฀is฀recognised฀when฀it฀is฀probable฀that฀future฀economic฀benefits฀will฀flow฀to฀the฀
entity฀and฀the฀cost฀can฀be฀measured฀reliably.฀

5.2฀Measurement฀at฀recognition฀
Investment฀ property฀ should฀ be฀ measured฀ initially฀ at฀ cost,฀ including฀ directly฀ attributable฀ expenditure฀
and฀transaction฀costs฀(IAS฀40:฀para.฀21).฀

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5.3฀Measurement฀after฀recognition฀
After฀recognition,฀entities฀can฀choose฀between฀two฀models,฀the฀fair฀value฀model฀and฀the฀cost฀model.฀
Whatever฀ policy฀ an฀ entity฀ chooses฀ should฀ be฀ applied฀ to฀ all฀ of฀ its฀ investment฀ property฀ (IAS฀ 40:฀฀
para.฀30).฀

Fair฀value฀model฀ Any฀change฀in฀fair฀value฀reported฀in฀profit฀or฀loss,฀not฀depreciated฀

Cost฀model฀ As฀cost฀model฀of฀IAS฀16฀–฀unless฀held฀for฀sale฀(IFRS฀5)฀฀or฀leased฀฀
(IFRS฀16)฀

5.4฀Transfers฀to฀or฀from฀investment฀property฀
Transfers฀ to฀ or฀ from฀ investment฀ property฀ should฀ only฀ be฀ made฀ when฀ there฀ is฀ a฀ change฀ in฀ use฀฀
(IFRS฀40:฀para.฀57).฀฀

A฀ change฀ in฀ use฀ occurs฀ when฀ the฀ property฀ meets,฀ or฀ ceases฀ to฀ meet,฀ the฀ definition฀ of฀ investment฀
property฀ and฀ there฀ is฀ evidence฀ of฀ the฀ change฀ in฀ use฀ (IAS฀ 40:฀ para.฀ 57).฀ For฀ example,฀ owner฀
occupation฀ commences฀ so฀ the฀ investment฀ property฀ will฀ be฀ treated฀ under฀ IAS฀ 16฀ as฀ an฀ owner-
occupied฀property.฀

In฀ isolation,฀ a฀ change฀ in฀ management's฀ intentions฀ for฀ the฀ use฀ of฀ a฀ property฀ does฀ not฀ provide฀
evidence฀of฀a฀change฀in฀use฀(IAS฀40:฀para.฀57).฀฀

Accounting฀treatment฀

Transfer฀from฀investment฀ Transfer฀from฀
property฀to฀owner-occupied฀ owner-occupied฀to฀
or฀inventories investment฀property

•฀฀ Cost฀for฀subsequent฀accounting฀is฀ •฀฀ Apply฀IAS฀16฀or฀IFRS฀16฀(for฀

fair฀value฀at฀date฀of฀change฀of฀ property฀held฀by฀a฀lessee฀as฀
use right-of-use฀asset)฀up฀to฀date฀of฀
change฀of฀use
•฀฀ Apply฀IAS฀16,฀IAS฀2฀or฀IFRS฀16฀
as฀appropriate฀after฀date฀of฀ •฀฀ At฀date฀of฀change,฀property฀
change฀of฀use revalued฀to฀fair฀value฀
•฀฀ At฀date฀of฀change,฀any฀difference฀
between฀the฀carrying฀amount฀
under฀IAS฀16฀or฀IFRS฀16฀and฀its฀
fair฀value฀is฀treated฀as฀a฀
revaluation฀under฀IAS฀16
฀

5.5฀Disposals฀
Any฀ gain฀ or฀ loss฀ on฀ disposal฀ of฀ investment฀ property฀ is฀ the฀ difference฀ between฀ the฀ net฀ disposal฀
proceeds฀and฀the฀carrying฀amount฀of฀the฀asset.฀It฀should฀be฀recognised฀as฀income฀or฀expense฀
in฀profit฀or฀loss฀(unless฀IFRS฀16฀requires฀otherwise฀on฀a฀sale฀and฀leaseback).฀

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Activity฀5:฀Investment฀property฀ ฀

Burdock,฀a฀public฀limited฀company,฀operates฀in฀the฀fashion฀industry฀and฀has฀a฀financial฀year฀end฀of฀
31฀May฀20X6.฀Burdock฀owns฀a฀number฀of฀prestigious฀apartments฀which฀it฀leases฀to฀famous฀persons฀
who฀ are฀ under฀ a฀ contract฀ of฀ employment฀ to฀ promote฀ its฀ fashion฀ clothing.฀ The฀ apartments฀ are฀ let฀ at฀
below฀ the฀ market฀ rate.฀ The฀ lease฀ terms฀ are฀ short฀ and฀ are฀ normally฀ for฀ six฀ months.฀ The฀ leases฀
terminate฀when฀the฀contracts฀for฀promoting฀the฀clothing฀terminate.฀Burdock฀wishes฀to฀account฀for฀the฀
apartments฀ as฀ investment฀ properties฀ with฀ the฀ difference฀ between฀ the฀ market฀ rate฀ and฀ actual฀ rental฀
charged฀to฀be฀recognised฀as฀an฀employee฀benefit฀expense.฀฀ ฀

Required฀
Discuss฀how฀the฀above฀should฀be฀dealt฀with฀in฀the฀financial฀statements฀of฀Burdock฀for฀the฀year฀ended฀
31฀May฀20X6.฀฀

Supplementary฀reading฀
For฀ a฀ decision฀ tree฀ summarising฀ the฀ treatment฀ of฀ property฀ plus฀ an฀ additional฀ practice฀ activity฀ on฀
IAS฀40,฀see฀Chapter฀3฀Section฀4฀of฀the฀Supplementary฀Reading.฀This฀is฀available฀in฀Appendix฀2฀of฀
the฀digital฀edition฀of฀the฀Workbook.฀

6฀Government฀grants฀(IAS฀20)฀

Tutorial฀note฀
IAS฀20฀Accounting฀for฀Government฀Grants฀and฀Disclosure฀of฀Government฀Assistance฀is฀a฀fairly฀
straightforward฀standard฀that฀you฀have฀seen฀before.฀The฀main฀points฀are฀summarised฀below.฀

(a)฀ Grants฀are฀not฀recognised฀until฀there฀is฀reasonable฀ assurance฀that฀the฀conditions฀will฀be฀

complied฀with฀and฀the฀grant฀will฀be฀received฀(IAS฀20:฀para.฀7).฀
(b)฀ Government฀grants฀are฀recognised฀in฀profit฀or฀loss฀so฀as฀to฀match฀them฀with฀the฀related฀costs฀
they฀are฀intended฀to฀compensate฀on฀a฀systematic฀basis฀(IAS฀20:฀para.฀12).฀
(c)฀ Government฀ grants฀ relating฀ to฀ assets฀ can฀ be฀ presented฀ either฀ as฀ deferred฀ income฀ or฀ by฀
deducting฀ the฀ grant฀ in฀ calculating฀ the฀ carrying฀ amount฀ of฀ the฀ asset฀ (IAS฀ 20:฀฀
para.฀25).฀
(d)฀ Grants฀ relating฀ to฀ income฀ may฀ either฀ be฀ shown฀ separately฀ or฀ as฀ part฀ of฀ 'other฀ income'฀ or฀
alternatively฀deducted฀from฀the฀related฀expense฀(IAS฀20:฀para.฀29).฀
(e)฀ A฀ government฀ grant฀ that฀ becomes฀ repayable฀ is฀ accounted฀ for฀ as฀ a฀ change฀ in฀ accounting฀
estimate฀in฀accordance฀with฀IAS฀8฀Accounting฀Policies,฀Changes฀in฀Accounting฀Estimates฀and฀
Errors฀(IAS฀20:฀para.฀32).฀
(i)฀ Repayments฀ of฀ grants฀ relating฀ to฀ income฀ are฀ applied฀ first฀ against฀ any฀ unamortised฀
deferred฀credit฀and฀then฀in฀profit฀or฀loss.฀
(ii)฀ Repayments฀of฀grants฀relating฀to฀assets฀are฀recorded฀by฀increasing฀the฀carrying฀amount฀
of฀ the฀ asset฀ or฀ reducing฀ the฀ deferred฀ income฀ balance.฀ Any฀ resultant฀ cumulative฀ extra฀
depreciation฀is฀recognised฀in฀profit฀or฀loss฀immediately.฀

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Activity฀6:฀Government฀grant฀ ฀

On฀ 1฀ June฀ 20X8฀ Epsilon฀ opened฀ a฀ new฀ factory฀ in฀ an฀ area฀ designated฀ by฀ the฀ Government฀ as฀ an฀
economic฀development฀area.฀On฀that฀day฀the฀Government฀provided฀Epsilon฀with฀a฀grant฀of฀$30m฀to฀
assist฀it฀in฀the฀development฀of฀the฀factory.฀This฀grant฀was฀in฀three฀parts:฀
(a)฀ $6m฀ of฀ the฀ grant฀ was฀ a฀ payment฀ by฀ the฀ Government฀ as฀ an฀ inducement฀ to฀ Epsilon฀ to฀ begin฀
developing฀the฀factory.฀No฀conditions฀were฀attached฀to฀this฀part฀of฀the฀grant.฀
(b)฀ $15m฀of฀the฀grant฀related฀to฀the฀construction฀of฀the฀factory฀at฀a฀cost฀of฀$60m.฀The฀land฀was฀
leased฀so฀the฀whole฀of฀the฀$60m฀is฀depreciable฀over฀the฀estimated฀40฀year฀useful฀life฀of฀the฀
factory.฀
(c)฀ The฀ remaining฀ $9m฀ was฀ received฀ subject฀ to฀ keeping฀ at฀ least฀ 200฀ employees฀ working฀ at฀ the฀
factory฀for฀a฀period฀of฀at฀least฀five฀years.฀If฀the฀number฀drops฀below฀200฀at฀any฀time฀in฀any฀
financial฀ year฀ in฀ this฀ five฀ year฀ period฀ then฀ 20%฀ of฀ the฀ grant฀ is฀ repayable฀ in฀ that฀ year.฀ From฀
1฀June฀20X8฀220฀workers฀were฀employed฀at฀the฀factory฀and฀estimates฀are฀that฀this฀number฀is฀
unlikely฀to฀fall฀below฀200฀over฀the฀relevant฀five฀year฀period.฀
Required฀
Explain฀how฀the฀grant฀of฀$30m฀should฀be฀reported฀in฀the฀financial฀statements฀of฀Epsilon฀for฀the฀year฀
ended฀ 30฀September฀ 20X8.฀ Where฀ IFRSs฀ allow฀ alternative฀ treatments฀ of฀ any฀ part฀ of฀ the฀ grant฀ you฀
should฀explain฀both฀treatments.฀

7฀Borrowing฀costs฀(IAS฀23)฀
Borrowing฀ costs฀ directly฀ attributable฀ to฀ the฀ acquisition,฀ construction฀ or฀ production฀ of฀ a฀ qualifying฀
asset฀are฀capitalised฀as฀part฀of฀the฀cost฀of฀that฀asset.฀(IAS฀23:฀para.฀26)฀

A฀ qualifying฀ asset฀ is฀ one฀ that฀ necessarily฀ takes฀ a฀ substantial฀ period฀ of฀ time฀ to฀ get฀ ready฀ for฀ its฀
intended฀use฀or฀sale.฀(IAS฀23:฀para.฀5)฀

(a)฀ Borrowing฀costs฀eligible฀for฀capitalisation:฀
(i)฀ Funds฀ borrowed฀ specifically฀ for฀ a฀ qualifying฀ asset฀ –฀ capitalise฀ actual฀
borrowing฀ costs฀ incurred฀ less฀ investment฀ income฀ on฀ temporary฀ investment฀ of฀ the฀ funds฀
(IAS฀23:฀para.฀12)฀
(ii)฀ Funds฀ borrowed฀ generally฀ –฀ weighted฀ average฀ of฀ borrowing฀ costs฀ outstanding฀
during฀the฀period฀(excluding฀borrowings฀specifically฀for฀a฀qualifying฀asset)฀multiplied฀by฀
expenditure฀ on฀ qualifying฀ asset.฀ The฀ amount฀ capitalised฀ should฀ not฀ exceed฀ total฀
borrowing฀costs฀incurred฀in฀the฀period฀(IAS฀23:฀para.฀14).฀
(b)฀ Commencement฀of฀capitalisation฀begins฀when฀(IAS฀23:฀para.฀17):฀
(i)฀ Expenditures฀for฀the฀asset฀are฀being฀incurred;฀
(ii)฀ Borrowing฀costs฀are฀being฀incurred;฀and฀
(iii)฀ Activities฀ that฀ are฀ necessary฀ to฀ prepare฀ the฀ asset฀ for฀ its฀ intended฀ use฀ or฀ sale฀ are฀ in฀
progress.฀
(c)฀ Capitalisation฀ is฀ suspended฀ during฀ extended฀ periods฀ when฀ development฀ is฀ interrupted฀฀
(IAS฀23:฀para.฀20).฀
(d)฀ Capitalisation฀ceases฀when฀substantially฀all฀the฀activities฀necessary฀to฀prepare฀the฀asset฀for฀its฀
intended฀use฀or฀sale฀are฀complete฀(IAS฀23:฀para.฀22).฀

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The฀financial฀statements฀disclose฀(IAS฀23:฀para.฀26):฀

฀ The฀amount฀of฀borrowing฀costs฀capitalised฀during฀the฀period;฀and฀
฀ The฀capitalisation฀rate฀used฀to฀determine฀the฀amount฀of฀borrowing฀costs฀eligible฀for฀
capitalisation.฀

Activity฀7:฀Borrowing฀costs฀ ฀

Zenzi฀Co฀had฀the฀following฀loans฀in฀place฀at฀the฀beginning฀and฀end฀of฀20X8.฀
฀ 1฀January 31฀December฀
฀ 20X8 20X8฀
฀ $m $m฀
10.0%฀Bank฀loan฀repayable฀20Y3฀ 120 120฀
9.5%฀Bank฀loan฀repayable฀20Y1฀ 80 80฀
On฀1฀January฀20X8,฀Zenzi฀Co฀began฀construction฀of฀a฀qualifying฀asset,฀a฀piece฀of฀machinery฀for฀a฀
hydro-electric฀ plant,฀ using฀ existing฀ borrowings.฀ Expenditure฀ drawn฀ down฀ for฀ the฀ construction฀ was:฀
$30m฀on฀1฀January฀20X8,฀$20m฀on฀1฀October฀20X8.฀

Required฀
Calculate฀the฀borrowing฀costs฀to฀be฀capitalised฀for฀the฀machinery.฀

8฀฀Agriculture฀(IAS฀41)฀
IAS฀ 41฀ Agriculture฀ covers฀ the฀ accounting฀ treatment฀ of฀ biological฀ assets฀ (except฀ bearer฀ plants)฀ and฀
agricultural฀produce฀at฀the฀point฀of฀harvest.฀After฀harvest฀IAS฀2฀Inventories฀applies฀to฀the฀agricultural฀
produce,฀as฀illustrated฀in฀the฀time฀line฀below.฀

IAS฀41฀ IAS฀2฀฀

฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ ฀ Time฀

฀ Biological฀transformation฀

฀ Planting/฀ Harvest/฀ Sale฀

฀ birth฀ slaughter฀
Bearer฀ plants,฀ which฀ are฀ plants฀ that฀ are฀ used฀ to฀ grow฀ crops฀ but฀ are฀ not฀ themselves฀ consumed฀ (eg฀
grapevines),฀are฀excluded฀from฀the฀scope฀of฀IAS฀41.฀Instead฀they฀are฀accounted฀for฀under฀IAS฀16฀
using฀either฀the฀cost฀or฀revaluation฀model.฀

Agricultural฀produce:฀the฀harvested฀product฀of฀an฀entity's฀biological฀assets.฀
Key terms Biological฀assets:฀living฀animals฀or฀plants.฀฀

Biological฀transformation:฀the฀processes฀of฀growth,฀degeneration,฀production฀and฀procreation฀
that฀cause฀qualitative฀and฀quantitative฀changes฀in฀a฀biological฀asset.฀
฀ (IAS฀41:฀para.฀5)฀

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3:฀Non-current฀assets฀

8.1฀Recognition฀
As฀with฀other฀non-financial฀assets฀under฀the฀Conceptual฀Framework,฀a฀biological฀asset฀or฀agricultural฀
produce฀is฀recognised฀when฀(IAS฀41:฀para.฀10):฀

(a)฀ The฀entity฀controls฀the฀asset฀as฀a฀result฀of฀past฀events;฀
(b)฀ It฀is฀probable฀that฀future฀economic฀benefits฀associated฀with฀the฀asset฀will฀flow฀to฀the฀
entity;฀and฀
(c)฀ The฀fair฀value฀or฀cost฀of฀the฀asset฀can฀be฀measured฀reliably.฀

8.2฀Measurement฀
Biological฀assets฀are฀measured฀both฀on฀initial฀recognition฀and฀at฀the฀end฀of฀each฀reporting฀period฀
at฀fair฀value฀less฀costs฀to฀sell (IAS฀41:฀para.฀12).฀

Agricultural฀produce฀at฀the฀point฀of฀harvest฀is฀also฀measured฀at฀fair฀value฀less฀costs฀to฀
sell฀(IAS฀41:฀para.฀13).฀

The฀fair฀value฀less฀costs฀to฀sell฀of฀agricultural฀produce฀harvested฀becomes฀its฀cost฀under฀IAS฀2.฀After฀
harvest,฀ the฀ agricultural฀ produce฀ is฀ measured฀ at฀ the฀ lower฀ of฀ cost฀ and฀ net฀ realisable฀ value฀ in฀
accordance฀with฀IAS฀2.฀

Changes฀in฀fair฀value฀less฀costs฀to฀sell฀are฀recognised฀in฀profit฀or฀loss฀(IAS฀41:฀para.฀26).฀

Where฀fair฀ value฀ cannot฀ be฀ measured฀ reliably,฀biological฀assets฀are฀measured฀at฀cost฀less฀

accumulated฀depreciation฀and฀impairment฀losses฀(IAS฀41:฀para.฀30).฀

Ethics฀note฀
Although฀ethics฀will฀certainly฀feature฀in฀the฀second฀question฀of฀Section฀A,฀ethical฀issues฀could฀feature฀
in฀any฀question฀in฀the฀SBR฀exam.฀Therefore฀you฀need฀to฀be฀alert฀to฀any฀threats฀to฀the฀fundamental฀
principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀question.฀

For฀example,฀pressure฀to฀achieve฀a฀particular฀profit฀figure฀could฀lead฀to฀deliberate฀attempts฀to฀
improve฀profits฀through:฀

฀ Incorrect฀capitalisation฀of฀development฀expenditure฀when฀it฀does฀not฀meet฀the฀IAS฀38฀criteria฀
in฀order฀to฀reduce฀development฀costs฀charged฀to฀profit฀or฀loss฀

฀ Incorrect฀capitalisation฀of฀more฀interest฀than฀permitted฀by฀IAS฀23฀in฀order฀to฀reduce฀finance฀
costs฀

฀ Inappropriate฀classification฀of฀property฀as฀investment฀property฀in฀order฀to฀avoid฀depreciation฀
and฀to฀recognise฀revaluation฀gains฀in฀profit฀or฀loss฀

฀ Manipulation฀of฀the฀estimation฀of฀recoverable฀amount฀to฀avoid฀impairment฀losses฀

Time฀pressure฀at฀the฀year฀end฀or฀inexperience/lack฀of฀training฀of฀the฀reporting฀accountant฀could฀lead฀
to฀errors฀when฀complex฀procedures฀are฀required,฀for฀example฀in฀testing฀CGUs฀for฀impairment,฀or฀
where฀significant฀judgement฀is฀required,฀for฀example฀in฀the฀capitalisation฀of฀intangible฀assets.฀

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Chapter฀summary฀

Non-current฀assets฀

1.฀ Property,฀plant฀and฀ 2.฀ Impairment฀of฀assets฀ 3. Fair฀value฀฀

equipment฀(IAS฀16)฀ (IAS฀36)฀ measurement฀
Tangible฀items฀that฀are฀held฀by฀the฀ ฀ Impairment฀indicators:฀
(IFRS฀13)฀
entity฀for฀use฀in฀the฀production฀or฀ ฀ External฀ ฀ 'The฀price฀that฀would฀be฀received฀to฀
supply฀of฀goods฀or฀services,฀for฀ –฀ Significant฀fall฀in฀market฀value฀ sell฀an฀asset฀or฀paid฀to฀transfer฀a฀
฀
rental฀to฀others,฀or฀for฀ liability฀in฀an฀orderly฀transaction฀
฀ –฀ Significant฀external฀adverse฀
administrative฀purposes฀and฀are฀ between฀market฀participants฀at฀the฀
expected฀to฀be฀used฀during฀more฀ changes฀
measurement฀date'฀
than฀one฀period฀ ฀ –฀ Increase฀in฀market฀interest฀rates฀
฀ Fair฀value฀is฀after฀transport฀costs,฀
฀ –฀ Net฀assets฀>฀market฀
Recognise฀when:฀ but฀before฀transaction฀costs฀
capitalisation฀
฀ Probable฀that฀future฀economic฀ ฀ Market-based฀measure฀(ie฀use฀
benefits฀will฀flow฀to฀the฀entity฀ ฀ Internal฀
assumptions฀market฀participants฀
฀ –฀ Obsolescence/damage฀ would฀use),฀not฀entity฀specific฀
฀ The฀cost฀of฀the฀asset฀can฀be฀
฀ –฀ Significant฀internal฀adverse฀
measured฀reliably฀ ฀ Hierarchy฀for฀inputs฀to฀valuation฀
changes฀ techniques:฀
Initial฀recognition฀at฀cost฀ ฀ –฀ Performance฀worse฀than฀
฀ (1)฀Unadjusted฀quoted฀prices฀
Components฀of฀assets฀should฀be฀ expected฀ (active฀market)฀for฀identical฀
recognised฀separately฀if฀they฀are฀ ฀ Impairment฀loss฀where:฀ items฀
expected฀to฀generate฀different฀ recoverable฀amount฀(RA)฀<฀carrying฀ ฀ (2)฀Inputs฀other฀than฀quoted฀prices฀
patterns฀of฀benefits฀ amount฀ that฀can฀be฀observed฀directly฀
Subsequent฀measurement,฀choice฀of ฀ RA฀=฀ higher฀of:฀ (prices)฀or฀indirectly฀(derived฀
from฀prices)฀
฀ FV฀less฀costs฀ ฀฀฀฀฀Value฀in฀use฀
Cost฀model:฀Cost฀less฀ ฀ ฀of฀disposal฀ CF฀฀฀฀฀฀฀฀DF฀฀฀PV฀฀ ฀ (3)฀Unobservable฀inputs฀
accumulated฀depreciation/฀ ฀ ฀ ฀ ฀ Multiple฀markets,฀use฀FV฀in:฀
impairment฀losses฀ ฀ ฀ ฀ ฀ X฀
1
/(1+r)฀ X฀
฀ (1)฀Principal฀market฀(if฀there฀is฀one)฀
Revaluation฀model:฀Revalued฀ ฀ ฀ ฀ ฀ X฀ /(1+r)2฀ X฀ 1

฀ (2)฀Most฀advantageous฀market฀(ie฀
amount฀less฀subsequent฀ ฀ ฀ ฀ ฀ etc฀ ฀ ฀฀฀฀
the฀best฀one฀after฀both฀
accumulated฀depreciation/฀ ฀ ฀ ฀ ฀ ฀ ฀ X฀
transaction฀and฀transport฀costs)฀
impairment฀losses฀(entire฀class),฀fair฀ ฀ CGUs:฀
value฀(FV)฀(using฀FV฀hierarchy฀in฀ ฀ (1)฀Test฀individual฀CGUs฀ ฀ Non-financial฀assets:฀highest฀and฀
IFRS฀13)฀ ฀ (2)฀Test฀group฀of฀CGUs฀including:฀ best฀use฀that฀is฀physically฀possible,฀
–฀ Unallocated฀goodwill฀ legally฀permissible฀and฀financially฀
Depreciate฀on฀a฀systematic฀basis฀
feasible฀
over฀the฀useful฀life฀ –฀ Unallocated฀corporate฀assets฀
฀ FV฀of฀a฀liability฀(example):฀
Review฀useful฀life/depreciation฀ ฀ ฀ Before฀ Imp฀฀฀฀After
method฀and฀residual฀value฀at฀least฀ ฀ Expected฀value฀of฀cash฀flows
฀ ฀ ฀ loss฀
each฀financial฀year฀end฀ ฀ Third-party฀contractor฀mark-up฀ X฀
Goodwill฀ X฀ (X)฀ X฀ ฀ ฀ X฀
Impairment:฀charge฀first฀to฀OCI฀ Other฀assets฀ X฀ (X)฀ X฀ ฀ Inflation฀adjustment฀ X฀
(for฀any฀revaluation฀surplus)฀then฀ ฀ ฀ X฀ (X)฀ X฀ ฀ ฀ X฀
profit฀or฀loss฀(P/L)฀ ฀ Risk฀premium฀(re฀diff฀cash฀flows)฀ X฀
Exchanges฀of฀items฀of฀PPE฀are฀ ฀ ฀ X฀
measured฀at฀fair฀value฀ ฀ Discount฀to฀PV฀ X฀

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3:฀Non-current฀assets฀

4.฀ Intangible฀assets฀ 5.฀ Investment฀ 6. Government฀grants฀

(IAS฀38)฀ property฀(IAS฀40)฀ (IAS฀20)฀
Identifiable฀non-monetary฀assets฀ Property฀held฀to฀earn฀rentals฀or฀for฀ ฀ Recognised฀when฀'reasonably฀certain'฀
without฀physical฀substance฀ capital฀appreciation฀or฀both฀rather฀ condition฀met฀
An฀asset฀is฀identifiable฀if:฀ than฀for:฀ ฀ (NB:฀different฀to฀Conceptual฀
฀ Use฀in฀the฀production฀or฀supply฀ Framework)฀
(a)฀ It฀is฀separable,฀or฀
of฀goods฀or฀services฀or฀for฀ ฀ Grants฀re฀assets:฀
(b)฀ It฀arises฀from฀ administrative฀purposes;฀or฀ ฀ –฀ Deferred฀income,฀or฀
contractual/legal฀rights฀ –฀ Reduce฀carrying฀amount฀
฀ Sale฀in฀the฀ordinary฀course฀of฀ ฀
Recognise฀when:฀ business฀ ฀ Grants฀re฀income:฀
฀ Probable฀that฀future฀economic฀ –฀ In฀P/L฀when฀expense฀recognised฀
Recognise฀when:฀
benefits฀will฀flow฀to฀the฀entity฀ (i)฀ Other฀income,฀or฀
฀ Probable฀that฀future฀economic฀
฀ The฀cost฀of฀the฀asset฀can฀be฀ (ii)฀ Reduce฀related฀expense฀
benefits฀will฀flow฀to฀the฀entity฀
measured฀reliably฀ Annual฀impairment฀tests฀required฀for:฀
฀ The฀cost฀of฀the฀asset฀can฀be฀ ฀ Goodwill฀฀
Initial฀measurement:฀ measured฀reliably฀
฀ Intangibles฀not฀yet฀ready฀for฀use฀
Purchased:฀ Initial฀measurement:฀ ฀ Intangibles฀with฀indefinite฀useful฀life฀
฀ Cost฀(as฀IAS฀16)฀ ฀ Cost฀ Impairment฀loss:฀
Internally฀generated:฀ –฀ Purchase฀price฀ DR฀ OCI฀(&฀Revaluation฀surplus)฀(First฀if฀
฀ Capitalise฀if฀฀ –฀ Directly฀attributable฀
revalued)฀
DR฀ P/L฀
P฀robable฀future฀economic฀bens฀ expenditure฀
CR฀ Goodwill฀of฀CGU฀(First)฀
I฀ ntention฀to฀complete฀&฀ After฀recognition,฀choice฀of฀ CR฀ Other฀assets฀pro-rata฀
use/sell฀asset฀ ฀฀ Cost฀model:฀as฀IAS฀16฀unless฀ Impairment฀loss฀reversals:฀
R฀esources฀adequate฀and฀ held฀for฀sale฀(IFRS฀5)฀or฀leased฀ ฀ Permitted฀where฀RA฀increases฀
available฀to฀complete฀&฀ (IFRS฀16)฀
฀ Opposite฀double฀entry฀
use/sell฀ ฀฀ Fair฀value฀model:฀Market฀ ฀ Cannot฀reverse฀above฀lower฀of:฀
A฀bility฀to฀use/sell฀ value฀at฀year฀end,฀gain/loss฀in฀ –฀ RA฀
฀
P/L,฀not฀depreciated฀
T฀echnical฀feasibility฀ –฀ Carrying฀amount฀if฀no฀impairment฀
Impairment:฀charge฀to฀P/L฀฀ occurred฀
E฀xpenditure฀can฀be฀measured฀
reliably฀ ฀ –฀ Goodwill฀never฀reversed฀

Never฀capitalised:฀
฀ Internally฀generated฀brands,฀
mastheads,฀publishing฀titles฀&฀
customer฀lists,฀start-up฀costs,฀
training,฀advertising,฀
7.฀ Borrowing฀costs฀฀ 8.฀Agriculture฀(IAS฀41)฀
relocations/reorganisations฀ (IAS฀23)฀ Biological฀asset:฀A฀living฀animal฀or฀plant฀
After฀recognition,฀choice฀of฀ ฀ Capitalise:฀ Agricultural฀produce:฀The฀harvested฀
–฀ Cost฀model:฀as฀IAS฀16฀ –฀ Funds฀borrowed฀specifically:฀ product฀of฀the฀entity's฀biological฀assets฀

–฀ Revaluation฀model:฀ ฀actual฀borrowing฀costs฀less฀ (Bearer฀plants฀accounted฀for฀under฀IAS฀16)฀฀

revaluation฀only฀by฀ income฀on฀temporary฀investment฀ Recognise฀when:฀
reference฀to฀an฀active฀ of฀funds฀
฀ Controlled฀as฀a฀result฀of฀past฀events฀
market฀ –฀ Funds฀borrowed฀generally:฀฀
฀ Probable฀future฀economic฀benefits,฀
Amortisation:฀ ฀ weighted฀average฀borrowing฀ and฀
฀ Finite฀useful฀life:฀Systematic฀ costs฀(excl฀specific฀borrowing฀
฀ Fair฀value฀or฀cost฀can฀be฀measured฀
basis฀over฀useful฀life฀(UL)฀ costs)฀฀weighted฀average฀
reliably฀
expenditure฀
฀ Indefinite฀UL:฀at฀least฀annual฀
Measurement:฀
impairment฀tests฀ ฀ Cease฀capitalisation฀when฀ready฀for฀
intended฀use฀ Biological฀assets:฀FV฀less฀costs฀to฀sell฀
Impairment:฀charge฀first฀to฀OCI฀
(for฀any฀revaluation฀surplus)฀ ฀ Suspend฀if฀development฀interrupted฀ Agricultural฀produce:฀
then฀P/L฀฀ (for฀an฀extended฀period)฀ At฀the฀point฀of฀harvest:฀฀FV฀less฀costs฀to฀sell฀
(becomes฀IAS฀2฀cost)฀
Thereafter฀–฀as฀inventories฀฀

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Knowledge฀diagnostic฀

1.฀ Property,฀plant฀and฀equipment฀(IAS฀16)฀

฀ Property,฀plant฀and฀equipment฀can฀be฀accounted฀for฀under฀the฀cost฀model฀(depreciated)฀or฀
revaluation฀model฀(depreciated฀revalued฀amounts,฀gains฀recognised฀in฀other฀
comprehensive฀income).฀

2.฀ Impairment฀of฀assets฀(IAS฀36)฀

฀ Impairment฀losses฀occur฀where฀the฀carrying฀amount฀of฀an฀asset฀is฀above฀its฀recoverable฀
amount.฀

฀ Impairment฀losses฀are฀charged฀first฀to฀other฀comprehensive฀income฀(re฀any฀revaluation฀
surplus฀relating฀to฀the฀asset)฀and฀then฀to฀profit฀or฀loss.฀

฀ Where฀cash฀flows฀cannot฀be฀measured฀separately,฀the฀impairment฀losses฀are฀calculated฀by฀
reference฀to฀the฀cash-generating฀unit.฀Resulting฀impairment฀losses฀are฀allocated฀first฀
against฀any฀goodwill฀and฀then฀pro-rata฀to฀other฀assets.฀

3.฀ Fair฀value฀measurement฀(IFRS฀13)฀

฀ IFRS฀13฀treats฀all฀assets,฀liabilities฀and฀an฀entity's฀own฀equity฀instruments฀in฀a฀
consistent฀way.฀A฀fair฀value฀hierarchy฀is฀used฀to฀establish฀fair฀value,฀using฀observable฀
inputs฀as฀far฀as฀possible฀as฀fair฀value฀is฀a฀market-based฀measure.฀

4.฀฀ Intangible฀assets฀(IAS฀38)฀

฀ Intangible฀assets฀can฀also฀be฀accounted฀for฀under฀the฀cost฀model฀or฀revaluation฀model,฀
but฀only฀intangibles฀with฀an฀active฀market฀can฀be฀revalued.฀

฀ Intangible฀assets฀are฀amortised฀over฀their฀useful฀lives฀(normally฀to฀a฀zero฀residual฀value)฀
unless฀they฀have฀an฀indefinite฀useful฀life฀(annual฀impairment฀tests฀required).฀

5.฀ Investment฀property฀(IAS฀40)฀

฀ Investment฀property฀can฀be฀accounted฀for฀under฀the฀cost฀model฀or฀the฀fair฀value฀model฀
(not฀depreciated,฀gains฀and฀losses฀recognised฀in฀profit฀or฀loss).฀

6.฀฀ Government฀grants฀(IAS฀20)฀
฀ Government฀grants฀are฀recognised฀when฀there฀is฀reasonable฀assurance฀that฀the฀conditions฀will฀
be฀satisfied฀and฀the฀grant฀will฀be฀received.฀Grants฀are฀normally฀presented฀as฀deferred฀income฀
and฀recognised฀in฀profit฀or฀loss฀to฀match฀against฀related฀costs.฀Grants฀relating฀to฀assets฀can฀
either฀be฀presented฀in฀deferred฀income฀or฀deducted฀from฀the฀carrying฀amount฀of฀the฀asset.฀

7.฀฀ Borrowing฀costs฀(IAS฀23)฀

฀ Borrowing฀costs฀relating฀to฀qualifying฀assets฀(those฀which฀necessarily฀take฀a฀substantial฀
period฀of฀time฀to฀be฀ready฀for฀use/sale)฀must฀be฀capitalised.฀฀This฀includes฀both฀specific฀and฀
general฀borrowings฀of฀the฀company.฀

8.฀฀ Agriculture฀(IAS฀41)฀฀

฀ Biological฀assets฀and฀agricultural฀produce฀at฀the฀point฀of฀harvest฀are฀measured฀at฀fair฀value฀
less฀costs฀to฀sell,฀with฀changes฀reported฀in฀profit฀or฀loss.฀

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3:฀Non-current฀assets฀

Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀questions฀below฀from฀the฀Further฀question฀practice฀bank:฀฀

Q4฀Camel฀Telecom฀
Q5฀Acquirer฀

Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website,฀written฀by฀the฀SBR฀examining฀team,฀which฀are฀relevant฀
to฀the฀topics฀studied฀in฀this฀Chapter฀and฀which฀are฀useful฀reading:฀

IAS฀36฀impairment฀of฀assets฀(2009)฀
IAS฀16฀property฀plant฀and฀equipment฀(2009)฀
IAS฀16฀and฀componentisation฀(2011)฀
How฀do฀changes฀to฀IAS฀16,฀38฀and฀IFRS฀11฀impact฀you?฀(2014)฀
How฀to฀measure฀fair฀value฀(2011)฀
www.accaglobal.com/uk/en/member/ab/cpd-ab.html฀

IFRS฀13฀Fair฀Value฀Measurement฀
www.accaglobal.com/uk/en/student/exam-support-resources/professional-exams-study-
resources/p2/technical-articles.html฀

The฀IAS฀plus฀website฀has฀a฀summary฀of฀IFRS฀13฀and฀links฀to฀guidance฀(IFRS฀in฀Focus)฀and฀a฀
podcast฀produced฀by฀Deloitte.฀฀

www.iasplus.com/en/standards/ifrs/ifrs13฀

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฀
฀
฀
฀

Employee฀benefits
฀
฀
฀
฀
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Discuss฀and฀apply฀the฀accounting฀treatment฀of฀short-term฀and฀long-term฀employee฀ C5(a)฀
benefits฀and฀defined฀contribution฀and฀defined฀benefit฀plans.฀

Account฀for฀gains฀and฀losses฀on฀settlements฀and฀curtailments.฀ C5(b)฀

Account฀for฀the฀'Asset฀Ceiling'฀test฀and฀the฀reporting฀of฀actuarial฀(remeasurement)฀ C5(c)฀
gains฀and฀losses.฀

฀ ฀

Exam฀context฀
Employee฀ benefits฀ include฀ short-term฀ benefits฀ such฀ as฀ salaries,฀ and฀ long-term฀ benefits฀ such฀ as฀
pensions.฀This฀topic฀is฀not฀covered฀in฀Financial฀Reporting฀and฀so฀will฀be฀new฀to฀you฀at฀this฀level.฀฀
In฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀employee฀benefits฀could฀feature฀in฀any฀section,฀and฀
may฀be฀a฀whole฀or฀part-question.฀

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฀฀

Chapter฀overview฀
฀
฀
1. Short-term฀ 6.฀Current฀
฀ Employee฀benefits
benefits฀ developments฀
฀
฀
฀
฀ ฀

Post-employment฀
benefits฀

2.฀Defined฀contribution฀plans 3.฀Defined฀benefit฀plans฀

4.฀Settlements฀

5.฀Asset฀ceiling฀test฀

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4:฀Employee฀benefits฀

1฀Short-term฀benefits฀
1.1฀Introduction฀to฀employee฀benefits฀

Employee
Benefits

Short-term Post-employment Other฀long-term Termination

benefits benefits benefits benefits

฀
IAS฀19฀Employee฀Benefits฀covers฀four฀distinct฀types฀of฀employee฀benefit.฀However,฀only฀short-term฀
and฀post-employment฀benefits฀are฀examinable.฀
Accounting฀for฀short-term฀ employee฀ benefit฀ costs฀tends฀to฀be฀quite฀straightforward,฀because฀
they฀ are฀ simply฀ recognised฀ as฀ an฀ expense฀ in฀ the฀ employer's฀ financial฀ statements฀ of฀ the฀ current฀
period.฀Accounting฀for฀the฀cost฀of฀deferred฀employee฀benefits฀is฀much฀more฀difficult฀because฀of฀
the฀large฀amounts฀involved,฀as฀well฀as฀the฀long฀time฀scale,฀complicated฀estimates฀and฀uncertainties.฀

Supplementary฀reading฀
See฀Chapter฀4฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀background฀reading฀on฀the฀conceptual฀
nature฀ of฀ employee฀ benefit฀ costs฀ and฀ the฀ principles฀ underlining฀ the฀ accounting.฀ This฀ is฀ available฀ in฀
Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

1.2฀Short-term฀benefits฀

Employee฀benefits:฀All฀forms฀of฀consideration฀given฀by฀an฀entity฀in฀exchange฀for฀service฀
rendered฀by฀employees฀or฀for฀the฀termination฀of฀employment.฀
Key฀term฀
Short-term฀benefits:฀Employee฀benefits฀(other฀than฀termination฀benefits)฀that฀are฀expected฀to฀be฀
settled฀wholly฀before฀12฀months฀after฀the฀end฀of฀the฀annual฀reporting฀period฀in฀which฀the฀employees฀
render฀the฀related฀service.฀฀
฀ (IAS฀19:฀para.฀8)฀

Short-term฀benefits฀include฀items฀such฀as฀(IAS฀19:฀para.฀9):฀
(a)฀ Wages,฀salaries฀and฀social฀security฀contributions฀
(b)฀ Paid฀annual฀leave฀and฀paid฀sick฀leave฀
(c)฀ Profit-sharing฀and฀bonuses฀
(d)฀ Non-monetary฀ benefits฀ (eg฀ medical฀ care,฀ housing,฀ cars฀ and฀ free฀ or฀ subsidised฀ goods฀ or฀
services).฀
Short-term฀ employee฀ benefits฀ are฀ recognised฀ as฀ a฀ liability฀ and฀ an฀ expense฀ when฀ an฀ employee฀ has฀
rendered฀service฀during฀an฀accounting฀period,฀ie฀on฀an฀accruals฀basis.฀
Short-term฀benefits฀are฀not฀discounted฀to฀present฀value.฀

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฀฀

1.3฀Short-term฀paid฀absences฀ We฀are฀concerned฀with฀
payment฀by฀the฀company,฀not฀
Accumulating฀paid฀absences฀ the฀government.฀฀฀

Accumulating฀paid฀absences฀are฀those฀that฀can฀be฀carried฀forward฀for฀use฀in฀future฀periods฀if฀the฀
current฀period's฀entitlement฀is฀not฀used฀in฀full฀(eg฀holiday฀pay).฀
The฀expected฀cost฀of฀any฀unused฀entitlement฀that฀can฀be฀carried฀forward฀or฀paid฀in฀lieu฀of฀holidays฀is฀
recognised฀as฀an฀accrual฀at฀the฀year฀end.฀฀
You've฀worked฀more฀than฀you฀should฀
฀ on฀full฀pay,฀but฀next฀year฀you฀will฀
work฀less฀than฀you฀should฀on฀full฀pay.฀
Non-accumulating฀paid฀absences฀
Non-accumulating฀ absences฀ cannot฀ be฀ carried฀ forward฀ (eg฀ maternity฀ leave฀ or฀ military฀ service).฀
Therefore฀they฀are฀only฀recognised฀as฀an฀expense฀when฀the฀absence฀occurs฀(IAS฀19:฀para.฀11).฀

Activity฀1:฀Short-term฀benefits฀(1)฀ ฀ ฀
Plyman฀ Co฀ has฀ 100฀ employees.฀ Each฀ is฀ entitled฀ to฀ five฀ working฀ days'฀ of฀ paid฀ sick฀ leave฀ for฀ each฀
year,฀and฀unused฀sick฀leave฀can฀be฀carried฀forward฀for฀one฀year.฀Sick฀leave฀is฀taken฀on฀a฀LIFO฀basis฀
(ie฀first฀out฀of฀the฀current฀year's฀entitlement฀and฀then฀out฀of฀any฀balance฀brought฀forward).฀
As฀ at฀ 31฀ December฀ 20X8,฀ the฀ average฀ unused฀ entitlement฀ is฀ two฀ days฀ per฀ employee.฀ Plyman฀ Co฀
expects฀(based฀on฀past฀experience฀which฀is฀expected฀to฀continue)฀that฀92฀employees฀will฀take฀five฀
days฀or฀fewer฀sick฀leave฀in฀20X9฀and฀the฀remaining฀eight฀employees฀will฀take฀an฀average฀of฀six฀and฀
a฀half฀days฀each.฀
Required฀
State฀the฀required฀accounting฀for฀sick฀leave.฀

Activity฀2:฀Short-term฀benefits฀(2)฀ ฀ ฀
The฀salaried฀employees฀of฀an฀entity฀are฀entitled฀to฀20฀days'฀paid฀leave฀each฀year.฀The฀entitlement฀
accrues฀ evenly฀ over฀ the฀ year฀ and฀ unused฀ leave฀ may฀ be฀ carried฀ forward฀ for฀ one฀ year.฀ The฀ holiday฀
year฀ is฀ the฀ same฀ as฀ the฀ financial฀ year.฀ At฀ 31฀ December฀ 20X4,฀ the฀ entity฀ had฀ 2,200฀ salaried฀
employees฀ and฀ the฀ average฀ unused฀ holiday฀ entitlement฀ was฀ 4฀ days฀ per฀ employee.฀ Approximately฀
6%฀ of฀ employees฀ leave฀ without฀ taking฀ their฀ entitlement฀ and฀ there฀ is฀ no฀ cash฀ payment฀ when฀ an฀
employee฀leaves฀in฀respect฀of฀holiday฀entitlement.฀There฀are฀255฀working฀days฀in฀the฀year฀and฀the฀
total฀annual฀salary฀cost฀is฀$42฀million.฀No฀adjustment฀has฀been฀made฀in฀the฀financial฀statements฀for฀
the฀above฀and฀there฀was฀no฀opening฀accrual฀required฀for฀holiday฀entitlement.฀
Required฀
Discuss,฀ with฀ suitable฀ computations,฀ how฀ the฀ leave฀ that฀ may฀ be฀ carried฀ forward฀ is฀ treated฀ in฀ the฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X4.฀

1.4฀Profit-sharing฀and฀bonus฀plans฀
An฀entity฀recognises฀the฀expected฀cost฀of฀profit-sharing฀and฀bonus฀payments฀when,฀and฀only฀when฀
(IAS฀19:฀para.฀19–24):฀
(a)฀ The฀entity฀has฀a฀present฀ legal฀ or฀ constructive฀ obligation฀to฀make฀such฀payments฀as฀a฀
result฀of฀past฀events;฀and฀
(b)฀ A฀reliable฀estimate฀of฀the฀obligation฀can฀be฀made.฀

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A฀ present฀ obligation฀ exists฀ when฀ and฀ only฀ when฀ the฀ entity฀ has฀ no฀ realistic฀ alternative฀ but฀ to฀ make฀
payments.฀

Illustration฀1฀
Profit-sharing฀plan฀
Mooro฀Co฀runs฀a฀profit฀sharing฀plan฀under฀which฀it฀pays฀3%฀of฀its฀net฀profit฀for฀the฀year฀to฀its฀
employees฀if฀none฀have฀left฀during฀the฀year.฀Mooro฀Co฀estimates฀that฀this฀will฀be฀reduced฀by฀staff฀
turnover฀to฀2.5%฀in฀20X9.฀
Required฀
Which฀costs฀should฀be฀recognised฀by฀Mooro฀Co฀for฀the฀profit฀share?฀
Solution฀
Mooro฀Co฀should฀recognise฀a฀liability฀and฀an฀expense฀of฀2.5%฀of฀net฀profit.฀

1.5฀Post-employment฀benefits฀
Post-employment฀ benefits฀ are฀ employee฀ benefits฀ which฀ are฀ payable฀ after฀ the฀ completion฀ of฀
employment.฀

Post-employment
benefits

Defined฀contribution฀ Defined฀benefit฀
plans plans

฀
(a)฀ Defined฀contribution฀plans฀
฀ Eg฀annual฀contribution฀=฀5%฀salary฀
฀ Future฀pension฀depends฀on฀the฀value฀of฀the฀fund฀฀ Employer฀bears฀the฀
risk;฀employee฀knows฀
(b)฀ Defined฀benefit฀plans฀ what฀their฀pension฀
will฀be.฀
Final salary
฀ Eg฀annual฀pension฀=฀ ×฀years฀worked฀
60
฀ Future฀pension฀depends฀on฀final฀salary฀and฀years฀worked฀
The฀accounting฀for฀the฀two฀different฀types฀of฀plan฀are฀very฀different.฀It฀is฀important฀that฀you฀decide฀on฀
the฀nature฀of฀the฀plan฀before฀attempting฀to฀account฀for฀it.฀
A฀ pension฀ plan฀ will฀ normally฀ be฀ held฀ in฀ a฀ form฀ of฀ trust฀ separate฀ from฀ the฀ sponsoring฀ employer.฀
Although฀ the฀ directors฀ of฀ the฀ sponsoring฀ company฀ may฀ also฀ be฀ trustees฀ of฀ the฀ pension฀ plan,฀ the฀
sponsoring฀ company฀ and฀ the฀ pension฀ plan฀ are฀ separate฀ legal฀ entities฀ that฀ are฀ accounted฀ for฀
separately.฀

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฀฀

Sponsoring
employer

Pays฀contributions

The฀pension฀scheme฀
Pension฀plan/ (or฀plan/trust)฀is฀a฀
scheme separate฀fund฀from฀
the฀company฀itself.
Pays฀pensions฀in฀
future฀in฀accordance฀
with฀the฀plan's฀rules

Pensioners

Supplementary฀reading฀
See฀ Chapter฀ 4฀ Section฀ 2฀ of฀ the฀ Supplementary฀ Reading฀ for฀ a฀ further฀ exploration฀ of฀ the฀ conceptual฀
differences฀ between฀ defined฀ contribution฀ and฀ defined฀ benefit฀ plans,฀ further฀ definitions,฀ and฀ for฀ a฀
discussion฀ of฀ multi-employer฀ plans.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀

2฀Defined฀contribution฀plans฀
Defined฀contribution฀plans:฀post-employment฀benefit฀plans฀under฀which฀an฀entity฀pays฀fixed฀
contributions฀into฀a฀separate฀entity฀(a฀fund)฀and฀will฀have฀no฀legal฀or฀constructive฀obligation฀to฀pay฀
Key฀term฀
further฀contributions฀if฀the฀fund฀does฀not฀hold฀sufficient฀assets฀to฀pay฀all฀employee฀benefits฀relating฀to฀
employee฀service฀in฀the฀current฀and฀prior฀periods.฀
(IAS฀19:฀para.฀8)฀

2.1฀Accounting฀treatment฀
The฀obligation฀for฀each฀year฀is฀shown฀as฀an฀expense฀for฀the฀period฀(disclosed฀in฀a฀note)฀and฀in฀the฀
statement฀of฀financial฀position฀to฀the฀extent฀that฀it฀has฀not฀been฀paid.฀These฀are฀easy฀to฀account฀for,฀
as฀the฀cost฀of฀the฀pension฀contribution฀is฀always฀made฀under฀the฀control฀of฀the฀sponsoring฀employer฀
(IAS฀19:฀paras.฀51–52).฀

Activity฀3:฀Defined฀contribution฀plans฀ ฀
Mouse,฀a฀public฀limited฀company,฀agrees฀to฀contribute฀5%฀of฀employees'฀total฀remuneration฀into฀a฀
post-employment฀plan฀each฀period.฀
In฀the฀year฀ended฀31฀December฀20X9,฀the฀company฀paid฀total฀salaries฀of฀$10.5฀million.฀A฀bonus฀of฀
$3฀million฀based฀on฀the฀income฀for฀the฀period฀was฀paid฀to฀the฀employees฀in฀March฀20Y0.฀
The฀company฀had฀paid฀$510,000฀into฀the฀plan฀by฀31฀December฀20X9.฀
Required฀
Calculate฀ the฀ total฀ profit฀ or฀ loss฀ expense฀ for฀ post-employment฀ benefits฀ for฀ the฀ year฀ and฀ the฀ accrual฀
which฀will฀appear฀in฀the฀statement฀of฀financial฀position฀at฀31฀December฀20X9.฀

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3฀Defined฀benefit฀plans฀

Defined฀benefit฀plans:฀post-employment฀benefit฀plans฀other฀than฀defined฀contribution฀plans.฀
Key฀term฀ (IAS฀19:฀para.฀8)฀

3.1฀Introduction฀
Typically,฀ a฀ separate฀ plan฀ is฀ established฀ into฀ which฀ the฀ company฀ makes฀ regular฀ payments,฀ as฀
advised฀by฀an฀actuary.฀This฀fund฀needs฀to฀ensure฀that฀it฀has฀enough฀assets฀to฀pay฀future฀pensions฀to฀
pensioners.฀The฀entity฀records฀the฀pension฀plan฀assets฀(at฀fair฀value)฀and฀liabilities฀(at฀present฀value)฀
in฀its฀own฀books฀as฀it฀bears฀the฀pension฀plan's฀risks฀and฀benefits,฀so฀in฀substance,฀if฀not฀in฀legal฀form,฀
it฀owns฀the฀assets฀and฀owes฀the฀liabilities.฀

3.2฀Complexity฀
Accounting฀ for฀ defined฀ benefit฀ plans฀ is฀ much฀ more฀ complex฀ than฀ for฀ defined฀ contribution฀ plans฀
because:฀
(a)฀ The฀ future฀ benefits฀ (arising฀ from฀ employee฀ service฀ in฀ the฀ current฀ or฀ prior฀ years)฀ cannot฀ be฀
measured฀exactly,฀but฀whatever฀they฀are,฀the฀employer฀will฀have฀to฀pay฀them,฀and฀the฀liability฀
should฀therefore฀be฀recognised฀now.฀To฀measure฀these฀future฀obligations,฀it฀is฀necessary฀to฀use฀
actuarial฀assumptions.฀
(b)฀ The฀obligations฀payable฀in฀future฀years฀should฀be฀valued,฀by฀discounting,฀on฀a฀present฀value฀
basis.฀This฀is฀because฀the฀obligations฀may฀be฀settled฀in฀many฀years'฀time.฀
(c)฀ If฀actuarial฀assumptions฀change,฀the฀amount฀of฀required฀contributions฀to฀the฀fund฀will฀change,฀
and฀there฀may฀be฀actuarial฀(remeasurement)฀gains฀or฀losses.฀A฀contribution฀into฀a฀fund฀in฀any฀
period฀will฀not฀equal฀the฀expense฀for฀that฀period,฀due฀to฀remeasurement฀gains฀or฀losses.฀

3.3฀Measurement฀of฀plan฀obligation฀
Projected฀unit฀credit฀method฀
IAS฀ 19฀ requires฀ the฀ use฀ of฀ the฀ projected฀ unit฀ credit฀ method฀ which฀ sees฀ each฀ period฀ of฀ service฀ as฀
giving฀rise฀to฀an฀additional฀ unit฀ of฀ benefit฀ entitlement฀and฀measures฀each฀unit฀separately฀to฀
build฀up฀the฀final฀liability฀(obligation).฀The฀accumulated฀present฀value฀of฀(discounted)฀future฀benefits฀
will฀incur฀interest฀over฀time,฀and฀an฀interest฀expense฀should฀be฀recognised.฀
These฀calculations฀are฀complex฀and฀would฀normally฀be฀carried฀out฀by฀an฀actuary.฀In฀the฀exam,฀you฀
will฀be฀given฀the฀figures.฀฀
The฀actuary฀helps฀calculate฀the฀
Actuarial฀assumptions฀ present฀value฀of฀the฀plan฀obligation.฀

Actuarial฀ assumptions฀ are฀ needed฀ to฀ estimate฀ the฀ size฀ of฀ the฀ future฀ (post-employment)฀
benefits฀ that฀ will฀ be฀ payable฀ under฀ a฀ defined฀ benefits฀ scheme.฀ The฀ main฀ categories฀ of฀ actuarial฀
assumptions฀are:฀
฀ Demographic฀ assumptions,฀ eg฀ mortality฀ rates฀ before฀ and฀ after฀ retirement,฀ the฀ rate฀ of฀
employee฀turnover,฀early฀retirement฀
฀ Financial฀assumptions,฀eg฀future฀salary฀rises฀
Actuarial฀assumptions฀made฀should฀be฀unbiased฀and฀based฀on฀market฀expectations.฀
(IAS฀19:฀paras.฀75–76)฀
Discounting฀–฀current฀service฀cost฀
The฀ benefits฀ earned฀ must฀ be฀ discounted฀ to฀ arrive฀ at฀ the฀ present฀ value฀ of฀ the฀ defined฀ benefit฀
obligation.฀The฀increase฀during฀the฀year฀in฀this฀obligation฀is฀called฀the฀current฀service฀cost฀which฀is฀
shown฀as฀an฀expense฀in฀profit฀or฀loss.฀

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In฀effect,฀the฀current฀service฀cost฀is฀the฀increase฀in฀total฀pensions฀payable฀as฀a฀result฀of฀continuing฀to฀
employ฀your฀staff฀for฀another฀year.฀
The฀discount฀rate฀used฀is฀determined฀by฀reference฀to฀market฀yields฀at฀the฀end฀of฀the฀reporting฀
period฀on฀high฀quality฀corporate฀bonds฀(or฀government฀bonds฀for฀currencies฀for฀which฀no฀deep฀
market฀in฀high฀quality฀corporate฀bonds฀exists).฀The฀term฀of฀the฀bonds฀should฀be฀consistent฀with฀that฀of฀
the฀post-employment฀benefit฀obligations.฀
(IAS฀19:฀para.฀120)฀
Compounding฀–฀interest฀cost฀
The฀obligation฀must฀be฀compounded฀ back฀ up฀each฀year฀reflecting฀the฀fact฀that฀the฀benefits฀are฀
one฀ period฀ closer฀ to฀ settlement.฀ This฀ increase฀ in฀ the฀ obligation฀ is฀ called฀ interest฀ cost฀ and฀ is฀ also฀
shown฀as฀an฀expense฀in฀profit฀or฀loss.฀

Discount฀

Current฀ Increase฀in฀
service฀cost฀ annual฀pension฀
Service฀
performed฀ DEBIT฀฀฀฀Current฀service฀cost฀(P/L)฀ payments฀
CREDIT฀฀Present฀value฀of฀obligation฀

Year฀
Now฀ Retirement฀ Death฀
end฀

Compound:฀

DEBIT฀฀฀฀Net฀interest฀cost฀(P/L)฀
CREDIT฀฀Present฀value฀of฀obligation฀

Remeasurements฀of฀plan฀obligation฀
Remeasurement฀ gains฀ or฀ losses฀ may฀ arise฀ due฀ to฀ differences฀ between฀ the฀ year฀ end฀
actuarial฀valuation฀of฀the฀defined฀benefit฀obligation฀and฀its฀accounting฀value.฀
They฀are฀made฀up฀of฀changes฀in฀the฀present฀value฀of฀the฀obligation฀resulting฀from:฀
฀ Experience฀adjustments฀(the฀effects฀of฀differences฀between฀the฀previous฀actuarial฀assumptions฀
and฀what฀has฀actually฀occurred);฀and฀
IAS฀19฀views฀them฀a฀bit฀like฀a฀
revaluation,฀so฀they฀go฀to฀OCI.฀
฀ The฀effects฀of฀changes฀in฀actuarial฀assumptions.฀฀
Remeasurement฀ gains฀ and฀ losses฀ are฀ recognised฀ in฀ other฀ comprehensive฀ income฀ ('Items฀ that฀
will฀not฀be฀reclassified฀to฀profit฀or฀loss')฀in฀the฀period฀in฀which฀they฀occur.฀

3.4฀Measurement฀of฀plan฀assets฀
The฀ sponsoring฀ employer฀ needs฀ to฀ set฀ aside฀ investments฀ during฀ the฀ accounting฀ period฀ to฀ cover฀ the฀
pension฀liability.฀To฀meet฀the฀IAS฀19฀criteria฀(and฀protect฀the฀pensioners!)฀they฀must฀be฀held฀by฀an฀
entity฀legally฀separate฀from฀the฀reporting฀entity.฀
Plan฀assets฀are฀(IAS฀19:฀paras.฀113–115):฀
฀ Assets฀ such฀ as฀ stocks฀ and฀ shares,฀ held฀ by฀ a฀ fund฀ that฀ is฀ legally฀ separate฀ from฀ the฀ reporting฀
entity,฀which฀exists฀solely฀to฀pay฀employee฀benefits฀
฀ Insurance฀policies,฀issued฀by฀an฀insurer฀that฀is฀not฀a฀related฀party,฀the฀proceeds฀of฀which฀can฀
only฀be฀used฀to฀pay฀employee฀benefits฀

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4:฀Employee฀benefits฀

Interest฀ income฀ is฀ applied฀ to฀ the฀ asset฀ and฀ netted฀ against฀ the฀ interest฀ cost฀ on฀ the฀ defined฀
benefit฀ obligation.฀ The฀ resulting฀ net฀ interest฀ cost฀ (or฀ income)฀ on฀ the฀ net฀ defined฀ benefit฀
liability฀(or฀asset)฀is฀recognised฀in฀profit฀ or฀ loss฀and฀represents฀the฀financing฀effect฀of฀paying฀for฀
benefits฀in฀advance฀or฀in฀arrears.฀

Difference฀between฀actual฀return฀and฀amounts฀
in฀net฀interest฀
Compound:฀ =฀remeasurement฀recognised฀in฀OCI฀
DEBIT฀ Fair฀value฀plan฀assets฀
CREDIT฀฀Net฀interest฀cost฀(or฀income)฀(P/L)฀
Increase฀in฀
Service฀ annual฀pension฀
performed฀ payments฀

Now฀ Year฀ Contributions:฀ Retirement฀ Death฀

end฀ DEBIT฀฀ Fair฀value฀plan฀assets฀
CREDIT฀฀Company฀cash฀
฀

Remeasurements฀of฀plan฀assets฀
The฀value฀of฀the฀investments฀will฀increase฀over฀time.฀This฀is฀called฀the฀return฀on฀plan฀assets฀and฀
is฀defined฀as฀interest,฀dividends฀and฀other฀income฀derived฀from฀the฀plan฀assets฀together฀with฀
realised฀and฀unrealised฀gains฀or฀losses฀on฀the฀plan฀assets,฀less฀any฀costs฀of฀managing฀plan฀
assets฀and฀tax฀payable฀by฀the฀plan฀itself.฀
The฀difference฀between฀the฀return฀ on฀ plan฀ assets฀ and฀the฀ interest฀ income฀referred฀to฀above฀
included฀ in฀ net฀ interest฀ on฀ the฀ net฀ defined฀ benefit฀ liability฀ (or฀ asset)฀ is฀ a฀ remeasurement฀ and฀ is฀
recognised฀in฀other฀comprehensive฀income฀('Items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss').฀

3.5฀Past฀service฀cost฀
Past฀service฀cost฀is฀the฀increase฀or฀decrease฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation฀for฀
employee฀service฀in฀prior฀periods,฀resulting฀from:฀฀
(a)฀ A฀ plan฀ amendment฀ (the฀ introduction฀ or฀ withdrawal฀ of,฀ or฀ changes฀ to,฀ a฀ defined฀ benefit฀ Eg฀
plan);฀or฀ reducing฀
the฀number฀
(b)฀ A฀curtailment฀(a฀significant฀reduction฀by฀the฀entity฀in฀the฀number฀of฀employees฀covered฀by฀ by฀which฀
the฀years฀
the฀plan).฀ worked฀is฀
divided฀to฀
Past฀service฀cost฀is฀recognised฀as฀an฀adjustment฀to฀the฀obligation฀and฀as฀an฀expense฀(or฀income)฀at฀ increase฀
the฀earlier฀of฀the฀following฀dates:฀ pension฀
payable.฀
(a)฀ When฀the฀plan฀amendment฀or฀curtailment฀occurs;฀or฀
(b)฀ When฀ the฀ entity฀ recognises฀ related฀ restructuring฀ costs฀ (in฀ accordance฀ with฀ IAS฀ 37)฀ or฀
termination฀benefits.฀ (IAS฀19:฀para.฀99)฀
For฀example:฀
(a)฀ An฀amendment฀is฀made฀to฀the฀plan฀which฀improves฀benefits฀for฀plan฀members.฀
An฀increase฀to฀the฀obligation฀(and฀expense)฀is฀recognised฀when฀the฀amendment฀occurs:฀

DEBIT฀฀฀ Profit฀or฀loss฀ X
CREDIT฀Present฀value฀of฀defined฀benefit฀obligation฀ ฀ X฀
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(b)฀ Discontinuance฀ of฀ an฀ operation,฀ so฀ that฀ employees'฀ services฀ are฀ terminated฀ earlier฀ than฀
expected.฀
A฀reduction฀in฀the฀obligation฀(and฀income)฀is฀recognised฀at฀the฀same฀time฀as฀the฀termination฀
benefits฀are฀recognised:฀

DEBIT฀฀฀ Present฀value฀of฀defined฀benefit฀obligation X
CREDIT฀Profit฀or฀loss฀ ฀ X฀
฀

3.6฀Approach฀
The฀ suggested฀ approach฀ to฀ defined฀ benefit฀ plans฀ is฀ to฀ deal฀ with฀ the฀ change฀ in฀ the฀ obligation฀ and฀
asset฀in฀the฀following฀order,฀building฀up฀the฀disclosure฀notes.฀However,฀as฀long฀as฀all฀the฀steps฀are฀
followed฀they฀can฀be฀done฀in฀a฀different฀order.฀
Refer฀back฀
to฀this฀table฀
Step฀ Item฀ Recognition฀ when฀
doing฀
(1)฀ Record฀opening฀figures:฀ questions.฀

฀ Obligation฀ ฀
฀ Asset฀

(2)฀ Net฀interest฀cost฀
฀ Interest฀applied฀to฀b/d฀obligation฀
and฀assets฀(and฀netted฀in฀profit฀or฀
loss).฀ DEBIT฀฀ Net฀interest฀cost฀(P/L)฀(x%฀×฀b/d฀
฀ Should฀also฀reflect฀any฀changes฀in฀ ฀ obligation)฀
obligation฀during฀period,฀eg฀past฀ CREDIT฀ PV฀defined฀benefit฀obligation฀
service฀cost฀ ฀ (SOFP)฀
฀ The฀interest฀on฀assets฀is฀time฀ and฀
apportioned฀for฀contributions฀less฀ DEBIT฀ Plan฀assets฀(SOFP)฀(x%฀×฀b/d฀assets)฀
benefits฀paid฀in฀the฀period฀(if฀they฀
occur฀throughout฀the฀year฀rather฀than฀ CREDIT฀ Net฀interest฀cost฀(P/L)฀
at฀the฀start฀or฀end฀of฀the฀year).฀The฀
interest฀on฀obligations฀is฀also฀time฀
apportioned฀for฀benefits฀paid฀

(3)฀ Current฀service฀cost฀
฀ Increase฀in฀the฀present฀value฀of฀the฀ DEBIT฀ Current฀service฀cost฀(P/L)฀
obligation฀resulting฀from฀employee฀ CREDIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀
service฀in฀the฀current฀period฀

(4) Past฀service฀cost฀ Increase฀in฀obligation:฀

฀ ฀ ฀ Change฀in฀PV฀obligation฀for฀
DEBIT฀ Past฀service฀cost฀(P/L)฀
employee฀service฀in฀prior฀periods,฀ CREDIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀
resulting฀from฀a฀plan฀amendment฀or฀
curtailment฀ Decrease฀in฀obligation:฀

฀ Charged฀or฀credited฀immediately฀to฀ DEBIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀

profit฀or฀loss฀ CREDIT฀ Past฀service฀cost฀(P/L)฀

(5)฀ Contributions฀ ฀
฀ Into฀the฀plan฀by฀the฀company฀ DEBIT฀ Plan฀assets฀(SOFP)฀
฀ As฀advised฀by฀actuary฀ CREDIT฀ Company฀cash฀

(6)฀ Benefits฀ DEBIT฀ PV฀defined฀benefit฀obligation฀(SOFP)฀

฀ Actual฀pension฀payments฀made฀ CREDIT฀ Plan฀assets฀(SOFP)฀

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4:฀Employee฀benefits฀

Step฀ Item฀ Recognition฀

(7) Remeasurements฀
฀ ฀ ฀ Arising฀from฀annual฀valuations฀of฀
obligation฀and฀assets฀
฀ On฀obligation,฀differences฀between฀
actuarial฀assumptions฀and฀actual฀ Recognise฀all฀changes฀due฀to฀remeasurements฀
experience฀during฀the฀period,฀or฀ in฀other฀comprehensive฀income฀
changes฀in฀actuarial฀assumptions฀
฀ On฀assets,฀differences฀between฀actual฀
return฀on฀plan฀assets฀and฀amounts฀
included฀in฀net฀interest฀

(8)฀ Disclose฀deficit฀or฀surplus฀in฀accordance฀
See฀Activity฀4฀
with฀the฀Standard฀
฀

Illustration฀2฀
Defined฀benefit฀plan฀
Angus฀operates฀a฀defined฀benefit฀scheme฀for฀its฀employees฀but฀has฀yet฀to฀record฀anything฀for฀the฀
current฀year฀except฀to฀expense฀the฀cash฀contributions฀which฀were฀$18฀million.฀The฀opening฀position฀
was฀a฀net฀liability฀of฀$45฀million฀which฀is฀included฀in฀the฀non-current฀liabilities฀of฀Angus฀in฀its฀draft฀
financial฀statements.฀Current฀service฀costs฀for฀the฀year฀were฀$15฀million฀and฀interest฀rates฀on฀good฀
quality฀corporate฀bonds฀fell฀from฀8%฀at฀the฀start฀of฀the฀year฀to฀6%฀by฀31฀March฀20X8.฀In฀addition,฀
a฀payment฀of฀$9฀million฀was฀made฀out฀of฀the฀cash฀of฀the฀pension฀scheme฀in฀relation฀to฀employees฀
who฀left฀the฀scheme.฀The฀reduction฀in฀the฀pension฀scheme฀liability฀as฀a฀result฀of฀the฀curtailment฀
was฀$12฀million.฀The฀actuary฀has฀assessed฀that฀the฀scheme฀is฀in฀deficit฀by฀$51฀million฀as฀at฀
31฀March฀20X8.฀
Required฀
Calculate฀the฀gain/loss฀on฀remeasurement฀of฀the฀defined฀benefit฀pension฀net฀liability฀of฀Angus฀as฀at฀
31฀March฀20X8,฀and฀state฀how฀this฀should฀be฀treated.฀
Solution฀
The฀loss฀on฀remeasurement฀is฀calculated฀as฀$8.4฀million฀(W)฀and฀should฀be฀recognised฀in฀other฀
comprehensive฀income฀for฀the฀year.฀฀
Working:฀Net฀liability฀
฀$m฀฀฀฀
Opening฀net฀liability฀ ฀45.0฀
Net฀interest฀cost฀($45m ×฀8%)฀ ฀3.6฀
Current฀service฀cost฀ ฀15.0฀
Gain฀on฀curtailment฀($12m฀–฀$9m)฀ ฀(3.0)฀
Cash฀contributions฀into฀the฀scheme฀ ฀(18.0)฀
฀ ฀42.6฀
Loss฀on฀remeasurement ()฀ ฀฀฀฀8.4฀
Closing฀net฀liability฀ ฀51.0฀
฀

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Activity฀4:฀Defined฀benefit฀plans฀ ฀ ฀
Lewis,฀a฀public฀limited฀company,฀has฀a฀defined฀benefit฀plan฀for฀its฀employees.฀The฀present฀value฀of฀
the฀future฀benefit฀obligations฀at฀1฀January฀20X7฀was฀$1,120฀million฀and฀the฀fair฀value฀of฀the฀plan฀
assets฀was฀$1,040฀million.฀
Further฀data฀concerning฀the฀year฀ended฀31฀December฀20X7฀is฀as฀follows:฀
฀ $m
Current฀service฀cost฀ 76
Benefits฀paid฀to฀former฀employees฀ 88
Contributions฀paid฀to฀plan฀ 94
฀
Present฀value฀of฀benefit฀obligations฀at฀31฀December 1,222 As฀valued฀by฀
Fair฀value฀of฀plan฀assets฀at฀31฀December฀ 1,132 professional฀actuaries฀
฀
Interest฀cost฀(gross฀yield฀on฀'blue฀chip'฀corporate฀bonds):฀5%
On฀1฀January฀20X7฀the฀plan฀was฀amended฀to฀provide฀additional฀benefits฀with฀effect฀from฀that฀date.฀
The฀ present฀ value฀ of฀ the฀ additional฀ benefits฀ at฀ 1฀ January฀ 20X7฀ was฀ calculated฀ by฀ actuaries฀ at฀
$40฀million.฀
Required฀
Prepare฀ the฀ required฀ notes฀ to฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀ income฀ and฀
statement฀of฀financial฀position฀for฀the฀year฀ended฀31฀December฀20X7.฀
Assume฀the฀contributions฀and฀benefits฀were฀paid฀on฀31฀December฀20X7.฀

Solution฀
Notes฀to฀the฀statement฀of฀profit฀or฀loss฀and฀other฀comprehensive฀income฀
Defined฀benefit฀expense฀recognised฀in฀profit฀or฀loss ฀
฀ $m฀฀
Current฀service฀cost฀ ฀
Past฀service฀cost฀ ฀
Net฀interest฀costs฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Other฀comprehensive฀income฀(items฀that฀will฀not฀be฀reclassified฀to฀profit฀or฀loss):฀
Remeasurements฀of฀defined฀benefit฀plans฀
฀ $m฀฀
Remeasurement฀gain/(loss)฀on฀defined฀benefit฀obligation ฀
Return฀on฀plan฀assets฀(excluding฀amounts฀in฀net฀interest) ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Notes฀to฀the฀statement฀of฀financial฀position฀
Net฀defined฀benefit฀liability฀recognised฀in฀the฀statement฀of฀financial฀position฀ ฀
฀ 31.12.X7฀ 31.12.X6
฀ $m฀฀ $m฀
Present฀value฀of฀defined฀benefit฀obligation ฀
Fair฀value฀of฀plan฀assets ฀฀฀฀ ฀฀฀฀฀฀฀฀
Net฀liability฀ ฀฀฀฀ ฀฀฀฀฀฀฀฀
฀

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4:฀Employee฀benefits฀

Changes฀in฀the฀present฀value฀of฀the฀defined฀benefit฀obligation ฀
฀ $m฀
Opening฀defined฀benefit฀obligation฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀defined฀benefit฀obligation฀ ฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀ ฀
฀ ฀ ฀
Changes฀in฀the฀fair฀value฀of฀plan฀assets ฀
฀ $m฀
Opening฀fair฀value฀of฀plan฀assets฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀
฀ ฀ ฀฀฀฀฀฀฀฀฀฀฀฀
Closing฀fair฀value฀of฀plan฀assets฀ ฀฀฀฀฀฀฀฀฀฀฀฀

Supplementary฀reading฀
Although฀questions฀frequently฀ask฀you฀to฀assume฀that฀contributions฀and฀benefits฀are฀paid฀at฀the฀year฀
end,฀this฀is฀not฀invariably฀the฀case.฀See฀Chapter฀4฀Section฀4฀of฀the฀Supplementary฀Reading฀for฀a฀
comprehensive฀example฀in฀which฀contributions฀are฀paid฀at฀the฀start฀of฀the฀period฀and฀benefits฀paid฀
in฀two฀instalments฀across฀the฀period.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀

4฀ Settlements฀
A฀settlement฀is฀a฀transaction฀that฀eliminates฀all฀further฀legal฀or฀constructive฀obligations฀
for฀part฀or฀all฀of฀the฀benefits฀provided฀under฀a฀defined฀benefit฀plan฀(other฀than฀a฀payment฀of฀benefits฀
to,฀or฀on฀behalf฀of,฀employees฀that฀is฀set฀out฀in฀the฀terms฀of฀the฀plan฀and฀included฀in฀the฀actuarial฀
assumptions).฀฀
Example:฀a฀lump-sum฀cash฀payment฀made฀in฀exchange฀for฀rights฀to฀receive฀post-employment฀benefits.฀
The฀gain฀or฀loss฀on฀a฀settlement฀is฀recognised฀in฀profit฀or฀loss฀when฀the฀settlement฀occurs:฀

DEBIT฀ PV฀obligation฀(as฀advised฀by฀actuary) X
CREDIT฀ FV฀plan฀assets฀(any฀assets฀transferred)฀ X฀
CREDIT฀ Cash฀(paid฀directly฀by฀the฀entity)฀ X฀
CREDIT/DEBIT฀ Profit฀or฀loss฀(difference)฀ X฀
฀
(IAS฀19:฀para.฀99)฀

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฀฀

5฀ The฀'Asset฀Ceiling'฀test฀
Amounts฀recognised฀as฀a฀net฀pension฀asset฀in฀the฀statement฀of฀financial฀position฀must฀not฀be฀stated฀at฀
more฀than฀their฀recoverable฀amount.฀Consequently,฀IAS฀19฀(IAS฀19:฀paras.฀64฀and฀65)฀requires฀any฀
net฀pension฀asset฀to฀be฀measured฀at฀the฀lower฀of:฀
฀ Net฀reported฀asset;฀or฀
฀ The฀present฀value฀of฀any฀refunds/reduction฀of฀future฀contributions฀available฀from฀the฀pension฀
plan฀
Any฀impairment฀loss฀is฀charged฀immediately฀to฀other฀comprehensive฀income.฀
(IAS฀19:฀para.฀8)฀

Supplementary฀reading฀
See฀Chapter฀4฀Section฀3฀of฀the฀Supplementary฀Reading฀for฀an฀illustration฀of฀the฀'Asset฀Ceiling'฀test.฀
This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

6฀Current฀developments฀and฀other฀issues฀

6.1฀General฀issues฀around฀IAS฀19฀
IAS฀ 19฀ was฀ last฀ revised฀ in฀ 2011.฀ In฀ the฀ longer฀ term,฀ the฀ IASB฀ intends฀ to฀ undertake฀ a฀ more฀
fundamental฀review฀and฀produce฀a฀revised฀standard฀to฀address฀other฀issues,฀but฀recognises฀that฀
this฀will฀take฀some฀years฀to฀complete.฀
Some฀of฀the฀key฀issues฀are:฀
(a)฀ Definitions฀of฀the฀types฀of฀plan฀
(b)฀ Interest฀rate฀used฀for฀discounting฀
(c)฀ Measurement฀of฀plan฀liabilities฀
(d)฀ Treatment฀of฀more฀unusual฀plans:฀
(i)฀ 'Hybrid'฀plans฀(part฀defined฀contribution,฀part฀defined฀benefit)฀
(ii)฀ 'Higher฀of'฀plans฀(where฀the฀employee's฀pension฀is฀defined฀benefit,฀but฀can฀be฀higher฀if฀
the฀funds฀invested฀perform฀well)฀
(iii)฀ Company฀'top-ups'฀or฀guaranteed฀returns฀on฀defined฀contribution฀plans฀
The฀ scenarios฀ in฀ (d)฀ are฀ all฀ currently฀ accounted฀ for฀ as฀ defined฀ benefit฀ plans฀ as,฀ given฀ that฀ the฀
contributions฀are฀not฀fixed,฀they฀do฀not฀meet฀the฀definition฀of฀a฀defined฀contribution฀plan.฀
However,฀it฀may฀be฀more฀appropriate฀to฀have฀a฀different฀ form฀ of฀ accounting,฀eg฀a฀separate฀
liability฀measured฀at฀fair฀value฀for฀the฀'top-up'฀in฀scenario฀(d)(iii)฀or฀to฀revise฀the฀definitions฀of฀the฀
types฀of฀plan.฀
The฀ presentation฀ and฀ recognition฀ requirements฀ of฀ IAS฀ 19฀ may฀ not฀ be฀ consistent฀ with฀ the฀
Conceptual฀ Framework.฀ For฀ example฀ the฀ interest฀ element฀ is฀ recognised฀ in฀ profit฀ or฀ loss฀ while฀ the฀
'correction'฀ (difference฀ between฀ actual฀ return฀ and฀ interest฀ applied)฀ is฀ recognised฀ in฀ other฀
comprehensive฀income.฀The฀logic฀for฀this฀split฀is฀that฀the฀interest฀element฀shows฀the฀financing฀effect฀of฀
paying฀ for฀ benefits฀ in฀ advance฀ or฀ arrears.฀ However,฀ under฀ the฀Conceptual฀ Framework,฀ there฀ is฀ no฀
conceptual฀basis฀for฀this฀split.฀฀
The฀Exposure฀Draft฀Conceptual฀Framework฀(ED/2015/3:฀paras.฀7.19–7.27)฀addresses฀this฀issue฀to฀
some฀extent฀by฀providing฀guidance฀on฀whether฀to฀present฀income฀and฀expenses฀in฀profit฀or฀loss฀or฀in฀
other฀ comprehensive฀ income.฀ The฀ ED฀ proposes฀ that฀ all฀ items฀ of฀ income฀ and฀ expense฀ should฀ be฀
shown฀ in฀ profit฀ or฀ loss฀ unless฀ relating฀ to฀ the฀ remeasurement฀ of฀ assets฀ and฀ liabilities฀ –฀ these฀ would฀
normally฀be฀shown฀in฀other฀comprehensive฀income.฀The฀ED฀is฀therefore฀consistent฀with฀the฀approach฀
already฀adopted฀in฀IAS฀19.฀

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4:฀Employee฀benefits฀

IAS฀ 19฀ could฀ also฀ be฀ criticised฀ for฀ reporting฀ estimated฀ figures฀ in฀ profit฀ or฀ loss,฀ while฀ reporting฀ the฀
difference฀to฀arrive฀at฀the฀actual฀return฀in฀other฀comprehensive฀income.฀
IAS฀19฀uses฀the฀'projected฀unit฀credit฀method'฀for฀recognition฀of฀pension฀obligations,฀which฀means฀
that฀ future฀ anticipated฀ increases฀ in฀ salary฀ (and฀ therefore฀ future฀ pension฀ liabilities)฀ based฀ on฀ years฀
worked฀ to฀ date฀ are฀ included.฀ It฀ could฀ be฀ argued฀ that฀ this฀ approach฀ does฀ not฀ comply฀ with฀ the฀
Conceptual฀Framework฀(or฀the฀ED)฀because฀those฀increases฀have฀not฀been฀earned฀yet฀and฀therefore฀
do฀not฀relate฀to฀the฀period.฀Indeed,฀they฀may฀never฀be฀earned฀(or฀payable)฀if฀the฀employee฀does฀not฀
work฀for฀the฀same฀company฀for฀his฀or฀her฀whole฀working฀life.฀฀

6.2฀ Plan฀amendment,฀curtailment฀or฀settlement/availability฀of฀a฀
refund฀
The฀IASB฀issued฀proposed฀narrow฀scope฀amendments฀to฀IAS฀19฀in฀2015.฀The฀proposed฀amendments฀
clarify฀two฀issues฀relating฀to฀defined฀benefit฀schemes:฀
(a)฀฀ The฀current฀service฀cost฀in฀a฀period฀before฀a฀plan฀amendment,฀settlement฀of฀curtailment฀is฀not฀
affected฀by,฀or฀included฀in,฀the฀resulting฀past฀service฀cost฀or฀gain฀or฀loss฀on฀settlement.฀
(b)฀฀ When฀a฀plan฀amendment,฀settlement฀or฀curtailment฀occurs฀and฀the฀net฀defined฀benefit฀liability฀
or฀asset฀is฀remeasured:฀
(i)฀ Net฀ interest฀ for฀ the฀ remaining฀ period฀ is฀ determined฀ based฀ on฀ the฀ remeasured฀ net฀
defined฀benefit฀liability฀or฀asset฀
(ii)฀ Current฀service฀cost฀and฀interest฀for฀the฀period฀after฀the฀remeasurement฀are฀determined฀
using฀assumptions฀used฀for฀the฀remeasurement฀
(IASB,฀2015)฀

6.3฀Pension฀accounting฀and฀risk฀
IAS฀19฀requires฀risk-based฀disclosures,฀including฀detail฀on฀the฀choice฀of฀investments,฀future฀cash฀
requirements฀and฀information฀about฀risks฀to฀which฀the฀scheme฀exposes฀the฀company.฀
The฀IAS฀19฀disclosure฀requirements฀were฀generally฀seen฀as฀an฀opportunity฀for฀entities฀to฀explain฀their฀
pension฀scheme฀risks฀and,฀crucially,฀how฀such฀risks฀are฀being฀managed.฀The฀entity฀should:฀
฀ Explain฀ the฀ characteristics฀ of,฀ and฀ risks฀ associated฀ with,฀ the฀ entity's฀defined฀ benefit฀ plans,฀
focusing฀ on฀ unusual,฀ entity-specific฀ or฀ plan-specific฀ risks,฀ or฀ risks฀ that฀ arise฀ from฀ a฀
concentration฀of฀investments฀in฀one฀particular฀area;฀
฀ Identify฀ and฀ explain฀ the฀ amounts฀ in฀ the฀ entity's฀ financial฀ statements฀ arising฀ from฀ its฀ defined฀
benefit฀plans;฀and฀
฀ Explain฀ how฀ the฀ defined฀ benefit฀ plans฀ may฀ affect฀ the฀ entity's฀ future฀ cash฀ flows,฀ including฀ a฀
sensitivity฀ analysis฀ which฀ shows฀ the฀ potential฀ impact฀ of฀ changes฀ in฀ actuarial฀ assumptions.฀
Disclosure฀is฀required฀as฀to฀the฀funding฀arrangements฀and฀commitments฀from฀the฀company฀to฀
make฀contributions฀to฀the฀plan.฀
These฀ disclosures฀ provide฀ an฀ opportunity฀ for฀ the฀ entity฀ to฀ demonstrate฀ that฀ it฀ is฀ aware฀ of฀ the฀ risks฀
associated฀with฀its฀defined฀benefit฀plans฀and฀how฀it฀is฀managing฀its฀risks,฀so฀that฀users฀will฀draw฀the฀
correct฀conclusions.฀As฀with฀all฀disclosure,฀there฀needs฀to฀be฀a฀balance฀between฀providing฀enough฀
relevant฀ information฀ to฀ allow฀ users฀ to฀ understand฀ the฀ risks,฀ without฀ disclosing฀ so฀ much฀ information฀
that฀they฀cannot฀see฀what฀is฀relevant.฀
Possible฀risks฀to฀which฀a฀defined฀benefit฀pension฀plan฀exposes฀an฀entity฀include:฀
฀ Investment฀risk฀
฀ Interest฀risk฀
฀ Salary฀risk฀฀
฀ Longevity฀risk฀

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6.4฀Stakeholder฀perspectives฀
The฀ growing฀ cost฀ of฀ providing฀ defined฀ benefit฀ pension฀ plans฀ to฀ employees฀ has฀ been฀ a฀ concern฀ to฀
companies฀ for฀ a฀ number฀ of฀ years.฀ Due฀ to฀ increasing฀ life฀ expectancies฀ and฀ economic฀ conditions,฀
companies฀ report฀ increasing฀ pension฀ liabilities฀ on฀ the฀ statement฀ of฀ financial฀ positon฀ and,฀ more฀
importantly,฀ have฀ to฀ make฀ large฀ cash฀ contributions฀ in฀ order฀ to฀ fund฀ pension฀ deficits.฀ From฀ the฀
employees'฀ perspective,฀ defined฀ benefit฀ pension฀ plans฀ are฀ generally฀ preferred฀ as฀ they฀ provide฀ a฀
guaranteed฀income฀on฀retirement.฀฀
There฀have,฀however,฀been฀a฀number฀of฀cases฀in฀recent฀years฀in฀which฀the฀ability฀of฀a฀company฀to฀
continue฀ as฀ a฀ going฀ concern฀ is฀ put฀ in฀ doubt฀ as฀ a฀ result฀ of฀ its฀ pension฀ plan฀ commitments.฀ In฀ such฀
situations,฀employees฀lose฀their฀job฀security฀and,฀if฀the฀company฀is฀liquidated,฀employees฀potentially฀
do฀not฀receive฀the฀full฀amount฀of฀benefits฀due฀to฀them฀under฀the฀pension฀plan฀as฀there฀are฀insufficient฀
assets฀to฀cover฀the฀pension฀liabilities฀of฀the฀company.฀Investors฀may฀receive฀reduced฀dividends฀from฀
companies฀that฀need฀to฀use฀surplus฀cash฀to฀make฀deficit฀contributions฀and฀will฀be฀concerned฀about฀
the฀value฀of฀their฀investment฀if฀the฀company฀is฀not฀able฀to฀continue฀as฀a฀going฀concern.฀Other฀lenders฀
and฀creditors฀will฀also฀be฀concerned฀about฀whether฀the฀company฀has฀sufficient฀resources฀to฀settle฀any฀
debts฀as฀they฀fall฀due.฀฀
Most฀companies฀have฀now฀closed฀their฀defined฀benefit฀pension฀plans฀to฀new฀joiners฀in฀an฀effort฀to฀
reduce฀ pension฀ costs฀ and฀ avoid฀ increasing฀ liabilities฀ further,฀ but฀ the฀ existing฀ liabilities฀ in฀ respect฀ of฀
benefits฀already฀accrued฀will฀remain฀an฀issue฀for฀a฀number฀of฀years฀to฀come.฀

Exercise฀1:฀Pension฀disclosure฀ ฀
The฀ financial฀ statements฀ of฀ Sainsbury's฀ plc฀ include฀ disclosures฀ relating฀ to฀ its฀ defined฀ benefit฀
obligation.฀Sainsbury's฀is฀a฀listed฀company฀in฀the฀UK฀which฀has฀been฀subject฀to฀media฀attention฀in฀
respect฀of฀its฀significant฀pension฀deficit.฀฀
Take฀ a฀ look฀ at฀ the฀ pension฀ disclosure฀ in฀ Sainsbury's฀ Annual฀ Report฀ available฀ at:฀
www.about.sainsburys.co.uk/investors฀฀
Then,฀ using฀ companies฀ that฀ you฀ are฀ familiar฀ with,฀ research฀ the฀ pension฀ disclosures฀ given฀ in฀ their฀
financial฀statements.฀

Ethics฀note฀
In฀general,฀the฀ethical฀dilemmas฀that฀are฀likely฀to฀be฀tested฀in฀the฀Strategic฀Business฀Reporting฀(SBR)฀
exam฀occur฀in฀the฀context฀of฀manipulation฀of฀financial฀statements,฀with฀someone฀in฀authority,฀such฀as฀
a฀managing฀director,฀wishing฀to฀present฀the฀financial฀statements฀in฀a฀more฀favourable฀light.฀฀
The฀SBR฀exam฀will฀be฀the฀first฀time฀you฀will฀be฀tested฀on฀employee฀benefits.฀It฀could฀form฀the฀basis฀of฀
part฀of฀an฀ethical฀question.฀One฀area฀such฀a฀question฀might฀focus฀on฀could฀be฀the฀difference฀
between฀defined฀benefit฀and฀defined฀contribution฀pension฀plans.฀The฀main฀difference฀between฀the฀
two฀types฀of฀plans฀lies฀in฀who฀bears฀the฀risk:฀if฀the฀employer฀bears฀the฀risk,฀even฀in฀a฀small฀way฀by฀
guaranteeing฀or฀specifying฀the฀return,฀the฀plan฀is฀a฀defined฀benefit฀plan.฀A฀defined฀contribution฀
scheme฀must฀give฀a฀benefit฀formula฀based฀solely฀on฀the฀amount฀of฀the฀contributions,฀and฀therefore฀no฀
guarantee฀is฀offered฀by฀the฀employer.฀
A฀defined฀benefit฀scheme฀may฀be฀created฀even฀if฀there฀is฀no฀legal฀obligation,฀if฀an฀employer฀has฀a฀
practice฀of฀guaranteeing฀the฀benefits฀payable.฀฀
There฀could,฀in฀consequence,฀be฀an฀incentive฀for฀a฀company฀director฀to฀argue฀that฀a฀plan฀is฀a฀
defined฀contribution฀plan,฀especially฀where฀the฀legal฀position฀is฀in฀conflict฀with฀the฀substance.฀That฀
way,฀assets฀and฀liabilities฀are฀not฀shown฀in฀the฀statement฀of฀financial฀position,฀and฀in฀particular,฀a฀
net฀liability,฀which฀could฀affect฀loan฀covenants,฀is฀not฀shown.฀

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4:฀Employee฀benefits฀

Chapter฀summary฀
฀
฀
Short-term฀benefits฀
฀ ฀ Recognised฀as฀a฀liability฀as฀employee฀
1.฀ Employee฀benefits฀ renders฀service฀(ie฀accruals฀basis)฀
(IAS฀19)฀
฀ Not฀discounted฀
฀ Accrue฀for฀short-term฀compensated฀
absences฀(eg฀holiday฀pay)฀that฀can฀
Post-employment฀
be฀carried฀forwards฀
benefits฀

2.฀ Defined฀contribution฀ 3.฀ Defined฀benefit฀plans฀

plans฀ ฀ Definition฀
฀ Definition฀ ฀ Post-employment฀plans฀other฀than฀defined฀contribution฀
฀ An฀entity฀pays฀fixed฀contributions฀ plans฀
into฀a฀separate฀entity฀(a฀fund)฀and฀ ฀ Company฀guarantees฀pension฀
will฀have฀no฀legal฀or฀constructive฀
Final฀salary
obligation฀to฀pay฀further฀ ฀ Eg฀ x฀years฀worked฀
contributions฀if฀the฀fund฀does฀not฀ 60
hold฀sufficient฀assets฀to฀pay฀all฀ ฀ Projected฀unit฀credit฀method:฀
employee฀benefits฀relating฀to฀ ฀ (1)฀Opening฀asset฀and฀obligation฀
employee฀service฀in฀the฀current฀or฀
฀ (2)฀Net฀interest฀cost:฀ Dr฀฀Net฀interest฀cost฀(P/L)฀
prior฀periods฀
฀ ฀ ฀ Cr฀฀PV฀obligation฀(x%฀x฀b/d)฀
฀ Company's฀only฀obligation฀is฀
฀ ฀ ฀ Dr฀฀Plan฀assets฀(x%฀x฀b/d)฀
agreed฀contribution,฀eg฀5%฀฀฀ ฀ ฀ ฀ Cr฀฀Net฀interest฀cost฀(P/L)฀
salary฀
฀ (3)฀Current฀service฀ Dr฀฀CSC฀(P/L)฀
฀ Accounted฀for฀on฀accruals฀basis฀ ฀ ฀ cost:฀ Cr฀฀PV฀obligation฀
฀ ฀ (4)฀Past฀service฀ Dr/Cr฀฀PSC฀(P/L)฀
฀ ฀ cost:฀ Cr/Dr฀฀PV฀obligation฀
฀ 6.฀ Current฀developments฀ ฀ ฀ (amendment/฀curtailment)฀
Outstanding฀issues:฀ ฀ (5)฀Contributions:฀ Dr฀฀Plan฀assets฀
(a)฀ Definitions฀of฀the฀types฀of฀plan฀ ฀ ฀ ฀ Cr฀฀Company฀cash฀
(b)฀ Interest฀rate฀used฀for฀discounting฀ ฀ (6)฀Benefits:฀ Dr฀฀PV฀obligation฀
(c)฀ Measurement฀of฀plan฀liabilities฀ ฀ ฀ ฀ Cr฀฀Plan฀assets฀
(d)฀ Treatment฀of฀more฀unusual฀plans:฀ ฀ (7)฀Remeasurements:฀
(i)฀ 'hybrid'฀plans฀(part฀defined฀ ฀ ฀ –฀฀฀฀recognise฀immediately฀in฀OCI฀
฀ contribution,฀part฀defined฀ ฀ (8)฀Disclosure฀฀
benefit)฀
(ii)฀ 'higher฀of'฀plans฀(where฀
pension฀is฀defined฀benefit,฀but฀ 4.฀ Settlements฀
can฀be฀higher฀if฀the฀funds฀
฀ A฀transaction฀that฀eliminates฀all฀further฀
invested฀perform฀well)฀
legal/constructive฀obligation฀for฀part/all฀benefits฀
(iii)฀company฀'top-ups'฀or฀
฀ Any฀gain/loss฀recognised฀in฀P/L฀
guaranteed฀returns฀on฀defined฀
contribution฀plans฀
(e)฀ Defined฀benefit฀schemes฀are฀ 5.฀ Asset฀ceiling฀test฀
increasingly฀costly฀and฀risky,฀and฀
Net฀asset฀measured฀at฀lower฀of:฀
many฀have฀been฀closed฀to฀new฀
entrants.฀฀ ฀ Net฀reported฀asset฀฀
฀ PV฀refunds฀available฀from฀plan/฀reductions฀in฀future฀
contributions฀

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Knowledge฀diagnostic฀

1.฀ Short-term฀benefits฀
฀ ฀ Short-term฀benefits฀are฀accounted฀for฀on฀an฀accruals฀basis฀and฀not฀discounted.฀
฀ ฀ Post-employment฀benefits฀are฀arrangements฀that฀provide฀for฀pensions฀on฀retirement.฀
They฀can฀be฀divided฀into฀defined฀contribution฀and฀defined฀benefit฀plans.฀
2.฀ Defined฀contribution฀plans฀
฀ ฀ Also฀known฀as฀'money฀purchase'฀schemes.฀The฀employer฀accounts฀for฀the฀agreed฀cost฀to฀
the฀company฀on฀an฀accruals฀basis.฀The฀employee฀bears฀the฀risk฀of฀the฀pension's฀value.฀
3.฀ Defined฀benefit฀plans฀
฀ ฀ Also฀known฀as฀'final฀salary'฀schemes.฀The฀employer฀guarantees฀the฀employee฀an฀annual฀
pension฀based฀on฀final฀salary฀and฀number฀of฀years฀worked.฀
฀ ฀ The฀projected฀unit฀credit฀method฀is฀used฀to฀accrue฀costs.฀These฀include฀current฀
service฀cost฀and฀net฀interest฀cost฀(or฀income)฀on฀the฀net฀defined฀benefit฀liability฀(or฀
asset).฀Remeasurement฀differences฀between฀the฀year-end฀values฀of฀the฀assets฀and฀
obligation฀and฀the฀book฀amounts฀are฀recognised฀in฀other฀comprehensive฀income.฀
฀ ฀ Past฀service฀costs฀on฀plan฀amendments฀or฀curtailments฀are฀recognised฀in฀profit฀or฀
loss.฀
4.฀ Settlements฀
฀ ฀ The฀effects฀of฀settlements฀are฀recognised฀in฀profit฀or฀loss.฀
5.฀ 'Asset฀ceiling'฀test฀
฀ ฀ Defined฀benefit฀pension฀assets฀are฀limited฀to฀the฀lower฀of฀the฀net฀reported฀asset฀and฀
the฀present฀value฀of฀any฀refunds/contribution฀reductions฀available.฀
6.฀ Current฀developments฀
฀ ฀ IAS฀19฀was฀revised฀in฀2011,฀however,฀there฀are฀other฀key฀issues฀that฀still฀need฀addressing,฀
such฀as฀definitions฀and฀accounting฀for฀different฀types฀of฀plan.฀

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4:฀Employee฀benefits฀

Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀question฀below฀from฀the฀Further฀question฀practice฀bank:฀
Q6฀Radost฀

Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website,฀written฀by฀the฀SBR฀examining฀team,฀which฀are฀relevant฀to฀the฀
topics฀studied฀in฀this฀Chapter฀and฀which฀are฀useful฀reading:฀
Pension฀posers฀(2015)฀
IAS฀19฀Employee฀Benefits฀(2010)฀
www.accaglobal.com/uk/en/member/ab/cpd-ab.html฀
PwC฀have฀produced฀an฀informative฀guide฀to฀the฀practical฀aspects฀of฀applying฀IAS฀19.฀฀
https://inform.pwc.com/show?action=applyInformContentTerritory&id=1344034701155349&tid=1฀

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฀฀

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SKILLS฀CHECKPOINT฀1
฀ ฀
฀

Approaching฀ethical฀issues
฀
฀
฀
฀

aging information
Man

aging information
Man
An
sw
er
Approaching pl
t
en
manag ime

ethical issues Resolving

an
em
t

nin
Approaching financial Exam success skills
Good

reporting issues

g
ethical issues

uirereq rpretation
Specific SBR skills

e m e nts
Applying good

req of rprineteation
consolidation
Creating effective

m eunirts
techniques
discussion
Eff d p

of t inteect
an
e c re

c rr

Performing
r re Co
ti v

e financial analysis
se w ri
nt tin
Co

ati g
on
l
Efficient numerica
analysis
฀

Introduction฀
Section฀A฀of฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam฀will฀consist฀of฀two฀scenario฀based฀
questions฀that฀will฀total฀50฀marks.฀The฀second฀of฀these฀questions฀will฀require฀candidates฀to฀
consider฀the฀reporting฀implications฀and฀the฀ethical฀implications฀of฀specific฀events฀in฀a฀given฀
scenario.฀
The฀two฀Section฀B฀questions฀could฀deal฀with฀any฀aspect฀of฀the฀syllabus.฀Therefore,฀ethics฀could฀
feature฀in฀this฀part฀of฀the฀exam฀too.฀฀
Given฀that฀ethics฀will฀feature฀in฀every฀exam,฀it฀is฀essential฀that฀you฀have฀mastered฀the฀
appropriate฀technique฀for฀approaching฀ethical฀issues฀in฀order฀to฀maximise฀your฀marks฀in฀the฀
exam.฀
As฀a฀reminder,฀the฀detailed฀syllabus฀learning฀outcomes฀for฀ethics฀are:฀
A฀฀฀฀Fundamental฀ethical฀and฀professional฀principles฀
1. Professional฀behaviour฀and฀compliance฀with฀accounting฀standards.฀
2. Ethical฀requirements฀of฀corporate฀reporting฀and฀the฀consequences฀of฀unethical฀behaviours.฀
฀ ฀

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฀฀

Skills฀Checkpoint฀1:฀Approaching฀ethical฀issues฀

SBR฀Skill:฀Approaching฀ethical฀issues฀
A฀step฀by฀step฀technique฀for฀approaching฀ethical฀issues฀has฀been฀outlined฀below.฀Each฀
step฀will฀be฀explained฀in฀more฀detail฀in฀the฀following฀sections฀as฀the฀question฀'Range'฀
is฀answered฀in฀stages.฀

STEP฀1:
Look฀at฀the฀mark฀allocation฀of฀the฀question฀
and฀work฀out฀how฀many฀minutes฀you฀have฀to฀
answer฀the฀question฀(based฀on฀1.95฀minutes฀
a฀mark).

STEP฀2:฀
Read฀the฀requirement฀and฀analyse฀it.฀Highlight฀
each฀sub-requirement฀separately,฀identify฀the฀verb(s)฀
and฀ask฀yourself฀what฀each฀sub-requirement฀means.฀

STEP฀3:
Read฀the฀scenario,฀asking฀yourself฀for฀each฀
paragraph฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀and฀
whether฀the฀proposed฀accounting฀treatment฀
complies฀with฀that฀IAS฀or฀IFRS.฀Identify฀which฀
fundamental฀principles฀from฀the฀ACCA฀Code฀of฀
Ethics฀and฀Conduct฀(the฀ACCA฀Code)฀are฀relevant฀
and฀whether฀there฀are฀any฀threats฀to฀these฀
principles.฀

STEP฀4:
Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀
requirements฀as฀headings.฀You฀could฀use฀a฀mind฀
map,฀a฀bullet-pointed฀list฀or฀simply฀annotate฀the฀
question.฀Try฀and฀come฀up฀with฀separate฀points฀for฀
each฀paragraph฀in฀the฀scenario.฀Make฀sure฀you฀
generate฀enough฀points฀for฀the฀marks฀available฀–
the฀ACCA฀marking฀guides฀typically฀allocate฀1฀mark฀
per฀relevant฀well-explained฀point.

STEP฀5:
Write฀up฀your฀answer฀using฀key฀words฀from฀the฀
requirements฀as฀headings.฀Create฀a฀separate฀sub-
heading฀for฀each฀key฀paragraph฀in฀the฀scenario.฀
Write฀in฀full฀sentences฀and฀clearly฀explain฀each฀
point.
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Skills฀Checkpoint฀1฀

Exam฀success฀skills฀
For฀this฀question,฀we฀will฀focus฀on฀the฀following฀exam฀success฀skills฀and฀in฀particular:฀
฀ Good฀ time฀ management.฀ The฀ exam฀ will฀ be฀ time-pressured฀ and฀ you฀ will฀
need฀to฀manage฀your฀time฀carefully฀to฀ensure฀that฀you฀can฀make฀a฀good฀attempt฀
at฀ every฀ part฀ of฀ every฀ question.฀ You฀ will฀ have฀ 3฀ hours฀ and฀ 15฀ minutes฀ in฀ the฀
exam,฀which฀works฀out฀at฀1.95฀minutes฀a฀mark.฀The฀following฀question฀is฀worth฀
20฀marks฀so฀you฀should฀allow฀39฀minutes.฀You฀should฀allocate฀approximately฀a฀
quarter฀ to฀ a฀ third฀ of฀ your฀ time฀ to฀ reading฀ (first฀ the฀ requirement฀ and฀ then฀ the฀
scenario)฀ and฀ preparing฀ an฀ answer฀ plan.฀ In฀ this฀ question,฀ this฀ equates฀ to฀
approximately฀ 10฀ minutes฀ which฀ should฀ be฀ broken฀ down฀ into฀ 5฀ minutes฀ for฀
reading฀and฀5฀minutes฀for฀planning.฀The฀remaining฀29฀minutes฀should฀then฀be฀
allocated฀ to฀ writing฀ up฀ the฀ answer฀ and฀ split฀ between฀ the฀ issues฀ raised฀ by฀ the฀
different฀paragraphs฀in฀the฀question.฀
฀ Managing฀ information.฀ This฀ type฀ of฀ case฀ study฀ style฀ question฀ typically฀
contains฀four฀or฀five฀paragraphs฀of฀information฀and฀each฀paragraph฀is฀likely฀to฀
revolve฀around฀a฀different฀IAS฀or฀IFRS.฀This฀is฀a฀lot฀of฀information฀to฀absorb฀and฀
the฀ best฀ approach฀ is฀ effective฀ planning.฀ As฀ you฀ read฀ each฀ paragraph,฀ you฀
should฀think฀about฀which฀IAS฀or฀IFRS฀may฀be฀relevant฀(there฀could฀be฀more฀than฀
one฀ relevant฀ for฀ each฀ paragraph)฀ and฀ if฀ you฀ cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀
IFRS,฀ you฀ can฀ fall฀ back฀ on฀ the฀ principles฀ of฀ the฀ Conceptual฀ Framework฀ for฀
Financial฀Reporting฀(the฀Conceptual฀Framework).฀Also฀ask฀yourself฀which฀of฀the฀
ACCA฀ Code's฀ fundamental฀ principles฀ are฀ relevant฀ and฀ whether฀ there฀ are฀ any฀
threats฀ to฀ these฀ principles฀ in฀ the฀ scenario.฀ It฀ is฀ really฀ important฀ to฀ identify฀ the฀
ethical฀ issues฀ as฀ there฀ is฀ a฀ danger฀ that฀ you฀ only฀ focus฀ on฀ the฀ accounting฀
treatment฀and฀you฀will฀not฀pass฀the฀question.฀
฀ Correct฀ interpretation฀ of฀ requirements.฀ At฀ first฀ glance,฀ it฀ looks฀ like฀ the฀
following฀ question฀ just฀ contains฀ one฀ requirement.฀ However,฀ on฀ closer฀
examination฀ you฀ will฀ discover฀ that฀ it฀ contains฀ two฀ sub-requirements.฀ Once฀ you฀
have฀ identified฀ the฀ requirements,฀ by฀ focusing฀ on฀ the฀ verb฀ and฀ each฀ sub-
requirement,฀you฀need฀to฀analyse฀them฀to฀determine฀exactly฀what฀your฀answer฀
should฀address.฀
฀ Answer฀ planning.฀Everyone฀will฀have฀a฀preferred฀style฀for฀an฀answer฀plan.฀
For฀example,฀it฀may฀be฀a฀mind฀map,฀bullet-pointed฀lists฀or฀simply฀annotating฀the฀
question฀paper.฀Choose฀the฀approach฀that฀you฀feel฀most฀comfortable฀with฀or฀if฀
you฀ are฀ not฀ sure,฀ try฀ out฀ different฀ approaches฀ for฀ different฀ questions฀ until฀ you฀
have฀found฀your฀preferred฀style.฀
฀ Effective฀ writing฀ and฀ presentation.฀ It฀ is฀ often฀ helpful฀ to฀ use฀ key฀ words฀
from฀ the฀ requirement฀ as฀ headings฀ in฀ your฀ answer.฀ You฀ may฀ also฀ wish฀ to฀ use฀
sub-headings฀in฀your฀answer฀–฀you฀could฀use฀a฀separate฀sub-heading฀for฀each฀
paragraph฀ from฀ the฀ scenario฀ in฀ the฀ question฀ which฀ contains฀ an฀ issue฀ for฀
discussion.฀Underline฀your฀headings฀and฀sub-headings฀with฀a฀ruler฀and฀write฀in฀
full฀sentences,฀ensuring฀your฀style฀is฀professional.฀Two฀professional฀marks฀will฀be฀
awarded฀to฀the฀ethical฀issues฀question฀in฀Section฀A฀of฀the฀SBR฀exam.฀The฀use฀of฀
headings,฀ sub-headings฀ and฀ full฀ sentences฀ as฀ well฀ as฀ clear฀ explanations฀ and฀
ensuring฀ that฀ all฀ sub-requirements฀ are฀ met฀ and฀ all฀ issues฀ in฀ the฀ scenario฀ are฀
addressed฀will฀help฀you฀obtain฀these฀two฀marks.฀

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฀฀

Skill฀Activity฀

STEP 1฀ Look฀ at฀ the฀ mark฀ allocation฀ of฀ the฀ following฀ question฀ and฀ work฀ out฀
฀ how฀ many฀ minutes฀ you฀ have฀ to฀ answer฀ the฀ question.฀ It฀ is฀ a฀ 20฀ mark฀
question฀and฀at฀1.95฀minutes฀a฀mark,฀it฀should฀take฀39฀minutes.฀On฀
the฀basis฀of฀spending฀approximately฀a฀third฀to฀a฀quarter฀of฀your฀time฀
reading฀ and฀ planning,฀ this฀ time฀ should฀ be฀ split฀ approximately฀ as฀
follows:฀
 Reading฀the฀question฀–฀5฀minutes฀
 Planning฀your฀answer฀–฀5฀minutes฀
 Writing฀up฀your฀answer฀–฀29฀minutes฀
Within฀each฀of฀these฀phases,฀your฀time฀should฀be฀split฀roughly฀equally฀
between฀the฀two฀sub-requirements฀(ethical฀implications฀and฀accounting฀
implications).฀

Required฀
Discuss฀ the฀ ethical฀ and฀ accounting฀ implications฀ of฀ the฀ above฀ situations฀ from฀ the฀
perspective฀of฀the฀Finance฀Director.฀ ฀(18฀marks)฀

Professional฀marks฀will฀be฀awarded฀in฀question฀2฀for฀application฀of฀ethical฀principles.฀฀
฀ (2฀marks)฀
(Total฀=฀20฀marks)฀

STEP 2฀ Read฀the฀requirement฀for฀the฀following฀question฀and฀analyse฀it.฀
฀ Highlight฀each฀sub-requirement,฀identify฀the฀verb(s)฀and฀ask฀yourself฀
what฀each฀sub-requirement฀means.฀

Verb฀–฀refer฀to฀ Sub-requirement฀1฀
Sub-requirement฀2
ACCA฀definition฀

Required฀
Discuss฀ the฀ ethical฀ and฀ accounting฀ implications฀ of฀ the฀ above฀ situations฀ from฀ the฀
perspective฀of฀the฀Finance฀Director.฀ ฀฀฀฀฀(20฀marks)฀

Note฀whose฀
฀ viewpoint฀your฀
answer฀should฀be฀
฀ from฀

฀
Your฀ verb฀ is฀ 'discuss'.฀ This฀ is฀ defined฀ by฀ the฀ ACCA฀ as฀ 'Consider฀ and฀ debate/argue฀
about฀the฀pros฀and฀cons฀of฀an฀issue.฀Examine฀in฀detail฀by฀using฀arguments฀in฀favour฀or฀
against'.฀
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Skills฀Checkpoint฀1฀

There฀are฀two฀sub-requirements฀to฀discuss:฀
(1)฀ The฀ethical฀implications฀
(2)฀ The฀accounting฀implications฀
In฀ this฀ context,฀ the฀ verb฀ 'discuss'฀ is฀ asking฀ you฀ to฀ examine฀ each฀ of฀ the฀ proposed฀
changes฀ in฀ accounting฀ policies฀ and฀ estimates฀ and฀ assess฀ arguments฀ in฀ favour฀ and฀
against฀adopting.฀
For฀ the฀ ethical฀ implications,฀ you฀ need฀ to฀ consider฀ the฀ fundamental฀ principles฀ of฀ the฀
ACCA฀Code฀and฀whether฀there฀are฀any฀threats฀to฀these฀principles฀in฀the฀scenario.฀
For฀ the฀ accounting฀ implications,฀ you฀ need฀ to฀ assess฀ whether฀ the฀ proposed฀ treatment฀
complies฀with฀the฀relevant฀IAS฀or฀IFRS.฀฀

STEP 3฀ Now฀read฀the฀scenario.฀฀
฀
Accounting฀implications฀
Ask฀ yourself฀ for฀ each฀ paragraph฀ which฀ IAS฀ or฀ IFRS฀ may฀ be฀ relevant฀
(remember฀ you฀ do฀ not฀ need฀ to฀ know฀ the฀ IAS฀ or฀IFRS฀ number)฀ and฀ whether฀
the฀ proposed฀ accounting฀ treatment฀ complies฀ with฀ that฀ IAS฀ or฀ IFRS.฀ If฀ you฀
cannot฀ think฀ of฀ a฀ relevant฀ IAS฀ or฀ IFRS,฀ then฀ refer฀ to฀ the฀ Conceptual฀
Framework฀for฀Financial฀Reporting฀(Conceptual฀Framework).฀฀
To฀ identify฀ the฀ issues,฀ you฀ might฀ want฀ to฀ consider฀ whether฀ one฀ or฀ more฀ of฀
the฀following฀are฀relevant฀in฀the฀scenario:฀

Potential฀issue฀ What฀does฀it฀mean?฀

Recognition฀ When฀should฀the฀item฀be฀recorded฀in฀the฀financial฀
statements?฀

Initial฀measurement฀ What฀amount฀should฀be฀recorded฀when฀the฀item฀is฀
first฀recognised?฀

Subsequent฀ Once฀the฀item฀has฀been฀recognised,฀how฀should฀
measurement฀ the฀amount฀change฀year฀on฀year?฀

Presentation฀ What฀heading฀should฀the฀amount฀appear฀under฀in฀
the฀statement฀of฀financial฀position฀or฀statement฀of฀
profit฀or฀loss฀and฀other฀comprehensive฀income?฀

Disclosure฀ Is฀a฀note฀to฀the฀accounts฀required฀in฀relation฀to฀the฀
transaction฀or฀balance?฀

Ethical฀implications฀
Consider฀ the฀ ACCA฀ Code.฀ The฀ fundamental฀ principle฀ of฀ professional฀
competence฀ is฀ going฀ to฀ be฀ the฀ most฀ important฀ in฀ an฀ SBR฀ question฀ because฀
an฀ACCA฀accountant฀must฀prepare฀financial฀statements฀in฀accordance฀with฀
IAS฀and฀IFRS.฀Therefore,฀if฀the฀accountant฀is฀associated฀with฀any฀accounting฀
treatment฀that฀does฀not฀comply฀with฀IAS฀or฀IFRS,฀they฀will฀be฀breaching฀the฀
principle฀ of฀ professional฀ competence.฀ Other฀ fundamental฀ principles฀ may฀
also฀ be฀ relevant฀ (objectivity,฀ integrity,฀ confidentiality,฀ professional฀
behaviour).฀Watch฀out฀for฀threats฀in฀the฀questions฀to฀any฀of฀these฀principles.฀
Reminders฀of฀these฀threats฀have฀been฀included฀below:฀
฀
฀

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฀฀

Threat Explanation

Self-interest฀ A฀financial฀or฀other฀interest฀may฀
inappropriately฀influence฀the฀accountant's฀
judgement฀or฀behaviour฀

Self-review฀ Where฀the฀accountant฀may฀not฀appropriately฀
evaluate฀the฀results฀of฀a฀previous฀judgement฀
made฀or฀activity฀or฀service฀performed฀by฀
themselves฀or฀others฀within฀their฀firm฀

Advocacy฀ Threat฀that฀the฀accountant฀promotes฀a฀client's฀
or฀employer's฀position฀to฀the฀point฀that฀their฀
objectivity฀is฀compromised฀

Familiarity฀ Due฀to฀a฀long฀or฀close฀relationship฀with฀a฀
client฀or฀employer,฀the฀accountant฀may฀be฀
too฀sympathetic฀to฀their฀interests฀or฀too฀
accepting฀of฀their฀work฀

Intimidation฀ The฀accountant฀may฀not฀act฀objectively฀due฀to฀
actual฀or฀perceived฀pressures฀฀

฀
฀ Note฀the฀company's฀main฀business฀activities฀–฀
this฀could฀be฀important฀for฀revenue฀recognition฀
฀ and฀the฀fact฀that฀it฀in฀the฀manufacturing฀
industry฀means฀that฀inventory฀and฀non-current฀
assets฀may฀be฀relevant.฀(Accounting)฀
Question฀–฀Range฀(20฀marks)฀
Range฀ is฀ a฀ privately-owned฀ furniture฀ design฀ and฀ manufacturing฀
company฀which฀prepares฀its฀accounts฀in฀accordance฀with฀International฀
Financial฀ Reporting฀ Standards.฀ Range฀ manufactures฀ and฀ The฀Managing฀
Director฀still฀owns฀
Managing฀Director฀is฀
installs฀ high฀ quality฀ office฀ furniture฀ for฀ a฀ wide฀ range฀ of฀ 100%฀of฀the฀
unlikely฀to฀be฀a฀ shares.฀There฀
qualified฀accountant฀so฀
corporate฀clients.฀The฀company฀was฀founded฀30฀years฀ago฀and฀is฀still฀ could฀be฀a฀conflict฀
unlikely฀to฀be฀familiar฀ of฀interest฀here.฀
with฀IAS/IFRS.฀
100%฀ owned฀ by฀ its฀ founder฀ who฀ is฀ also฀ the฀ Managing฀ (Ethics)฀
(Accounting฀and฀
Ethics)฀
Director฀of฀the฀company.฀

At฀ the฀ planning฀ meeting฀ for฀ the฀ next฀ accounting฀ period,฀ the฀
Bound฀by฀ACCA฀
Managing฀ Director฀ suggested฀ to฀ the฀ Finance฀ Director฀ (an฀ Code฀(Ethics)฀

IAS฀8฀Accounting฀ ACCA-qualified฀accountant)฀that฀a฀number฀of฀changes฀be฀made฀
Policies,฀Changes฀in฀
Accounting฀Estimates฀ to฀ Range's฀ accounting฀ policies฀ and฀ estimates.฀The฀proposed฀
and฀Errors฀
(Accounting)฀ changes฀are฀outlined฀below.฀
IAS฀16฀Property,฀Plant฀
and฀Equipment.฀
Range's฀ manufacturing฀ machinery฀ is฀ currently฀ being฀ depreciated฀ on฀ a฀
(Accounting)฀
Reduces฀depreciation,฀
straight฀ line฀ basis฀ over฀ 5฀ years.฀ The฀ Managing฀ Director฀ would฀ like฀ to฀
increases฀profits.฀
Does฀this฀evidence฀
(Ethics)฀
support฀the฀proposed฀ extend฀ the฀ useful฀ life฀ of฀ this฀ plant฀ to฀ 10฀ years.฀ Historically,฀
change?฀(Accounting฀
and฀Ethics)฀ profits฀ or฀ losses฀ on฀ disposal฀ of฀ machinery฀ have฀ been฀
minimal.฀

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฀ IFRS฀15฀Revenue฀from฀
Contracts฀with฀Customers฀
(Accounting)฀
฀

Range฀ has฀ two฀ main฀ revenue฀ streams.฀ Firstly,฀ the฀ company฀ earns฀
When฀is฀the฀
revenue฀ from฀ the฀ sale฀ of฀ office฀ furniture฀ to฀ corporate฀ performance฀
obligation฀satisfied?฀
clients.฀ Secondly,฀ the฀ company฀ offers฀ an฀ installation฀ service฀ in฀ (Accounting)฀

exchange฀ for฀ a฀ fee.฀ The฀ Managing฀ Director฀ would฀ like฀ to฀ revise฀ the฀

Recognise฀revenue฀ revenue฀ recognition฀ policy฀ so฀ that฀ revenue฀ is฀ recognised฀ when฀ the฀
and฀profit฀earlier.฀
(Accounting฀and฀ customer฀signs฀the฀contract฀rather฀than฀on฀delivery฀and฀over฀the฀
Ethics)฀
period฀of฀installation฀of฀the฀furniture฀respectively.฀

Finally,฀ the฀ Managing฀ Director฀ has฀ noticed฀ that฀ in฀ the฀ past฀ year,฀
Does฀this฀evidence฀
there฀ has฀ been฀ a฀ decrease฀ in฀ the฀ percentage฀ of฀ furniture฀ support฀the฀proposed฀
change?฀(Accounting฀
returned฀by฀customers฀for฀repair฀under฀warranty.฀He฀would฀ and฀Ethics)฀
IAS฀37฀Provisions,฀
Contingent฀Liabilities฀ like฀to฀reduce฀the฀provision฀for฀warranties฀in฀the฀forthcoming฀year.฀
and฀Contingent฀Assets฀
(Accounting)฀
As฀the฀Managing฀Director฀was฀leaving฀the฀meeting,฀he฀mentioned฀to฀
the฀ Finance฀ Director฀ that฀ now฀ he฀ had฀ reached฀ the฀ age฀ of฀ 65,฀ he฀
would฀like฀to฀retire฀and฀sell฀the฀business฀in฀one฀year's฀time.฀฀฀

Required฀
Incentive฀to฀change฀
accounting฀policies฀and฀
estimates฀to฀increase฀ Discuss฀the฀ethical฀and฀accounting฀implications฀of฀the฀above฀situations฀
profits฀and฀maximise฀the฀
price฀he฀could฀sell฀his฀ from฀the฀perspective฀of฀the฀Finance฀Director.฀ (18฀marks)฀
shares฀for฀on฀retirement฀
(Ethics)฀
Professional฀marks฀will฀be฀awarded฀in฀this฀question฀for฀the฀application฀
of฀ethical฀principles.฀ (2฀marks)฀

฀ ฀฀฀฀฀(Total฀=฀20฀marks)฀

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฀฀

STEP 4฀ Prepare฀an฀answer฀plan฀using฀key฀words฀from฀the฀requirements฀as฀
฀ headings฀ (accounting฀ implications).฀ You฀ could฀ use฀ a฀ mind฀ map฀
similar฀ to฀ the฀ one฀ shown฀ below.฀ Alternatively฀ you฀ could฀ use฀ a฀
bullet-pointed฀list฀or฀simply฀annotate฀the฀question.฀฀
Try฀ and฀ come฀ up฀ with฀ separate฀ points฀ for฀ each฀ of฀ the฀ three฀
proposed฀ changes฀ in฀ accounting฀ policies฀ or฀ estimates฀ in฀ the฀
scenario.฀
Make฀ sure฀ you฀ generate฀ enough฀ points฀ for฀ the฀ marks฀ available฀ –฀
there฀ are฀ 18฀ marks฀ available,฀ so฀ on฀ the฀ basis฀ of฀ 1฀ mark฀ per฀
relevant฀ well-explained฀ point,฀ to฀ achieve฀ a฀ comfortable฀ pass,฀ you฀
should฀aim฀to฀generate฀14–15฀points฀for฀this฀18-mark฀question.฀
฀
฀
฀ Accounting฀
implications฀
฀
฀
฀ Change฀in฀accounting฀policy฀
or฀estimate฀
฀
฀฀ Change฀ in฀ policy:฀ when฀
฀ required฀ by฀ IFRS฀ or฀ results฀
฀ in฀ more฀ relevant/reliable฀
information฀
฀
฀ Change฀ in฀ estimate:฀ when฀
฀ change฀in฀circumstances฀or฀
฀ new฀information฀

฀
฀
฀
Extending฀useful฀life฀(UL)฀of฀ Change฀in฀revenue฀ Decreasing฀warranty฀
฀ machinery฀ recognition฀ provision฀
฀
(Change฀in฀accounting฀estimate)฀ (Change฀in฀accounting฀policy)฀ (Change฀in฀accounting฀
฀ ฀ Separate฀performance฀ estimate)฀
฀ Review฀required฀annually฀
฀ No฀evidence฀for฀increase฀
฀ obligations฀ ฀ Only฀if฀costs฀of฀repair฀
฀ Revenue฀for฀furniture฀on฀ under฀warranty฀likely฀
฀ delivery฀ to฀decrease฀
฀ Revenue฀for฀installation฀ ฀ Possible฀evidence฀as฀
as฀service฀performed฀ less฀furniture฀returned
฀ Proposed฀change฀not฀
permitted฀

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฀
Ethical฀
฀ implications฀
฀
฀
฀
FD฀=฀ACCA฀qualified฀so฀ Reject฀changes฀to฀useful฀life฀
Professional฀competence฀=฀
฀
bound฀by฀ACCA฀Code฀ of฀machinery฀and฀revenue฀
compliance฀with฀IAS/IFRS฀
recognition฀
฀
฀
฀
Threat฀to฀principles฀of฀ Proposed฀changes฀to฀UL฀of฀
If฀MD฀disagrees,฀seek฀advice฀
professional฀competence,฀ machinery฀and฀revenue฀
฀ from฀ACCA฀and/or฀legal฀
objectivity฀and฀integrity฀as฀ recognition฀would฀result฀in฀
฀ advice.฀Consider฀resigning.฀
MD฀motivated฀to฀maximise฀ non-compliance฀with฀IAS฀16฀
profit฀and฀sales฀price฀
฀ and฀IFRS฀15฀

฀
฀

STEP 5฀ Write฀ up฀ your฀ answer฀ using฀ key฀ words฀ from฀ the฀ requirements฀ as฀
฀ headings.฀Create฀a฀separate฀sub-heading฀for฀each฀key฀paragraph฀
in฀ the฀ scenario.฀ Write฀ in฀ full฀ sentences฀ and฀ clearly฀ explain฀ each฀
point,฀ ensuring฀ that฀ you฀ use฀ professional฀ language.฀ For฀ the฀
accounting฀implications,฀structure฀your฀answer฀for฀each฀of฀the฀three฀
items฀as฀follows:฀
 Rule/principle฀per฀IAS฀or฀IFRS฀(state฀briefly)฀
 Apply฀ rule/principle฀ to฀ the฀ scenario฀ (correct฀ accounting฀
treatment฀and฀why)฀
 Conclude฀
For฀the฀ethical฀implications,฀take฀the฀following฀approach:฀
 Should฀the฀FD฀accept฀the฀proposed฀change?฀Why/why฀not?฀
 Would฀ the฀ change฀ result฀ in฀ a฀ breach฀ of฀ any฀ of฀ the฀ ethical฀
principles?฀If฀so,฀which฀and฀why?฀฀
 Are฀there฀any฀additional฀threats฀to฀the฀ethical฀principles?฀
 What฀action฀should฀the฀FD฀take฀next?฀
฀ From฀the฀point฀of฀view฀of฀
the฀Finance฀Director฀as฀
this฀was฀asked฀for฀in฀the฀
Suggested฀solution฀ requirement.฀

Make฀sure฀you฀write฀in฀ As฀an฀ACCA฀qualified฀accountant,฀the฀Finance฀Director฀(FD)฀is฀bound฀
full฀sentences.฀This฀will฀
help฀you฀to฀obtain฀the฀ by฀ the฀ ACCA฀ Code฀ of฀ Ethics฀ and฀ Conduct฀ (the฀ ACCA฀ Code).฀ This฀
two฀professional฀skills฀ With฀the฀verb฀‘discuss'฀in฀
marks.฀ means฀ adhering฀ to฀ its฀ fundamental฀ principles,฀ one฀ of฀ which฀ is฀ the฀requirement,฀it฀is฀
useful฀to฀have฀a฀short฀
professional฀ competence.฀ This฀ requires฀ the฀ FD฀ to฀ ensure฀ the฀ accounts฀ opening฀paragraph฀
explaining฀the฀basis฀of฀
comply฀ with฀ International฀ Financial฀ Reporting฀ Standards฀ (IFRS).฀ your฀discussion.฀

Therefore,฀ the฀ FD฀ should฀ only฀ accept฀ the฀ proposed฀ changes฀ if฀ they฀
comply฀with฀IFRS.฀

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฀฀
In฀ethics฀questions,฀you฀
should฀also฀look฀out฀for฀
The฀ FD฀ should฀ also฀ be฀ aware฀ of฀ threats฀ to฀ the฀ ACCA฀ Code's฀ threats฀to฀the฀ACCA฀
Code's฀fundamental฀
fundamental฀ principles.฀ Here฀ the฀ self-interest฀ threat฀ is฀ that฀ the฀ principles฀in฀the฀scenario฀
and฀mention฀them฀in฀your฀
Managing฀ Director฀ (MD)฀ wishes฀ to฀ retire฀ and฀ sell฀ his฀ shares฀ in฀ one฀ answer.฀

year's฀ time฀ which฀ may฀ incentivise฀ him฀ to฀ increase฀ profit฀ in฀ order฀ to฀
maximise฀his฀exit฀price฀from฀the฀business.฀ Use฀key฀words฀for฀the฀
requirement฀to฀structure฀
your฀answer฀and฀help฀
Accounting฀implications฀ you฀to฀obtain฀the฀two฀
professional฀skills฀marks฀
Changes฀in฀accounting฀policies฀and฀estimates฀

Underlined฀sub-headings฀ IAS฀ 8฀ Accounting฀ Policies,฀ Changes฀ in฀ Accounting฀ Estimates฀ and฀

will฀help฀you฀structure฀
your฀answer฀and฀help฀ Errors฀only฀permits฀a฀change฀in฀accounting฀policy฀if฀the฀change:฀
you฀to฀obtain฀the฀two฀
professional฀skills฀marks.฀  Is฀required฀by฀an฀IFRS;฀and฀
 Results฀in฀information฀that฀is฀more฀relevant฀and฀reliable.฀฀

A฀change฀in฀accounting฀estimate฀is฀only฀required฀when฀changes฀occur฀ State฀relevant฀
rule/principle฀from฀
in฀the฀circumstances฀on฀which฀the฀estimate฀was฀based฀or฀as฀a฀result฀of฀ IAS฀or฀IFRS฀very฀briefly฀
(you฀do฀not฀need฀to฀
new฀information฀or฀more฀experience.฀ state฀IAS/IFRS฀number)

Changing฀an฀accounting฀policy฀or฀estimate฀purely฀to฀boost฀profits฀and฀
share฀price฀would฀contravene฀IAS฀8฀and฀be฀considered฀unethical.฀฀
Apply฀rule/principle฀
Extending฀the฀useful฀life฀of฀manufacturing฀machinery฀ to฀scenario.฀
IAS฀ 16฀ Property,฀ Plant฀ and฀ Equipment฀ requires฀ the฀ useful฀ life฀ of฀ an฀
asset฀ to฀ be฀ reviewed฀ at฀ least฀ each฀ financial฀ year฀ end,฀ and,฀ if฀
Rule/principle฀
expectations฀ differ฀ from฀ previous฀ estimates,฀ the฀ change฀ should฀ be฀
accounted฀for฀prospectively฀as฀a฀change฀in฀accounting฀estimate.฀

The฀MD฀wishes฀to฀double฀the฀useful฀life฀of฀the฀machinery.฀This฀would฀
Apply฀ reduce฀ the฀ amount฀ of฀ depreciation฀ charged฀ each฀ year฀ on฀ machinery฀
significantly,฀thereby฀increasing฀profit.฀

However,฀there฀does฀not฀appear฀to฀be฀any฀evidence฀that฀the฀useful฀life฀
of฀ machinery฀ should฀ be฀ increased฀ given฀ there฀ have฀ been฀ minimal฀

Apply฀ profits฀or฀losses฀on฀disposal฀in฀the฀past฀which฀suggests฀that฀the฀current฀
useful฀life฀of฀5฀years฀is฀appropriate.฀If฀the฀useful฀life฀of฀the฀machinery฀
were฀ underestimated฀ to฀ the฀ extent฀ the฀ MD฀ is฀ suggesting,฀ this฀ would฀
have฀resulted฀in฀substantial฀profits฀on฀disposal.฀

The฀ useful฀ life฀ of฀ the฀ machinery฀ should฀ remain฀ at฀ 5฀ years฀ in฀ the฀
Conclude฀with฀your฀
absence฀ of฀ any฀ evidence฀ to฀ suggest฀ that฀ its฀ utility฀ to฀ Range฀ will฀
opinion฀
increase฀to฀10฀years.฀

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Recognising฀revenue฀when฀the฀customer฀signs฀the฀contract฀

IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀requires฀the฀entity฀to฀
identify฀the฀performance฀obligations฀in฀a฀contract.฀
Rule/principle฀

Here,฀ there฀ appear฀ to฀ be฀ two฀ performance฀ obligations฀ in฀ a฀ typical฀
contract฀ with฀ a฀ customer.฀ Firstly,฀ the฀ promise฀ to฀ transfer฀ goods฀ in฀ the฀
form฀of฀office฀furniture,฀and฀secondly,฀the฀promise฀to฀transfer฀a฀service฀
Apply฀
in฀the฀form฀of฀installation฀of฀the฀office฀furniture.฀The฀MD's฀proposal฀to฀
revise฀ the฀ revenue฀ recognition฀ policy฀ fails฀ to฀ split฀ the฀ performance฀
obligations฀ as฀ both฀ revenue฀ streams฀ would฀ be฀ recognised฀ when฀ the฀
customer฀signs฀the฀contract.฀

Revenue฀ should฀ be฀ recognised฀ when฀ each฀ performance฀ obligation฀ is฀

satisfied.฀This฀occurs฀when฀the฀promised฀good฀or฀service฀is฀transferred฀
Rule/principle฀
to฀ a฀ customer.฀ The฀ sale฀ of฀ office฀ furniture฀ results฀ in฀ satisfaction฀ of฀ a฀
performance฀ obligation฀ at฀ a฀ point฀ in฀ time.฀ IFRS฀ 15฀ indicators฀ of฀ the฀
transfer฀ of฀ control฀ include฀ transfer฀ of฀ physical฀ possession฀ of฀ the฀ asset฀ Apply฀

and฀ the฀ customer฀ having฀ the฀ significant฀ risks฀ and฀ rewards฀ of฀
ownership.฀ In฀ the฀ case฀ of฀ Range's฀ office฀ furniture,฀ the฀ transfer฀ of฀
control฀appears฀to฀take฀place฀at฀the฀point฀of฀delivery฀of฀the฀furniture฀to฀
the฀ customer฀ rather฀ than฀ when฀ the฀ customer฀ signs฀ the฀ contract.฀
Therefore,฀ the฀ existing฀ revenue฀ recognition฀ policy฀ is฀ correct฀ and฀ the฀
MD's฀proposed฀change฀would฀contravene฀IFRS฀15.฀
Conclude฀with฀your฀
opinion฀
The฀ installation฀ service฀ results฀ in฀ satisfaction฀ of฀ a฀ performance฀
obligation฀ over฀ time.฀ IFRS฀ 15฀ requires฀ revenue฀ to฀ be฀ recognised฀ by฀
Apply฀
measuring฀progress฀towards฀complete฀satisfaction฀of฀the฀performance฀
obligation.฀ Therefore฀ the฀ current฀ policy฀ of฀ recognising฀ revenue฀ over฀
the฀period฀of฀installation฀is฀correct฀and฀the฀MD's฀proposed฀change฀to฀

Conclude฀with฀your฀ recognise฀ it฀ when฀ the฀ customer฀ signs฀ the฀ contract฀ would฀ contravene฀
opinion฀
IFRS฀15฀and฀not฀be฀permitted.฀

It฀is฀worth฀noting฀that฀the฀MD's฀proposed฀changes฀would฀both฀result฀in฀
earlier฀recognition฀of฀revenue฀and฀therefore฀profit.฀

Reducing฀the฀warranty฀provision฀

Under฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets,฀
where฀ there฀ is฀ a฀ present฀ obligation,฀ probable฀ outflow฀ and฀ a฀ reliable฀ Rule/principle฀

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estimate,฀ a฀ provision฀ should฀ be฀ made฀ for฀ the฀ best฀ estimate฀ of฀ the฀
expenditure฀required฀to฀settle฀the฀obligation.฀฀

Here,฀there฀seems฀to฀be฀evidence฀to฀suggest฀that฀expected฀expenditure฀
has฀ fallen฀ as฀ fewer฀ customers฀ are฀ returning฀ furniture฀ under฀ warranty.฀
Therefore,฀ there฀ may฀ be฀ some฀ justification฀ in฀ reducing฀ the฀ provision฀ Apply฀

which฀would฀result฀in฀a฀decrease฀in฀expenses฀and฀increase฀in฀profit.฀

This฀ would฀ be฀ a฀ change฀ in฀ accounting฀ estimate฀ given฀ that฀ the฀
proportion฀ of฀ returns฀ and฀ likely฀ repair฀ costs฀ involve฀ management฀
Conclude฀with฀your฀
opinion฀ judgement.฀As฀such,฀it฀should฀be฀accounted฀for฀prospectively.฀

Ethical฀implications฀

Issue฀(1):฀Should฀the฀FD฀
The฀ proposed฀ increase฀ of฀ the฀ machinery's฀ useful฀ life฀ appears฀ to฀ be฀
accept฀the฀proposed฀
change?฀Why/why฀
unjustified฀because฀the฀evidence฀indicates฀that฀the฀current฀useful฀life฀is฀
not?฀
still฀appropriate.฀
Issue฀(2):฀Should฀the฀FD฀
accept฀the฀proposed฀
The฀ change฀ to฀ revenue฀ recognition฀ is฀ not฀ permitted฀ because฀ it฀ would฀
change?฀Why/why฀
not?฀
contravene฀IFRS฀15.฀

In฀ethics฀questions,฀you฀ There฀ are฀ possible฀ advocacy฀ and฀ intimidation฀ threats฀ here฀ if฀ the฀ FD฀
should฀also฀look฀out฀for฀
threats฀to฀the฀ACCA฀ feels฀ pressured฀ to฀ act฀ in฀ the฀ MD's฀ best฀ interests.฀ There฀ is฀ also฀ a฀
Code's฀fundamental฀
principles฀in฀the฀ familiarity฀threat฀if฀the฀FD฀were฀inclined฀to฀accept฀the฀changes฀out฀of฀
scenario฀and฀mention฀
them฀in฀your฀answer.฀ friendship.฀ Either฀ way,฀ if฀ the฀ FD฀ were฀ to฀ accept฀ the฀ change฀ to฀ the฀ Issues฀(1)(2):฀Would฀
there฀be฀a฀breach฀of฀
useful฀ life฀ of฀ the฀ machinery฀ and฀ the฀ change฀ in฀ revenue฀ recognition,฀ any฀ethical฀principles?฀
If฀so,฀which฀and฀why?฀
this฀would฀be฀a฀breach฀of฀the฀ACCA฀Code's฀fundamental฀principles฀of฀
professional฀ competence฀ (due฀ to฀ non-compliance฀ with฀ IFRS),฀
objectivity฀(giving฀in฀to฀pressure฀from฀the฀FD)฀and฀integrity฀(if฀they฀did฀
so฀knowingly,฀with฀the฀sole฀motivation฀of฀maximising฀the฀exit฀price฀for฀
the฀MD).฀

Issue฀(3):฀Should฀the฀FD฀ The฀proposed฀decrease฀in฀the฀warranty฀provision฀appears฀potentially฀
accept฀the฀proposed฀
change?฀Why/why฀ justifiable฀ due฀ to฀ the฀ decrease฀ in฀ furniture฀ returned฀ under฀ warranty.฀
not?฀
However,฀ if฀ on฀ further฀ investigation฀ there฀ is฀ insufficient฀ evidence฀ to฀
Issue฀(3):฀Would฀there฀
be฀a฀breach฀of฀any฀
justify฀ the฀ decrease฀ in฀ provision฀ and฀ the฀ sole฀ motivation฀ is฀ to฀ boost฀
ethical฀principles?฀If฀so,
which฀and฀why?฀
profits฀ and฀ maximise฀ the฀ MD's฀ exit฀ price,฀ this฀ change฀ would฀ not฀ be฀
permitted.฀

Conclude฀any฀ethical฀
The฀ FD฀ should฀ explain฀ to฀ the฀ MD฀ why฀ the฀ proposed฀ changes฀ to฀ the฀
issues฀question฀with฀
advice฀on฀what฀the฀
useful฀life฀of฀the฀machinery฀and฀revenue฀recognition฀are฀not฀permitted.฀
person฀should฀do฀next.฀
If฀ the฀ MD฀ refuses฀ to฀ accept฀ this,฀ as฀ the฀ MD฀ is฀ the฀ founder,฀ sole฀

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shareholder฀ and฀ most฀ senior฀ director,฀ external฀ advice฀ would฀ be฀

required.฀It฀would฀be฀appropriate฀to฀seek฀professional฀advice฀from฀the฀
ACCA.฀ Legal฀ advice฀ should฀ be฀ also฀ be฀ considered.฀ Finally,฀
resignation฀should฀be฀considered฀if฀the฀matters฀cannot฀be฀resolved.฀

Other฀points฀to฀note:฀
฀ This฀is฀a฀comprehensive,฀detailed฀answer.฀You฀could฀still฀have฀
scored฀a฀strong฀pass฀with฀a฀shorter฀answer฀as฀long฀as฀it฀
addressed฀all฀three฀issues฀and฀came฀to฀a฀justified฀conclusion฀for฀
each.฀
฀ Both฀sub-requirements฀(accounting฀implications฀and฀ethical฀
implications)฀have฀been฀addressed,฀each฀with฀their฀own฀heading.฀
฀ All฀three฀of฀the฀proposed฀changes฀in฀accounting฀policies฀or฀
estimates฀have฀been฀addressed,฀each฀with฀their฀own฀sub-
heading.฀
฀ The฀length฀of฀answer฀for฀each฀of฀the฀three฀changes฀is฀not฀the฀
same฀–฀there฀is฀more฀to฀say฀about฀revenue฀recognition฀as฀there฀
are฀two฀revenue฀streams฀and฀more฀detailed฀rules฀to฀apply.฀
฀ The฀answer฀correctly฀addresses฀the฀issues฀from฀the฀perspective฀of฀
the฀finance฀director.฀
฀ The฀answer฀involves฀'discussion'฀–฀for฀each฀of฀the฀three฀proposed฀
changes,฀it฀explains฀under฀what฀circumstances฀a฀change฀would฀
be฀permitted฀and฀whether฀the฀change฀is฀permissible฀in฀each฀
case.฀
฀ The฀professional฀marks฀have฀been฀obtained฀through฀answering฀
both฀sub-requirements,฀addressing฀all฀three฀of฀the฀proposed฀
changes,฀using฀headings฀and฀sub-headings฀and฀writing฀from฀the฀
perspective฀of฀the฀Finance฀Director฀in฀full฀sentences฀which฀are฀
clearly฀explained฀in฀professional฀language.฀

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฀฀

Exam฀success฀skills฀diagnostic฀

Every฀time฀you฀complete฀a฀question,฀use฀the฀diagnostic฀below฀to฀assess฀how฀effectively฀you฀
demonstrated฀ the฀ exam฀ success฀ skills฀ in฀ answering฀ the฀ question.฀ The฀ table฀ has฀ been฀
completed฀ below฀ for฀ the฀ Range฀ activity฀ to฀ give฀ you฀ an฀ idea฀ of฀ how฀ to฀ complete฀ the฀
diagnostic.฀

Exam฀success฀skills฀ Your฀reflections/observations฀

Good฀time฀ Did฀you฀spend฀approximately฀a฀quarter฀to฀a฀third฀of฀your฀
management฀ time฀reading฀and฀planning?฀
Did฀you฀allow฀yourself฀time฀to฀address฀both฀sub-
requirements฀(ethical฀and฀accounting฀implications)฀and฀all฀
three฀of฀the฀proposed฀changes฀in฀accounting฀policies฀and฀
estimates฀in฀the฀scenario?฀
Your฀writing฀time฀should฀have฀been฀split฀between฀these฀
three฀proposed฀changes฀but฀it฀does฀not฀necessarily฀have฀to฀
be฀spread฀evenly฀–฀there฀is฀more฀to฀say฀about฀some฀issues฀
(eg฀revenue)฀than฀others.฀

Managing฀information฀฀฀ Did฀you฀identify฀the฀relevant฀IAS฀or฀IFRS฀for฀each฀proposed฀
change฀in฀accounting฀policy฀or฀estimate?฀
Did฀you฀spot฀that฀the฀Finance฀Director฀is฀ACCA฀qualified฀so฀
is฀bound฀by฀the฀ACCA's฀Code฀but฀the฀Managing฀Director฀is฀
unlikely฀to฀have฀detailed฀knowledge฀of฀accounting฀
standards?฀
Did฀you฀identify฀the฀threat฀to฀the฀ACCA฀Code's฀ethical฀
principles฀in฀the฀scenario฀from฀the฀Managing฀Director฀
planning฀to฀retire฀and฀sell฀his฀shares฀in฀one฀year's฀time?฀

Correct฀interpretation฀ Did฀you฀understand฀what฀was฀meant฀by฀the฀verb฀'discuss'?฀
of฀requirements฀
Did฀ you฀ spot฀ the฀ two฀ sub-requirements฀ (ethical฀ implications฀
and฀accounting฀implications)?฀
Did฀you฀understand฀what฀each฀sub-requirement฀meant?฀

Answer฀planning฀ Did฀ you฀ draw฀ up฀ an฀ answer฀ plan฀ using฀ your฀ preferred฀
approach฀ (eg฀ mind฀ map,฀ bullet-pointed฀ list฀ or฀ annotated฀
question฀paper)?฀
Did฀ your฀ plan฀ address฀ both฀ the฀ ethical฀ and฀ accounting฀
implications?฀
Did฀your฀plan฀address฀each฀of฀the฀three฀proposed฀changes฀
to฀accounting฀policies฀and฀estimates฀in฀the฀question?฀

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Skills฀Checkpoint฀1฀

Exam฀success฀skills฀ Your฀reflections/observations฀

Effective฀writing฀and฀ Did฀you฀use฀underlined฀headings฀(key฀words฀from฀
presentation฀ requirements)฀and฀sub-headings฀(one฀for฀each฀proposed฀
change฀in฀accounting฀policy฀or฀estimate)?฀
Did฀you฀address฀both฀sub-requirements฀and฀all฀three฀
proposed฀changes฀in฀accounting฀policy฀or฀estimate?฀
Did฀you฀use฀full฀sentences?฀
Did฀you฀explain฀why฀the฀proposed฀accounting฀treatment฀
was฀correct฀or฀incorrect?฀
Did฀you฀explain฀why฀key฀facts฀in฀the฀scenario฀proposed฀a฀
threat฀to฀the฀ACCA฀Code's฀ethical฀principles?฀

Most฀important฀action฀points฀to฀apply฀to฀your฀next฀question฀
฀
฀
฀
฀

Summary฀
In฀ the฀ SBR฀ exam,฀ the฀ ethical฀ issues฀ will฀ typically฀ be฀ closely฀ linked฀ with฀ accounting฀
issues฀ –฀ whether฀ following฀ a฀ certain฀ accounting฀ treatment฀ would฀ have฀ any฀ ethical฀
implications.฀ Remember฀ that฀ an฀ ACCA฀ accountant฀ must฀ demonstrate฀ the฀ fundamental฀
principle฀of฀professional฀competence฀through฀financial฀statements฀that฀comply฀with฀IAS฀
and฀ IFRS.฀ Therefore,฀ the฀ first฀ step฀ in฀ question฀ is฀ to฀ consider฀ whether฀ the฀ accounting฀
treatment฀ in฀ the฀ scenario฀ complies฀ with฀ IAS฀ and฀ IFRS฀ and,฀ if฀ not,฀ identify฀ what฀ the฀
ethical฀ implications฀ may฀ be฀ by฀ identifying฀ the฀ relevant฀ ethical฀ principles฀ and฀ any฀
threats฀to฀them.฀Your฀answer฀should฀conclude฀with฀practical฀advice฀on฀next฀steps฀to฀be฀
taken฀by฀the฀individual฀concerned.฀

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฀
฀

Provisions,฀contingencies
฀
฀
฀
฀
and฀events฀after฀the
฀
฀ reporting฀period
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Discuss฀and฀apply฀the฀recognition,฀de-recognition฀and฀measurement฀of฀provisions,฀ C7(a)฀
contingent฀liabilities฀and฀contingent฀assets฀including฀environmental฀provisions฀and฀
restructuring฀provisions.฀

Discuss฀and฀apply฀the฀accounting฀for฀events฀after฀the฀reporting฀date.฀ C7(b)฀

Exam฀context฀
This฀ chapter฀ is฀ almost฀ entirely฀ revision฀ as฀ you฀ have฀ encountered฀ provisions฀ and฀ events฀ after฀ the฀
reporting฀period฀in฀Financial฀Reporting.฀However,฀both฀topics฀are฀highly฀examinable,฀and฀questions฀
are฀likely฀to฀be฀more฀technically฀challenging฀than฀those฀you฀met฀in฀Financial฀Reporting.฀
฀
In฀the฀Strategic฀Business฀Reporting฀(SBR)฀exam,฀both฀topics฀are฀likely฀to฀feature฀as฀parts฀of฀questions,฀
rather฀than฀as฀a฀whole฀question฀itself.฀For฀example,฀in฀Section฀A,฀you฀may฀be฀required฀to฀spot฀that฀
an฀ issue฀ has฀ occurred฀ after฀ the฀ reporting฀ date,฀ and฀ then฀ work฀ out฀ the฀ effect฀ of฀ the฀ issue฀ on฀ the฀
financial฀statements.฀฀

฀ ฀

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Chapter฀overview฀
฀
฀ Provisions,฀contingencies฀and฀
฀ events฀after฀the฀reporting฀period฀
฀
฀
฀
฀ ฀
1.฀ Provisions฀
(IAS฀37)฀

5.฀ Events฀after฀the฀
reporting฀period฀
(IAS฀10)฀

3.฀ Contingent฀ 4.฀ Contingent฀assets฀

liabilities฀(IAS฀37)฀ (IAS฀37)฀

2.฀ Specific฀types฀฀
of฀provision฀

Future฀operating฀ Onerous฀ Restructuring฀ Environmental฀

losses฀ contracts฀ provisions฀

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5:฀Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀
฀

1฀ Provisions฀(IAS฀37)฀
Tutorial฀note฀
You฀have฀studied฀IAS฀37฀Provisions,฀Contingent฀Liabilities฀and฀Contingent฀Assets฀in฀your฀earlier฀
studies฀and฀so฀should฀be฀familiar฀with฀much฀of฀this฀section.฀However,฀the฀questions฀about฀IAS฀37฀that฀
feature฀in฀the฀SBR฀exam฀will฀be฀much฀more฀technically฀challenging,฀so฀it฀is฀important฀to฀make฀sure฀
you฀can฀discuss฀and฀apply฀the฀requirements฀of฀the฀standard฀given฀here.฀You฀also฀need฀to฀be฀able฀to฀
discuss฀the฀consistency฀of฀IAS฀37฀with฀the฀Conceptual฀Framework.฀฀

A฀provision:฀a฀liability฀of฀uncertain฀timing฀or฀amount.฀฀
Key฀term฀ (IAS฀37:฀para.฀10)฀

1.1฀Recognition฀
A฀provision฀is฀recognised฀when฀(IAS฀37:฀para.฀14):฀
(a)฀ An฀entity฀has฀a฀present฀obligation฀(legal฀or฀constructive)฀as฀a฀result฀of฀a฀past฀event;฀
(b)฀ It฀ is฀ probable฀ that฀ an฀ outflow฀ of฀ resources฀ embodying฀ economic฀ benefits฀ will฀ be฀
required฀to฀settle฀the฀obligation;฀and฀
(c)฀ A฀reliable฀estimate฀can฀be฀made฀of฀the฀amount฀of฀the฀obligation.฀

Is฀IAS฀37฀consistent฀with฀the฀Conceptual฀Framework?฀
IAS฀37฀requires฀recognition฀of฀a฀liability฀only฀if฀it฀is฀probable฀that฀the฀obligation฀will฀result฀in฀an฀
outflow฀of฀resources฀from฀the฀entity.฀This฀is฀inconsistent฀with฀other฀standards฀such฀as฀IFRS฀3฀Business฀
Combinations฀and฀IFRS฀9฀Financial฀Instruments,฀which฀do฀not฀apply฀the฀probability฀criterion฀to฀
liabilities.฀In฀addition,฀probability฀is฀not฀part฀of฀the฀current฀Conceptual฀Framework฀definition฀of฀a฀
liability.฀Although฀Exposure฀Draft฀2015/3:฀Conceptual฀Framework฀for฀Financial฀Reporting฀changes฀
the฀definition฀of฀a฀liability,฀it฀does฀not฀refer฀to฀probability฀and฀therefore฀the฀inconsistency฀will฀remain.฀฀
The฀IASB฀has฀acknowledged฀this฀inconsistency,฀however฀as฀the฀Conceptual฀Framework฀does฀not฀
override฀the฀requirements฀of฀individual฀standards,฀the฀recognition฀requirements฀of฀IAS฀37฀will฀
remain.฀

฀
Supplementary฀reading฀
See฀Chapter฀5฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀revision฀of฀the฀detail฀of฀the฀recognition฀of฀
provisions.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

1.2฀Measurement฀฀
General฀rule฀
The฀ amount฀ recognised฀ is฀ the฀ best฀ estimate฀ of฀ the฀ expenditure฀ required฀ to฀ settle฀ the฀ present฀
obligation฀at฀the฀end฀of฀the฀reporting฀period฀(IAS฀37:฀para.฀36).฀
Allowing฀for฀uncertainties฀
(a)฀ Where฀ the฀ provision฀ being฀ measured฀ involves฀ a฀ large฀ population฀ of฀ items฀
฀฀use฀expected฀values.฀
(b)฀ Where฀a฀single฀obligation฀is฀being฀measured฀
฀ ฀฀The฀individual฀most฀likely฀outcome฀may฀be฀the฀best฀estimate.฀

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Supplementary฀reading฀
See฀Chapter฀5฀Section฀1฀of฀the฀Supplementary฀Reading฀for฀revision฀activities฀on฀the฀recognition฀and฀
measurement฀of฀provisions.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

Discounting฀of฀provisions฀
Where฀the฀time฀value฀of฀money฀is฀material,฀the฀provision฀is฀discounted.฀The฀discount฀rate฀should:฀
฀ Be฀a฀pre-tax฀rate฀
฀ Appropriately฀reflect฀the฀risk฀associated฀with฀the฀cash฀flows฀
The฀unwinding฀of฀the฀discount฀is฀recognised฀in฀profit฀or฀loss.฀

1.3฀Reimbursements฀
Some฀or฀all฀of฀the฀expenditure฀needed฀to฀settle฀a฀provision฀may฀be฀expected฀to฀be฀recovered฀from฀a฀
third฀ party,฀ eg฀ an฀ insurer.฀ This฀ reimbursement฀ should฀ be฀ recognised฀ only฀ when฀ it฀ is฀ virtually฀
certain฀that฀reimbursement฀will฀be฀received฀if฀the฀entity฀settles฀the฀obligation฀(IAS฀37:฀para.฀53).฀

1.4฀Recognising฀an฀asset฀when฀creating฀a฀provision฀
An฀ asset฀ can฀ only฀ be฀ recognised฀ where฀ the฀ present฀ obligation฀ recognised฀ as฀ a฀ provision฀ gives฀
access฀ to฀ future฀ economic฀ benefits฀ (eg฀ decommissioning฀ costs฀ could฀ be฀ an฀ IAS฀ 16฀ component฀ of฀
cost).฀฀

1.5฀Derecognition฀
If฀it฀is฀no฀longer฀probable฀that฀an฀outflow฀of฀resources฀embodying฀economic฀benefits฀will฀be฀required฀
to฀settle฀the฀obligation,฀the฀provision฀should฀be฀reversed฀(IAS฀37:฀para.฀59).฀

2฀Specific฀types฀of฀provision฀
2.1฀Future฀operating฀losses฀
Provisions฀ are฀ not฀ recognised฀ for฀ future฀ operating฀ losses.฀ They฀ do฀ not฀ meet฀ the฀ definition฀ of฀ a฀
liability฀and฀the฀general฀recognition฀criteria฀set฀out฀in฀the฀standard฀(IAS฀37:฀para.฀63).฀

2.2฀Onerous฀contracts฀
IAS฀37฀defines฀an฀onerous฀contract฀as฀one฀in฀which฀unavoidable฀costs฀of฀completing฀the฀contract฀
exceed฀the฀benefits฀expected฀to฀be฀received฀under฀it฀(IAS฀37:฀para.฀10).

Unavoidable฀costs฀of฀meeting฀an฀
obligation฀are฀the฀lower฀of:

Cost฀of฀fulfilling Penalties฀from฀failure฀
the฀contract to฀fulfil฀the฀contract

An฀ example฀ may฀ be฀ a฀ fixed฀ price฀ supply฀ contract฀ related฀ to฀ a฀ particular฀ product฀ that,฀ due฀ to฀
inflation,฀now฀costs฀more฀to฀manufacture฀than฀the฀fixed฀sale฀price฀agreed฀in฀the฀contract.฀฀
If฀ an฀ entity฀ has฀ a฀ contract฀ that฀ is฀ onerous,฀ the฀ present฀ obligation฀ under฀ the฀ contract฀ must฀ be฀
recognised฀and฀measured฀as฀a฀provision฀(IAS฀37:฀para.฀66).฀฀

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5:฀Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀
฀

A฀lease฀agreement฀that฀becomes฀onerous฀is฀only฀within฀the฀scope฀of฀IAS฀37,฀and฀therefore฀results฀
in฀the฀creation฀of฀a฀provision,฀if฀simplified฀accounting฀is฀applied,฀so฀that฀no฀lease฀liability฀has฀been฀
recognised.฀This฀is฀only฀the฀case฀where฀a฀lease฀is฀short-term฀or฀for฀an฀asset฀with฀a฀low฀value.฀

2.3฀Restructuring฀
Restructuring฀is฀a฀programme฀that฀is฀planned฀and฀is฀controlled฀by฀management฀and฀materially฀
changes฀ either฀ the฀ scope฀ of฀ a฀ business฀ undertaken฀ by฀ an฀ entity,฀ or฀ the฀ manner฀ in฀ which฀ that฀
business฀is฀conducted฀(IAS฀37:฀para.฀10).฀฀
Examples฀of฀restructuring฀include฀(IAS฀37:฀para.฀70):฀
฀ The฀sale฀or฀termination฀of฀a฀line฀of฀business฀
฀ The฀closure฀of฀business฀locations฀or฀the฀relocation฀of฀business฀activities฀฀
฀ Changes฀in฀management฀structure฀
฀ Fundamental฀reorganisations฀that฀have฀a฀material฀effect฀on฀the฀nature฀and฀focus฀of฀the฀entity's฀
operations฀
One฀ of฀ the฀ main฀ purposes฀ of฀ IAS฀ 37฀ was฀ to฀ target฀ abuses฀ of฀ provisions฀ for฀ restructuring฀ by฀
introducing฀strict฀criteria฀about฀when฀such฀a฀provision฀can฀be฀made.฀
A฀provision฀for฀restructuring฀is฀recognised฀only฀when฀the฀entity฀has฀a฀constructive฀ obligation฀to฀
restructure.฀Such฀an฀obligation฀only฀arises฀where฀an฀entity:฀
(a)฀ Has฀a฀detailed฀formal฀plan฀for฀the฀restructuring;฀and฀
(b)฀ Has฀ raised฀ a฀valid฀ expectation฀ in฀ those฀ affected฀ that฀ it฀ will฀ carry฀ out฀ the฀ restructuring฀ by฀
starting฀to฀implement฀that฀plan฀or฀announcing฀its฀main฀features฀to฀those฀affected฀by฀it.฀
Where฀the฀restructuring฀involves฀the฀sale฀of฀an฀operation,฀no฀obligation฀arises฀until฀the฀entity฀has฀
entered฀into฀a฀binding฀sale฀agreement.฀
Restructuring฀costs฀฀
A฀ restructuring฀ provision฀ includes฀ only฀ the฀ direct฀ expenditures฀ arising฀ from฀ the฀ restructuring,฀
which฀are฀those฀that฀are฀both฀(IAS฀37:฀para.฀80):฀
(a)฀ Necessarily฀entailed฀by฀the฀restructuring;฀and฀
(b)฀ Not฀associated฀with฀the฀ongoing฀activities฀of฀the฀entity.฀
The฀provision฀should฀not฀include฀(IAS฀37:฀para.฀81):฀
฀ Retraining฀or฀relocating฀continuing฀staff฀
฀ Marketing฀
฀ Investment฀in฀new฀systems฀and฀distribution฀networks฀

Activity฀1:฀Restructuring฀฀ ฀ ฀
Trailer,฀ a฀ public฀ limited฀ company,฀ operates฀ in฀ the฀ manufacturing฀ sector.฀ During฀ the฀ year฀ ended฀
31฀May฀ 20X5,฀ Trailer฀ announced฀ two฀ major฀ restructuring฀ plans.฀ The฀ first฀ plan฀ is฀ to฀ reduce฀ its฀
capacity฀by฀the฀closure฀of฀some฀of฀its฀smaller฀factories,฀which฀have฀already฀been฀identified.฀This฀will฀
lead฀ to฀ the฀ redundancy฀ of฀ 500฀ employees,฀ who฀ have฀ all฀ individually฀ been฀ selected฀ and฀
communicated฀with.฀The฀costs฀of฀this฀plan฀are฀$9฀million฀in฀redundancy฀costs,฀$4฀million฀in฀retraining฀
costs฀ and฀ $5฀ million฀ in฀ lease฀ termination฀ costs.฀ The฀ second฀ plan฀ is฀ to฀ re-organise฀ the฀ finance฀ and฀
information฀technology฀department฀over฀a฀one-year฀period฀but฀it฀does฀not฀commence฀for฀two฀years.฀
The฀plan฀results฀in฀20%฀of฀finance฀staff฀losing฀their฀jobs฀during฀the฀restructuring.฀The฀costs฀of฀this฀plan฀
are฀$10฀million฀in฀redundancy฀costs,฀$6฀million฀in฀retraining฀costs฀and฀$7฀million฀in฀equipment฀lease฀
termination฀costs.฀

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฀฀

Required฀
Discuss฀the฀treatment฀of฀each฀of฀the฀above฀restructuring฀plans฀in฀the฀financial฀statements฀of฀Trailer฀for฀
the฀year฀ended฀31฀May฀20X5.฀฀

Activity฀2:฀Environmental฀provisions฀ ฀ ฀
A฀company฀was฀awarded฀a฀licence฀to฀quarry฀limestone฀in฀an฀area฀of฀outstanding฀natural฀beauty.฀
As฀part฀of฀the฀agreement,฀the฀company฀was฀required฀to฀build฀access฀roads฀as฀well฀as฀the฀structures฀
necessary฀for฀the฀extraction฀process.฀The฀total฀cost฀of฀these฀was฀$50฀million.฀The฀quarry฀came฀into฀
operation฀on฀31฀December฀20X3฀and฀the฀operating฀licence฀was฀for฀20฀years฀from฀that฀date.฀Under฀
the฀ terms฀ of฀ the฀ operating฀ licence,฀ the฀ company฀ is฀ obliged฀ to฀ remove฀ the฀ access฀ roads฀ and฀
structures฀and฀ restore฀ the฀ natural฀ environmental฀ habitat฀ at฀ the฀ end฀ of฀ the฀ quarry's฀ 20-year฀ life.฀ At฀฀
31฀December฀20X3,฀the฀estimated฀cost฀of฀the฀restoration฀work฀was฀$10฀million,฀and฀this฀estimate฀did฀
not฀ change฀ by฀ 31฀ December฀ 20X4.฀ An฀ additional฀ cost฀ of฀ $500,000฀ per฀ annum฀ the฀ quarry฀ is฀
operated฀ (at฀ 31฀ December฀ 20X4฀ prices)฀ will฀ also฀ be฀ incurred฀ at฀ the฀ end฀ of฀ the฀ licence฀ period฀ to฀
clean฀ up฀ further฀ progressive฀ environmental฀ damage฀ that฀ will฀ arise฀ through฀ the฀ extraction฀ of฀ the฀
limestone.฀
An฀ appropriate฀ discount฀ rate฀ reflecting฀ market฀ assessments฀ of฀ the฀ time฀ value฀ of฀ money฀ and฀ risks฀
specific฀to฀the฀operation฀is฀8%.฀
Required฀
Explain฀the฀treatment฀of฀the฀cost฀of฀the฀assets฀and฀associated฀obligation฀relating฀to฀the฀quarry:฀
(a)฀ As฀at฀31฀December฀20X3฀
(b)฀ For฀the฀year฀ended฀31฀December฀20X4.฀
Work฀to฀the฀nearest฀$1,000.฀

3฀ Contingent฀liabilities฀(IAS฀37)฀
Contingent฀liability฀(IAS฀37)฀
Key฀term฀ A฀contingent฀liability฀is฀either:฀
(a)฀ A฀possible฀obligation฀arising฀from฀past฀events฀whose฀existence฀will฀be฀confirmed฀only฀by฀
the฀occurrence฀of฀one฀or฀more฀uncertain฀future฀events฀not฀wholly฀within฀the฀control฀of฀the฀
entity;฀or฀
(b)฀ A฀present฀obligation฀that฀arises฀from฀past฀events฀but฀is฀not฀recognised฀because:฀
฀ (i)฀ It฀is฀not฀probable฀that฀an฀outflow฀of฀economic฀benefit฀will฀be฀required฀to฀settle฀the฀
obligation;฀or฀฀
฀ (ii)฀ The฀amount฀of฀the฀obligation฀cannot฀be฀measured฀with฀sufficient฀reliability.฀
(IAS฀37:฀para.฀10)฀

Contingent฀liabilities฀should฀not฀be฀recognised฀in฀financial฀statements,฀but฀should฀be฀disclosed฀
unless฀the฀possibility฀of฀an฀outflow฀of฀economic฀benefits฀is฀remote฀(IAS฀37:฀paras.฀27–28).฀

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฀

For฀each฀class฀of฀contingent฀liability,฀an฀entity฀must฀disclose฀the฀following฀(IAS฀37:฀para.฀86):฀
(a)฀ The฀nature฀of฀the฀contingent฀liability฀
(b)฀ An฀estimate฀of฀its฀financial฀effect฀
(c)฀ An฀indication฀of฀the฀uncertainties฀relating฀to฀the฀amount฀or฀timing฀of฀any฀outflow฀
(d)฀ The฀possibility฀of฀any฀reimbursement.฀

Supplementary฀reading฀
See฀Chapter฀5฀Section฀1.3฀of฀the฀Supplementary฀Reading฀for฀a฀decision฀tree฀summarising฀the฀
recognition฀criteria฀of฀IAS฀37฀for฀provisions฀and฀contingent฀liabilities.฀This฀is฀available฀in฀Appendix฀2฀
of฀the฀digital฀edition฀of฀the฀Workbook.฀

4฀Contingent฀assets฀(IAS฀37)฀
Contingent฀asset฀(IAS฀37):฀a฀possible฀asset฀that฀arises฀from฀past฀events฀and฀whose฀existence฀
will฀be฀confirmed฀by฀the฀occurrence฀of฀one฀or฀more฀uncertain฀future฀events฀not฀wholly฀within฀the฀
Key฀term฀
entity's฀control.฀฀
(IAS฀37:฀para.฀10)฀

A฀ contingent฀ asset฀ should฀ not฀ be฀ recognised,฀ but฀ should฀ be฀ disclosed฀ where฀ an฀ inflow฀ of฀
economic฀benefits฀is฀probable฀(IAS฀37:฀para฀34).฀
A฀ brief฀ description฀ of฀ the฀ contingent฀ asset฀ should฀ be฀ provided฀ along฀ with฀ an฀ estimate฀ of฀ its฀ likely฀
financial฀effect฀(IAS฀37:฀para.฀89).฀

5฀Events฀after฀the฀reporting฀period฀(IAS฀10)฀
Tutorial฀note฀
You฀have฀studied฀IAS฀10฀as฀part฀of฀Financial฀Reporting.฀This฀section฀contains฀a฀summary฀of฀the฀key฀
points฀of฀the฀standard,฀but,฀if฀you฀are฀unsure,฀return฀to฀your฀Financial฀Reporting฀study฀material฀and฀฀
re-read฀it.฀

Events฀ after฀ the฀ reporting฀ period฀ are฀ those฀ events,฀ both฀ favourable฀ and฀ unfavourable,฀ that฀
occur฀between฀the฀year฀end฀and฀the฀date฀on฀which฀the฀financial฀statements฀are฀authorised฀for฀issue฀
(IAS฀10:฀para.฀3).฀
Two฀types฀of฀events฀can฀be฀identified฀(IAS฀10:฀para.฀3):฀

Adjusting฀events฀ Non-adjusting฀events
Provide฀evidence฀of฀conditions฀ Indicative฀of฀conditions฀that฀
that฀existed฀at฀the฀end฀of฀the฀ arose฀after฀the฀end฀of฀the฀
reporting฀period reporting฀period

Financial฀statements฀should฀be฀ Not฀adjusted฀for฀in฀financial฀
adjusted statements,฀but฀are฀disclosed
฀
Going฀concern฀
If฀ management฀ determines฀ after฀ the฀ reporting฀ period฀ that฀ the฀ reporting฀ entity฀ will฀ be฀ liquidated฀ or฀
cease฀ trading,฀ the฀ financial฀ statements฀ are฀ adjusted฀ so฀ that฀ they฀ are฀ not฀ prepared฀ on฀ the฀ going฀
concern฀basis.฀

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Supplementary฀reading฀
See฀Chapter฀5฀Section฀2฀of฀the฀Supplementary฀Reading฀for฀examples฀of฀adjusting฀and฀non-adjusting฀
events.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

5.1฀ Disclosure฀
(a)฀ An฀entity฀discloses฀the฀date฀when฀the฀financial฀statements฀were฀authorised฀for฀issue฀and฀who฀
gave฀the฀authorisation฀(IAS฀10:฀para฀17).฀
(b)฀ If฀ non-adjusting฀ events฀ after฀ the฀ reporting฀ period฀ are฀ material,฀ non-disclosure฀ could฀ influence฀
the฀decisions฀of฀users฀taken฀on฀the฀basis฀of฀the฀financial฀statements.฀Accordingly,฀the฀following฀
is฀disclosed฀for฀each฀material฀category฀of฀non-adjusting฀event฀after฀the฀reporting฀period:฀
(i)฀ The฀nature฀of฀the฀event;฀and฀
(ii)฀ An฀ estimate฀ of฀ its฀ financial฀ effect,฀ or฀ statement฀ that฀ such฀ an฀ estimate฀ cannot฀ be฀
made.฀(IAS฀10:฀para฀21)฀ ฀

Activity฀3:฀IAS฀37฀and฀IAS฀10฀ ฀
Delta฀is฀an฀entity฀that฀prepares฀financial฀statements฀to฀31฀March฀each฀year.฀During฀the฀year฀ended฀
31฀March฀20X2฀the฀following฀events฀occurred:฀
(a)฀ At฀31฀March฀20X2,฀Delta฀was฀engaged฀in฀a฀legal฀dispute฀with฀a฀customer฀who฀alleged฀that฀
Delta฀had฀supplied฀faulty฀products฀that฀caused฀the฀customer฀actual฀financial฀loss.฀The฀directors฀
of฀Delta฀consider฀that฀the฀customer฀has฀a฀75%฀chance฀of฀succeeding฀in฀this฀action฀and฀that฀the฀
likely฀outcome฀should฀the฀customer฀succeed฀is฀that฀the฀customer฀would฀be฀awarded฀damages฀
of฀$1m.฀The฀directors฀of฀Delta฀further฀believe฀that฀the฀fault฀in฀the฀products฀was฀caused฀by฀the฀
supply฀ of฀ defective฀ components฀ by฀ one฀ of฀ Delta's฀ suppliers.฀ Delta฀ has฀ initiated฀ legal฀ action฀
against฀ the฀ supplier฀ and฀ considers฀ there฀ is฀ a฀ 70%฀ chance฀ Delta฀ will฀ receive฀ damages฀ of฀
$800,000฀from฀the฀supplier.฀Ignore฀discounting.฀ ฀
(b)฀ On฀ 10฀ April฀ 20X2,฀ a฀ water฀ leak฀ at฀ one฀ of฀ Delta's฀ warehouses฀ damaged฀ a฀ consignment฀ of฀
inventory.฀ This฀ inventory฀ had฀ been฀ manufactured฀ prior฀ to฀ 31฀ March฀ 20X2฀ at฀ a฀ total฀ cost฀ of฀
$800,000.฀ The฀ net฀ realisable฀ value฀ of฀ the฀ inventory฀ prior฀ to฀ the฀ damage฀ was฀ estimated฀ at฀
$960,000.฀ Because฀ of฀ the฀ damage฀ Delta฀ was฀ required฀ to฀ spend฀ a฀ further฀ $150,000฀ on฀
repairing฀ and฀ re-packaging฀ the฀ inventory.฀ The฀ inventory฀ was฀ sold฀ on฀ 15฀ May฀ 20X2฀ for฀
proceeds฀of฀$900,000.฀Any฀adjustment฀in฀respect฀of฀this฀event฀would฀be฀regarded฀by฀Delta฀
as฀material.฀
Required฀
Discuss฀how฀these฀events฀would฀be฀reported฀in฀the฀financial฀statements฀of฀Delta฀for฀the฀year฀ended฀฀
31฀March฀20X2.฀

Supplementary฀reading฀
See฀ Chapter฀ 5฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ for฀ an฀ exam฀ standard฀ question฀ involving฀
provisions฀and฀events฀after฀the฀reporting฀period.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀
of฀the฀Workbook.฀

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฀

Ethics฀note฀
Although฀ethics฀will฀certainly฀feature฀in฀the฀second฀question฀of฀Section฀A,฀ethical฀issues฀could฀feature฀
in฀any฀question฀in฀the฀SBR฀exam.฀Therefore฀you฀need฀to฀be฀alert฀to฀any฀threats฀to฀the฀fundamental฀
principles฀of฀the฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀question.฀
For฀example,฀pressure฀to฀achieve฀a฀particular฀profit฀figure฀could฀lead฀to฀deliberate฀attempts฀to฀
manipulate฀profits฀through฀making฀provisions฀that฀are฀not฀necessary฀in฀years฀of฀high฀profits,฀in฀order฀
to฀release฀those฀provisions฀in฀future฀periods฀when฀profits฀are฀lower.฀Although฀the฀rules฀in฀IAS฀37฀are฀
meant฀to฀prevent฀this฀situation,฀the฀Standard฀is฀not฀perfect฀and฀manipulation฀is฀possible.฀฀
Another฀example฀that฀could฀arise฀is฀pressure฀to฀obtain฀financing,฀which฀requires฀the฀presentation฀of฀a฀
healthy฀financial฀position.฀This฀could,฀for฀example,฀lead฀directors฀to฀ignore฀information฀received฀after฀
the฀reporting฀date฀that฀should฀result฀in฀a฀write฀down฀of฀receivables.฀฀฀

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฀฀

Chapter฀summary฀
฀

Provisions,฀contingencies฀and฀
events฀after฀the฀reporting฀period฀

1.฀ Provisions฀(IAS฀37)฀ 5.฀ Events฀after฀the฀reporting฀

'A฀liability฀of฀uncertain฀timing฀or฀amount'฀
period฀(IAS฀10)฀
฀ Recognise฀liability:฀ Adjusting:฀
–฀ Present฀obligation฀(as฀a฀result฀of฀a฀past฀event)฀ ฀ Evidence฀of฀conditions฀at฀year฀end฀
(i)฀ Legal฀obligation,฀or฀ Non-adjusting:฀
(ii)฀ Constructive฀obligation฀
฀ Other฀฀disclose฀
–฀ Probable฀outflow฀of฀resources฀embodying฀economic฀
฀
benefits฀
Going฀concern฀implications฀฀adjust฀
–฀ Reliable฀estimate฀ ฀
฀ Large฀population฀฀expected฀values฀
฀ Single฀obligation฀฀most฀likely฀outcome฀
฀ Discount฀if฀material฀

3.฀ Contingent฀liabilities฀ 4.฀ Contingent฀assets฀

Possible฀obligation,฀or฀
Present฀obligation฀where:฀฀ Possible฀asset฀
฀ Outflow฀of฀resources฀not฀probable,฀or฀ ฀
฀ Cannot฀make฀reliable฀estimate.฀ ฀ ฀ Inflow฀
฀
Disclose฀(unless฀outflow฀of฀resources฀is฀remote)฀ ฀
฀ Virtually฀฀ Probable฀ Not฀
฀ certain฀ ฀ probable฀
฀ Brief฀description฀of฀nature฀
฀
฀ Estimate฀of฀financial฀effect฀฀ where฀
฀ RECOGNISE฀ DISCLOSE฀ DO฀
฀ Indication฀of฀uncertainties฀ practicable฀
฀ ฀ –฀nature฀ NOTHING฀
฀฀ Possibility฀of฀reimbursement฀
฀ ฀ –฀estimate฀

2.฀ Specific฀types฀of฀
provision฀

Future฀ Restructuring฀ Environmental฀

operating฀ Only฀provide฀if:฀ provisions฀
losses฀ ฀ Detailed฀formal฀plan;฀and฀ Make฀a฀provision฀where฀there฀฀
฀ Valid฀expectation฀raised฀by฀ is฀a฀legal฀or฀constructive฀obligation฀to฀
Do฀not฀provide฀฀
starting฀to฀implement฀฀ clean฀up/decommission฀
it฀or฀by฀announcing฀main฀features฀
฀ Provision฀is฀discounted฀to฀present฀
Includes฀only฀direct฀expenditures:฀ value฀
Onerous฀contracts฀ (a)฀ Necessarily฀entailed฀by฀the฀ ฀ DR฀฀Asset฀(depreciate฀over฀UL)฀
Provide฀for฀unavoidable฀cost:฀ restructuring;฀and฀
฀ CR฀฀Provision฀
(b)฀ Not฀associated฀with฀the฀ongoing฀ ฀
Lower฀of฀
activities฀of฀the฀entity:฀
฀ (i)฀ Retraining/relocating฀staff฀
฀ net฀cost฀ penalties฀from฀ (ii)฀ Marketing฀
฀of฀fulfilling฀ failure฀to฀ (iii)฀ Investment฀in฀new฀
฀ ฀ fulfil฀ systems/distribution฀networks฀

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5:฀Provisions,฀contingencies฀and฀events฀after฀the฀reporting฀period฀
฀

Knowledge฀diagnostic฀

1.฀ Provisions฀
฀ Provisions฀are฀recognised฀when฀the฀Conceptual฀Framework฀definition฀of฀a฀liability฀and฀
recognition฀criteria฀are฀met.฀
2.฀ Specific฀types฀of฀provision฀
฀ Provisions฀are฀not฀made฀for฀future฀operating฀losses฀as฀there฀is฀no฀obligation฀to฀incur฀
them.฀
฀ Where฀a฀contract฀is฀onerous฀a฀provision฀is฀made฀for฀the฀unavoidable฀cost.฀Restructuring฀
provisions฀are฀only฀recognised฀when฀certain฀criteria฀are฀met.฀
3.฀ Contingent฀liabilities฀
฀ Contingent฀liabilities฀are฀not฀recognised฀because฀they฀are฀possible฀rather฀than฀present฀
obligations,฀the฀outflow฀is฀not฀probable฀or฀the฀liability฀cannot฀be฀reliably฀measured.฀
฀ Contingent฀liabilities฀are฀disclosed.฀
4.฀ Contingent฀assets฀
฀ Contingent฀assets฀are฀disclosed,฀but฀only฀where฀an฀inflow฀of฀economic฀benefits฀is฀probable.฀
5.฀ Events฀after฀the฀reporting฀period฀(IAS฀10)฀
฀ Adjusting฀events฀are฀adjusted฀in฀the฀financial฀statements฀as฀they฀provide฀evidence฀of฀
conditions฀existing฀at฀the฀end฀of฀the฀reporting฀period.฀
฀ Non-adjusting฀events฀are฀disclosed฀if฀material,฀as,฀while฀important,฀they฀do฀not฀affect฀the฀
financial฀statement฀figures.฀

฀
฀

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Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀following฀question฀from฀the฀Further฀question฀practice฀bank:฀
Q7฀Cleanex฀

Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website,฀which฀have฀been฀written฀by฀the฀SBR฀examining฀team,฀and฀are฀
relevant฀to฀the฀topics฀covered฀in฀this฀chapter:฀
The฀shortcomings฀of฀IAS฀37฀(2016)฀฀
www.accaglobal.com/uk/en/member/ab/cpd-ab.html฀
฀

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฀
฀
฀
฀

Income฀taxes
฀
฀
฀
฀
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Discuss฀and฀apply฀the฀recognition฀and฀measurement฀of฀deferred฀tax฀liabilities฀and฀ C6(a)฀
deferred฀tax฀assets.฀

Discuss฀ and฀ apply฀ the฀ recognition฀ of฀ current฀ and฀ deferred฀ tax฀ as฀ income฀ or฀ C6(b)฀
expense.฀฀

Discuss฀and฀apply฀the฀treatment฀of฀deferred฀taxation฀on฀a฀business฀combination.฀ C6(c)฀

Exam฀context฀
You฀have฀encountered฀income฀taxes฀in฀your฀earlier฀studies฀in฀Financial฀Reporting;฀however,฀in฀
Strategic฀Business฀Reporting฀(SBR),฀this฀topic฀is฀examined฀at฀a฀much฀higher฀level.฀Deferred฀tax฀is฀most฀
likely฀to฀feature฀as฀part฀of฀a฀consolidation฀question฀in฀Section฀A,฀but฀it฀could฀also฀be฀tested฀as฀a฀
whole฀question฀in฀Section฀B.฀

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Chapter฀overview฀
฀
฀

1.฀ Current฀tax฀ Income฀taxes฀ 6.฀Deferred฀tax:฀other฀

temporary฀differences฀

3.฀ Deferred฀tax:฀
recognition฀

2.฀ Deferred฀tax฀
principles:฀revision฀

4.฀ Deferred฀tax:฀
measurement฀

7.฀ Deferred฀tax:฀
presentation฀

5.฀Deferred฀tax:฀group฀
financial฀statements฀

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6:฀Income฀taxes฀

1฀ Current฀tax฀
Current฀tax฀is฀the฀amount฀of฀income฀taxes฀payable฀(or฀recoverable)฀in฀respect฀of฀taxable฀profit฀(or฀
loss)฀for฀a฀period.฀ ฀
Key฀term฀
฀(IAS฀12:฀para.฀5)฀

Current฀ tax฀ unpaid฀ for฀ current฀ and฀ prior฀ periods฀ is฀ recognised฀ as฀ a฀ liability฀ (IAS฀ 12:฀ para.฀ 12).฀
Amounts฀paid฀in฀excess฀of฀amounts฀due฀are฀shown฀as฀an฀asset฀(IAS฀12:฀para.฀12).฀
The฀benefit฀relating฀to฀a฀tax฀loss฀that฀can฀be฀carried฀back฀to฀recover฀current฀tax฀of฀a฀previous฀period฀
is฀recognised฀as฀an฀asset฀(IAS฀12:฀para.฀13).฀

Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ of฀ current฀ tax฀ and฀
activities฀ to฀ test฀ your฀ brought฀ forward฀ knowledge.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀
edition฀of฀the฀Workbook.฀

1.1฀Disclosure฀
Tax฀ is฀ a฀ significant฀ cost฀ to฀ businesses,฀ with฀ corporation฀ tax฀ rates฀ of฀ over฀ 30%฀ of฀ profits฀ in฀ some฀
countries.฀However,฀the฀tax฀expense฀shown฀in฀the฀financial฀statements฀is฀rarely฀equal฀to฀the฀current฀tax฀
rate฀ applied฀ to฀ accounting฀ profit.฀ Investors฀ need฀ to฀ know฀ why฀ this฀ is฀ the฀ case฀ so฀ that฀ they฀ can฀
understand฀ historical฀ tax฀ cash฀ flows฀ and฀ liabilities,฀ as฀ well฀ as฀ predict฀ future฀ tax฀ cash฀ flows฀ and฀
liabilities.฀฀
IAS฀12฀therefore฀requires฀entities฀to฀explain฀the฀relationship฀between฀the฀tax฀expense฀and฀the฀tax฀that฀
would฀ be฀ expected฀ by฀ applying฀ the฀ current฀ tax฀ rate฀ to฀ accounting฀ profit.฀ This฀ explanation฀ can฀ be฀
presented฀ as฀ a฀ reconciliation฀ of฀ amounts฀ of฀ tax฀ or฀ a฀ reconciliation฀ of฀ the฀ rate฀ of฀ tax,฀ as฀ shown฀ in฀
Illustration฀1฀below.฀฀

Illustration฀1฀
Extract฀from฀Virgin฀Atlantic฀Annual฀Report฀March฀2016฀–฀note฀10:฀Tax฀

฀
(Virgin฀Atlantic฀Annual฀Report฀2016:฀p.฀65)฀

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2฀Deferred฀tax฀principles:฀revision฀
2.1฀Basic฀principles฀฀
IAS฀12฀Income฀Taxes฀covers฀both฀current฀tax฀and฀deferred฀tax.฀฀

Current฀tax฀is฀the฀amount฀ Deferred฀tax฀is฀an฀accounting฀
actually฀payable฀to฀the฀tax฀ measure,฀used฀to฀match฀the฀tax฀
authorities฀in฀relation฀to฀the฀trading฀ effects฀of฀transactions฀with฀their฀
activities฀of฀the฀entity฀during฀the฀ accounting฀effect.
period.
฀
Issue฀
When฀a฀company฀recognises฀an฀asset฀or฀liability,฀it฀expects฀to฀recover฀or฀settle฀the฀carrying฀amount฀
of฀that฀asset฀or฀liability.฀In฀other฀words,฀it฀expects฀to฀sell฀or฀use฀up฀assets,฀and฀to฀pay฀off฀liabilities.฀
What฀happens฀if฀that฀recovery฀or฀settlement฀is฀likely฀to฀make฀future฀tax฀payments฀larger฀(or฀smaller)฀
than฀they฀would฀otherwise฀have฀been฀if฀the฀recovery฀or฀settlement฀had฀no฀tax฀consequences?฀฀
Similarly,฀ some฀ items฀ of฀ income฀ or฀ expense฀ are฀ included฀ in฀ accounting฀ profit฀ in฀ one฀ period,฀ but฀
included฀ in฀ taxable฀ profit฀ in฀ a฀ different฀ period฀ (IAS฀ 12:฀ para.฀ 17).฀ This฀ is฀ because฀ the฀ accounting฀
profit฀ is฀ determined฀ by฀ applying฀ the฀ principles฀ of฀ IFRS,฀ whereas฀ taxable฀ profit฀ is฀ determined฀ by฀
applying฀ the฀ tax฀ rules฀ established฀ by฀ the฀ tax฀ authorities.฀ Without฀ some฀ form฀ of฀ adjustment,฀ this฀
difference฀ may฀ cause฀ the฀ tax฀ charge฀ in฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀ comprehensive฀
income฀to฀be฀misleading.฀฀
In฀ both฀ of฀ these฀ circumstances,฀ IAS฀ 12฀ requires฀ companies฀ to฀ recognise฀ a฀ deferred฀ tax฀ liability฀ (or฀
deferred฀tax฀asset)฀(IAS฀12:฀paras.฀15฀and฀24).฀
Concepts฀underlying฀deferred฀tax฀

Conceptual฀ As฀a฀result฀of฀a฀past฀transaction฀or฀event,฀an฀entity฀has฀an฀obligation฀to฀
Framework฀–฀ pay฀tax฀or฀a฀right฀to฀future฀tax฀relief.฀Therefore,฀the฀entity฀has฀met฀the฀
definition฀of฀asset฀ Conceptual฀Framework฀definition฀of฀a฀liability฀or฀asset฀and฀so฀needs฀to฀
and฀liability฀ record฀a฀deferred฀tax฀liability฀or฀asset.฀

Conceptual฀ To฀achieve฀'matching'฀in฀the฀statement฀of฀profit฀or฀loss฀and฀other฀
Framework฀–฀ comprehensive฀income,฀the฀entity฀should฀record฀tax฀in฀the฀accounts฀in฀
accruals฀concept฀ the฀same฀period฀as฀the฀item฀that฀the฀tax฀relates฀to฀is฀recorded.฀If฀the฀tax฀
is฀paid฀in฀a฀different฀period฀to฀that฀in฀which฀the฀item฀is฀accounted฀for,฀a฀
deferred฀tax฀adjustment฀is฀needed.฀

Tax฀base฀

The฀tax฀base฀of฀an฀asset฀or฀liability฀is฀the฀amount฀attributed฀to฀that฀asset฀or฀liability฀for฀tax฀purposes.฀
Key฀term฀ (IAS฀12:฀para.฀5)฀

Tax฀ payable฀ by฀ an฀ entity฀ is฀ calculated฀ by฀ the฀ tax฀ authorities฀ using฀ a฀ tax฀ computation.฀ A฀ tax฀
computation฀ is฀ similar฀ to฀ a฀ statement฀ of฀ profit฀ or฀ loss,฀ except฀ that฀ it฀ is฀ constructed฀ using฀ tax฀ rules฀
instead฀of฀IFRS.฀Now฀imagine฀the฀tax฀authorities฀drawing฀up฀a฀statement฀of฀financial฀position฀for฀the฀
same฀entity,฀but฀using฀tax฀rules฀instead฀of฀IFRS.฀In฀these฀'tax฀accounts',฀assets฀and฀liabilities฀will฀be฀
stated฀at฀their฀carrying฀amount฀for฀tax฀purposes,฀which฀is฀their฀tax฀base.฀฀฀
Different฀tax฀jurisdictions฀may฀have฀different฀tax฀rules.฀The฀tax฀rules฀determine฀the฀tax฀base.฀฀

In฀the฀SBR฀exam,฀the฀question฀will฀state฀the฀tax฀rules฀in฀a฀jurisdiction,฀or฀the฀tax฀base฀of฀certain฀assets฀
or฀liabilities฀in฀that฀jurisdiction.฀฀

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The฀table฀below฀gives฀some฀examples฀of฀tax฀rules฀and฀the฀resulting฀tax฀base.฀฀฀

Item฀ Carrying฀amount฀ Tax฀rule฀ Tax฀base฀(amount฀in฀

in฀the฀statement฀of฀ 'tax฀accounts')฀
financial฀position฀฀ Remember฀
this฀is฀the฀
carrying฀
Tax฀written฀down฀
Item฀of฀property,฀ Carrying฀amount฀=฀ value฀in฀the฀
Attracts฀tax฀relief฀in฀the฀ value฀=฀cost฀–฀ tax฀accounts.฀
plant฀and฀ cost฀–฀accumulated฀
form฀of฀tax฀depreciation฀ accumulated฀tax฀ As฀the฀cash฀
equipment฀ depreciation฀ has฀not฀been฀
depreciation฀
received,฀the฀
Chargeable฀for฀tax฀on฀a฀ income฀is฀not฀
yet฀included฀
Included฀in฀financial฀ cash฀basis,฀ie฀when฀ Nil฀฀ in฀the฀tax฀
statements฀on฀an฀ received฀฀ accounts,฀so฀
Accrued฀income฀ the฀tax฀base฀
accruals฀basis฀ie฀when฀ Chargeable฀for฀tax฀on฀ Same฀as฀carrying฀amount฀ is฀nil.฀
receivable฀ an฀accruals฀basis,฀ie฀ in฀statement฀of฀financial฀
when฀receivable฀ position฀฀

Attracts฀tax฀relief฀on฀a฀ Nil฀฀ For฀revenue฀

Included฀in฀financial฀ cash฀basis,฀ie฀when฀ received฀in฀

Accrued฀expenses฀ statements฀on฀an฀ paid฀ advance,฀the฀

tax฀base฀of฀
and฀provisions฀ accruals฀basis฀ie฀when฀ Attracts฀tax฀relief฀on฀an฀ Same฀as฀carrying฀amount฀ the฀resulting฀
payable฀ accruals฀basis,฀ie฀when฀ in฀statement฀of฀financial฀ liability฀is฀its฀
carrying฀
payable฀ position฀ amount,฀less฀
any฀amount฀
When฀the฀cash฀is฀ of฀the฀
received,฀it฀will฀be฀ revenue฀that฀
Chargeable฀for฀tax฀on฀a฀
Income฀received฀in฀ included฀in฀the฀ will฀not฀be฀
cash฀basis,฀ie฀when฀ Nil฀ taxable฀in฀
advance฀ financial฀statements฀as฀
received฀ future฀
deferred฀income฀ie฀a฀
periods.฀
liability฀

฀
Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 2.1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ on฀ tax฀ bases.฀ This฀ is฀
available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

Illustration฀2฀
Concepts฀underlying฀deferred฀tax฀
Suppose฀Barton,฀a฀supplier฀of฀gas฀and฀electricity,฀recorded฀accrued฀income฀of฀$100,000฀in฀its฀
financial฀statements฀for฀the฀year฀ended฀31฀December฀20X5.฀The฀accrued฀income฀related฀to฀gas฀and฀
electricity฀supplied฀but฀not฀yet฀invoiced฀during฀December฀20X5.฀In฀January฀20X6,฀Barton฀invoiced฀its฀
customers฀and฀was฀paid฀$100,000฀in฀relation฀to฀the฀accrued฀income.฀In฀the฀jurisdiction฀in฀which฀
Barton฀operates,฀income฀is฀taxed฀on฀a฀cash฀receipts฀basis฀and฀the฀rate฀of฀tax฀is฀20%.฀฀

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Extracts฀from฀Barton's฀tax฀computation฀and฀financial฀statements฀are฀shown฀below.฀

Tax฀computation฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Income฀ 0 100฀
Tax฀payable฀at฀20%฀ 0 (20)฀

STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀(in฀revenue)฀ 100 0฀
Mismatch฀ Mismatch฀
Current฀tax฀(tax฀computation)฀ 0 (20)฀

STATEMENT฀OF฀FINANCIAL฀POSITION฀(EXTRACT)
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀ 100 0฀
฀
Income฀is฀taxed฀on฀a฀cash฀receipts฀basis,฀so฀there฀is฀no฀tax฀to฀pay฀in฀20X5฀and฀$20,000฀to฀pay฀in฀
20X6.฀This฀creates฀a฀mismatch฀in฀the฀financial฀statements฀as฀the฀income฀and฀the฀related฀tax฀payable฀
are฀recorded฀in฀different฀periods.฀To฀resolve฀this฀mismatch,฀a฀deferred฀tax฀adjustment฀is฀calculated฀
and฀recorded฀in฀the฀financial฀statements,฀as฀follows.

Deferred฀tax฀calculation฀ ฀ 20X5฀ The฀tax฀base฀will฀

฀ 20X6฀
always฀be฀zero฀if฀
฀ $'000 $'000฀
the฀item฀is฀taxed฀on฀
a฀cash฀receipts฀
Carrying฀amount฀of฀accrued฀income฀ ฀100฀ ฀ 0฀
basis.฀
(statement฀of฀financial฀position)฀
Notice฀how฀the฀
Tax฀base฀of฀accrued฀income฀ ฀฀(0)฀ ฀฀฀(0)฀
actual฀tax฀payable฀
in฀20X6฀is฀equal฀to฀
Temporary฀difference฀ ฀฀100฀ the฀deferred฀tax฀ ฀฀฀0฀
calculated฀for฀
Deferred฀tax฀at฀20%฀ ฀฀฀(20)฀ 20X5.฀ ฀฀฀0฀

฀
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STATEMENT฀OF฀PROFIT฀OR฀LOSS฀AND฀OTHER฀COMPREHENSIVE฀INCOME฀(EXTRACT)฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀(in฀revenue)฀ 100 0฀
Matching฀ Matching฀
Current฀tax฀(tax฀computation)฀ 0 (20)฀
Deferred฀tax฀฀ (20) 20฀

STATEMENT฀OF฀FINANCIAL฀POSITION฀(EXTRACT)฀
฀ 20X5 20X6฀
฀ $'000 $'000฀
Accrued฀income฀ 100 0฀
Deferred฀tax฀liability฀ (20) 0฀
฀
In฀20X5,฀the฀double฀entry฀to฀record฀the฀deferred฀tax฀is:฀
DEBIT฀deferred฀tax฀(statement฀of฀profit฀or฀loss)฀฀ ฀ ฀ $20,000฀
CREDIT฀deferred฀tax฀liability฀(statement฀of฀financial฀position)฀ ฀ ฀ $20,000฀
In฀20X6,฀the฀entry฀is฀reversed:฀฀
DEBIT฀deferred฀tax฀liability฀(statement฀of฀financial฀position)฀฀ $20,000฀
CREDIT฀deferred฀tax฀(statement฀of฀profit฀or฀loss)฀ ฀ ฀ ฀ ฀ $20,000฀
The฀end฀result฀is฀that฀the฀tax฀is฀recorded฀in฀the฀same฀period฀as฀the฀transaction฀it฀relates฀to.฀This฀is฀the฀
aim฀of฀deferred฀tax฀(the฀accruals฀concept).฀Also,฀in฀20X5,฀as฀a฀result฀of฀a฀past฀transaction฀(Barton฀
has฀earned฀$100,000฀of฀income),฀Barton฀has฀an฀obligation฀to฀pay฀tax.฀Therefore,฀the฀Conceptual฀
Framework฀definition฀of฀a฀liability฀has฀been฀met฀which฀is฀why฀a฀deferred฀tax฀liability฀must฀be฀
recognised.฀

2.2฀Calculating฀deferred฀tax฀
฀
Deferred฀tax฀calculation฀ The฀tax฀base฀will฀always฀
be฀zero฀if฀the฀item฀is฀
฀ $ taxed฀on฀a฀cash฀receipts฀
basis฀or฀tax฀relief฀is฀
Carrying฀amount฀of฀asset/liability฀(statement฀of฀financial฀position) X/(X) granted฀on฀a฀cash฀paid฀
basis.฀
If฀the฀temporary฀
Tax฀base฀฀ (X)/X
difference฀is฀positive,฀
Temporary฀difference฀ deferred฀tax฀is฀negative,฀ X/(X)
so฀a฀deferred฀tax฀liability,฀ Calculated฀as฀temporary฀
and฀vice฀versa.฀ difference฀×฀tax฀rate฀
Deferred฀tax฀(liability)/asset฀ (X)/X

฀
Deferred฀tax฀is฀the฀tax฀attributable฀to฀temporary฀differences.฀฀

Temporary฀differences:฀differences฀between฀the฀carrying฀amount฀of฀an฀asset฀or฀liability฀in฀the฀
statement฀of฀financial฀position฀(eg฀value฀from฀an฀accounting฀perspective)฀and฀its฀tax฀base฀(eg฀value฀
Key฀term฀
from฀a฀tax฀perspective).฀
฀(IAS฀12:฀para.฀5)฀

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If฀an฀item฀is฀never฀taxable฀or฀tax฀deductible,฀its฀tax฀base฀is฀deemed฀to฀be฀its฀carrying฀amount฀so฀there฀
is฀no฀temporary฀difference฀and฀no฀related฀deferred฀tax.฀฀
There฀are฀two฀types฀of฀temporary฀difference฀(IAS฀12:฀paras.฀15,฀24).฀
฀
Taxable฀temporary฀difference฀
For฀example,฀the฀entity฀has฀
recognised฀accrued฀income,฀but฀the฀ Tax฀to฀pay฀in฀the฀future Deferred฀tax฀liability฀
accrued฀income฀is฀not฀chargeable฀for฀
tax฀until฀the฀entity฀receives฀the฀cash฀

Deductible฀temporary฀difference฀
For฀example,฀the฀entity฀has฀recorded฀a฀ Tax฀saving฀in฀the฀future
provision,฀but฀the฀provision฀does฀not฀ Deferred฀tax฀asset฀
attract฀tax฀relief฀until฀the฀entity฀actually฀
spends฀the฀cash฀฀

2.3฀Revision฀of฀temporary฀differences฀seen฀in฀Financial฀Reporting฀
The฀following฀tables฀summarise฀the฀temporary฀differences฀you฀saw฀in฀Financial฀Reporting.฀Remember฀
that฀the฀tax฀rule฀determines฀the฀tax฀base.฀In฀the฀exam,฀make฀sure฀you฀apply฀the฀tax฀rule฀given฀in฀the฀
question.฀฀฀
Property,฀plant฀and฀equipment฀

Financial฀statements฀treatment฀ The฀asset฀is฀depreciated฀over฀its฀useful฀life฀as฀per฀IAS฀16฀and฀
is฀carried฀at฀cost฀less฀accumulated฀depreciation.฀฀

Tax฀rule฀ Tax฀depreciation฀is฀granted฀on฀the฀asset.฀The฀tax฀
depreciation฀is฀accelerated฀(ie฀it฀is฀more฀rapid฀than฀
accounting฀depreciation).฀฀

Tax฀base฀ Tax฀written฀down฀value฀=฀cost฀–฀cumulative฀tax฀depreciation฀฀

Temporary฀difference฀ A฀temporary฀difference฀arises฀because฀accounting฀
depreciation฀and฀tax฀depreciation฀are฀charged฀at฀different฀
rates.฀In฀this฀example,฀the฀tax฀depreciation฀is฀at฀a฀quicker฀
rate฀than฀the฀accounting฀depreciation.฀This฀results฀in฀a฀
taxable฀temporary฀difference฀(and฀so฀a฀deferred฀tax฀liability)฀
because฀the฀carrying฀amount฀of฀the฀asset฀will฀be฀higher฀than฀
its฀tax฀written฀down฀value.฀If฀the฀tax฀depreciation฀was฀at฀a฀
slower฀rate฀than฀the฀accounting฀depreciation,฀a฀deductible฀
temporary฀difference฀arises฀and฀results฀in฀a฀deferred฀tax฀
asset฀(IAS฀12:฀para.฀17b).฀
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Accrued฀income/accrued฀expense฀฀

Financial฀statements฀treatment฀ The฀accrued฀income฀or฀accrued฀expense฀is฀included฀in฀the฀
financial฀statements฀when฀the฀item฀is฀accrued.฀

Tax฀rule฀ Income฀and฀expenses฀are฀taxed฀on฀a฀cash฀receipts/cash฀
paid฀basis,฀ie฀they฀are฀chargeable฀to฀tax/attract฀tax฀relief฀
when฀they฀are฀actually฀received/paid.฀

Tax฀base฀ Nil.฀฀

Temporary฀difference฀ The฀temporary฀difference฀is฀the฀amount฀of฀the฀accrued฀
income฀or฀expense.฀฀
If฀it฀is฀accrued฀income,฀it฀will฀result฀in฀a฀deferred฀tax฀liability,฀
as฀tax฀will฀be฀paid฀in฀the฀future฀when฀the฀income฀is฀actually฀
received.฀฀
If฀it฀is฀an฀accrued฀expense,฀it฀will฀result฀in฀a฀deferred฀tax฀
asset,฀as฀the฀entity฀will฀get฀tax฀relief฀in฀the฀future฀when฀the฀
expense฀is฀actually฀paid.฀฀฀
฀
฀
Provisions฀and฀allowances฀for฀doubtful฀debts฀

Financial฀statements฀treatment฀ A฀provision฀is฀included฀in฀the฀financial฀statements฀when฀the฀
criteria฀in฀IAS฀37฀are฀met.฀
A฀doubtful฀debt฀allowance฀is฀recognised฀in฀accordance฀with฀฀
IFRS฀9.฀

Tax฀treatment฀ Expenses฀related฀to฀provisions฀attract฀tax฀relief฀on฀a฀cash฀
paid฀basis;฀ie฀they฀attract฀tax฀relief฀when฀they฀are฀actually฀
paid.฀
Expenses฀related฀to฀doubtful฀debts฀attract฀tax฀relief฀when฀the฀
debts฀become฀irrecoverable฀and฀are฀written฀off.฀฀

Tax฀base฀ Nil.฀฀

Temporary฀difference฀ The฀temporary฀difference฀is฀the฀amount฀of฀the฀provision฀or฀
allowance.฀This฀will฀result฀in฀a฀deferred฀tax฀asset฀as฀the฀entity฀
will฀get฀tax฀relief฀in฀the฀future฀when฀the฀related฀expense฀is฀
actually฀paid/debts฀become฀irrecoverable฀and฀are฀written฀off.฀
฀

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Illustration฀3฀฀
Revision฀of฀deferred฀tax฀
The฀information฀given฀below฀has฀been฀extracted฀from฀the฀financial฀statements฀of฀Carlton฀at฀
31฀December:฀฀
฀ 20X2 20X1฀
฀ $฀ $฀
Property,฀plant฀&฀equipment฀(cost฀$100,000฀on฀1฀Jan฀20X1) ฀
฀฀–฀carrying฀amount฀ 80,000฀ 90,000฀
Accrued฀income฀฀ 25,000 –฀
Provision฀฀ (5,000) –
฀
Profit฀before฀depreciation,฀accrued฀income฀and฀provision 100,000 90,000฀
฀
฀

Carlton฀recognised฀a฀deferred฀tax฀liability฀of฀$6,000฀at฀31฀December฀20X1.฀
The฀tax฀written฀down฀value฀of฀the฀property,฀plant฀and฀equipment฀is฀as฀follows:฀

฀ 20X2 20X1฀
฀ $ $฀
Property,฀plant฀&฀equipment฀–฀tax฀written฀down฀value 49,000 70,000฀
฀
The฀provision฀is฀allowed฀for฀tax฀when฀the฀associated฀expense฀is฀paid.฀Tax฀is฀charged฀on฀the฀accrued฀
income฀when฀that฀income฀is฀received.฀The฀rate฀of฀tax฀is฀30%.฀
Calculation฀of฀deferred฀tax฀temporary฀differences฀and฀deferred฀tax฀liability฀at฀
31.12.X2฀
Item฀ Accounting฀ Tax฀base฀ Temporary฀
carrying฀amount difference฀
The฀tax฀base฀
฀ $฀฀฀฀฀ $฀฀฀฀฀ $฀฀฀฀฀ will฀always฀be฀
Property,฀plant฀&฀equipment฀(PPE)฀ ฀ 80,000 ฀ ฀ 49,000 ฀ ฀ 31,000 ฀ zero฀if฀the฀item฀
is฀taxed฀on฀a฀
Accrued฀income฀ ฀25,000฀ ฀0฀ ฀25,000฀ cash฀receipts฀
Provision฀ (5,000) 0 ฀฀฀(5,000)฀ basis.฀The฀tax฀
base฀of฀PPE฀is฀
฀ ฀ ฀ ฀ ฀฀51,000 ฀ its฀tax฀written฀
down฀value.฀
Deferred฀tax฀liability฀(net)฀at฀30%฀ ฀ ฀ (15,300)฀
฀
฀

The฀deferred฀tax฀liability฀represents฀net฀tax฀that฀will฀be฀payable฀on฀these฀items฀in฀the฀future.฀The฀
deferred฀tax฀charge฀to฀profit฀or฀loss฀for฀the฀year฀ended฀31฀December฀20X2฀is฀the฀movement฀on฀
the฀deferred฀tax฀liability:฀฀
฀ ฀ $฀฀฀฀฀฀
Deferred฀tax฀liability฀at฀31฀December฀20X1 ฀ ฀6,000฀
Charge฀to฀profit฀or฀loss฀ ฀ ฀ ฀฀฀฀9,300฀
Deferred฀tax฀liability฀at฀31฀December฀20X2 ฀ ฀฀15,300฀
฀
฀

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Effect฀on฀Carlton's฀profit฀or฀loss฀in฀20X2฀
฀ ฀ $ ฀฀฀฀฀ Tax฀rate฀applied฀
Profit฀before฀adjustments฀ ฀ ฀ 100,000 ฀ to฀accounting฀
profit฀is฀
Depreciation฀ ฀ =฀$79,000฀=฀taxable฀profit.฀ ฀ ฀(10,000)฀ $110,000฀×฀
Accrued฀income/provision฀not฀
Accrued฀income฀ ฀ included฀in฀tax฀computation฀ ฀25,000฀ 30%฀=฀$33,000
until฀received/paid฀
Provision฀ ฀ ฀ ฀฀(5,000)฀
Current฀tax฀+฀
Profit฀before฀tax฀ ฀ ฀110,000฀ Deferred฀tax฀=฀
Current฀tax฀[(100,000฀– 21,000฀tax฀dep'n)฀× 30%]฀ ฀(23,700)฀ $23,700฀+฀
$9,300฀=฀
Deferred฀tax฀ ฀ ฀ ฀฀(9,300)฀ $33,000฀
Profit฀for฀the฀year฀ ฀ ฀ ฀77,000฀
฀
฀

Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 2.2฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ revision฀ of฀ other฀ temporary฀
differences฀covered฀in฀Financial฀Reporting฀and฀activities฀to฀test฀your฀brought฀forward฀knowledge.฀This฀
is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

3฀Deferred฀tax:฀recognition฀
Under฀ IAS฀ 12,฀ a฀ deferred฀ tax฀ liability฀ or฀ asset฀ is฀ recognised฀ for฀ all฀ taxable฀ and฀ deductible฀
temporary฀differences,฀unless฀they฀arise฀from:฀
(a)฀ The฀initial฀recognition฀of฀goodwill;฀or฀
(b)฀ The฀initial฀recognition฀of฀an฀asset฀or฀liability฀in฀a฀transaction฀which฀
(i)฀ Is฀not฀a฀business฀combination฀
(ii)฀ At฀ the฀ time฀ of฀ the฀ transaction,฀ affects฀ neither฀ accounting฀ profit฀ nor฀ taxable฀
profit.฀฀ (IAS฀12:฀paras.฀15,฀24)฀
Deferred฀tax฀assets฀are฀only฀recognised฀to฀the฀extent฀that฀it฀is฀probable฀that฀taxable฀profit฀will฀be฀
available฀against฀which฀the฀deductible฀temporary฀difference฀can฀be฀utilised฀(IAS฀12:฀para.฀24).฀

Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ recognition฀ of฀
deferred฀ tax฀ liabilities฀ and฀ assets.฀ This฀ is฀ available฀ in฀ Appendix฀ 2฀ of฀ the฀ digital฀ edition฀ of฀ the฀
Workbook.฀

Deferred฀ tax฀ is฀ recognised฀ in฀ the฀ same฀ section฀ of฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀as฀the฀transaction฀was฀recognised฀(IAS฀12:฀paras.฀58,฀61a).฀฀

Illustration฀4฀฀
Recognition฀of฀deferred฀tax฀
Charlton฀revalued฀a฀property฀from฀a฀carrying฀amount฀of฀$2฀million฀to฀its฀fair฀value฀of฀$2.5฀million฀
during฀the฀reporting฀period.฀The฀property฀cost฀$2.2฀million฀and฀its฀tax฀base฀is฀$1.8฀million.฀The฀tax฀
rate฀is฀30%.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀in฀Charlton's฀financial฀statements฀at฀
the฀end฀of฀the฀reporting฀period.฀

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Solution฀
The฀tax฀base฀is฀$1.8฀million฀and฀the฀carrying฀amount฀is฀$2.5฀million฀(being฀the฀historical฀carrying฀
amount฀of฀$2฀million฀plus฀a฀revaluation฀surplus฀of฀$500,000).฀
Therefore฀a฀taxable฀temporary฀difference฀of฀$700,000฀exists,฀giving฀rise฀to฀a฀deferred฀tax฀liability฀of฀
$210,000฀(30%฀×฀$700,000).฀
Of฀the฀taxable฀temporary฀difference:฀
฀ $200,000฀($2m฀–฀$1.8m)฀arises฀due฀to฀the฀accelerated฀tax฀depreciation฀granted฀on฀the฀asset;฀
and฀
฀ $500,000฀arises฀due฀to฀the฀revaluation.฀
Therefore฀deferred฀tax฀of฀$150,000฀(30%฀×฀$500,000)฀should฀be฀charged฀to฀other฀comprehensive฀
income,฀as฀this฀is฀where฀the฀revaluation฀gain฀is฀recognised,฀and฀the฀remainder฀should฀be฀charged฀to฀
profit฀or฀loss.฀

4฀Deferred฀tax:฀measurement฀
Deferred฀tax฀assets฀and฀liabilities฀are฀measured฀at฀the฀tax฀rates฀expected฀to฀apply฀to฀the฀period฀when฀
the฀asset฀is฀realised฀or฀liability฀settled,฀based฀on฀tax฀rates฀(and฀tax฀laws)฀that฀have฀been฀enacted฀
(or฀substantively฀enacted)฀by฀the฀end฀of฀the฀reporting฀period฀(IAS฀12:฀para.฀47).฀ This฀is฀
inconsistent฀
If฀tax฀rates฀change,฀the฀tax฀rate฀expected฀when฀the฀temporary฀difference฀will฀reverse฀is฀used฀ with฀IAS฀37฀
(IAS฀12:฀para.฀47).฀฀ which฀requires฀
discounting฀if฀
Deferred฀tax฀assets฀and฀liabilities฀should฀not฀be฀discounted฀because฀the฀complexities฀and฀ the฀effect฀is฀
difficulties฀involved฀will฀affect฀reliability฀(IAS฀12:฀paras.฀53,฀54).฀ material.฀฀

Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 4฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ measurement฀ of฀
deferred฀tax.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

5฀Deferred฀tax:฀group฀financial฀statements฀
You฀ must฀ appreciate฀ the฀ deferred฀ tax฀ aspects฀ of฀ business฀ combinations฀ as฀ these฀ are฀ likely฀ to฀ be฀
examined฀in฀the฀SBR฀exam.฀฀

There฀are฀some฀temporary฀differences฀which฀only฀arise฀in฀a฀business฀combination.฀This฀is฀because,฀
on฀consolidation,฀adjustments฀are฀made฀to฀the฀carrying฀amounts฀of฀assets฀and฀liabilities฀that฀are฀not฀
always฀reflected฀in฀the฀tax฀base฀of฀those฀assets฀and฀liabilities.฀฀
The฀ tax฀ bases฀ of฀ assets฀ and฀ liabilities฀ in฀ the฀ consolidated฀ financial฀ statements฀ are฀ determined฀ by฀
reference฀ to฀ the฀ applicable฀ tax฀ rules.฀ Usually฀ tax฀ authorities฀ calculate฀ tax฀ on฀ the฀ profits฀ of฀ the฀
individual฀ entities,฀ so฀ the฀ relevant฀ tax฀ bases฀ to฀ use฀ will฀ be฀ those฀ of฀ the฀ individual฀ entities฀ (IAS฀ 12:฀
para.฀11).฀฀
Deferred฀tax฀calculation฀ ฀ Carrying฀amount฀in฀
consolidated฀
฀ $ statement฀of฀financial฀
position฀
Carrying฀amount฀of฀asset/liability฀฀ X/(X)฀
(consolidated฀statement฀of฀financial฀position)฀ Tax฀base฀depends฀on฀tax฀
Tax฀base฀(usually฀subsidiary's฀tax฀base)฀ ฀(X)/X฀ rules.฀Usually฀tax฀is฀
charged฀on฀individual฀
Temporary฀difference฀ ฀X/(X)฀ entity฀profits,฀not฀
group฀profits.฀฀
Deferred฀tax฀(liability)/asset฀ (X)/X

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In฀the฀SBR฀exam,฀the฀question฀will฀state฀the฀tax฀rules฀in฀a฀jurisdiction,฀or฀the฀tax฀base฀of฀certain฀assets฀
or฀liabilities฀in฀that฀jurisdiction.฀฀฀
฀
5.1฀Fair฀value฀adjustments฀on฀consolidation฀฀
IFRS฀3฀requires฀assets฀acquired฀and฀liabilities฀assumed฀on฀acquisition฀of฀a฀subsidiary฀to฀be฀brought฀
into฀ the฀ consolidated฀ financial฀ statements฀ at฀ their฀ fair฀ value฀ rather฀ than฀ their฀ carrying฀ amount.฀
However,฀ this฀ change฀ in฀ fair฀ value฀ is฀ not฀ usually฀ reflected฀ in฀ the฀ tax฀ base,฀ and฀ so฀ a฀ temporary฀
difference฀arises฀(IAS฀12:฀para.฀19).฀฀
The฀accounting฀entries฀to฀record฀the฀resulting฀deferred฀tax฀are:฀
(a)฀ Deferred฀ tax฀ liability฀ due฀ to฀ fair฀ value฀ gain:฀ reduces฀ the฀ fair฀ value฀ of฀ the฀ net฀ assets฀ of฀ the฀
subsidiary฀and฀therefore฀increases฀goodwill:฀
DEBIT฀฀฀ Goodwill฀ ฀ ฀ X฀
CREDIT฀฀ Deferred฀tax฀liability฀ ฀ X฀
(b)฀ Deferred฀ tax฀ asset฀ due฀ to฀ fair฀ value฀ loss:฀ increases฀ the฀ fair฀ value฀ of฀ the฀ net฀ assets฀ of฀ the฀
subsidiary฀and฀therefore฀reduces฀goodwill:฀
DEBIT฀฀฀ Deferred฀tax฀asset฀ ฀ X฀
CREDIT฀฀ Goodwill฀ ฀ ฀ ฀ X฀

Activity฀1:฀Fair฀value฀adjustments฀ ฀
On฀1฀April฀20X5฀Alpha฀purchased฀100%฀of฀the฀ordinary฀shares฀of฀Beta.฀The฀fair฀values฀of฀the฀assets฀
and฀liabilities฀acquired฀were฀considered฀to฀be฀equal฀to฀their฀carrying฀amounts,฀with฀the฀exception฀of฀
equipment,฀which฀had฀a฀fair฀value฀of฀$54฀million.฀The฀tax฀base฀of฀the฀equipment฀on฀1฀April฀20X5฀
was฀$50฀million.฀฀฀
The฀tax฀rate฀is฀25%฀and฀the฀fair฀value฀adjustment฀does฀not฀affect฀the฀tax฀base฀of฀the฀equipment.฀
Required฀
Discuss฀how฀the฀above฀will฀affect฀the฀accounting฀for฀deferred฀tax฀under฀IAS฀12฀Income฀Taxes in฀the฀
group฀financial฀statements฀of฀Alpha.฀฀

5.2฀Undistributed฀profits฀of฀subsidiaries,฀branches,฀associates฀and฀
joint฀ventures฀฀
A฀ subsidiary's฀ profits฀ (or฀ share฀ of฀ associate's/joint฀ venture's฀ profits)฀ are฀ recognised฀ in฀ the฀
consolidated฀ financial฀ statements.฀ If฀ they฀ are฀ not฀ taxable฀ in฀ the฀ parent's฀ tax฀ regime฀ until฀ they฀ are฀
remitted฀to฀the฀parent฀as฀dividend฀income,฀a฀temporary฀difference฀arises฀(IAS฀12:฀para.฀38).฀฀฀฀
Under฀IAS฀12,฀a฀resulting฀deferred฀tax฀liability฀is฀recognised฀unless:฀
(a)฀ The฀ parent,฀ investor฀ or฀ venturer฀ is฀ able฀ to฀ control฀ the฀ timing฀ of฀ the฀ reversal฀ of฀ the฀ temporary฀
difference฀(eg฀by฀determining฀dividend฀policy);฀and฀
(b)฀ It฀is฀probable฀that฀the฀temporary฀difference฀will฀not฀reverse฀in฀the฀foreseeable฀future.฀
(IAS฀12:฀para.฀39)

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Illustration฀5฀฀
Undistributed฀profits฀of฀subsidiary฀
Carrol฀has฀one฀subsidiary,฀Anchor.฀The฀retained฀earnings฀of฀Anchor฀at฀acquisition฀were฀$2฀million.฀
The฀directors฀of฀Carrol฀have฀decided฀that฀over฀the฀next฀three฀years,฀they฀will฀realise฀earnings฀through฀
future฀dividend฀payments฀from฀Anchor฀amounting฀to฀$500,000฀per฀year.฀฀
Tax฀is฀payable฀on฀any฀remittance฀of฀dividends฀and฀no฀dividends฀have฀been฀declared฀for฀the฀current฀
year.฀฀
Required฀
Discuss฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀for฀the฀Carrol฀Group.฀฀
Solution฀
Deferred฀tax฀should฀be฀recognised฀on฀the฀unremitted฀earnings฀of฀subsidiaries฀unless฀the฀parent฀is฀
able฀to฀control฀the฀timing฀of฀dividend฀payments฀and฀it฀is฀unlikely฀that฀dividends฀will฀be฀paid฀for฀the฀
foreseeable฀future.฀Carrol฀controls฀the฀dividend฀policy฀of฀Anchor฀and฀this฀means฀that฀there฀would฀
normally฀be฀no฀need฀to฀recognise฀a฀deferred฀tax฀liability฀in฀respect฀of฀unremitted฀profits.฀However,฀
the฀profits฀of฀Anchor฀will฀be฀distributed฀to฀Carrol฀over฀the฀next฀few฀years฀and฀tax฀will฀be฀payable฀on฀
the฀dividends฀received.฀Therefore฀a฀deferred฀tax฀liability฀should฀be฀shown.฀

5.3฀Unrealised฀profits฀on฀intragroup฀trading฀฀
When฀a฀group฀entity฀sells฀goods฀to฀another฀group฀entity,฀the฀selling฀entity฀recognises฀the฀profit฀made฀
in฀its฀individual฀financial฀statements.฀If฀the฀related฀inventories฀are฀still฀held฀by฀the฀group฀at฀the฀year฀
end,฀ the฀ profit฀ is฀ unrealised฀ from฀ the฀ group฀ perspective฀ and฀ adjustments฀ are฀ made฀ in฀ the฀ group฀
accounts฀to฀eliminate฀it.฀The฀same฀adjustment฀is฀not฀usually฀made฀to฀the฀tax฀base฀of฀the฀inventories฀
(as฀tax฀is฀usually฀calculated฀on฀the฀individual฀entity฀profits,฀and฀not฀group฀profits)฀and฀a฀temporary฀
difference฀arises.฀฀

Illustration฀6฀฀
Unrealised฀profits฀on฀intragroup฀trading฀
P฀sells฀goods฀costing฀$150฀to฀its฀overseas฀subsidiary฀S฀for฀$200.฀At฀the฀year฀end,฀S฀still฀holds฀the฀
inventories.฀In฀the฀jurisdictions฀in฀which฀P฀and฀S฀operate,฀tax฀is฀charged฀on฀individual฀entity฀profits.฀
P's฀rate฀of฀tax฀is฀40%,฀whereas฀S's฀rate฀of฀tax฀is฀50%.฀
P฀pays฀tax฀of฀$20฀($50฀×฀40%)฀on฀the฀profit฀generated฀by฀the฀sale.฀฀
S฀is฀entitled฀to฀a฀future฀tax฀deduction฀for฀the฀$200฀paid฀for฀the฀inventories.฀The฀tax฀base฀of฀the฀
inventories฀is฀therefore฀$200฀from฀S's฀perspective.฀฀
From฀the฀perspective฀of฀the฀P฀group,฀the฀profit฀of฀$50฀generated฀by฀the฀sale฀is฀unrealised.฀In฀the฀
consolidated฀financial฀statements,฀the฀unrealised฀profit฀is฀eliminated,฀so฀the฀carrying฀amount฀of฀the฀
inventories฀from฀the฀group฀perspective฀is฀$150.฀฀
Deferred฀tax฀is฀calculated฀as:฀
฀ $฀฀฀
Carrying฀amount฀(in฀the฀group฀financial฀statements) 150฀
Tax฀base฀(cost฀of฀inventories฀to฀S)฀ (200)฀
Temporary฀difference฀(group฀unrealised฀profit) (50)฀
Deferred฀tax฀asset฀(50฀×฀50%฀(S's฀tax฀rate)) ฀25฀
฀
฀

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S's฀tax฀rate฀is฀used฀to฀calculate฀the฀deferred฀tax฀asset฀because฀S฀will฀receive฀the฀future฀tax฀deduction฀
related฀to฀the฀inventories.฀
In฀the฀consolidated฀financial฀statements฀a฀deferred฀tax฀asset฀of฀$25฀should฀be฀recognised:฀
DEBIT฀฀฀฀฀Deferred฀tax฀asset฀(in฀consolidated฀statement฀of฀financial฀position)฀ $25฀
CREDIT฀฀฀Deferred฀tax฀(in฀consolidated฀statement฀of฀profit฀or฀loss)฀฀ ฀ ฀ ฀ $25฀฀

Activity฀2:฀Unrealised฀profit฀on฀intragroup฀trading฀ ฀
Kappa฀prepares฀consolidated฀financial฀statements฀to฀30฀September฀each฀year.฀On฀1฀August฀20X3,฀
Kappa฀ sold฀ products฀ to฀ Omega,฀ a฀ wholly฀ owned฀ subsidiary,฀ for฀ $80,000.฀ The฀ goods฀ had฀ cost฀
Kappa฀$64,000.฀All฀of฀these฀goods฀remained฀in฀Omega's฀inventories฀at฀the฀year฀end.฀The฀rate฀of฀
income฀tax฀in฀the฀jurisdiction฀in฀which฀Omega฀operates฀is฀25%฀and฀tax฀is฀calculated฀on฀the฀profits฀of฀
the฀individual฀entities.฀฀
Required฀
Explain฀ the฀ deferred฀ tax฀ treatment฀ of฀ this฀ transaction฀ in฀ the฀ consolidated฀ financial฀ statements฀ of฀
Kappa฀for฀the฀year฀ended฀30฀September฀20X3.฀

6฀Deferred฀tax:฀other฀temporary฀differences฀฀
Tutorial฀note฀
The฀temporary฀differences฀discussed฀in฀this฀section฀are฀those฀that฀are฀introduced฀in฀the฀Strategic฀
Business฀Reporting฀syllabus฀and฀that฀haven't฀been฀covered฀in฀Financial฀Reporting.฀However,฀this฀is฀
not฀an฀exhaustive฀list฀of฀temporary฀differences฀that฀could฀be฀encountered฀in฀the฀Strategic฀Business฀
Reporting฀exam.฀You฀could฀be฀examined฀on฀deferred฀tax฀relating฀to฀any฀area฀of฀the฀syllabus.฀

6.1฀Gains฀or฀losses฀on฀financial฀assets฀
Gains฀ on฀ financial฀ assets฀ held฀ at฀ fair฀ value฀ are฀ either฀ recognised฀ in฀ profit฀ or฀ loss฀ or฀ in฀ other฀
comprehensive฀income฀(covered฀in฀Chapter฀7฀Financial฀instruments).฀
If฀the฀gain฀is฀not฀taxable฀until฀the฀financial฀asset฀is฀sold,฀the฀gain฀is฀ignored฀for฀tax฀purposes฀until฀the฀
sale฀and฀the฀tax฀base฀of฀the฀asset฀does฀not฀change.฀A฀taxable฀temporary฀difference฀arises฀generating฀
a฀deferred฀tax฀liability฀(IAS฀12:฀para.฀20).฀
Similarly,฀losses฀on฀financial฀assets฀that฀are฀not฀tax฀deductible฀until฀they฀are฀sold฀generate฀a฀deferred฀
tax฀asset฀(IAS฀12:฀para.฀20).฀
The฀ deferred฀ tax฀ is฀ recognised฀ in฀ the฀ same฀ section฀ of฀ the฀ statement฀ of฀ profit฀ or฀ loss฀ and฀ other฀
comprehensive฀income฀as฀the฀gain/loss฀on฀the฀financial฀asset.฀

Illustration฀7฀฀
Gains฀or฀losses฀on฀financial฀assets฀
On฀1฀October฀20X2,฀Kalle฀purchased฀an฀equity฀investment฀for฀$200,000.฀Kalle฀has฀made฀the฀
irrevocable฀election฀to฀carry฀the฀investment฀at฀fair฀value฀through฀other฀comprehensive฀income.฀฀
On฀30฀September฀20X3,฀the฀fair฀value฀of฀the฀investment฀was฀$240,000.฀In฀the฀tax฀jurisdiction฀in฀
which฀Kalle฀operates,฀unrealised฀gains฀and฀losses฀arising฀on฀the฀revaluation฀of฀investments฀of฀this฀
nature฀are฀not฀taxable฀unless฀the฀investment฀is฀sold.฀The฀rate฀of฀income฀tax฀in฀the฀jurisdiction฀in฀which฀
Kalle฀operates฀is฀25%.฀฀

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฀฀

Required฀
Explain฀how฀the฀deferred฀tax฀consequences฀of฀this฀transaction฀would฀be฀reported฀in฀the฀financial฀
statements฀of฀Kalle฀for฀the฀year฀ended฀30฀September฀20X3.฀
Solution฀
Since฀the฀unrealised฀fair฀value฀gain฀on฀the฀equity฀investment฀is฀not฀taxable฀until฀the฀investment฀is฀sold,฀
the฀tax฀base฀of฀the฀investment฀is฀unchanged฀by฀the฀fair฀value฀gain฀and฀remains฀as฀$200,000.฀
The฀fair฀value฀gain฀creates฀a฀taxable฀temporary฀difference฀of฀$40,000฀(carrying฀amount฀$240,000฀
–฀tax฀base฀$200,000).฀
This฀results฀in฀a฀deferred฀tax฀liability฀of฀$10,000฀($40,000฀×฀25%).฀฀
Because฀the฀unrealised฀gain฀is฀reported฀in฀other฀comprehensive฀income,฀the฀related฀deferred฀tax฀
expense฀is฀also฀reported฀in฀other฀comprehensive฀income.฀

6.2฀Unused฀tax฀losses฀and฀unused฀tax฀credits฀฀
Tax฀losses฀and฀tax฀credits฀may฀result฀in฀a฀tax฀saving฀if฀they฀can฀be฀carried฀forward฀to฀reduce฀future฀
tax฀payments.฀
A฀deferred฀tax฀asset฀is฀recognised฀for฀the฀carry฀forward฀of฀unused฀tax฀losses฀or฀credits฀to฀the฀extent฀
that฀ it฀ is฀ probable฀ that฀ future฀ taxable฀ profit฀ will฀ be฀ available฀ against฀ which฀ the฀ unused฀ tax฀ losses฀
and฀credits฀can฀be฀used฀(IAS฀12:฀para.฀34).฀

Supplementary฀reading฀
See฀ Chapter฀ 6฀ Section฀ 3.1.1฀ of฀ the฀ Supplementary฀ Reading฀ for฀ further฀ detail฀ on฀ the฀ recognition฀ of฀
deferred฀tax฀assets฀relating฀to฀tax฀losses.฀This฀is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀
Workbook.฀

Illustration฀8฀฀
Tax฀losses฀
Lambda,฀a฀wholly฀owned฀subsidiary฀of฀Epsilon,฀made฀a฀loss฀adjusted฀for฀tax฀purposes฀of฀$3m฀in฀the฀
year฀ended฀31฀March฀20X4.฀Lambda฀is฀unable฀to฀utilise฀this฀loss฀against฀previous฀tax฀liabilities฀and฀
local฀tax฀legislation฀does฀not฀allow฀Lambda฀to฀transfer฀the฀tax฀loss฀to฀other฀group฀companies.฀Local฀
legislation฀does฀allow฀Lambda฀to฀carry฀the฀loss฀forward฀and฀utilise฀it฀against฀its฀own฀future฀taxable฀
profits.฀The฀directors฀of฀Epsilon฀do฀not฀consider฀that฀Lambda฀will฀make฀taxable฀profits฀in฀the฀
foreseeable฀future.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀in฀the฀consolidated฀statement฀of฀financial฀position฀
of฀the฀Epsilon฀group฀at฀31฀March฀20X4.฀฀
Solution฀
The฀tax฀loss฀creates฀a฀potential฀deferred฀tax฀asset฀for฀the฀Epsilon฀group฀since฀its฀carrying฀amount฀is฀
nil฀and฀its฀tax฀base฀is฀$3m.฀
However,฀no฀deferred฀tax฀asset฀can฀be฀recognised฀because฀there฀is฀no฀prospect฀of฀being฀able฀to฀
reduce฀tax฀liabilities฀in฀the฀foreseeable฀future฀as฀no฀taxable฀profits฀are฀anticipated.฀฀

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6:฀Income฀taxes฀

Activity฀3:฀Tax฀losses฀ ฀
The฀ Baller฀ Group฀ incurred฀ $38m฀ of฀ tax฀ losses฀ in฀ the฀ year฀ ended฀ 31฀ December฀ 20X4.฀ Local฀ tax฀
legislation฀ allows฀ tax฀ losses฀ to฀ be฀ carried฀ forward฀ for฀ two฀ years฀ only.฀ The฀ taxable฀ profits฀ were฀
anticipated฀to฀be฀$21m฀in฀20X5฀and฀$24m฀in฀20X6.฀Uncertainty฀exists฀around฀the฀expected฀profits฀
for฀20X6฀as฀they฀are฀dependent฀on฀the฀successful฀completion฀of฀a฀service฀contract฀in฀20X5฀in฀order฀
for฀the฀contract฀to฀continue฀into฀20X6.฀It฀is฀anticipated฀that฀there฀will฀be฀no฀future฀reversals฀of฀existing฀
taxable฀temporary฀differences฀until฀after฀31฀December฀20X6.฀The฀rate฀of฀tax฀is฀20%.฀฀
Required฀
Explain฀ the฀ deferred฀ tax฀ implications฀ of฀ the฀ above฀ in฀ the฀ consolidated฀ financial฀ statements฀ of฀ the฀
Baller฀Group฀at฀31฀December฀20X4.฀

6.3฀Share-based฀payment฀฀
Deferred฀tax฀related฀to฀share-based฀payments฀is฀covered฀in฀Chapter฀9฀Share-based฀payment.฀

6.4฀Leases฀
Deferred฀tax฀related฀to฀leases฀is฀covered฀in฀Chapter฀8฀Leases.฀

Activity฀4:฀Deferred฀tax฀comprehensive฀question฀ ฀

Nyman,฀ a฀ public฀ limited฀ company,฀ has฀ three฀ 100%฀ owned฀ subsidiaries,฀ Glass,฀ Waddesdon,฀ and฀
Winsten฀SA,฀a฀foreign฀subsidiary.฀
(a)฀ The฀following฀details฀relate฀to฀Glass:฀
(i)฀ Nyman฀acquired฀its฀interest฀in฀Glass฀on฀1฀January฀20X3.฀The฀fair฀values฀of฀the฀assets฀
and฀liabilities฀acquired฀were฀considered฀to฀be฀equal฀to฀their฀carrying฀amounts,฀with฀the฀
exception฀of฀freehold฀property฀which฀had฀a฀fair฀value฀of฀$32฀million฀and฀a฀tax฀base฀of฀
$31฀million.฀The฀directors฀have฀no฀intention฀of฀selling฀the฀property.฀
(ii)฀ Glass฀has฀sold฀goods฀at฀a฀price฀of฀$6฀million฀to฀Nyman฀since฀acquisition฀and฀made฀a฀
profit฀ of฀ $2฀ million฀ on฀ the฀ transaction.฀ The฀ inventories฀ of฀ these฀ goods฀ recorded฀ in฀
Nyman's฀ statement฀ of฀ financial฀ position฀ at฀ the฀ year฀ end,฀ 30฀ September฀ 20X3,฀ was฀
$3.6฀million.฀
(b)฀ Waddesdon฀ undertakes฀ various฀ projects฀ from฀ debt฀ factoring฀ to฀ investing฀ in฀ property฀ and฀
commodities.฀ The฀ following฀ details฀ relate฀ to฀ Waddesdon฀ for฀ the฀ year฀ ended฀ 30฀September฀
20X3:฀
(i)฀ Waddesdon฀has฀a฀portfolio฀of฀readily฀marketable฀government฀securities฀which฀are฀held฀
as฀current฀assets฀for฀financial฀trading฀purposes.฀These฀investments฀are฀stated฀at฀market฀
value฀in฀the฀statement฀of฀financial฀position฀with฀any฀gain฀or฀loss฀taken฀to฀profit฀or฀loss.฀
These฀ gains฀ and฀ losses฀ are฀ taxed฀ when฀ the฀ investments฀ are฀ sold.฀ Currently฀ the฀
accumulated฀unrealised฀gains฀are฀$8฀million.฀
(ii)฀ Waddesdon฀ has฀ calculated฀ it฀ requires฀ an฀ allowance฀ for฀ credit฀ losses฀ of฀ $2฀ million฀
against฀ its฀ total฀ loan฀ portfolio.฀ Tax฀ relief฀ is฀ available฀ when฀ the฀ specific฀ loan฀ is฀ written฀
off.฀
(c)฀ Winsten฀ SA฀ has฀ unremitted฀ earnings฀ of฀ €20฀ million฀ which฀ would฀ give฀ rise฀ to฀ additional฀ tax฀
payable฀of฀$2฀million฀if฀remitted฀to฀Nyman's฀tax฀regime.฀฀Nyman฀intends฀to฀leave฀the฀earnings฀
within฀Winsten฀for฀reinvestment.฀
(d)฀ Nyman฀has฀unrelieved฀trading฀losses฀as฀at฀30฀September฀20X3฀of฀$10฀million.฀

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฀฀

Current฀ tax฀ is฀ calculated฀ based฀ on฀ the฀ individual฀ company's฀ financial฀ statements฀ (adjusted฀ for฀ tax฀
purposes)฀ in฀ the฀ tax฀ regime฀ in฀ which฀ Nyman฀ operates.฀ Assume฀ an฀ income฀ tax฀ rate฀ of฀ 30%฀ for฀
Nyman฀and฀25%฀for฀its฀subsidiaries.฀
Required฀
Explain฀the฀deferred฀tax฀implications฀of฀the฀above฀information฀for฀the฀Nyman฀group฀of฀companies฀for฀
the฀year฀ended฀30฀September฀20X3.฀

7฀Deferred฀tax:฀presentation฀
Deferred฀tax฀assets฀and฀liabilities฀can฀only฀be฀offset฀if฀(IAS฀12:฀para.฀74):฀
(a)฀ The฀ entity฀ has฀ a฀ legally฀ enforceable฀ right฀ to฀ set฀ off฀ current฀ tax฀ assets฀ against฀
current฀tax฀liabilities;฀and฀
(b)฀ The฀ deferred฀ tax฀ assets฀ and฀ liabilities฀ relate฀ to฀ income฀ taxes฀ levied฀ by฀ the฀ same฀ taxation฀
authority.฀

Ethics฀note฀
Ethical฀issues฀could฀feature฀in฀any฀question฀in฀the฀SBR฀exam.฀You฀need฀to฀be฀alert฀to฀any฀threats฀to฀
the฀fundamental฀principles฀of฀ACCA's฀Code฀of฀Ethics฀and฀Conduct฀when฀approaching฀every฀
question.฀
Deferred฀tax฀is฀difficult฀to฀understand฀and฀therefore฀a฀threat฀arises฀if฀the฀reporting฀accountant฀is฀not฀
adequately฀trained฀or฀experienced฀in฀this฀area.฀This฀could฀result฀in฀errors฀being฀made฀in฀the฀
recognition฀or฀measurement฀of฀deferred฀tax฀assets฀or฀liabilities.฀฀
Recognising฀deferred฀tax฀assets฀for฀the฀carry฀forward฀of฀unused฀tax฀losses฀requires฀judgment฀of฀
whether฀it฀is฀probable฀that฀future฀taxable฀profit฀will฀be฀available฀for฀offset.฀As฀such,฀a฀director฀under฀
pressure฀may฀be฀tempted฀to฀say฀that฀future฀taxable฀profits฀are฀probable,฀when฀in฀fact฀they฀are฀not,฀in฀
order฀to฀recognise฀a฀deferred฀tax฀asset.฀฀฀฀

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6:฀Income฀taxes฀

Chapter฀summary฀

฀
1.฀
฀ Current฀tax฀ Income฀taxes฀ 4.฀ Deferred฀tax:฀
฀฀ Tax฀charged฀by฀tax฀authority฀ measurement฀
฀฀ Unpaid฀tax฀recognised฀as฀a฀ ฀ Tax฀rates฀expected฀to฀apply฀when฀
liability฀ asset฀realised/liability฀settled,฀
฀ based฀on฀tax฀rates/laws:฀
฀ Benefits฀of฀tax฀losses฀that฀can฀be฀
฀ carried฀back฀recognised฀as฀an฀ 3.฀ Deferred฀tax:฀ –฀
฀ Enacted,฀or฀
recognition฀ –฀
฀ asset฀ ฀ Substantively฀enacted฀
 DT฀is฀recognised฀for฀all฀temporary฀ by฀end฀of฀reporting฀period฀
฀ Explanation฀required฀as฀to฀
differences,฀except:฀ ฀ Cannot฀be฀discounted฀
฀ difference฀between฀expected฀and฀
actual฀tax฀expense฀ –฀ Initial฀recognition฀of฀goodwill฀ (inconsistency฀with฀IAS฀37฀which฀
฀ –฀ Initial฀recognition฀in฀a฀transaction฀ requires฀discounting฀if฀material)฀

฀ (i)฀ Not฀a฀business฀combination,฀
฀
2.฀Deferred฀tax฀principles:฀
and฀
(ii)฀ At฀that฀time,฀does฀not฀affect฀
฀
revision ฀฀
accounting฀nor฀taxable฀profit฀ 6.฀Deferred฀tax:฀other฀
฀
A/c฀CA฀ ฀X฀  DT฀recognised฀in฀same฀section฀of฀ temporary฀differences฀
Less:฀tax฀base฀ ฀฀฀(X)฀฀฀ SPLOCI฀as฀transaction฀
฀
Taxable/(deductible)฀TD฀ ฀X/(X)฀ ฀ Development฀costs฀
฀
x฀%฀=฀(DTL)/DTA฀ (X)/X฀ ฀ –฀ DTL฀on฀A/c฀CA฀if฀fully฀tax฀
฀ ฀ Accelerated฀tax฀depreciation฀ deductible฀as฀incurred฀(tax฀
base฀=฀0)฀
฀
฀ –฀ A/c฀CA฀>฀tax฀WDV฀ 5.฀Deferred฀tax:฀group฀
฀ –฀ Tax฀base฀=฀tax฀WDV฀ ฀ Impairment฀(&฀inventory)฀losses฀
financial฀statements฀
฀ ฀ –฀ =>฀DTL฀ ฀ –฀ DTA฀on฀loss฀if฀not฀tax฀
฀ ฀ Revaluations฀not฀recognised฀for฀tax฀ ฀ Fair฀value฀adjustments฀ deductible฀until฀later฀(as฀tax฀
฀ –฀ A/c฀CA฀>฀tax฀WDV฀ –฀ DTL฀on฀FV฀increases฀฀ base฀does฀not฀change)฀
฀ ฀ –฀ Tax฀base฀=฀tax฀WDV฀ (&฀higher฀goodwill)฀ ฀ Financial฀assets฀
฀ ฀ –฀ DTL฀always฀recognised฀even฀if฀no฀ ฀ –฀ DTL฀on฀gains฀not฀taxable฀until฀
–฀ DTA฀on฀FV฀decreases฀฀
intention฀to฀sell,฀as฀revalued฀amount฀ sale฀
฀ (&฀lower฀goodwill)฀
recoverable฀through฀use฀generating฀
฀ Undistributed฀profits฀of฀ ฀ –฀ DTA฀on฀losses฀not฀tax฀
฀ taxable฀income฀
subsidiary/associate/joint฀venture฀ deductible฀until฀sale฀
฀ Accrued฀income/expense฀taxed฀on฀a฀cash฀
฀ basis฀ –฀ DTL฀recognised฀unless:฀ ฀ ฀–฀ recognised฀in฀same฀section฀of฀
SPLOCI฀as฀gain/loss฀
฀ ฀ –฀ Accrual฀in฀SOFP,฀but฀no฀accrual฀for฀ (i)฀ Parent฀is฀able฀to฀control฀timing฀
tax฀ ฀ Unused฀tax฀losses/credits฀
of฀reversal,฀and฀
฀
฀ –฀ Tax฀base฀=฀0฀ ฀ –฀ DT฀asset฀only฀if฀probable฀
(ii)฀ probable฀will฀not฀reverse฀in฀
฀ ฀ Provisions฀tax฀deductible฀when฀paid฀
future฀taxable฀profit฀available฀
foreseeable฀future฀ for฀offset฀
฀ ฀ –฀ Accrual฀in฀SOFP,฀but฀no฀accrual฀for฀
฀ Unrealised฀profit฀on฀intragroup฀trading฀ ฀ Share-based฀payment฀
tax฀
฀ ฀ –฀ Tax฀base฀=฀0฀ –฀ DTA฀recognised฀at฀receiving฀ ฀ –฀ See฀SBP฀chapter฀
฀ ฀ –฀ DTA฀based฀on฀prov'n฀ company's฀tax฀rate฀
฀ Leases฀
฀ Accrued฀income/expense฀taxed฀on฀an฀ ฀ –฀ See฀Leases฀chapter฀
฀ accruals฀basis฀
฀ ฀ –฀ Tax฀base฀=฀accrual฀
฀
฀ –฀ ฀No฀DT฀effect฀
฀ Never฀taxable/฀tax฀deductible฀ 7.฀ Deferred฀tax:฀
฀ ฀ –฀ No฀DT฀effect฀
฀ presentation฀
฀ ฀ DT฀assets/liabilities฀must฀be฀
Calculation฀of฀charge/(credit)฀to฀P/L:฀ offset,฀but฀only฀if:฀
฀
DTL฀(net)฀b/d฀ ฀X฀ ฀ –฀ Legal฀right฀to฀set฀off฀current฀
฀
OCI฀(re฀rev'n฀or฀investment฀in฀equity฀instruments)฀ ฀X฀ tax฀assets/liabilities,฀and฀
฀
Goodwill฀(re฀FV฀increases)฀ ฀X฀
฀ –฀ DT฀assets/liabilities฀relate฀
฀
P/L฀charge/(credit)฀ ฀ ฀฀X/(X)฀ to฀same฀tax฀authority
฀
DTL฀(net)฀c/d฀ ฀฀฀฀X฀฀฀฀฀
฀ ฀
฀ Key฀
฀ A/c฀CA฀=฀accounting฀carrying฀amount฀
DT฀=฀deferred฀tax฀
฀ DTA฀=฀deferred฀tax฀asset฀
฀ DTL฀=฀deferred฀tax฀liability฀฀
฀ FV฀=฀fair฀value฀
OCI฀=฀other฀comprehensive฀income฀
SOFP฀=฀statement฀of฀financial฀position฀
SPLOCI฀ =฀ statement฀ of฀ profit฀ or฀ loss฀ and฀
other฀comprehensive฀income฀
฀ Tax฀WDV฀=฀tax฀written฀down฀value฀ 143฀

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฀฀

Knowledge฀diagnostic฀

1.฀ Current฀tax฀
฀ ฀ Current฀tax฀is฀the฀tax฀charged฀by฀the฀tax฀authority.฀
฀ ฀ Unpaid฀amounts฀are฀shown฀as฀a฀liability.฀Any฀tax฀losses฀that฀can฀be฀carried฀back฀
are฀shown฀as฀an฀asset.฀
฀ ฀ An฀explanation,฀in฀the฀form฀of฀a฀reconciliation,฀is฀required฀as฀to฀the฀difference฀
between฀the฀expected฀tax฀expense฀and฀the฀actual฀tax฀expense฀for฀the฀period.฀
2.฀ Deferred฀tax฀principles:฀revision฀
฀ ฀ Deferred฀tax฀is฀the฀tax฀attributable฀to฀temporary฀differences,฀ie฀temporary฀differences฀
in฀timing฀of฀recognition฀of฀income฀and฀expense฀between฀IFRSs฀accounting฀and฀tax฀
calculations.฀
฀ ฀ They฀are฀measured฀as฀the฀difference฀between฀the฀accounting฀carrying฀amount฀of฀
an฀asset฀or฀liability฀and฀its฀tax฀base฀(ie฀tax฀value).฀
฀ ฀ Temporary฀differences฀are฀used฀to฀measure฀deferred฀tax฀from฀a฀statement฀of฀financial฀
position฀angle฀(consistent฀with฀the฀Conceptual฀Framework).฀
฀ ฀ Taxable฀temporary฀differences฀arise฀where฀the฀accounting฀carrying฀amount฀exceeds฀
the฀tax฀base.฀They฀result฀in฀deferred฀tax฀liabilities,฀representing฀the฀fact฀that฀current฀
tax฀will฀not฀be฀charged฀until฀the฀future,฀and฀so฀an฀accrual฀is฀made.฀
฀ ฀ Deductible฀temporary฀differences฀arise฀when฀the฀accounting฀carrying฀amount฀is฀less฀
than฀the฀tax฀base.฀They฀result฀in฀deferred฀tax฀assets,฀representing฀the฀fact฀that฀the฀
tax฀authorities฀will฀only฀give฀a฀tax฀deduction฀in฀the฀future฀(eg฀when฀a฀provision฀is฀paid).฀A฀
deferred฀tax฀credit฀reduces฀the฀tax฀charge฀as฀the฀item฀has฀already฀been฀deducted฀for฀
accounting฀purposes.฀
3.฀ Deferred฀tax:฀recognition฀
฀ ฀ Deferred฀tax฀is฀provided฀for฀under฀IAS฀12฀for฀all฀temporary฀differences฀(with฀limited฀
exceptions).฀
฀ ฀ Deferred฀tax฀is฀recognised฀in฀the฀same฀section฀of฀statement฀of฀profit฀or฀loss฀and฀other฀
comprehensive฀income฀as฀the฀related฀transaction.฀
4.฀ Deferred฀tax:฀measurement฀
฀ ฀ Deferred฀tax฀is฀measured฀at฀the฀tax฀rates฀expected฀to฀apply฀when฀the฀asset฀is฀realised฀
or฀liability฀settled฀(based฀on฀rates฀enacted/substantively฀enacted฀by฀the฀end฀of฀
the฀reporting฀period).฀
5.฀ Deferred฀tax:฀group฀financial฀statements฀
฀ ฀ In฀group฀financial฀statements,฀deferred฀tax฀may฀arise฀on฀fair฀value฀adjustments,฀
undistributed฀profits฀of฀subsidiaries฀and฀unrealised฀profits.฀
฀ A฀deferred฀tax฀asset฀is฀created฀for฀unused฀tax฀losses฀and฀credits,฀providing฀it฀is฀probable฀
that฀there฀will฀be฀future฀taxable฀profit฀against฀which฀they฀can฀be฀used.฀
6.฀ Deferred฀tax:฀other฀temporary฀differences฀
฀ ฀ Development฀costs:฀tax฀base฀is฀nil฀if฀costs฀are฀fully฀tax฀deductible฀as฀incurred฀฀ ฀
฀ ฀ Impairment฀(and฀inventory)฀losses:฀tax฀base฀does฀not฀change฀if฀loss฀not฀tax฀deductible฀until฀
sold฀฀
฀ ฀ Financial฀assets:฀if฀gains฀or฀losses฀are฀not฀taxable/deductible฀until฀the฀instrument฀is฀sold,฀a฀
temporary฀difference฀arises฀

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6:฀Income฀taxes฀

฀ ฀ Unused฀tax฀losses/credits:฀deferred฀tax฀asset฀is฀recognised฀only฀if฀probable฀future฀taxable฀
profit฀is฀available฀for฀offset.฀
7.฀ Deferred฀tax:฀presentation฀
฀ ฀ Deferred฀tax฀assets฀and฀liabilities฀are฀shown฀separately฀from฀each฀other฀(consistent฀
with฀the฀IAS฀1฀'no฀offset'฀principle)฀unless฀the฀entity฀has฀a฀legally฀enforceable฀right฀to฀
offset฀current฀tax฀assets฀and฀liabilities฀and฀the฀deferred฀tax฀assets฀and฀liabilities฀relate฀
to฀the฀same฀taxation฀authority.฀ ฀

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฀฀

Further฀study฀guidance฀

Question฀practice฀
Now฀try฀the฀question฀below฀from฀the฀Further฀question฀practice฀bank:฀
Q8฀DT฀Group฀฀฀
฀

Further฀reading฀
There฀are฀articles฀on฀the฀ACCA฀website,฀written฀by฀the฀SBR฀examining฀team,฀which฀are฀relevant฀to฀the฀
topics฀studied฀in฀this฀chapter฀and฀are฀useful฀reading:฀
IAS฀12฀Income฀Taxes฀(2011)฀฀
Recovery฀Position฀(2015)฀
www.accaglobal.com/uk/en/member/ab/cpd-ab.html฀
฀

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฀
฀
฀
฀

Financial฀instruments
฀
฀
฀
฀
฀

Learning฀objectives฀
On฀completion฀of฀this฀chapter,฀you฀should฀be฀able฀to:฀

฀ Syllabus฀
reference฀no.฀

Discuss฀and฀apply฀the฀initial฀recognition฀and฀measurement฀of฀financial฀instruments.฀ C3(a)฀

Discuss฀and฀apply฀the฀subsequent฀measurement฀of฀financial฀assets฀and฀financial฀ C3(b)฀
liabilities.฀

Discuss฀and฀apply฀the฀derecognition฀of฀financial฀assets฀and฀financial฀liabilities.฀ C3(c)฀

Discuss฀and฀apply฀the฀reclassification฀of฀financial฀assets.฀ C3(d)฀

Account฀for฀derivative฀financial฀instruments,฀and฀simple฀embedded฀derivatives.฀ C3(e)฀

Outline฀and฀apply฀the฀qualifying฀criteria฀for฀hedge฀accounting฀and฀account฀for฀ C3(f)฀
fair฀value฀hedges฀and฀cash฀flow฀hedges฀including฀hedge฀effectiveness.฀

Discuss฀and฀apply฀the฀general฀approach฀to฀impairment฀of฀financial฀instruments฀ C3(g)฀
including฀the฀basis฀for฀estimating฀expected฀credit฀losses.฀

Discuss฀the฀implications฀of฀a฀significant฀increase฀in฀credit฀risk.฀ C3(h)฀

Discuss฀and฀apply฀the฀treatment฀of฀purchased฀or฀originated฀credit฀impaired฀ C3(i)฀
financial฀assets.฀

Exam฀context฀
Financial฀instruments฀is฀a฀very฀important฀topic฀for฀Strategic฀Business฀Reporting฀(SBR),฀and฀is฀likely฀to฀
be฀examined฀often฀and฀in฀depth.฀It฀is฀also฀one฀of฀the฀more฀challenging฀areas฀of฀the฀syllabus,฀so฀it฀is฀
an฀area฀to฀which฀you฀need฀to฀dedicate฀a฀fair฀amount฀of฀time.฀

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฀฀

Chapter฀overview฀
฀

Financial฀assets Financial฀liabilities

4.฀ Derecognition฀฀
(IFRS฀9)฀

3.฀ Recognition฀฀ 9.฀ Disclosures฀฀

2.฀ Classification฀฀
(IFRS฀9)฀ (IFRS฀7)฀
(IAS฀32)฀

5.฀ Classification฀and฀
Financial฀instruments฀ measurement฀฀
1.฀ Standards฀ (IFRS฀9)฀

Initial฀ Subsequent฀
measurement฀ measurement฀

8.฀ Hedging฀
(IFRS฀9)฀฀

Financial฀
Financial฀assets฀
liabilities฀

7.฀ Impairment฀of฀
financial฀assets฀฀
(IFRS฀9)฀

6.฀ Embedded฀derivatives฀
(IFRS฀9)฀

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7:฀Financial฀instruments฀

1฀ Standards฀
The฀dynamic฀nature฀of฀international฀financial฀markets฀has฀resulted฀in฀the฀widespread฀use฀of฀a฀variety฀
of฀ financial฀ instruments.฀ Prior฀ to฀ the฀ issue฀ of฀ IAS฀ 32฀ and฀ IAS฀ 39฀ (the฀ forerunner฀ of฀ IFRS฀ 9),฀ many฀
financial฀instruments฀were฀'off฀balance฀sheet',฀being฀neither฀recognised฀nor฀disclosed฀in฀the฀financial฀
statements฀while฀still฀exposing฀the฀shareholders฀to฀significant฀risks.฀
The฀IASB฀has฀developed฀the฀following฀standards฀in฀relation฀to฀financial฀instruments:฀

Accounting฀for
financial
instruments

IAS฀32 IFRS฀9 IFRS฀7

Financial฀Instruments:฀ Financial฀Instruments Financial฀Instruments:฀
Presentation (first฀issued฀2009) Disclosures
(first฀issued฀2005) (first฀issued฀2005)฀
฀
฀

2฀ Classification฀(IAS฀32)฀
2.1฀ Definitions฀
In฀ order฀ to฀ decide฀ whether฀ a฀ transaction฀ is฀ a฀ financial฀ instrument฀ (and฀ how฀ to฀ classify฀ it฀ if฀ it฀ is฀ a฀
financial฀instrument),฀it฀is฀important฀to฀have฀a฀good฀understanding฀of฀the฀instruments฀as฀defined฀by฀
IAS฀32:฀

Financial
instruments

Financial฀assets Financial฀liabilities Equity฀instruments

Compound฀instruments

฀
฀
฀ ฀

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(1)฀ Financial฀instrument:฀any฀contract฀that฀gives฀rise฀to฀both฀a฀financial฀asset฀of฀one฀entity฀and฀
a฀financial฀liability฀or฀equity฀instrument฀of฀another฀entity฀(IAS฀32:฀para.฀11).฀
Key฀terms฀
(2)฀ Financial฀asset฀(IAS฀32:฀para.฀11)฀
Any฀asset฀that฀is:฀
฀ (a)฀ Cash;฀
฀ (b)฀ An฀equity฀instrument฀of฀another฀entity;฀
฀ (c)฀ A฀contractual฀right:฀
฀ (i)฀ To฀receive฀cash฀or฀another฀financial฀asset฀from฀another฀entity;฀or฀
฀ (ii)฀ To฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀
conditions฀that฀are฀potentially฀favourable฀to฀the฀entity;฀or฀
฀ (d)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀the฀entity's฀own฀equity฀instruments.฀
Examples:฀ Although฀technically฀financial฀instruments,
IFRS฀9฀does฀not฀change฀the฀treatment฀of฀
฀ ฀ Trade฀receivables฀ basic฀instruments฀such฀as฀trade฀
฀ ฀ Options฀ receivables
฀ ฀ Shares฀(as฀an฀investment)฀
(3)฀ Financial฀liability฀(IAS฀32:฀para.฀11)฀฀
฀ Any฀liability฀that฀is:฀
฀ (a)฀ A฀contractual฀obligation:฀
฀ (i)฀ To฀deliver฀cash฀or฀another฀financial฀asset฀to฀another฀entity;฀or฀
฀ (ii)฀ To฀exchange฀financial฀assets฀or฀financial฀liabilities฀with฀another฀entity฀under฀
conditions฀that฀are฀potentially฀unfavourable฀to฀the฀entity;฀or฀
฀ (b)฀ A฀contract฀that฀will฀or฀may฀be฀settled฀in฀an฀entity's฀own฀equity฀instruments.฀
Examples:฀
฀ ฀ Trade฀payables฀
฀ ฀ Debenture฀loans฀(payable)฀
฀ ฀ Mandatorily฀redeemable฀preference฀shares฀
฀ ฀ Forward฀contracts฀standing฀at฀a฀loss฀
(4)฀ Equity฀instrument:฀any฀contract฀that฀evidences฀a฀residual฀interest฀in฀the฀assets฀of฀an฀entity฀
after฀deducting฀all฀of฀its฀liabilities฀(IAS฀32:฀para.฀11).฀
Examples:฀
฀ ฀ An฀entity's฀own฀ordinary฀shares฀
฀ ฀ Warrants฀
฀ ฀ Non-cumulative฀irredeemable฀preference฀shares฀
(5)฀ Derivative.฀A฀derivative฀has฀three฀characteristics฀(IFRS฀9:฀Appendix฀A):฀
฀ (a)฀ Its฀value฀changes฀in฀response฀to฀an฀underlying฀variable฀(eg฀share฀price,฀commodity฀
price,฀foreign฀exchange฀rate฀or฀interest฀rate);฀
฀ (b)฀ It฀requires฀no฀initial฀net฀investment฀or฀an฀initial฀net฀investment฀that฀is฀smaller฀than฀would฀
be฀required฀for฀other฀types฀of฀contracts฀that฀would฀be฀expected฀to฀have฀a฀similar฀
response฀to฀changes฀in฀market฀factors;฀
฀ (c)฀ It฀is฀settled฀at฀a฀future฀date.฀
Examples:฀
฀ ฀ Foreign฀currency฀forward฀contracts฀
฀ ฀ Interest฀rate฀swaps฀
฀ ฀ Options฀

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7:฀Financial฀instruments฀

Supplementary฀reading฀
Chapter฀7฀Section฀1฀of฀the฀Supplementary฀Reading฀contains฀further฀details฀on฀these฀definitions.฀This฀
is฀available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

Classification฀as฀liability฀vs฀equity฀
IAS฀32฀clarifies฀that฀an฀instrument฀is฀only฀an฀equity฀instrument฀if฀neither฀(a)฀nor฀(b)฀in฀the฀definition฀of฀
a฀financial฀liability฀are฀met.฀(IAS฀32:฀para.฀16)฀
The฀critical฀feature฀of฀a฀financial฀liability฀is฀the฀contractual฀obligation฀to฀deliver฀cash฀or฀another฀
financial฀asset.฀

ED/2015/3:฀ Conceptual฀ Framework฀ for฀ Financial฀ Reporting฀ has฀ been฀ widely฀ criticised฀ for฀ not฀
addressing฀ the฀ distinction฀ between฀ debt฀ and฀ equity,฀ which฀ is฀ considered฀ a฀ significant฀ issue฀ in฀
financial฀ reporting.฀ The฀ IASB฀ is฀ undertaking฀ a฀ separate฀ research฀ project฀ Financial฀ Instruments฀ with฀
Characteristics฀of฀Equity฀to฀consider฀the฀matter฀further.฀
฀

Illustration฀1฀(revision)฀
Many฀entities฀issue฀preference฀shares฀which฀must฀be฀redeemed฀by฀the฀issuer฀for฀a฀fixed฀(or฀
determinable)฀amount฀at฀a฀fixed฀(or฀determinable)฀future฀date.฀
In฀such฀cases,฀the฀issuer฀has฀a฀contractual฀obligation฀to฀deliver฀cash.฀Therefore,฀the฀instrument฀is฀a฀
financial฀liability฀and฀should฀be฀classified฀as฀a฀liability฀in฀the฀statement฀of฀financial฀position.฀

2.2฀Compound฀instruments฀
Where฀ a฀ financial฀ instrument฀ contains฀ some฀ characteristics฀ of฀ equity฀ and฀ some฀ of฀ financial฀ liability฀
then฀its฀separate฀components฀need฀to฀be฀classified฀separately฀(IAS฀32:฀para.฀28).฀
A฀common฀example฀is฀convertible฀debt฀(convertible฀loan฀notes).฀
Method฀for฀separating฀the฀components฀(IAS฀32:฀para.฀32):฀
(1)฀ Determine฀ the฀ carrying฀ amount฀ of฀ the฀ liability฀ component฀ (by฀ measuring฀ the฀ fair฀ value฀ of฀ a฀
similar฀liability฀that฀does฀not฀have฀an฀associated฀equity฀component);฀
(2)฀ Assign฀the฀residual฀amount฀to฀the฀equity฀component.฀

Illustration฀2฀(revision)฀
Karaiskos฀SA฀issues฀1,000฀convertible฀bonds฀on฀1฀January฀20X1฀at฀par.฀฀Each฀bond฀is฀redeemable฀
in฀three฀years'฀time฀at฀its฀par฀value฀of฀$2,000฀per฀bond.฀Alternatively,฀each฀bond฀can฀be฀converted฀
at฀the฀maturity฀date฀into฀125฀$1฀shares.฀
The฀bonds฀pay฀interest฀annually฀in฀arrears฀at฀an฀interest฀rate฀(based฀on฀nominal฀value)฀of฀6%.฀฀
The฀prevailing฀market฀interest฀rate฀for฀3-year฀bonds฀that฀have฀no฀right฀of฀conversion฀is฀9%.฀
Required฀
Show฀the฀presentation฀of฀the฀compound฀instrument฀in฀the฀financial฀statements฀at฀inception.฀
3-year฀discount฀factors:฀ ฀ Simple฀ ฀฀฀฀Cumulative฀
฀ 6%฀ 0.840฀ 2.673฀
฀ 9%฀ 0.772฀ 2.531฀

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Solution฀
The฀convertible฀bonds฀are฀compound฀financial฀instruments฀and฀must฀be฀split฀into฀two฀components:฀
(a)฀ A฀financial฀liability฀(measured฀first),฀representing฀the฀contractual฀obligation฀to฀make฀a฀cash฀
payment฀at฀a฀future฀date;฀
(b)฀ An฀equity฀component฀(measured฀as฀a฀residual),฀representing฀what฀has฀been฀received฀by฀the฀
company฀for฀the฀option฀to฀convert฀the฀instrument฀into฀shares฀at฀a฀future฀date.฀This฀is฀sometimes฀
called฀a฀'warrant'.฀
Presentation฀
Non-current฀liabilities฀ $฀฀฀฀฀฀
Financial฀liability฀component฀of฀convertible฀bond฀(Working) 1,847,720
฀
Equity฀
Equity฀component฀of฀convertible฀bond฀(2,000,000฀– (Working)฀1,847,720)
฀
152,280 ฀
Working฀–฀value฀of฀liability฀component฀
฀ ฀ Market฀rate฀(9%)฀for฀ ฀$฀฀฀฀฀฀
equivalent฀non-convertible฀
Present฀value฀of฀principal฀payable฀at฀end฀of฀3฀years bonds฀used฀for฀discounting฀
1,544,000
(1,000฀×฀$2,000฀=฀$2m฀×฀0.772)฀ in฀both฀cases฀
303,720
Present฀value฀of฀interest฀annuity฀payable฀annually฀in฀arrears฀
for฀3฀years฀[(6%฀×฀$2m)฀×฀2.531]฀ ฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀฀
฀ ฀
฀1,847,720
฀

2.3฀Treasury฀shares฀
If฀ an฀ entity฀ reacquires฀ its฀ own฀ equity฀ instruments฀ ('treasury฀ shares'),฀ the฀ amount฀ paid฀ is฀
presented฀ as฀ a฀ deduction฀ from฀ equity฀ (IAS฀ 32:฀ para.฀ 33)฀ rather฀ than฀ as฀ an฀ asset฀ (as฀ an฀
investment฀by฀the฀entity฀in฀itself,฀by฀acquiring฀its฀own฀shares,฀cannot฀be฀shown฀as฀an฀asset).฀
No฀gain฀or฀loss฀is฀recognised฀in฀profit฀or฀loss฀on฀the฀purchase,฀sale,฀issue฀or฀cancellation฀of฀an฀entity's฀
own฀equity฀instruments฀(IAS฀32:฀para.฀33).฀Any฀premium฀or฀discount฀is฀recognised฀in฀reserves.฀

Illustration฀3฀
An฀entity฀acquired฀10,000฀of฀its฀own฀$1฀shares,฀which฀had฀previously฀been฀issued฀at฀$1.50฀each,฀
for฀$1.80฀each.฀The฀entity฀is฀undecided฀as฀to฀whether฀to฀cancel฀the฀shares฀or฀reissue฀them฀at฀a฀later฀
date.฀
Analysis฀
These฀are฀treasury฀shares฀and฀are฀presented฀as฀a฀deduction฀from฀equity:฀
Equity฀ $฀฀฀฀฀
Share฀capital฀ X฀฀฀฀฀
Share฀premium฀ X฀฀฀฀฀
Treasury฀shares฀(10,000฀×฀$1.80)฀ (18,000)฀
If฀the฀shares฀are฀subsequently฀cancelled,฀the฀$1.50฀will฀be฀debited฀to฀share฀capital฀($1)฀and฀share฀
premium฀($0.50),฀and฀the฀excess฀($0.30)฀recognised฀in฀retained฀earnings฀rather฀than฀in฀profit฀or฀
loss,฀as฀it฀is฀a฀transaction฀with฀the฀owners฀of฀the฀business฀in฀their฀capacity฀as฀owners.฀

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3฀ Recognition฀(IFRS฀9)฀
Financial฀ assets฀ and฀ liabilities฀ are฀ required฀ to฀ be฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀ position฀
when฀the฀entity฀becomes฀a฀party฀ to฀ the฀ contractual฀ provisions฀ of฀ the฀ instrument฀(IFRS฀9:฀
para.฀3.1.1).฀

Illustration฀4฀
Derivatives฀(eg฀a฀forward฀contract)฀are฀recognised฀in฀the฀financial฀statements฀at฀inception฀even฀
though฀there฀may฀have฀been฀no฀cash฀flow,฀and฀disclosures฀about฀them฀are฀made฀in฀accordance฀with฀
IFRS฀7.฀

The฀recognition฀criteria฀for฀financial฀instruments฀differ฀from฀those฀in฀the฀Conceptual฀Framework฀which฀
requires฀items฀to฀be฀recognised฀when฀there฀is฀a฀probable฀inflow฀or฀outflow฀of฀resources฀and฀the฀item฀
has฀a฀cost฀or฀value฀that฀can฀be฀measured฀reliably฀(Conceptual฀Framework:฀para.฀4.38).฀
Financial฀contracts฀vs฀executory฀contracts฀
IFRS฀ 9฀ applies฀ to฀ those฀ contracts฀ to฀ buy฀ or฀ sell฀ a฀ non-financial฀ item฀ that฀ can฀ be฀ settled฀ net฀ in฀
cash฀or฀another฀financial฀instrument,฀or฀by฀exchanging฀financial฀instruments฀as฀if฀the฀contracts฀were฀
financial฀instruments฀(IFRS฀9:฀para.฀2.4).฀These฀are฀considered฀financial฀contracts.฀
However,฀ contracts฀ that฀ were฀ entered฀ into฀ (and฀ continue฀ to฀ be฀ held)฀ for฀ the฀ entity's฀ expected฀
purchase,฀ sale฀ or฀ usage฀ requirements฀ of฀ non-financial฀ items฀ are฀ outside฀ the฀ scope฀ of฀
IFRS฀9฀(IFRS฀9:฀para.฀2.4).฀
These฀are฀ executory฀ contracts.฀Executory฀contracts฀are฀contracts฀under฀which฀neither฀party฀has฀
performed฀ any฀ of฀ its฀ obligations฀ (or฀ both฀ parties฀ have฀ partially฀ performed฀ their฀ obligations฀ to฀ an฀
equal฀extent)฀(IAS฀37:฀para.฀3).฀For฀example,฀an฀unfulfilled฀order฀for฀the฀purchase฀of฀goods,฀where฀
at฀the฀end฀of฀the฀reporting฀period,฀the฀goods฀have฀neither฀been฀delivered฀nor฀paid฀for.฀

Illustration฀5฀
A฀forward฀contract฀to฀purchase฀cocoa฀beans฀for฀use฀in฀making฀chocolate฀is฀an฀executory฀contract฀
which฀is฀outside฀the฀scope฀of฀IFRS฀9.฀
The฀purchase฀is฀not฀accounted฀for฀until฀the฀cocoa฀beans฀are฀actually฀delivered.฀

4฀ Derecognition฀(IFRS฀9)฀
Derecognition฀ is฀ the฀ removal฀ of฀ a฀ previously฀ recognised฀ financial฀ instrument฀ from฀ an฀ entity's฀
statement฀of฀financial฀position.฀฀Derecognition฀happens:฀
Financial฀assets:฀ –฀ When฀ the฀ contractual฀ rights฀ to฀ the฀ cash฀ flows฀ expire฀ (eg฀ because฀ a฀
customer฀ has฀ paid฀ their฀ debt฀ or฀ an฀ option฀ has฀ expired฀ worthless)฀
(IFRS฀9:฀para.฀3.2.3(a));฀or฀
฀ –฀ The฀ financial฀ asset฀ is฀ transferred฀ (eg฀ sold),฀ based฀ on฀ whether฀ the฀
entity฀ has฀ transferred฀ substantially฀ all฀ the฀ risks฀ and฀ rewards฀ of฀
ownership฀of฀the฀financial฀asset฀(IFRS฀9:฀para.฀3.2.3(b)).฀
Financial฀liabilities:฀ –฀ When฀ it฀ is฀ extinguished,฀ ie฀ when฀ the฀ obligation฀ is฀ discharged฀ (eg฀
paid฀off),฀cancelled฀or฀expires฀(IFRS฀9:฀para.฀3.3.1).฀
Where฀a฀part฀of฀a฀financial฀instrument฀(or฀group฀of฀similar฀financial฀instruments)฀meets฀the฀criteria฀
above,฀that฀part฀is฀derecognised฀(IFRS฀9:฀para.฀3.2.2(a)).฀
For฀ example,฀ if฀ an฀ entity฀ holds฀ a฀ bond฀ it฀ has฀ the฀ right฀ to฀ two฀ separate฀ sets฀ of฀ cash฀ inflows:฀ those฀
relating฀to฀the฀principal฀and฀those฀relating฀to฀the฀interest.฀It฀could฀sell฀the฀right฀to฀receive฀the฀interest฀
to฀another฀party฀while฀retaining฀the฀right฀to฀receive฀the฀principal.฀

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Supplementary฀reading฀
Chapter฀7฀Section฀2฀of฀the฀Supplementary฀Reading฀contains฀further฀details฀on฀derecognition.฀This฀is฀
available฀in฀Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

Activity฀1:฀Derecognition฀ ฀
Required฀
Discuss฀whether฀the฀following฀financial฀instruments฀would฀be฀derecognised.฀
(a)฀ AB฀ sells฀ an฀ investment฀ in฀ shares,฀ but฀ retains฀ a฀ call฀ option฀ to฀ repurchase฀ those฀ shares฀ at฀ any฀
time฀at฀a฀price฀equal฀to฀their฀current฀market฀value฀at฀the฀date฀of฀repurchase.฀
(b)฀ EF฀enters฀into฀a฀stocklending฀agreement฀where฀an฀investment฀is฀lent฀to฀a฀third฀party฀for฀a฀fixed฀
period฀of฀time฀for฀a฀fee.฀At฀the฀end฀of฀the฀period฀of฀time฀the฀investment฀(or฀an฀identical฀one)฀is฀
returned฀to฀EF.฀

5฀ Classification฀and฀measurement฀(IFRS฀9)฀

5.1฀Definitions฀
The฀ following฀ definitions฀ are฀ relevant฀ in฀ understanding฀ this฀ section,฀ and฀ you฀ should฀ refer฀ back฀ to฀
them฀when฀studying฀this฀material.฀฀

Amortised฀cost:฀the฀amount฀at฀which฀the฀financial฀asset฀or฀financial฀liability฀is฀measured฀at฀initial฀
recognition฀minus฀the฀principal฀repayments,฀plus฀or฀minus฀the฀cumulative฀amortisation฀using฀the฀
Key฀terms฀
effective฀interest฀method฀of฀any฀difference฀between฀that฀initial฀amount฀and฀the฀maturity฀amount฀and,฀
for฀financial฀assets,฀adjusted฀for฀any฀loss฀allowance.฀
Effective฀interest฀rate:฀the฀rate฀that฀exactly฀discounts฀estimated฀future฀cash฀payments฀or฀receipts฀
through฀the฀expected฀life฀of฀the฀financial฀asset฀or฀financial฀liability฀to฀the฀gross฀carrying฀amount฀of฀a฀
financial฀asset฀or฀to฀the฀amortised฀cost฀of฀a฀financial฀liability.฀
Held฀for฀trading:฀a฀financial฀asset฀or฀financial฀liability฀that:฀
(a)฀ Is฀acquired฀or฀incurred฀principally฀for฀the฀purpose฀of฀selling฀or฀repurchasing฀it฀in฀the฀near฀term;฀
(b)฀ On฀initial฀recognition฀is฀part฀of฀a฀portfolio฀of฀identified฀financial฀instruments฀that฀are฀managed฀
together฀and฀for฀which฀there฀is฀evidence฀of฀a฀recent฀actual฀pattern฀of฀short-term฀profit-taking;฀or฀
(c)฀ Is฀a฀derivative฀(except฀for฀a฀derivative฀that฀is฀a฀financial฀guarantee฀contract฀or฀a฀designated฀and฀
effective฀hedging฀instrument).฀
Financial฀guarantee฀contract:฀a฀contract฀that฀requires฀the฀issuer฀to฀make฀specified฀payments฀to฀
reimburse฀the฀holder฀for฀a฀loss฀it฀incurs฀because฀a฀specified฀debtor฀fails฀to฀make฀payment฀when฀due฀
in฀accordance฀with฀the฀original฀or฀modified฀terms฀of฀the฀debt฀instrument.฀฀
฀ (IFRS฀9:฀Appendix฀A)฀

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5.2฀Financial฀assets฀
฀ Initial฀measurement Subsequent฀
(IFRS฀9:฀para.฀5.1.1)฀ measurement฀
(IFRS฀9:฀paras.฀4.1.2–4.1.5,฀
5.7.5)฀
1฀ Investments฀in฀debt฀ ฀ ฀
instruments฀ ฀ ฀
Business฀model฀approach฀(Note฀1):฀ Fair฀value฀+฀transaction฀ Amortised฀cost฀
(a)฀Held฀to฀collect฀contractual฀cash฀ costs฀
flows;฀and฀cash฀flows฀are฀solely฀
principal฀and฀interest฀
฀ (b)฀Held฀to฀collect฀contractual฀cash฀ Fair฀value฀+฀transaction฀ Fair฀value฀through฀other฀
flows฀and฀to฀sell;฀and฀cash฀ costs฀ comprehensive฀income฀(with฀
flows฀are฀solely฀principal฀and฀ reclassification฀to฀profit฀or฀loss฀
interest฀ (P/L)฀on฀derecognition)฀
NB:฀interest฀revenue฀calculated฀
on฀amortised฀cost฀basis฀
recognised฀in฀P/L฀
2฀ Investments฀in฀equity฀ Fair฀value฀+฀transaction฀ Fair฀value฀through฀other฀
instruments฀not฀'held฀for฀ costs฀ comprehensive฀income฀(no฀
trading'฀ reclassification฀to฀P/L฀on฀
(optional฀irrevocable฀election฀on฀ derecognition)฀
initial฀recognition)฀ NB:฀dividend฀income฀
recognised฀in฀P/L฀
3฀ All฀other฀financial฀assets฀ Fair฀value฀(transaction฀ Fair฀value฀through฀profit฀or฀loss
(and฀any฀financial฀asset฀if฀this฀would฀ costs฀expensed฀in฀P/L)฀
eliminate฀or฀significantly฀reduce฀an฀
'accounting฀mismatch'฀(Note฀2))฀

Notes฀
1฀ The฀ business฀ model฀ approach฀ relates฀ to฀ groups฀ of฀ debt฀ instrument฀ assets฀ and฀ the฀
accounting฀treatment฀depends฀on฀the฀entity's฀intention฀for฀that฀group฀of฀assets.฀
(a)฀ If฀ the฀ intention฀ is฀ to฀ hold฀ the฀ group฀ of฀ debt฀ instruments฀ until฀ they฀ are฀ redeemed,฀ ie฀
receive฀ ('collect')฀ the฀ interest฀ and฀ capital฀ ('principal')฀ cash฀ flows,฀ then฀ changes฀ in฀ fair฀
value฀ are฀ not฀ relevant,฀ and฀ the฀ difference฀ between฀ initial฀ and฀ maturity฀ value฀ is฀
recognised฀using฀the฀amortised฀cost฀method.฀
(b)฀ If฀ the฀ intention฀ is฀ principally฀ to฀ hold฀ the฀ group฀ of฀ debt฀ instruments฀ until฀ they฀ are฀
redeemed,฀ but฀ they฀ may฀ be฀ sold฀ if฀ certain฀ criteria฀ are฀ met฀ (eg฀ to฀ meet฀ regulatory฀
solvency฀requirements),฀then฀their฀fair฀value฀is฀now฀relevant฀as฀they฀may฀be฀sold฀and฀so฀
they฀ are฀ measured฀ at฀ fair฀ value.฀ Changes฀ in฀ fair฀ value฀ are฀ recognised฀ in฀ other฀
comprehensive฀income,฀but฀interest฀is฀still฀recognised฀in฀profit฀or฀loss฀on฀the฀same฀basis฀
as฀if฀the฀intention฀was฀not฀to฀sell฀if฀certain฀criteria฀are฀met.฀
2฀ An฀'accounting฀mismatch'฀is฀a฀measurement฀or฀recognition฀inconsistency฀that฀would฀otherwise฀
arise฀ from฀ measuring฀ assets฀ or฀ liabilities฀ or฀ recognising฀ gains฀ or฀ losses฀ on฀ them฀ on฀ different฀
bases.฀Any฀financial฀asset฀can฀be฀designated฀at฀fair฀value฀through฀profit฀or฀loss฀if฀this฀would฀
eliminate฀the฀mismatch.฀
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Illustration฀6฀
Fair฀value฀of฀debt฀on฀initial฀recognition฀
A฀$5,000฀3-year฀interest-free฀loan฀is฀made฀to฀a฀director.฀If฀market฀interest฀charged฀on฀a฀similar฀loan฀
1
would฀be,฀say,฀4%,฀the฀fair฀value฀of฀the฀loan฀at฀inception฀is฀$5,000฀×฀ =฀$4,445฀and฀the฀loan฀
3
1.04
is฀recorded฀at฀that฀value.฀
฀

Illustration฀7฀
Amortised฀cost฀revision฀
A฀company฀purchases฀loan฀notes฀(nominal฀value฀$100,000)฀for฀$96,394฀on฀1฀January฀20X3,฀
incurring฀transaction฀costs฀of฀$350.฀The฀loan฀notes฀carry฀interest฀paid฀annually฀on฀31฀December฀of฀
4%฀of฀nominal฀value฀($4,000฀pa).฀The฀loan฀notes฀will฀be฀redeemed฀at฀par฀on฀31฀December฀20X5.฀
The฀effective฀interest฀rate฀is฀5.2%.฀
Required฀
Show฀the฀amortised฀cost฀of฀the฀loan฀notes฀from฀1฀January฀20X3฀to฀31฀December฀20X5฀(before฀
redemption).฀
Solution฀
฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀ $฀฀฀฀฀฀
1฀January฀b/d฀(96,394฀+฀350)฀ 96,744฀ 97,775฀ 98,859฀
Effective฀interest฀at฀5.2%฀of฀b/d฀(interest฀in฀P/L)฀ 5,031฀ 5,084฀ 5,141฀
'Coupon'฀interest฀received฀ ฀฀(4,000)฀ ฀฀(4,000)฀ ฀฀฀฀(4,000)฀
31฀December฀c/d฀ ฀97,775฀ ฀98,859฀ ฀100,000฀

Activity฀2:฀Measurement฀of฀financial฀assets฀ ฀ ฀

Wharton,฀ a฀ public฀ limited฀ company,฀ has฀ requested฀ your฀ advice฀ on฀ accounting฀ for฀ the฀ following฀
financial฀instrument฀transactions:฀
(a)฀ On฀1฀January฀20X1,฀Wharton฀made฀a฀$10,000฀interest-free฀loan฀to฀an฀employee฀to฀be฀paid฀
back฀on฀31฀December฀20X2.฀฀The฀market฀rate฀on฀an฀equivalent฀loan฀would฀have฀been฀5%.฀
(b)฀ Wharton฀ anticipates฀ capital฀ expenditure฀ in฀ a฀ few฀ years฀ and฀ so฀ invests฀ its฀ excess฀ cash฀ into฀
short-฀ and฀ long-term฀ financial฀ assets฀ so฀ it฀ can฀ fund฀ the฀ expenditure฀ when฀ the฀ need฀ arises.฀฀
Wharton฀will฀hold฀these฀assets฀to฀collect฀the฀contractual฀cash฀flows,฀and,฀when฀an฀opportunity฀
arises,฀the฀entity฀will฀sell฀financial฀assets฀to฀re-invest฀the฀cash฀in฀financial฀assets฀with฀a฀higher฀
return.฀ ฀ The฀ managers฀ responsible฀ for฀ this฀ portfolio฀ are฀ remunerated฀ on฀ the฀ overall฀ return฀
generated฀by฀the฀portfolio.฀฀฀
As฀part฀of฀this฀policy,฀Wharton฀purchased฀$50,000฀par฀value฀of฀loan฀notes฀at฀a฀10%฀discount฀
on฀their฀issue฀on฀1฀January฀20X1.฀The฀redemption฀date฀of฀these฀loan฀notes฀is฀31฀December฀
20X4.฀An฀interest฀coupon฀of฀3%฀of฀par฀value฀is฀paid฀annually฀on฀31฀December.฀Transaction฀
costs฀ of฀ $450฀ were฀ incurred฀ on฀ the฀ purchase.฀ The฀ annual฀ internal฀ rate฀ of฀ return฀ on฀ the฀ loan฀
notes฀is฀5.6%.฀
At฀31฀December฀20X1,฀due฀to฀a฀decrease฀in฀market฀interest฀rates,฀the฀fair฀value฀of฀these฀loan฀
notes฀increased฀to฀$51,000.฀
Required฀
Discuss,฀ with฀ suitable฀ calculations,฀ how฀ the฀ above฀ financial฀ instruments฀ should฀ be฀ accounted฀ for฀ in฀
the฀financial฀statements฀of฀Wharton฀for฀the฀year฀ended฀31฀December฀20X1.฀

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5.3฀Reclassification฀of฀financial฀assets฀
Financial฀ assets฀ are฀ reclassified฀ under฀ IFRS฀ 9฀ when,฀ and฀ only฀ when,฀ an฀ entity฀ changes฀
its฀business฀model฀for฀managing฀financial฀assets฀(IFRS฀9:฀para.฀4.4.1).฀The฀reclassification฀should฀
be฀applied฀prospectively฀from฀the฀reclassification฀date฀(IFRS฀9:฀para.฀5.6.1).฀
These฀ rules฀ only฀ apply฀ to฀ investments฀ in฀ debt฀ instruments฀ as฀ investments฀ in฀ equity฀
instruments฀ are฀ always฀ held฀ at฀ fair฀ value฀ and฀ any฀ election฀ to฀ measure฀ them฀ at฀ fair฀ value฀ through฀
other฀comprehensive฀income฀is฀an฀irrevocable฀one.฀

5.4฀ Treatment฀of฀gain฀or฀loss฀on฀derecognition฀
On฀derecognition฀of฀a฀financial฀asset฀in฀its฀entirety,฀the฀difference฀between:฀
(a)฀ The฀carrying฀amount฀(measured฀at฀the฀date฀of฀derecognition);฀and฀
(b)฀ The฀consideration฀received฀
is฀recognised฀in฀profit฀or฀loss฀(IFRS฀9:฀para.฀3.2.12).฀
Applying฀this฀rule,฀in฀the฀case฀of฀investments฀in฀equity฀instruments฀not฀held฀for฀trading฀where฀
the฀irrevocable฀election฀has฀been฀made฀to฀report฀changes฀in฀fair฀value฀in฀other฀comprehensive฀
income,฀ all฀ changes฀ in฀ fair฀ value฀ up฀ to฀ the฀ point฀ of฀ derecognition฀ are฀ reported฀ in฀ other฀
comprehensive฀income.฀
Therefore,฀a฀gain฀or฀loss฀in฀profit฀or฀loss฀will฀only฀arise฀if฀the฀investments฀in฀equity฀instruments฀are฀
not฀sold฀at฀their฀fair฀value฀and฀for฀any฀transaction฀costs฀on฀derecognition.฀Gains฀or฀losses฀
previously฀ reported฀ in฀ other฀ comprehensive฀ income฀ are฀ not฀ reclassified฀ to฀ profit฀ or฀ loss฀ on฀
derecognition.฀
For฀ investments฀ in฀ debt฀ held฀ at฀ fair฀ value฀ through฀ other฀ comprehensive฀ income,฀ on฀
derecognition,฀ the฀ cumulative฀ revaluation฀ gain฀ or฀ loss฀ previously฀ recognised฀ in฀ other฀
comprehensive฀income฀is฀reclassified฀to฀profit฀or฀loss฀(IFRS฀9:฀para.฀5.7.10).฀

5.5฀ Financial฀liabilities฀

฀ ฀ Initial฀measurement฀ Subsequent฀measurement
(IFRS฀9:฀para.฀5.1.1)฀ (IFRS฀9:฀para.฀4.2.1)฀

1฀ Most฀financial฀liabilities฀ Fair฀value฀less฀ Amortised฀cost฀

(eg฀trade฀payables,฀loans,฀ transaction฀costs฀
preference฀shares฀classified฀as฀a฀
liability)฀

2฀ Financial฀liabilities฀at฀fair฀ Fair฀value฀(transaction฀ Fair฀value฀through฀profit฀or฀฀

value฀through฀profit฀or฀loss฀ costs฀expensed฀in฀P/L)฀ loss*฀
(Note฀1)฀ ฀฀฀
–฀ 'Held฀for฀trading'฀(short-term฀
profit฀making)฀
–฀ Derivatives฀that฀are฀liabilities฀
–฀ Designated฀on฀initial฀
recognition฀at฀'fair฀value฀
through฀profit฀or฀loss'฀to฀
eliminate/significantly฀reduce฀
an฀'accounting฀mismatch'฀
(Note฀2)฀

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฀ –฀ A฀group฀of฀financial฀liabilities฀ ฀ ฀
(or฀financial฀assets฀and฀
financial฀liabilities)฀managed฀
and฀performance฀evaluated฀on฀
a฀fair฀value฀basis฀in฀
accordance฀with฀a฀
documented฀risk฀management฀
or฀investment฀strategy฀

3฀ Financial฀liabilities฀arising฀ Consideration฀received฀ Measure฀financial฀liability฀on฀

when฀transfer฀of฀financial฀ same฀basis฀as฀transferred฀asset฀
asset฀does฀not฀qualify฀for฀ (amortised฀cost฀or฀fair฀value)฀
derecognition฀฀

4฀ Financial฀guarantee฀ Fair฀value฀less฀ Higher฀of:฀

contracts฀(Note฀3)฀and฀ transaction฀costs฀ –฀ Impairment฀loss฀allowance฀
commitments฀to฀provide฀a฀
–฀ Amount฀initially฀recognised฀
loan฀at฀a฀below-market฀
less฀amounts฀amortised฀to฀
interest฀rate฀(Note฀4)฀
P/L฀(IFRS฀15)฀

*Changes฀in฀fair฀value฀due฀to฀changes฀in฀the฀liability's฀credit฀risk฀are฀recognised฀separately฀in฀other฀
comprehensive฀income฀(unless฀doing฀so฀would฀create฀or฀enlarge฀an฀'accounting฀mismatch')฀(IFRS฀9:฀
para.฀5.7.7).฀
Notes฀
1฀ Most฀financial฀liabilities฀are฀measured฀at฀amortised฀cost.฀
However,฀some฀financial฀liabilities฀are฀measured฀at฀fair฀ value฀ through฀ profit฀ or฀ loss฀ if฀
fair฀value฀information฀is฀relevant฀to฀the฀user฀of฀the฀financial฀statements.฀This฀includes฀where฀a฀
company฀is฀'trading'฀in฀financial฀liabilities,฀ie฀taking฀on฀liabilities฀hoping฀to฀settle฀them฀for฀less฀
in฀ the฀ short฀ term฀ to฀ make฀ a฀ profit,฀ and฀ derivatives฀ standing฀ at฀ a฀ loss฀ which฀ are฀ financial฀
liabilities฀rather฀than฀financial฀assets.฀
2฀ As฀ with฀ financial฀ assets,฀ financial฀ liabilities฀ can฀ be฀ designated฀ at฀ fair฀ value฀ through฀ profit฀ or฀
loss฀ if฀ doing฀ so฀ would฀ eliminate฀ an฀ 'accounting฀ mismatch',฀ ie฀ a฀ measurement฀ or฀
recognition฀ inconsistency฀ that฀ would฀ otherwise฀ arise฀ from฀ measuring฀ assets฀ or฀ liabilities฀ or฀
recognising฀gains฀or฀losses฀on฀them฀on฀different฀bases.฀
3฀ Financial฀guarantee฀contracts฀are฀a฀form฀of฀financial฀insurance.฀The฀entity฀guarantees฀it฀
will฀make฀a฀payment฀to฀another฀party฀if฀a฀specified฀debtor฀does฀not฀pay฀that฀other฀party.฀On฀
initial฀ recognition฀ the฀ fair฀ value฀ of฀ the฀ 'premiums'฀ received฀ (less฀ any฀ transaction฀ costs)฀ are฀
recognised฀as฀a฀liability.฀This฀is฀then฀amortised฀as฀income฀to฀profit฀or฀loss฀over฀the฀period฀of฀
the฀ guarantee,฀ representing฀ the฀ revenue฀ earned฀ as฀ the฀ performance฀ obligation฀ (ie฀ providing฀
the฀guarantee)฀is฀satisfied,฀thereby฀reducing฀the฀liability฀to฀zero฀over฀the฀period฀of฀cover฀if฀no฀
compensation฀ payments฀ are฀ actually฀ made.฀ However,฀ if,฀ at฀ the฀ year฀ end,฀ the฀ expected฀
impairment฀loss฀that฀would฀be฀payable฀on฀the฀guarantee฀exceeds฀the฀remaining฀liability,฀the฀
liability฀is฀increased฀to฀this฀amount.฀
4฀ Commitments฀ to฀ provide฀ a฀ loan฀ at฀ below-market฀ interest฀ rate฀ arise฀ where฀ an฀
entity฀has฀committed฀itself฀to฀make฀a฀loan฀to฀another฀party฀at฀an฀interest฀rate฀which฀is฀lower฀
than฀the฀rate฀the฀entity฀itself฀would฀pay฀to฀borrow฀the฀money.฀These฀are฀accounted฀for฀in฀the฀
same฀ way฀ as฀ financial฀ guarantee฀ contracts.฀ The฀ impairment฀ loss฀ in฀ this฀ case฀ would฀ be฀ the฀
present฀value฀of฀the฀expected฀interest฀receipts฀from฀the฀other฀party฀less฀the฀expected฀(higher)฀
interest฀payments฀the฀entity฀would฀pay.฀

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7:฀Financial฀instruments฀

Activity฀3:฀Measurement฀of฀financial฀liabilities฀ ฀
Johnson,฀ an฀ investment฀ property฀ company,฀ adopts฀ the฀ fair฀ value฀ model฀ to฀ measure฀ its฀ investment฀
properties.฀The฀fair฀value฀of฀the฀investment฀properties฀is฀highly฀dependent฀on฀interest฀rates.฀
The฀Finance฀Director฀of฀Johnson฀has฀requested฀your฀advice฀on฀accounting฀for฀the฀following฀financial฀
instrument฀transactions฀which฀took฀place฀in฀the฀year฀ended฀31฀December฀20X1:฀
(a)฀ On฀31฀December฀20X1,฀Johnson฀took฀out฀a฀$9,000,000฀bank฀loan฀specifically฀to฀finance฀the฀
purchase฀of฀some฀new฀investment฀properties.฀Fixed฀interest฀at฀the฀market฀rate฀of฀5%฀is฀charged฀
for฀the฀10-year฀term฀of฀the฀loan.฀Transaction฀costs฀of฀$150,000฀were฀incurred.฀฀฀
(b)฀ On฀ 1฀ November฀ 20X1฀ Johnson฀ took฀ out฀ a฀ speculative฀ forward฀ contract฀ to฀ buy฀ coffee฀ beans฀
for฀ delivery฀ on฀ 30฀ April฀ 20X2฀ at฀ an฀ agreed฀ price฀of฀ $6,000฀ intending฀ to฀ settle฀ net฀ in฀ cash.฀฀
Due฀to฀a฀surge฀in฀expected฀supply,฀a฀forward฀contract฀for฀delivery฀on฀30฀April฀20X2฀would฀
have฀cost฀$5,000฀on฀31฀December฀20X1.฀
Required฀
Discuss,฀ with฀ suitable฀ calculations,฀ how฀ the฀ above฀ financial฀ instruments฀ should฀ be฀ accounted฀ for฀ in฀
the฀financial฀statements฀of฀Johnson฀for฀the฀year฀ended฀31฀December฀20X1.฀฀฀

5.6฀Offsetting฀financial฀assets฀and฀financial฀liabilities฀(IAS฀32)฀
A฀ financial฀ asset฀ and฀ a฀ financial฀ liability฀ are฀ required฀ to฀ be฀ offset฀ (ie฀ presented฀ as฀ a฀ single฀ net฀
amount)฀when฀the฀entity:฀
(a)฀ Has฀a฀legally฀enforceable฀right฀to฀set-off฀the฀recognised฀amounts,฀and฀
(b)฀ Intends฀ either฀ to฀ settle฀ on฀ a฀ net฀ basis฀ or฀ to฀ realise฀ the฀ asset฀ and฀ settle฀ the฀ liability฀
simultaneously.฀
Otherwise,฀financial฀assets฀and฀financial฀liabilities฀are฀presented฀separately.฀
In฀ this฀ way,฀ the฀ amount฀ recognised฀ in฀ the฀ statement฀ of฀ financial฀ position฀ reflects฀ an฀ entity's฀
expected฀ cash฀ flows฀ from฀ settling฀ two฀ or฀ more฀ separate฀ financial฀ instruments,฀ providing฀ useful฀
information฀ about฀ the฀ entity's฀ ability฀ to฀ generate฀ cash,฀ claims฀ against฀ the฀ entity฀ and฀ the฀ entity's฀
liquidity฀and฀solvency.฀
Disclosure฀ of฀ the฀ gross฀ and฀ net฀ amounts฀ offset฀ is฀ required฀ by฀ IFRS฀ 7฀ as฀ well฀ as฀ information฀
about฀right฀of฀set-off฀arrangements฀and฀similar฀agreements฀(eg฀collateral฀agreements).฀

Supplementary฀reading฀
Chapter฀ 7฀ Section฀ 3฀ of฀ the฀ Supplementary฀ Reading฀ contains฀ further฀ explanation฀ and฀ practice฀ on฀
classification฀ and฀ measurement฀ of฀ financial฀ assets฀ and฀ financial฀ liabilities.฀ This฀ is฀ available฀ in฀
Appendix฀2฀of฀the฀digital฀edition฀of฀the฀Workbook.฀

6฀ Embedded฀derivatives฀(IFRS฀9)฀
Some฀ contracts฀ (that฀ may฀ or฀ may฀ not฀ be฀ financial฀ instruments฀ themselves)฀ may฀ have฀ derivatives฀
embedded฀in฀them.฀Ordinarily,฀derivatives฀not฀used฀for฀hedging฀are฀treated฀as฀'held฀for฀trading'฀and฀
measured฀at฀fair฀value฀through฀profit฀or฀loss.฀
With฀ limited฀ exceptions,฀ IFRS฀ 9฀ requires฀ embedded฀ derivatives฀ that฀ would฀ meet฀ the฀ definition฀ of฀ a฀
separate฀derivative฀instrument฀to฀be฀separated฀from฀the฀host฀contract฀(and฀therefore฀be฀measured฀
at฀fair฀value฀through฀profit฀or฀loss฀like฀other฀derivatives)฀(IFRS฀9:฀paras.฀4.3.3–4.3.5).฀

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฀฀

Illustration฀8฀
An฀entity฀may฀issue฀a฀bond฀which฀is฀redeemable฀in฀five฀years'฀time฀with฀part฀of฀the฀redemption฀price฀
being฀based฀on฀the฀increase฀in฀the฀FTSE฀100฀index.฀

Bond฀ ฀ Accounted฀for฀as฀normal฀
'Host'฀contract฀
(amortised฀cost)฀
฀ ฀ ฀

Embedded฀ Option฀on฀ ฀ Treat฀as฀derivative,฀ie฀remeasured฀

derivative฀ equities฀ to฀fair฀value฀with฀changes฀
recognised฀in฀P/L฀
฀
However,฀IFRS฀9฀does฀not฀requires฀embedded฀derivatives฀to฀be฀separated฀from฀the฀host฀contract฀if:฀

Exception฀ Reason฀

(a)฀ The฀economic฀characteristics฀and฀risks฀of฀ Eg฀an฀oil฀contract฀between฀two฀companies฀

the฀embedded฀derivative฀are฀closely฀ reporting฀in฀€,฀but฀priced฀in฀$.฀฀฀
related฀to฀those฀of฀the฀host฀contract;฀or฀ The฀'derivative'฀element฀($฀risk)฀is฀a฀normal฀
feature฀of฀the฀contract฀(as฀oil฀is฀priced฀in฀$)฀so฀
not฀really฀derivative฀

(b)฀ The฀hybrid฀(combined)฀instrument฀is฀ Both฀parts฀would฀be฀at฀fair฀value฀through฀profit฀

measured฀at฀fair฀value฀through฀profit฀ or฀loss฀anyway,฀so฀no฀need฀to฀split฀
or฀loss;฀or฀

(c)฀ The฀host฀contract฀is฀a฀financial฀asset฀ The฀measurement฀rules฀for฀financial฀assets฀

within฀the฀scope฀of฀IFRS฀9;฀or฀ require฀the฀whole฀instrument฀to฀be฀measured฀at฀
fair฀value฀through฀profit฀or฀loss฀anyway,฀so฀no฀
need฀to฀split฀

(d)฀ The฀embedded฀derivative฀significantly฀ If฀the฀derivative฀element฀changes฀the฀cash฀flows฀

modifies฀the฀cash฀flows฀of฀the฀contract. so฀much,฀then฀the฀whole฀instrument฀should฀be฀
measured฀at฀fair฀value฀through฀profit฀or฀loss฀
due฀to฀the฀risk฀involved฀(which฀is฀the฀
measurement฀category฀that฀would฀apply฀
without฀these฀rules,฀being฀derivative)฀
฀
(IFRS฀9:฀paras.฀4.3.3–4.3.5)฀

7฀ Impairment฀of฀financial฀assets฀(IFRS฀9)฀฀
7.1฀ Scope฀
IFRS฀9's฀impairment฀rules฀apply฀to฀(IFRS฀9:฀paras.฀5.5.1–5.5.2):฀
฀ Investments฀in฀debt฀instruments฀measured฀at฀amortised฀cost฀(business฀model:฀objective฀–฀to฀
collect฀contractual฀cash฀flows฀of฀principal฀and฀interest)฀
฀ Investments฀in฀debt฀instruments฀measured฀at฀fair฀value฀through฀other฀comprehensive฀income฀
(OCI)฀(business฀model:฀objective฀–฀to฀collect฀contractual฀cash฀flows฀of฀principal฀and฀interest฀
and฀to฀sell฀financial฀assets)฀
฀ Lease฀receivables฀within฀the฀scope฀of฀IFRS฀16฀Leases฀
฀ Contract฀assets฀within฀the฀scope฀of฀IFRS฀15฀Revenue฀from฀Contracts฀with฀Customers฀

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7:฀Financial฀instruments฀

฀ Financial฀guarantee฀contracts฀(see฀Section฀5.5)฀
฀ Commitments฀to฀provide฀loans฀at฀below-market฀interest฀rate฀(see฀Section฀5.5)฀

7.2฀ Definitions฀
The฀ following฀ definitions฀ are฀ important฀ in฀ understanding฀ this฀ section,฀ and฀ you฀ should฀ refer฀ back฀ to฀
them฀when฀studying฀this฀material.฀฀

Credit฀loss:฀the฀difference฀between฀all฀contractual฀cash฀flows฀that฀are฀due฀to฀an฀entity…and฀all฀the฀
cash฀flows฀that฀the฀entity฀expects฀to฀receive,฀discounted.฀฀
Key฀terms฀

Expected฀credit฀losses:฀the฀weighted฀average฀of฀credit฀losses฀with฀the฀respective฀risks฀of฀a฀default฀
occurring฀as฀the฀weights.฀
Lifetime฀expected฀credit฀losses:฀the฀expected฀credit฀losses฀that฀result฀from฀all฀possible฀default฀
events฀over฀the฀expected฀life฀of฀a฀financial฀instrument.฀฀
Past฀due:฀a฀financial฀asset฀is฀past฀due฀when฀a฀counterparty฀has฀failed฀to฀make฀a฀payment฀when฀
that฀payment฀was฀contractually฀due.฀
12-month฀expected฀credit฀losses:฀the฀portion฀of฀the฀lifetime฀expected฀credit฀losses฀that฀
represent฀the฀expected฀credit฀losses฀that฀result฀from฀default฀events฀on฀a฀financial฀instrument฀that฀are฀
possible฀within฀the฀12฀months฀after฀the฀reporting฀date.฀
(IFRS฀9:฀Appendix฀A)฀

7.3฀Approach฀
IFRS฀9's฀approach฀uses฀an฀'expected฀loss'฀model฀(IFRS฀9:฀para฀5.5.1).฀
This฀ means฀ that฀ the฀ financial฀ statements฀ should฀ reflect฀ the฀ general฀ pattern฀ of฀ deterioration฀ or฀
improvement฀in฀the฀credit฀quality฀of฀financial฀assets฀from฀the฀date฀of฀initial฀recognition,฀based฀
on฀changes฀in฀expectations฀(eg฀re฀performance฀of฀the฀borrower฀or฀external฀credit฀rating),฀recognising฀
an฀ allowance฀ even฀ before฀ a฀ credit฀ loss฀ (bad/doubtful฀ debt)฀ has฀ objectively฀ arisen.฀ This฀ is฀ a฀
forward-looking฀impairment฀model.฀
Credit฀losses฀should฀be฀recognised฀in฀three฀stages฀(IFRS฀9:฀para.฀5.5.3–5.5.11):฀

฀ Stage฀1฀ ฀ Stage฀2฀ ฀ Stage฀3฀

When?฀ Initial฀recognition฀ ฀ Credit฀risk฀ ฀ Objective฀

(and฀subsequently฀ increases฀ evidence฀of฀
if฀no฀significant฀ significantly฀ impairment฀exists฀
deterioration฀in฀ (rebuttable฀ at฀the฀reporting฀
credit฀risk)฀ presumption฀if฀ date฀
>฀30฀days฀past฀
due)฀
฀ ฀ ฀
Credit฀losses฀ 12-month฀ ฀ Lifetime฀expected฀ ฀ Lifetime฀expected฀
recognised฀ expected฀credit฀ credit฀losses฀ credit฀losses฀
losses฀
฀ ฀ ฀
Calculation฀ On฀gross฀carrying฀ ฀ On฀gross฀carrying฀ ฀ On฀carrying฀
of฀effective฀ amount฀ amount฀ amount฀net฀of฀
interest฀ allowance฀for฀
credit฀losses฀(see฀
below)฀after฀date฀
evidence฀exists฀

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฀฀

7.4฀Presentation฀
Credit฀losses฀are฀treated฀as฀follows:฀

Type฀of฀asset฀ Treatment฀of฀credit฀loss฀

All฀investments฀in฀debt฀ ฀ Recognised฀in฀profit฀or฀loss฀
instruments฀except฀those฀ ฀ Credit฀ losses฀ held฀ in฀ a฀ separate฀ allowance฀
measured฀at฀fair฀value฀through฀other฀ account฀offset฀against฀the฀carrying฀amount฀of฀
comprehensive฀income฀ the฀asset:฀
฀ Financial฀asset฀ X฀
฀ Allowance฀for฀credit฀losses฀ (X)฀
฀ Carrying฀amount฀(net฀of฀allowance฀for฀credit฀losses)฀฀X฀฀

Investments฀in฀debt฀instruments฀ ฀ Portion฀of฀the฀fall฀in฀fair฀value฀relating฀to฀credit฀
measured฀at฀fair฀value฀through฀ losses฀recognised฀in฀profit฀or฀loss฀
other฀comprehensive฀income฀ ฀ Remainder฀recognised฀in฀other฀comprehensive฀
income฀
฀ No฀allowance฀account฀necessary฀because฀already฀
carried฀at฀fair฀value฀(which฀is฀automatically฀reduced฀for฀
any฀fall฀in฀value,฀including฀credit฀losses)฀

(IFRS฀9:฀paras.฀5.5.8฀and฀5.5.2)฀

7.5฀Recognition฀
Stage฀1฀
The฀12-month฀expected฀credit฀losses฀are฀recognised฀at฀Stage฀1฀(ie฀on฀initial฀recognition฀of฀a฀
financial฀asset