Objectives 2

International Financial Reporting Standards • Explain the need for a single set of high-
quality international accounting
standards
• Identify the major policy-setting bodies
Introduction to and their role in the standard-setting
International Financial process
Reporting Standards • List the main steps in the standard-
setting process
• Familiarise with conceptual framework

1 2

Contents 3 How does global economy work? 4

• How does global economy work? The Global Economy

• International Convergence of
Accounting Standards International Trade
• History of IASB
Foreign Direct Investment
• Process of IFRS standard setting
• IFRS for SMEs Multinational Corporations
• Principles-Based Versus Rules-Based International Capital markets
• Conceptual Framework
• GAAP

3 4

1
 How does global economy work? 5 How does global economy work? 6

Imports Acquisition of existing

International Trade: foreign companies
Exports 2 common forms of FDI:
Creation of new foreign
In 2012, companies worldwide exported more than $18.0 subsidiaries
trillion worth of merchandise
The tremendous increase in the flow of
Three largest exporters: China, United States, and Germany FDI is partially attributable to the
liberalization of investment laws in
Three largest importers: United States, China, and Germany many countries specifically aimed at
attracting FDI

5 6

How does global economy work? 7 How does global economy work? 8

A multinational corporation International Capital Markets

….is a company that is headquartered in one country
Many multinational corporations have found it necessary to have their stock
but has operations in other countries. cross-listed on foreign stock exchanges.

Headquartered in London, HSBC operates through long- As of May 31, 2014, there were 525 foreign companies from
established businesses and an international network of more 46 countries cross-listed on the NYSE.
Source: https://www.nyse.com/get-started/international/documents-reports
than 6,200 offices in 74 countries and territories

KPMG International Cooperative (“KPMG International”) is Many U.S. companies are similarly cross-listed on
a Swiss entity. It is the coordinating entity for a global non-U.S. stock exchanges.
network of independent firms. Member firms are located Ex: More than 50 U.S. companies are listed on the
in 155 countries. Collectively, they employ more than London Stock Exchange, including Abbott Labs,
155,000 people Boeing, and Pfizer.

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2
International Convergence of Accounting Standards 9 International Convergence of Accounting Standards 10

Considerable differences exist across countries in the

accounting treatment of many items.

U.S: PPE not allowed to report at amounts greater than historical cost Globalization demands a
EU: assets are allowed to report at market values
single set of high-quality
Japan: R&D costs must be expensed as incurred
Canada and France: R&D costs may be capitalized as an asset international accounting
China: CF is required to use the direct method
U.S and EU: use the indirect method
standards.

=> Differences in accounting can result in significantly

different amounts being reported on FS

9 10

International Convergence of Accounting Standards 11 International Convergence of Accounting Standards 12

Benefits to Capital Markets… Benefits to Companies…

1. Enhanced worldwide comparability for investors 1. Lower cost of capital

2. More efficient capital allocation 2. Supports raising capital overseas
3. Enhanced credibility of local markets to foreign investors 3. Easier consolidation
4. No need to develop and maintain national standards 4. Easier cross-border acquisitions
5. Encourages integrated IT systems
6. Understand the financial statements of overseas suppliers,
customers, subsidiaries

11 12

3
International Convergence of Accounting Standards 13
International Convergence of Accounting Standards 14

2006:
Progress towards global accounting standards
▪ China: adopts accounting standards substantially in line with
2002: IFRS, with goal of full convergence
▪ Europe: European Union agrees to adopt IFRS from 2005 ▪ United States: IASB and FASB agree to accelerate
▪ United States: IASB and FASB agree joint program to improve respective convergence programme Memorandum of Understanding
standards and bring about their convergence (MoU)
2003: 2007:
▪ Australia, Hong Kong, New Zealand and South Africa: agree to adopt ▪ United States: SEC permits non-US companies to report
IFRS from 2005 using IFRS, consults on domestic use
2004: ▪ Brazil, Canada, Chile, Israel and Korea: establish timelines
to adopt IFRS;
▪ Japan: IASB and ASBJ agree to converge IFRS and Japanese GAAP
2008:
2005:
▪ Malaysia and Mexico: announce intention to adopt IFRS
▪ Europe: almost 7,000 companies in 25 countries simultaneously switch from
national GAAP to IFRS

13 14

International Convergence of Accounting Standards 15 History of IASB 16

2009:
▪ G20: leaders support work of the IASB, call for rapid move towards global 1973 - 2000:
accounting standards
International Accounting Standards Committee (IASC) is the
▪ Japan: approves IFRS road map, permits voluntary adoption of IFRS
independent standard setter based in London, UK
2011:
Set up in 1973 by 9 countries because of globalisation of
▪ Canada: commences use of IFRS
capital markets
▪ IFRS for SMEs: nearly 80 jurisdictions have adopted the IFRS for SMEs
2012: –Written commitment to use their best efforts to adopt IAS
▪ Argentina, Mexico and Russia: all commence use of IFRS IASC issued IASs 1 to 41
2013: By 2000 –despite the written commitment – only some
▪ IFRS Foundation and IOSCO agree joint Statement of Protocols to facilitate voluntary adoptions by listed companies, very few unlisted
greater consistency in application of IFRS globally companies
▪ IFRS Foundation publishes jurisdictional profiles to chart progress towards
global accounting standards

15 16

4
 History of IASB 17 History of IASB 18

Structure of IASB
Since 2001:
IASC reorganised into International Accounting
Standards Board (IASB)
IFRSs and improved IASs
Adoptions for listed companies by over 100 countries
Europe adopted IFRS for listed companies starting 2005
Dozens of other countries followed

17 18

Major Contributions of the IASB 19 Who Funds The IASB 20

▪ Harmonizing accounting standards and ▪ The IFRS Foundation is a not-for-profit organisation whose
disclosures to meet the needs of the world’s primary source of income comes from voluntary contributions
from countries that have put in place national financing regimes.
capital markets.
▪ Providing an accounting foundation for ▪ funding is based on national financing
regimes relative to a country’s GDP
underdeveloped or newly industrialized
countries to use as the accounting profession ▪ from publications and related activities
emerges in those countries. ▪ from contributions from international
▪ Advancing compatibility of domestic and accounting firms
international accounting requirements.
▪ In 2013 contributions were £21.4 million, an increase of 7% from
2012.

19 20

5
 Type of Pronouncement 21 IFRS for SMEs 22

IFRS for SMEs is intended for entities that

Reference Type of Pronouncement
do not have public accountability.
SMEs face problems in implementing
IAS International Accounting Standard (28)
IFRSs because of:

IFRS International Financial Reporting Standard (15)

– Scarcity of resources and expertise with
the SMEs to achieve compliance

Interpretation of the International Financial – Cost of compliance not commensurate

IFRIC with the expected benefits
Reporting Interpretations Committee (17)

=> Keeping in view the difficulties faced by the SMEs, The IFRS
Interpretation of the Standing Interpretations
SIC for SMEs was issued by the IASB in July 2009 to reduce the
Committee (10)
financial reporting burden.

21 22

Adoption of IFRS for SMEs 23 Process of IFRS standard setting 24

Many options: The IASB due process has the following elements:

Choose either: 1. Independent standard-setting board;

- IFRS for SMEs 2. Thorough and systematic process for developing

standards;
- Full IFRS
3. Engagement with investors, regulators, business leaders,
- or local GAAP
and the global accountancy profession at every stage of
the process; and
4. Collaborative efforts with the worldwide standard-setting
community.

23 24

6
 Principles-Based Versus Rules-Based 25 Advantages of Principles-Based 26

• IFRSs are often referred to as being principles- ▪ Broad guidelines that can be applied to
based. numerous situations
• US GAAP is said to be more rules-based. ▪ Allow accountants to apply professional
• This has led to about 25,000 pages of US GAAP judgment in assessing the substance of
versus about 2,000 pages of IFRSs. a transaction
▪ Result in simpler standards
▪ More accurately reflect a company’s
actual performance

Concepts Principles Rules

25 26

Disadvantages of Principles-Based 27 Conceptual Framework 28

▪ May reduce comparability and consistency

due to the lack of bright-light standards
• A constitution which proves to be the definitive
reference document for development of accounting
▪ Many accountants seem to prefer rules-based
standards.
standards because of their concerns about
the potential of litigation over their exercise of • A statement of principles, a philosophy and a map.
judgment in the absence of bright-line rules • It is NOT an accounting standard, and where there is
▪ Implementation of a principles-based perceived to be a conflict between the Framework and
approach to standards setting will not be easy the specific provisions of an accounting standard then
the accounting standard prevails
Applying different interpretation to the same facts might result in a
different answer

27 28

7
 Conceptual Framework 29
Asset

• What is in the Framework?

– Fundamental qualitative characteristics of accounting
information. (Relevance and Faithful Representation)
– Definition and recognition for the elements on FS.

Asset:
-A resource controlled by the entity;
-As a result of past events;
-From which future economics benefits are expected
to flow to the entity.
30

29 30

Liability Income

Liability: The increases in economic benefits during the accounting

period
-A present obligation of the entity;
- In form of inflows or enhancements of assets or decreases of
-Arising from past events; liabilities;
-And the settlement of which is expected to result in an - That result in increase in equity other than those relating to
outflow from the entity of resources embodying contributions from equity participants.
economic benefits.
31 32

31 32

8
Expense
Equity 34

The decreases in economic benefits during the accounting Equity:

period: – The residual interest in the assets of the entity
- In the form of outflows or depletions of assets or incurrences after deducting all its liabilities
of liabilities (It is considered as a function of assets and
- That result in decreases in equity, other than those relating to liabilities, i.e. a balancing figure)
distributions to equity participants
33

33 34

The recognition criteria for elements on FS 35 GAAP 36

The formal recognition criteria that have to be met to • GAAP regulates several principles:
enable elements to be recognised in the financial – Accrual basis accounting assumption
statements are:
– Going concern assumption
a. That an item that meets the definition of an element
– Materiality principle
;and
– Substance over form
b. It is probable that any future economic benefit
– Prudence principle
associated with the item will flow to or from the entity;
and; – Money measurement principle
c. The item’s cost or value can be measured with – ...
reliability.

35 36

9
 OBJECTIVES

▪ Define the term “Inventories”

▪ Introduce fundamental principle of IAS 2
▪ Determine the comprising costs of
IAS 2:
Inventories
▪ Acknowledge formulas for inventory-valuing
▪ Recognise of expenses when Inventories
sold
▪ Familiarise with disclosure requirements for
Inventories
1 2
2

1 2

CONTENTS INVENTORY DEFINITION

 Milestone Inventories are assets that:

 Fundamental principle of IAS 2  Held for sale in the ordinary course of
 Cost Of Inventories business;
 Measurement of cost
 In the process of production for such sale;
 Cost Formulas
or
 Net realisable value
 In the form of materials or supplies to be
 Recognition as an expense
consumed in the production process or in
 Disclosures
3
the rendering of services.
4

3 4

1
 EXCLUSION FUNDAMENTAL PRINCIPLE OF IAS 2
Inventory excludes: Inventories are required to be stated at:
 Construction contracts in progress (See IAS
11 Construction Contracts) The lower of
 Financial instruments (See IAS 32 Financial
Instruments: Presentation and IAS 39
Financial Instruments: Recognition and
Measurement)
 Biological assets related to agricultural activity
(See IAS 41 Agriculture) Net realisable
Cost
value

5 6

5 6

COST OF INVENTORIES COST OF PURCHASE

 Add:
Comprises:
➢Purchase price
 Cost of purchase
➢Import duties and other taxes (if irrecoverable)
 Cost of conversion ➢Transport and handling costs and other costs
 Other costs incurred in bringing the directly attributable to the acquisition
inventories to their present location and  Deduct:
➢Trade discount
condition
➢Rebates

7 8

7 8

2
 COST OF PURCHASE EXAMPLE COST OF CONVERSION
Includes:
Apple plc acquires a patch of items from  Costs directly related to the units of production
Germany. The purchase price of this patch is (direct costs - labour)
stated at $1,5 mil (VAT included @10%). Import  Allocation of:
• Fixed production overhead (factory rent and
tax rate is currently at 5% for this type of item rates) *
and import tax is irrevocable. Under contract’s • Variable production overhead (indirect materials
terms, Apple has to pay for the transport fee and labour)
If Low -> Expense recognised and should not be included
which is at $120.000 and receive a discount 6% in the cost of inventories.
of the purchase price. Identify the cost of If High -> decrease the amount of allocation

purchase for this automated-system. * Note: The allocation of fixed production costs to units of production
should be based upon the normal capacity of the production facilities
9 10

9 10

COST OF CONVERSION OTHER COSTS

Eurowidow produce and trade crystal door hander. The following is
detailed information about the costs of producing at Eurowidow factory To bring the inventories to their present
in last month: location and condition, such as:
 Fixed production overheads are $3.300, made up of Factory
manager’s wage ($1.800) and other fixed production overheads  Non-production overheads
($1.500)
 Indirect labour and materials are $2.750  The costs of designing products for
 Direct costs are $11.000 specific customers
 Average capacity: 1.000 units
 Theoretical capacity: 1.200 units
 Actual capacity utilised: 1.100 units

➢ Identify the cost of one item of inventory for last month?

11 12

11 12

3
 COSTS EXCLUDED OTHERS

They are:
 Borrowing costs: IAS 23
1. Abnormal amounts of wasted materials, labour, or
other production costs  Purchase inventories on deferred settlement
2. Storage costs, unless they are essential to the terms
production process before a further production
stage ➢ The difference between the purchase price
3. Administrative overheads that do not contribute to for normal credit terms and the amount paid
bringing inventories to their present location and
condition -> recognised as interest expense
4. Selling costs

→ If they incurred recognised as expenses.

13 14

13 14

COMPUTE THE COST OF INVENTORIES EXAMPLE 2

Example 1: Company X, produces seafood canned products.
Keep all the detail of the Example 1 with the
X’s inventory at the end of an accounting period includes a
finished product with the following costs to date: added following information:
$
Purchase price of materials 9.000
1. One-third of the materials (seafood) were
Trade discount (5%) 450 wasted as the result of an abnormal machine
8.550 malfunction.
Import duty (10%) (Irrecoverable) 855
2. The fixed production overheads are allocated to
Direct labour costs 5.850
Allocation of fixed production overheads 2.840
products on a normal capacity assumption.
Storage costs of raw seafood 150 Since the production was unusually low, only
Storage costs since product completed 75 $2.000 should be allocated to the products.
Advertising costs 317
Total cost 18.637
15 16

15 16

4
 COST OF INVENTORIES OF A SERVICE PROVIDER MEASUREMENT OF COST
Include: IAS 02:
 Labour costs;  Standard cost method (normal levels of
materials and supplies, labour, efficiency and
 Other costs of personnel directly
capacity utilisation)
engaged in providing the service; and
 Retail method (*)
 Attributable overheads
(*) Retail method is a technique used to estimate the
value of ending inventory using the cost to retail
price ratio.

17 18

17 18

EXAMPLE 3 : RETAIL METHOD COST FORMULAS

Cost ($) Retail (Sale prices)
($)
Techniques for the measurement of costs
Beginning Inventory 10.000 16.000

Purchases 14.000 20.000

Basis: separate measurement
Freight-In 800

Packing Cost 200 Weighted average First In – First Out

(FiFo)
Cost of Goods Available for Sale 25.000 36.000
An entity shall use the same cost formula for all inventories having a
Assuming sale of this period @ $19.000. Estimate the value similar nature and use to the entity. For inventories with a different
nature or use, different cost formulas may be justified. (IAS 2,
of ending inventory.
paragraph 25)
19 20

19 20

5
 EXAMPLE 4: WEIGHTED AVERAGE & FIFO ACCOUNTING FOR INVENTORY
On 1 January 20X0, a company’s inventory included 12 tables which had been The following transactions take place during
acquired for $140 per table. Purchase and sales of tables during the year to 31 the year:
December 20X0 were as follows:
Purchase: 01/03 Order 10 tables from the manufacturer
14 Jully 20X0 10 tables @ $142 per @$2,500
11 October 20X0 8 tables @ $145 per
02/03 Receive goods and Invoices
19 November 20X0 15 tables @ $147 per
Sales:
12/03 Make payment to the manufacturer by
26 August 20X0 16 tables cheque
5 November 20X0 7 tables 17/03 Sale 2 tables (@300 each) to customer A on
12 December 20X0 17 tables credit
→ Calculate the cost of tables sold during the year and the cost of the
inventory remaining at 31 December 20X0 using FIFO and weighted
Account for these transactions given that
average cost. inventories are measured using FIFO.
21 22

21 22

NET REALISABLE VALUE (NRV) NET REALISABLE VALUE (CONT)

 Inventories are usually written down to net realisable
 NRV is defined as “estimated selling price in the
value item by item. (IAS 2, paragraph 29)
ordinary course of business LESS the estimated
costs of completion and the estimated costs  Estimates of net realisable value are based on the
necessary to make the sale” most reliable evidence available at the time the
estimates are made. (IAS 2, paragraph 30)
(IAS 2, paragraph 7)
 Take into consideration the purpose for which the
 The practice of writing inventories down below
inventory is held
cost to NRV is consistent with the view that
assets should not be carried in excess of  Materials and other supplies held for use in the
amount expected to be realised from their sale production of inventories are not written down below
or use. cost if the finished products in which they will be
incorporated are expected to be sold at or above
cost.
23 24

23 24

6
 EXAMPLE 5 REVERSAL OF NRV

The inventory of a motor vehicles dealer at the end of an accounting When there is clear evidence of an increase in
period includes the following vehicles:
NRV because of changed economic
Cost incurred to Selling costs ($) Expected selling
date ($) price ($) circumstances, the amount of the write-down is
Vehicle A 14.000 1.250 18.000 reversed. This amount is limited to the original
Vehicle B 17.500 1.000 20.000 write-down so that the new carrying amount is the
Vehicle C 13.000 2.750 15.000 lower of the cost and the revised NRV.

When a vehicle is sold, a commission (5% of selling price) is paid to

sales staff. Calculate the value at which these vehicles should be
shown in the dealer’s financial statements.

25 26

25 26

RECOGNITION AS AN EXPENSE DISCLOSURES

When inventories are sold:  The accounting policies for Inventories
 The carrying amount of those inventories shall  Total carrying amount of Inventories
be recognised as an expense in the period in
which the related revenue is recognised.
together with an analysis into appropriate
categories
 The amount of any write-down of inventories to
net realisable value and all losses of inventories  The amount of Inventories recognised as an
shall be recognised as an expense in the period expense during the period
the write-down or loss occurs.  The amount of any write-down to NRV
 The amount of reversal of NRV (if any) shall be during the period and the amount of any
recognised as a reduction in the amount of reversal of previous write-downs.
inventories recognised as an expense in the
period in which the reversal occurs.
27 28

27 28

7
 IAS 2 AND VAS 2

 Exceed amount paid on settlement terms

is recognised as interest expense
 Techniques for measurement of cost:
standard cost method and retail method
 LIFO

29

29

8
 Objectives
the definition of “Property, plant and
Define and explain
equipment”
Plant, Property
Understand and apply the concept of “initial measurement”
and Equipment
(PPE) Describe and apply two models of “subsequent measurement”

Distinguish depreciation methods

IAS 16
List out disclosure requirements

1 2

Scope Scope of IAS 16

Definitions
Recognition • Applied in accounting for PPE, except when another IAS
requires/permits different treatments.
PPE cost
Content • Does not apply to:
PPE measurement • PPE held for sale (IFRS 5)
Depreciation methods • Investment property (IAS 40)
• Biological assets (IAS 41)
Derecognition
• Mineral rights, the exploration for and extraction of
Disclosure requirements minerals, oil, natural gas and similar non-
regenerative resources.

3 4

1
 Definitions
• PPE are tangible items held:
• For use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and • PPE should be classified as
• To be used more than one reporting period. an asset when:
• Carrying amount • Future economic
• the amount at which an asset is recognised after deducting any Recognition benefits, associated with
accumulated depreciation and accumulated impairment losses.
• Depreciation Criteria the asset, flowing to the
• the systematic allocation of the depreciable amount of an asset over its enterprise is probable
useful life. • Its cost can be reliably
• Entity-specific value measured.
• the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful
life or expects to incur when settling a liability.

5 6

PPE cost
• Initial cost
• Minor spare parts -> inventories. Initial
• Major spare parts -> PPE (if expected to use in more than one accounting period).
• Entity could aggregate individually insignificant items as PPE. measurement
• Include costs of items that enable future economic benefits from related assets PPE
• Subsequent cost Measurement
• Include:
• Replacement cost at regular intervals Subsequent
• Major inspections cost
• Exclude: measurement
• Repairs and maintenance costs

7 8

2
 PPE’s Initial Measurement
PPE’s Initial Measurement
• PPE’s initial measurement will be measured/recorded at cost at
recognition:
= Purchase price (and/or value of equivalent considerations) • Directly attributable costs: Any costs directly attributable to bringing the
- Trade discount/rebates asset to the location and condition necessary for it to be capable of
operating in the manner intended by management. Examples:
+ Non-refundable taxes and duties • Cost of site preparation
+ Directly attributable costs • Initial delivery and handling cost
- Implicit or imputed interest of deferred payment • Installation and assembly cost
+ Borrowing costs in accordance with IAS 23 • Cost of testing, less the net proceeds from the sale of any product
+ Initial estimated decommissioning costs arising from test production
• Borrowing cost to extend permitted by IAS 23, Borrowing costs
• Professional fees.

9 10

PPE’s Initial Measurement Example 1:

Vissan is installing a new plant. Costs incurred as following:
• Initial estimated decommissioning costs:
1. Cost of plant $1,000,000
“the initial estimate of the costs of dismantling and 2. Delivery and handling costs 280,000
removing the item and restoring the site on which it is 3. Set-up costs 125,000
located, the obligation for which an entity incurs 4. Architect costs 80,000
either: 5. Consultancy fee for advices on acquisition 20,000
• (1) when the item is acquired or 6. Interest charges on deferred payment 75,000
• (2) as a consequence of having used the item during a 7. Dismantling costs after 10 years (10% rate) 100,000
particular period for purposes other than to produce
inventories during that period.” • Requirement: In accordance with IAS 16, what amount should be
capitalized as the cost of the new plant?
• Credited to a liability => IAS 37: Recognition of
provisions.

11 12

3
 PPE’s Initial Measurement
PPE’s Initial Measurement Assets exchanged for other assets
• The cost of the acquired assets is measured at fair value, unless:
a) the transaction lacks of commercial substance.
• Expenses not to be recognised as cost of
PPE: b) the fair value of neither assets received nor the assets given
up is reliably measured.
• Advertising and promotional costs.
• Administration or other general • Then, the cost of the acquired assets is measured at carrying value
overhead costs. of the assets given up.
• Start-up and pre-production costs.
• Staff training costs.
• Operating losses prior commercial
production.

13 14

PPE’s subsequent measurement Example 2:

Capitalised (added to carrying amount) if In the second half of the fifth year Vissan continued expenditures for the
Subsequent future economics benefits is probable plant. These expenditures were as follows:
and exceed its originally accessed Type of expenses Amount Comments
expenditure
standard performance: 1 Periodic maintenance costs 3,000 Maintenance services were provided to
production equipment installed in the new plant to
• Extend useful life restore the original standard of performance.
• Increase capacity 2 Installation of two new 220,000 Initially 12 lines were installed. Management
• Improve output quality production line. decided to install two more system to increase
the output.
• Reduce operating costs
3 Pilot production costs 6,000 Cost of producing samples to ensure the proper
work of the newly installed machines.
4 Reconstruction of metal 18,000 Removal of 5-year-old, fully depreciated metal
Expensed: if not qualify criteria above floor coating floor coating and covering with a new metal floor
coating. This increases the useful life of the
building by 5 more years.

15 16

4
 PPE’s subsequent measurement
Subsequent
measurement • Revalue:
Revaluation • All assets of the same class
Revaluation model: carried at a • Frequency depends on the change in FV of
Cost model: carried at cost
PPE
less any accumulated revalued amount (fair value at
the date of the revaluation less • Depreciation can be:
depreciation and any
any subsequent accumulated • Restated proportionally
accumulated impairment
• Eliminated against carrying amount
losses. depreciation and subsequent
accumulated impairment losses)

17 18

Incremental revaluation: credited to OCI Example 3 : Revaluation

as revaluation surplus
A building cost $5m. and has been depreciated by $2m, leaving a net
• If previously decremental revalued, credited as
income
book value of $3m. It is revalued to $6m.
Decremental revaluation: debited as an
expense (PL) Initial One Two
Revaluation
• If previously incrementally revalued, debited to Valuation 5 10 6
Revaluation surplus
Acc. Depr. (2) (4) 0
Revaluation surplus:
Net book value 3 6 6
• Transfer to RE when the PPE is derecognised
• Transfer evenly to RE when the PPE is used

19 20

5
 Depreciation Depreciation
• Spreading the cost of assets over their beneficial periods Methods of Depreciation
• Depreciable amount: original cost less residual value
• Estimated useful life: either years or units of production.
• Causes of Depreciation: Straight-Line Diminishing Balance Units-of-Production

• Physical deterioration
• Wear and tear
• Erosion, rust, rot and decay
• Technical or commercial obsolescence
• Legal limit on use of assets

21 22

Impairment Derecognition
• Assets impairment is subject to IAS
36:
• The carrying amount of an asset will be derecognised:
An impairment is a reduction in
• on disposal or
value of an asset that is still in use
because of damage, new, cheaper • when no future benefits are expected from its use or disposal.
technology, etc. • The gain or loss arising from the derecognition of an item of
• IFRS 3 Business Combinations property, plant and equipment shall be included in profit or loss
explains how to account for an when the item is derecognised. Gains shall not be classified as
impairment relating to acquisitions. revenue.

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6
 Disclosures Disclosures
• The financial statements will also disclose:
• the existence and amounts of restrictions on title, and property,
plant and equipment pledged as security for liabilities;
Measurement basis Depreciation methods • the amount of expenditures recorded in the carrying amount in the
course of its construction;
• the amount of contractual commitments for the acquisition of
property, plant and equipment; and
Gross carrying amount • if it is not disclosed separately on the face of the income statement,
and accumulated the amount of compensation from third parties for items that were
Useful lives or
depreciation at impaired, lost or given up that is included in the income statement.
depreciation rates
beginning and end of the
period

25 26

Disclosures
• If items are stated at revalued amounts, the following will be
disclosed:
• the effective date of the revaluation;
• whether an independent valuer was involved;
• the methods, and significant assumptions, applied in estimating the items’ FV
• the extent to which the items’ FV were determined directly
• for each revalued class of PPE, the carrying amount that would have been
recorded had the assets been carried under the cost model; and
• the revaluation surplus, indicating the change for the period, and any
restrictions on the distribution of the balance to shareholders.

27

7
 IFRS 17
Leases

Objectives
DEFINE A CONTRACT IS/CONTAINS
LEASES

ACCOUNTING FOR LEASES

ALLOCATE FINANCE CHARGES OVER

THE TERM OF A FINANCIAL LEASE

OUTLINE THE DISCLOSURE

REQUIREMENTS FOR IFRS 17

1
 Contents

SCOPE DEFINITIONS

LESSEE LESSOR
ACCOUNTING ACCOUNTING

SALES AND
DISCLOSURES
LEASE BACK
3

Scope
Apply to all leases other than:

• Leases to explore natural resources

• Biological assets (IAS 41)
• Licensing agreements for intellectual properties
(manuscripts, patents, films, etc.)
• Intellectual property (IFRS 15)
• Service concession arrangement (IFRIC 12)
• Licensing agreement (IAS 38)
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2
 Scope

Recognition exemptions

• Short-term leases
• Low value underlying asset (when new)

Definitions
Lease
• A contract, or part of a contract, that conveys the right to use an
asset (the underlying asset) for a period of time in exchange for
consideration.

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

Lessor
• An entity that provides the right to use an underlying asset for a
period of time in exchange for consideration. 6

3
 Definitions
Inception of the lease
• The earlier of the date of a lease agreement and the date of
commitment by the parties to the principal terms and conditions of
the lease.
Finance lease
• A lease that transfers substantially all the risks and rewards
incidental to ownership of an underlying asset.
Operating lease
• A lease that does not transfer substantially all the risks and
rewards incidental to ownership of an underlying asset. 7

Risk (idle capacity, technological obsolescence)

Reward (profitable operation, gain from increase

of asset’s value, realisation of a residual value)

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 Definitions
Lease term
• The non-cancellable period for which a lessee has the right to
use an underlying asset together with both:
• (a) periods covered by an option to extend the lease if the lessee is
reasonably certain to exercise that option; and
• (b) periods covered by an option to terminate the lease if the lessee
is reasonably certain not to exercise that option.

Lease incentives
• Payments made by a lessor to a lessee associated with a lease, or
the reimbursement or assumption by a lessor of costs of a lessee.
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Definitions
Unguaranteed residual value

• That portion of the residual value of the underlying asset,

the realisation of which by a lessor is not assured or is
guaranteed solely by a party related to the lessor.

Residual value guarantee

• A guarantee made to a lessor by a party unrelated to the

lessor that the value (or part of the value) of an
underlying asset at the end of a lease will be at least a
specified amount.

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 11

Definitions
Interest rate implicit in the lease
• The rate of interest that causes the present value of (a) the
lease payments and (b) the unguaranteed residual value to
equal the sum of (i) the fair value of the underlying asset
and (ii) any initial direct costs of the lessor.
Lessee’s incremental borrowing rate
• The rate of interest that a lessee would have to pay to
borrow over a similar term, and with a similar security, the
funds necessary to obtain an asset of a similar value to the
right-of use asset in a similar economic environment.

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•At the commencement

date, a lessee shall
Lessee recognise:
accounting
➢a right-of-use asset
➢a lease liability.

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 Lessee accounting

Initial measurement

Subsequent measurement
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Lessee accounting
• Initial measurement for right-of-
use asset (at cost) including:
✓Lease liability
✓Lease payments made at or
before the commencement
date, less any lease
incentives
✓Initial direct cost
✓Dismantling cost
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 Lessee accounting
• Lease liability is initially measure by present value
(using interest rate implicit in the lease/lessee’s
incremental borrowing rate) of the lease payments that
are not paid at that date including:
• fixed payments (less any incentives)
• variable lease payments
• residual value guarantees
• the exercise price of a purchase option (If certain)
• payments of penalties for terminating the lease
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15

•Example 1: Open Co entered into the contract on

1 January 20X0 for 5 years, annual rental
payments are $100 000 in arrears (that is, 31
December each year) and at the end of the lease
term, the machine will be returned back to the
lessor. The economic life of a machine is 10
years. Use the discount rate of 3%. Accounting
treatment at the 1 Jan 20X0 according to IFRS
16?
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 Lessee accounting
• Subsequent measurement
• Right-of-use asset: Cost model,
revaluation model or fair value model
(IAS 40)
• Lease liability: Payment would be
allocated to Interest payment on the
liability and the reduction of the liability

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•Example 2: Accounting treatment for the

following periods with given information in the
example 1 (Open Co)

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 • Classify operating lease or a finance lease

Lessor accounting
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Classification of lease

Main indicators for finance lease:

1. Transfer of ownership at the end of lease term.
2. Bargain purchase option, which is certain to be exercised,
at sufficiently lower than the fair value.
3. Lease term is for major part of economic life of the asset.
4. At inception date of the lease, PV of lease payment at
least substantially to the fair value of the assets.
5. The assets are specialised that only lessee can use it.
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 Classification of lease

Suggestive indicators:
• If the lessee can cancel the lease, the lessor’s losses
associated with the cancellation are borne by the lessee
• Gains or losses resulting from the fluctuations in the fair
value of the residual will accrue to the lessee.
• Continuation of the lease for the secondary term with a
substantial lower rent.

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Lessor accounting
Finance leases
• Initial measurement:
➢At commencement date, lessor shall
recognise receivable at an amount equal to
the net investment in the lease.
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 Gross investment
amount including:
• fixed payments (less
Net investment in any incentives)
the lease = • variable lease payments
Gross investment • residual value
in the lease guarantees
discounted at • the exercise price of a
implicit rate of purchase option (If
certain)
the lease
• payments of penalties
for terminating the lease

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Lessor accounting
Finance leases
• Subsequent measurement:
➢Lease payment receive should be divided
into finance income and reduction amount for
receivable amount.
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 Lessor accounting

• Operating leases
• A lessor shall recognise lease payments from
operating leases as income and keeps
recognising the asset (determine for the
depreciation, add any initial direct cost to the
carrying amount of the asset)
• The income recognition is described in IFRS15.

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Sale and leaseback

• Lessee recognises the use of asset and

the profit/loss of sale.
• Lessor recognises asset using relevant
IFRS lease using IFRS 16.

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 Sale and leaseback

• Lessee recognises the financial liability.

• Lessor recognises the financial asset.

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• Lessee
• Presentation
❑Right-of-use assets separately
from other assets (if not, right of
use assets is presented in line
with asset having similar nature
Disclosure and disclose for it).
❑Lease liabilities separately from
other liabilities (if not, disclose
which line is it!)
❑Cash payment for lease liability
is presented within financial
activities of the CF.
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 Lessee

Disclosure

✓Effect that leases have on the financial position

(single note or separate section).
Disclosure ✓Depreciation, interest expense for the lease.
✓Gains or losses from sale and leaseback.
✓Carrying amount of right-of-use assets.
✓Nature of the lessee’s leasing activities.
✓Any future related cash outflows (variable lease
payment, options, residual value.
✓Short-term leases or leases of low-value
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Disclosure 30

❖Lessor
❖Disclosure
❖Effect that leases have on the financial position,
financial performance and cash flows of the lessor.
❖Finance lease:
❖selling profit or loss
❖Incomes from the lease.
❖Any significant changes in the carrying of the net
investment in lease asset.
❖Operating lease: lease income separate from
disclosing income relating to variable lease
payments.
❖Nature of the lessor’s leasing activities.
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15
 Objectives
IFRS 15
Revenue from • Explain concepts within the
Contracts with standard.
Customers • Distinguish steps in 5-steps model.
• Apply 5-steps model in recording
revenue.
• Describe disclosure requirement for
revenue in according with IFRS 15.

1 2

1 2

Contents Scope of IFRS 15

• All contracts with customers, except:
• Scope of IFRS 15 ❖lease contracts
• Definitions ❖insurance contracts
• Reporting principle of revenue ❖financial instruments and other contractual rights or
• 5-steps model in recording revenue obligations
• Disclosure ❖non-monetary exchanges between entities

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 • Performance obligation: A promise in a
Definitions contract with a customer to transfer good or
service to the customer.
• Contract: An agreement between two or more • Stand-alone selling price: The price at
parties that creates enforceable rights and which an entity would sell a promised good
obligations. or service separately to a customer.
• Contract asset: An entity’s right to consideration in
exchange for goods or services that the entity has Definitions • Transaction price: The amount of
consideration to which an entity expects to
transferred to a customer be entitled in exchange for transferring
• Contract liability: An entity’s obligation to transfer promised goods or services to a customer,
goods or services to a customer for which the entity excluding amounts collected on behalf of
has received consideration (or the amount is due) third parties.
from the customer.
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5 6

Step 1 Identifying the contract

Reporting principle of
revenue Identifying performance
Step 2 obligations
5-steps
model in Step 3 Determining the transaction
price
Accrual Matching recording
basic concept revenue Step 4 Allocating the transaction price

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Step 5 Recognising revenue
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5-steps model in recording revenue • Entity shall recognise the

consideration received from a
customer as a liability until either:
• Step 1: Identifying the contract ➢Entity has no remaining
• An entity shall account for a contract if (all): obligations all, or
5-steps model
substantially all, of received
✓Parties have approved committed the contract; consideration is non- in recording
✓Each party’s rights can be identified; refundable
revenue
➢The contract has been
✓Payment terms is identified; terminated and the
✓Contract has commercial substance; and consideration received from
the customer is non-
✓It is probable for the collect the consideration. refundable.
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5-steps model in recording revenue

5-steps model in recording revenue
Step 2: Identifying performance
• Combination of contracts (to a single obligations
contract) if:
✓Contracts are negotiated as a package with At contract inception, business shall
a single commercial objective. identify performance obligation for:
✓Amount of consideration to be paid in one • good or service that is distinct; or
contract depends on the price or • a series of distinct goods or services that
performance of the other contract are substantially the same and that have the
✓Goods or services in the contracts are a same pattern of transfer to the customer.
single performance obligation.
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3
 5-steps model in recording revenue 5-steps model in recording revenue
Factors indicate for the distinction (separately If good or service is not distinct,
identifiable):
an entity shall combine them
▪ Entity is not using the good or service as an
input to produce or deliver the combined until it identifies a bundle of
output specified by the customer. goods or services that is distinct.
▪ Good or service does not significantly modify
or customise another good or service
promised in the contract.
▪ Good or service is not highly dependent on
other goods or services promised in the
contract.
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5-steps model in recording revenue 5-steps model in recording revenue

Entity could satisfy the obligation by transferring good or service
(ie an asset) to a customer (control gain). Either: • In the early stages of a contract, if an entity
may not be able to reasonably measure the
• over time (using output and input methods); or outcome of a performance obligation, but the
• at a point in time entity expects to recover the costs incurred in
satisfying the performance obligation. In those
circumstances, the entity shall recognise
revenue only to the extent of the costs
incurred until such time.

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 5-steps
• Step 3: Determining the transaction
5-steps model in recording revenue
model in
price
recording • Consider the effects of all of the Variable consideration includes of discounts, rebates,
revenue following: refunds, credits, price concessions, incentives,
✓Variable consideration performance bonuses, penalties or other similar items.
✓Constraining estimates of variable
consideration
✓Existence of a significant financing
component in the contract
✓Non-cash consideration How to estimate for these amounts?
✓Consideration payable to a customer
Expected value Most likely amount
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Constraining estimates of variable consideration

5-steps model in recording revenue

5-steps Entity shall include in the transaction price

• Existence of a significant financing component in
estimated variable consideration only to the
model in extent that it is highly probable that a the contract (Consideration > Cash selling price):
recording significant reversal in the amount of • It could be either explicitly or implicitly.
cumulative revenue recognised will not occur
• Discount the transaction price (using
revenue when the uncertainty associated with the
appropriate discount rate).
variable consideration is subsequently
resolved. • Separate effects of financing component
(interest revenue or interest Expense) from
revenue from contracts in PL.
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 Non-cash consideration:

If the fair value is not

At fair value available → stand-
5-steps alone selling price

model in
recording
revenue If customer contributes goods or services
5-steps model Consideration payable to a customer:
to facilitate an entity’s fulfilment of the
contract and if entity obtains control of in recording • Includes cash, coupon or voucher.
those contributed goods or services → revenue • It is a reduction of the transaction price.
non-cash consideration

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5-steps model in recording revenue 5-steps model in recording revenue

Step 5: Recognising revenue

• Step 4: Allocating the transaction price
• Allocate on each performance
obligation.
Dr AR/Cash/Bank
• Allocate discount (if any).
Cr Revenue
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 5-steps model in recording
Disclosure
revenue
Contract costs recognised as asset: Qualitative and quantitative information for all of the following
✓Contracts with customers (revenue and impairment losses,
Costs of obtaining a contract (if contract balance, significant changes in the contract asset
the entity expects to recover those costs) and the contract liability, performance obligations, transaction
Costs to fulfil a contract (the costs price allocated).
relate directly to a contract, the costs ✓Judgements, and changes in the judgements, made in
generate or enhance resources of the applying this Standard to those contracts.
entity, the costs are expected to be
recovered) ✓Any assets recognised from the costs to obtain or fulfil a
contract with a customer. 26
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 IAS 21 The Effects of Changes in Foreign Exchange Rates

1
IAS 21
The Effects of Changes in
Foreign Exchange Rates
1

Objectives
To include foreign currency transactions and
foreign operations in the financial statements of
an entity and how to translate financial
statements into a presentation currency.

To determine which exchange rate(s) to use and

how to report the effects of changes in exchange
rates in the financial statements.

1
 IAS 21 The Effects of Changes in Foreign Exchange Rates

Contents
1. Scope & Definitions
2. Determination of functional currency
3. Reporting foreign currency transactions in
the functional currency
4. Recognition of exchange differences
5. Translation to the presentation currency
6. Disclosure
7. Comparison with VAS 10
3

1 SCOPE
Standard applicable to
a. All foreign currency transactions & balances in foreign
currencies except derivative transactions & balances
within the scope of IAS 39
b. Translating results/financial position in foreign operation
for the purpose of
 Consolidation – CFS
 proportionate consolidation – JVs
 equity accounting – Associate
c. Translating results/financial position into presentation
currency.
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 IAS 21 The Effects of Changes in Foreign Exchange Rates

1
Definitions
 Closing rate is the spot exchange rate at the end of the reporting
period.
 Functional currency is the currency of the primary economic
environment in which the entity operates.
 Foreign currency is a currency other than the functional currency
of the entity.
 Presentation currency is the currency in which the financial
statements are presented.
 Spot exchange rate is the exchange rate for immediate delivery.
 Foreign operation is an entity that is a subsidiary, associate, join
venture or branch of a reporting entity, the activities of which are
based or conducted in a country or currency other than those of
the reporting entity

2 2 Determination of functional
currency
Primary indicators
Currency:
 Mainly influences sales prices for its goods and
services
 Of the country whose competitive forces and
regulations mainly determine the sales prices of its
goods and services
 Mainly influences labour, materials and other costs of
providing goods and services

3
 IAS 21 The Effects of Changes in Foreign Exchange Rates

2 Determination of functional
currency
Further indicators:
Currency:
 Funds from financing activities (ie issuing debt and
equity instruments) are generated
 Receipts from operating activities are usually retained

2 Determination of functional
currency
Additional indicators

Degree of operational independence from

parent

Proportion of transactions with parent

Influence of cash flows on parent’s cash

flows

Financial autonomy compared with parent

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4
 IAS 21 The Effects of Changes in Foreign Exchange Rates

2 Determination of functional
currency

Primary
Indicators

Management Further
Judgement Indicators

Additional
Indicators

2 Determination of functional
currency
 An entity does not have a free choice of
functional currency

 An entity cannot change functional currency

unless facts and circumstances relevant to its
determination change

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5
 IAS 21 The Effects of Changes in Foreign Exchange Rates

2 Determination of functional
currency
 If the functional currency is the currency of a
hyperinflationary economy restatement in
accordance with IAS 29 - Financial Reporting in
Hyperinflationary Economies

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3 Reporting foreign currency transactions in

the functional currency
 Net investment in a foreign operation:
 A monetary item that is receivable from or payable to a
foreign operation
 Settlement is neither planned nor likely to occur in the
foreseeable future
Note: foreign operation could be any subsidiary of the group

Entity

grants a loan
Sub Sub
12
A B

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

3 Reporting foreign currency transactions in

the functional currency

 Monetary Items

 Non-monetary Items

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3 Reporting foreign currency transactions in

the functional currency

Items that will be received or be delivered in

Monetary a fixed or determinable number of units of
currency

Example:
Cash
Cash equivalents
Marketable debt securities
Accounts receivable/payable

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

3 Reporting foreign currency transactions in

the functional currency

Items that will not be received or be

Non -Monetary delivered in a fixed or determinable number
of units of currency

Example:
Inventory
Prepaid expenses (it depends)
Investment property
Property, plant, and equipment
Intangible assets (e.g. goodwill)

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3 Reporting foreign currency transactions in

the functional currency

Initial recognition

IAS 21
Reporting Foreign
Subsequent measurement
currency
transactions
Carrying amount determined
by comparing two amounts

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

3 Reporting foreign currency

transactions in the functional currency

 Initial recognition:
@ the rate at the transaction date (*)
Apply for both monetary and non-
monetary items

(*) May use e.g. average rate for week or month as a practical
approximation. However, average rates not reliable if currency
fluctuates significantly

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3 Reporting foreign currency

transactions in the functional currency
 Subsequent measurement:

Non - monetary Non-monetary

Monetary items at fair value
Items at historical
Items
cost

Rate at the reporting Rate at the date of Rate at the date

date (closing rate) transaction of valuation

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

3 Reporting foreign currency

transactions in the functional currency
 Carrying amount determined by comparing two amounts
(Inventory, asset for which there is an indication of
impairment) compare:
Cost/ Net realisableValue/
Carrying amount Recoverable amount

Comparison
with

Rate at the date that

Historical rate OR rate
the amount is
at the date of the determined (e.g.
measurement/valuation reporting date)

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4 Recognition of exchange differences

Any gains/losses produced on translation are
recognized in profit or loss in the period they
arise
Three exceptions
 Hedges - IAS 39
 Non-monetary items
 Monetary item which is treated as part of the
investment in the foreign operation

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

4 Recognition of exchange differences

Monetary items:
Recognise in Profit or Lost

Non-monetary items:
Recognise in Profit or Lost (on disposal) or
Recognise in Other Comprehensive Income (on
a revaluation)

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4 Recognition of exchange differences

Monetary Items

Realised Unrealised
Exchange differences Exchange differences

Recognised in P/L
(both gains and losses)

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

4 Recognition of exchange differences

Non-monetary items

Gain/loss is recognised in Gain/loss is recognised in

profit or loss (on disposal) other comprehensive income (on a
revaluation)

Exchange component Exchange component

recognised in profit and recognised in other
loss comprehensive income

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4 Recognition of exchange differences

 When the transaction is settled within the same accounting
period as that in which it occurred, all the exchange
difference is recognised in that period.

 However, when the transaction is settled in a subsequent

accounting period, the exchange difference recognised in
each period up to the date of settlement is determined by
the change in exchange rates during each period.

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

4 Recognition of exchange differences

 Net investment in a foreign operation
 Exchange differences arising on entity’s net investment in a
foreign operation shall be recognised in profit or loss in the
separate financial statements of the reporting entity or of
the foreign operation

 In the financial statements that include the foreign operation

and the reporting entity (eg consolidated financial
statements when the foreign operation is a subsidiary),
such exchange differences shall be recognised initially in
other comprehensive income and reclassified from equity to
profit or loss on disposal of the net investment.

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4 Change in functional currency

 If there is a change to the underlying

transactions, events and conditions
 Example: a change in the currency that mainly influences the sales
prices of goods and services may lead to a change in an entity’s
functional currency.

 Translation procedures should be applied to

the new functional currency prospectively from
the date of the change

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

4 Change in functional currency

 The resulting translated amounts for non-

monetary items are treated as their historical
cost.

 Exchange differences arising from the

translation of a foreign operation previously
recognised in other comprehensive income,
are NOT reclassified from equity to profit or
loss until the disposal of the operation.

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5 Translation to the presentation currency

Rates at reporting date

Assets and liabilities
(closing rate)

Rate at date of transaction

Income and expenses
(or average rate)

All resulting exchange differences shall be recognised in

other comprehensive income.

Reclassify to P/L
on disposal

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

Translation of a Foreign Operation

 If an entity has a foreign operation (e.g. a foreign
subsidiary, associate or joint venture) it will necessary to
translate the financial statements of the operation into the
same currency as is used in the entity’s own financial
statements (by consolidation or proportionate
consolidation or the equity method).

 The translation process is the same as the process when

translating an entity’s financial statements from a
functional currency to a presentation currency.

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6 Disclosure
The following should be disclosed:
 Exchange gains and losses recorded through
profit and loss and comprehensive income
except for financial instruments measured at
fair value
 In accounting policy note disclose that P/L
items are translated at rate at transaction
dates

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

6 Disclosure

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6
Additional disclosures
 Reasons (if applicable):
 Why there has been a change in the functional
currency
 Why the presentation and functional currency
are different

 If entity’s presentation currency is different from its

functional currency, its financial statements should
only be described as compliant with IFRSs if all the
requirements of IAS 21 are applied

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 IAS 21 The Effects of Changes in Foreign Exchange Rates

6 Additional disclosures (continued)

 If entity’s additional financial information is

displayed in a currency different from either its
functional or its presentation currency and all the
requirements of IAS 21 have not been met:
 Clearly identify such information as supplementary
 Disclose the currency of the supplementary
information
 Disclose the entity’s functional currency and the
method of translation used as a basis for presenting
the supplementary information

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7 Comparison
 Include a requirement to determine “functional
currency”
 Specific criteria for using a currency other than
VND as an accounting currency (Circular
244/2009/TT-BTC) (at least 70% of transactions
are with the parent entities or in the parent
entities’ currency). Replaced by Circular
200/2014/TT-BTC.
 IAS 21 doesn’t include the requirements for
distinguishing between foreign operations that
are integral to the operations of the reporting
entities and foreign entities.
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17
 Objectives
Define current tax and temporary differences

Ias 12 income taxes Explain the meaning of Tax base

Calculate and account for the deferred tax assets and

liabilities

State the disclosure requirements of IAS 12

1 2

Scope
Contents

Scope • IAS 12
Disclosure
• Apply to income taxes
Deferred
Definitions
• Does not apply to government grant (IAS 20)
tax

Current tax Tax base

3 4

1
 Definitions
Definitions • Accounting profit: profit or loss for a
period before deducting tax expense.
Accounting profit:
• Taxable profit (tax loss): the profit (loss)
for a period, determined in accordance + Expense recognised but not-deductible for tax purpose
with the rules established by the taxation + Income not recognised but included for tax purpose
authorities - Expense not recognised but deductible for tax purpose
- Income recognised but not taxable
= Taxable profit (tax loss)

5 6

Example 1:
• Current tax
A company with an issued share capital of 1,000,000 ordinary shares
✓The amount of income taxes payable
has the following results for the three year to 31 December (in $000):
Definitions (recoverable) in respect of the taxable
profit (tax loss).
20X0 20X1 20X2
Profit before tax 800 800 800 • Deferred tax
Depreciation charged in the year 200 200 200 ✓Deferred tax liabilities: the amounts of
Depreciation for tax purposes 400 150 50 income taxes payable in future periods in
respect of taxable temporary differences.
Assuming that there are no other permanent or temporary differences
✓Deferred tax assets: the amounts of
and that the rate of tax is 20%, compute the company’s profit after
income taxes recoverable in future
tax for each of the three years. Also, calculate the earnings per share
periods.
ratio for each year.

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2
 Tax base

• Asset: amount deductible against taxable benefit when recover

the carrying amount
Tax base • Examples:
• A machine cost 100. For tax purposes, depreciation of 30
Amount attributed to asset/liability for tax purpose has already been deducted in the current and prior periods
and the remaining cost will be deductible in future periods,
either as depreciation or through a deduction on disposal.
Revenue generated by using the machine is taxable, any
gain on disposal of the machine will be taxable and any loss
on disposal will be deductible for tax purposes. The tax
base of the machine is 70.

9 10

Tax base
Tax base
Liability: carrying amount less amount deductible for tax purpose in the
future period.
• Examples:
Examples:
• Interest receivable has a carrying amount of 100. The related
interest revenue will be taxed on a cash basis. The tax base • Current liabilities include accrued expenses with a carrying amount
of the interest receivable is nil. of 100. The related expense has already been deducted for tax
• Trade receivables have a carrying amount of 100. The purposes. The tax base of the accrued expenses is 100.
related revenue has already been included in taxable profit • Current liabilities include accrued expenses with a carrying amount
(tax loss). The tax base of the trade receivables is 100. of 100. The related expense will be deducted for tax purposes on a
cash basis. The tax base of the accrued expenses is nil.
• A loan payable has a carrying amount of 100. The repayment of the
loan will have no tax consequences. The tax base of the loan is 100.

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3
 • Current tax liabilities (assets) for
Current tax the current and prior periods shall
be measured at the amount
• Current tax liability and current tax expected to be paid to (recovered
asset Current from) the taxation authorities,
using the tax rates (and tax laws)
• Current tax for current and prior
periods shall, to the extent unpaid, be
recognised as a liability. If the amount
tax that have been enacted or
substantively enacted by the
end of the reporting period. (IAS
already paid in respect of current and 12_46)
prior periods exceeds the amount due
for those periods, the excess shall be
recognised as an asset. (IAS 12_12)

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Deferred tax
The difference between
01 02
Carrying amount > Tax Carrying amount < Tax
carrying amount and tax base base base
• Taxable temporary • Deductible temporary
difference (deferred tax difference (deferred tax
Temporary liability) asset)
differences
Taxable Deductible
temporary
temporary
differences differences Deferred tax

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4
 Deferred tax Example 2:
A company with an issued share capital of 1,000,000 ordinary
shares has the following results for the three year to 31
December (in $):
20X0 20X1 20X2
Profit before tax 800 800 800
Depreciation charged in the year 200 200 200
Depreciation for tax purposes 400 150 50
Assuming that the depreciation charges relates to an asset
acquired for $600,000 on 1 January 20X0, using straight-line
basis over three year and estimated residual value is 0. Show
the necessary transfers to and from the company’s deferred tax
account. Tax rate is 20%.

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Deferred tax
Deferred tax
• Deferred tax assets and liabilities shall not be
• Deferred tax assets and liabilities shall be measured at discounted.
the tax rates that are expected to apply to the period • The carrying amount of a deferred tax asset shall
when the asset is realised or the liability is settled, based be reviewed at the end of each reporting period. An
on tax rates (and tax laws) that have been enacted or entity shall reduce the carrying amount of a
substantively enacted by the end of the reporting period. deferred tax asset to the extent that it is no longer
probable that sufficient taxable profit will be
available to allow the benefit of part or all of that
deferred tax asset to be utilised. Any such
reduction shall be reversed to the extent that it
becomes probable that sufficient taxable profit will
be available.

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5
 ➢Current tax expense (income);

• A deferred tax asset shall be ➢Any adjustments recognised in the

recognised for the carry-forward of period for current tax of prior periods;
unused tax losses and unused tax ➢The amount of deferred tax expense;
Deferred tax credits to the extent that it is probable ➢The amount of the benefit arising from a
that future taxable profit will be
available against which the unused
disclosure previously unrecognised tax loss, tax
credit or temporary difference of a prior
tax losses and unused tax credits can period that is used to reduce current tax
be utilised. expense/ deferred tax expense

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