ACCA

(The Ul mate FR book)

By,
CA Vishal Jain
(Educator – ACCA FR & SBR)
 CHAPTER 1
IAS 16: PROPERTY, PLANT & EQUIPMENT

1. Meaning of Property, Plant & Equipment

Property, plant and equipment are:

Tangible items Held for USE Life > ONE period

Production or supply of goods /

services
Rental to others
Administrative works

Scope of IAS 16 Applicable standard

PPE, held for use PPE under IAS 16
PPE, held for sale in ordinary course of business Inventory under IAS 2
PPE, held for sale IFRS 5
PROPERTY, held for rental IP under IAS 40
Plant and equipment held for rental PPE under IAS 16
Biological assets IAS 41
Bearer plants PPE under IAS 16

2. Recognition Principle

An item of PPE shall be recognized as an asset in financial statements, if and only if:
👉 Probable future economic benefits are expected to flow to entity; and
👉 Costs can be measured reliably

Recognition principle SATISFIED Recognition principle NOT SATISFIED

Recognise PPE in FS. Expense off to P&L.

3. Measurement Principle

Initial Measurement Subsequent Measurement

👉 Initial costs
👉 Subsequent costs
Cost Model OR Revaluation Model
4. Measurement Principle - Initial Measurement @ COST

An item of PPE that qualifies for recognition shall be measured at its COST

Meaning of COST
Purchase price of PPE XXX
Add: Non-refundable taxes / import duties / etc. XXX
Less: Trade discounts or rebates (refer NOTE below) (XXX)
Less: Finance costs (Deferred payments) (XXX)
Add: Finance costs (under IAS 23) XXX
Add: any directly attributable costs incurred to bring the asset XXX
to the LOCATION and CONDITION for intended use by the
management
Add: PRESENT VALUE of estimated costs of dismantling and XXX
removing the item and restoring the site on which it is
located
Total amount to be capitalised XXX

NOTE: Cash discount (or settlememt discount, if any) should NOT be adjusted with cost of
asset. Rather, the same should be recognised as "other income" in P&L.

NOTE: Costs of Testing may be capitalised as part of cost of PPE, but any proceeds earned by
the company in selling any items produced as a result of that testing should be accounted for
in PL.

Meaning of DIRECTLY ATTRIBUTABLE COSTS

INCLUDES EXCLUDES
👉 Employee costs for construction of PPE. Costs of staff training
👉 Costs of site preparation 👉 Costs of opening a new facility
👉 Initial delivery and handling costs 👉 Costs of relocating or reorganizing part
or all of an entity’s operations.
👉 Installation and assembly costs 👉 Costs of introducing a new product or
👉 Professional fees service
👉 Costs incurred after an item is capable
of being operated in a manner intended by
management.
👉 Testing costs - whether the asset is working 👉 Initial operating losses, such as those
properly after deducting proceeds from the sale incurred while demand for the item’s
of any product produced during the testing output builds up; and
period.
👉 Other directly attributable overheads 👉 General overheads (ALLOCATED).

Costs of dismantling, Decommissioning, removal and site restoration

Obligation (Legal / Constructive) for dismantling, removing and restoring the site on which an
item of property, plant and equipment is located, are capitalised to the cost of asset and also
recognised as a Provision.
In absence of legal regulation, if an entity undertakes an
Constructive obligation
obligation as per its past practices or its reputation.
Provision to be PRESENT VALUE of decommissioning or restoration costs using
capitalised to Asset risk adjusted discount rate.
 Initial accounting
Subsequent accounting treatment
treatment
Capitalise the amount of Unwind provison and charge
provision to cost of the finance costs;
asset. Depreciate Asset
Asset Debit Finance costs Debit
To Provision for DRRC To Provision for DRRC

Provision for DRRC Debit

To Bank

Example 1 on Provision for DRRC:

On 1 April 20X4, A Limited purchased an Oil Rig for $10 millions. Incurred installation costs of
$2 millions. A Limited estimates decommissioning and restoration costs of $6 millions. Life of
Oil rig is 3 years. Rate of interest is 10% p.a. Suggest accounting treatment.
Subsequent Costs

Repairs and
Inspections Replacements
Maintenance
Day to day servicing of Capitalise the cost to CA of Asset; and
asset and minor Derecognise the CA of replaced part/ Inspection costs
replacements

Only if it increases efficiency or economic benefits or enables the

Expensed off to SPL
overall asset to be operated.

NOTE: If carrying amount of old component (Replacement or Inspection) is not identifiable, as

there was no breakdown of cost at initial recognition, then calculate the same as follows:

Step 1: Identify the current cost (Cost on date of replacement)

Step 2: Calculate the present value of current cost on date of initial recognition

Step 3: CA of replaced component (on replacement date) = Depreciated value of PV.

Example 2 on Replacement accounting (Breakup of costs is available)

A Ltd. has acquired a heavy machinery at a cost of $1,00,00,000 (Turbine costing 30 millions
and rest of machine costing 70 millions). The estimated useful life of machinery is 10 years.
However, the life of turbine is 4 years. At the end of the fourth year, the turbine requires
replacement. The remainder of the machine is perfect and is expected to last for the next six
years The cost of a new turbine is $45,00,000. Calculate the revised carrying amount of the
machinery at YE 4? Consider the discount rate of 5% per annum.
Example 3 on Replacement accounting (Breakup of costs is NOT available)
A Ltd. has acquired a heavy machinery at a cost of $1,00,00,000 (with no breakdown of the
component parts). The estimated useful life is 10 years. At the end of the fourth year, one of
the major components, the turbine requires replacement, as further maintenance is
uneconomical. The remainder of the machine is perfect and is expected to last for the next
four years The cost of a new turbine is $45,00,000. Calculate the revised carrying amount of
the machinery at YE 4? Consider the discount rate of 5% per annum.
5. Measurement Principle - Subsequent Measurement

COST MODEL REVALUATION MODEL

Original cost of asset Fair value of asset

Less: Accumulated depreciation Less: Subsequent accumulated depn.
Less: Accumulated Impairment losses Less: Subsequent accumulated impair. loss
Net Carrying amount Net Carrying amount

An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to all assets in the same class (Assets of similar nature or use) of
property, plant and equipment.

Example: Industrial building and Office building - even though the nature is same i.e.,
building but use is different and hence it will be classified as separate class of assets.

6. Subsequent Measurement - REVALUATION MODEL

Frequency
When the fair value of a revalued asset differs materially from its carrying amount, a further
revaluation is required.
Generally, once in three to five years.
However, if Fair value experiences significant and volatile changes then annual revaluation is
needed.

Treatment of REVALUATION GAIN / LOSS (Asset by Asset)

Revaluation - 1st Time

Revaluation Gain Revaluation Loss
Recognise the gain in OCI Recognise the Loss in SPL

Revaluation - Subsequently
Prior revaluation gain Prior revaluation loss
Revaluation Gain Revaluation Loss Revaluation Gain Revaluation Loss
Recognise the gain in OCI Adjust the Recognise the gain in Recognise the Loss
revaluation loss SPL to the extent loss in SPL
from OCI to the was initially recognised
extent credit in SPL, any excess is
balance is existing recognised in OCI
in revaluation
reserve, any excess
loss to SPL

NOTE: The treatment of revaluation gain or loss has to be done asset by asset.
REVALUATION APPROACHES

Depreciation elimination Approach Restatement Approach

STEP 1: Eliminate entire accumulated STEP 1: Calculate % increase / decrease
depreciation against the Gross carrying amount (Revaluation gain or loss / Net carrying
of the asset. amount)
Accumulated Depreciation Debit
To Asset

STEP 2: Increase/ decrease the net carrying STEP 2: Proportionately increase/ decrease
amount to its fair value. gross carrying amount and accumulated
depreciation
Asset Debit Asset (Gross block) Debit
To Revaluation reserve To Accumulated Depreciation
To Revaluation reserve

Treatment of REVALUATION RESERVE

👉 Transferred to Retained Earnings.

Option 1 On derecognition/ disposal of PPE
Over the remaining useful life of PPE (for an amount of excess
WHEN ? depreciation. Further if on disposal of asset, there is a credit
Option 2
balance in revaluation reserve then that should be transferred to
retained earnings.

NOTE: If an entity opts for Option 2, special care needs to taken while adjusting revaluation
loss or impairment loss with revaluation reserve considering a portion of reserve is already
transferred to retained earnings.

Example 4: A Limited purchased a machinery for $900,000 having a useful life of 10

years. At the end of 2nd year, Fair value of machine is $960,000. Further at end of sixth
year, the machine was revalued to $300,000.
Suggest accounting treatment if entity has a policy of:
A. Annual transfer of revaluation reserve to retained earnings; and
B. Transfer at the end of derecognition of machinery
7. Special cases

A. Self constructed asset

Same measurement principle as discussed above. However, the cost of abnormal amounts of
wasted material, labour or other resources incurred in self constructing an asset is not
included in the cost of the asset.

B. PPE acquired in Exchange

Recognise PPE at FV of asset GIVEN UP, unless:

👉 Exchange transaction lacks commercial substance; or
👉 If neither of the fair values are available.
In such cases, recognise the asset acquired at the CA of asset given up.

NOTE: Commercial substance exists, if there is a significant difference between:

- Economic benefits from assets exchanged; or
- Risk, amount and timing of cash flow of the assets exchanged

D. Safety and Environmental equipment

These items may be necessary for the entity to obtain future economic benefits from its
other assets. They are also called as ENABLER ASSETS and are capitalised as PPE.

E. Spare parts
Items such as spare parts, stand-by equipment and servicing equipment are recognised in
accordance with this IAS when they meet the definition of property, plant and equipment.
Otherwise, such items are classified as inventory.

8. Depreciation (commences when Ready/ Available to USE)

i.
Depreciation is the systematic allocation of depreciable amount over the useful life of asset.

ii. Methods of depreciation can be:

Straight line method.
WDV method
Machine hour rate method

ii. Method of depreciation, Residual value and useful life are all estimates and has to be
reviewed at each reporting dates. Any changes in such estimates has to be accounted for
prospectively.
Revised depreciable amount
Revised depreciation =
Revised useful life
iii. Depreciation ceases when either the asset is sold or is classified as held for sale.
iv. Depreciation does not cease, when the asset is idle / retired from active use.
v. Depreciation should be recognised in SPL unless it can be capitalised to any other assets.

vi. Component accounting

Each part of an item of PPE with a cost that is significant in relation to the total cost of the
item and having a different useful life, should be depreciated separately.

NOTE: Component accounting can be followed, even if the cost is NOT significant.
9. Derecognition
PPE should be de-recognised either:
👉 On disposal; or
👉 when no future economic benefits are expected from its use or disposal .
NOTE: Gains or losses arising on derecognition of PPE is recognised in SPL

NOTE: On disposal or de-recognition of revalued asset, transfer the balance of revaluation

reserve to retained earnings.

10. Disclosure requirements

Measurment basis (i.e., cost model or revaluation model)
Methods of depreciation
Useful life of the asset
Reconciliation statement showing:
- Opening gross block of the asset
- Additions and deletions during the year
- Closing gross block of the asset
- Depreciation charged during the year
- Revaluations during the year
- Opening and closing accumulated depreciation
- Classified as held for sale
- Opening and closing net carrying amount

11. Costs to be capitalised

Particulars Treatment
List price of machine Added to Cost of asset
Trade discount Reduced from Cost of asset
Cash / settlement discount Profit & Loss
Non refundable taxes / import duties Added to Cost of asset
Refundable taxes No treatment. Reduce, if already added
Delivery and handling fees Added to Cost of asset
Installation fees Added to Cost of asset
Pre product testing Added to Cost of asset
Purchase of 5 year maintenance contract Prepaid expense and amortise to P&L
Site preparation costs Added to Cost of asset
Professional's fees on acquisition advice Added to Cost of asset
Interest charges for deferred credit Profit & Loss
Interest charges on qualifying asset Added to Cost of asset
Investment income on temporary funds Reduced from Cost of asset
Stamp duty and legal fees Added to Cost of asset
Architect fees Added to Cost of asset
Materials and labour Added to Cost of asset
Employement cost for construction Added to Cost of asset
Staff training costs Profit & Loss
 Directly attributable overhead costs Added to Cost of asset
Allocated overhead costs Profit & Loss
Costs of relocating employees Profit & Loss
Costs of opening ceremony Profit & Loss
Income received on temporary use Profit & Loss
Costs of purchase of land Added to Cost of asset
Income from use of car parking Profit & Loss
Decommissioning, removal / restoration costs Added to Cost of asset at PRESENT VALUE.

12. EXAM FOCUS POINT

Diminishing balance and reducing balance will be used interchangeably .

Date of revaluation is very important to calculate gain or loss on revaluation and
depreciation subsequent to revaluation.
Annual transfer of revaluation reserve to retained earnings is only required if specified in
the question.
 CHAPTER 2
IAS 40: Investment Property
1. Meaning
Property (i.e, Land or Building or both or a part thereof):
Held for NOT Held for
✔ Rental to others; and / or ❌ Production/ Supply of goods/ services
✔ for capital appreciation ❌ Administrative purposes
❌ Sale in ordinary course of business
❌ Held for Sale

3. Nature of investment property

Held for use PPE under IAS 16

Held for sale in ordinary course Inventory under IAS 2

Held for sale IFRS 5

Held for rental to employees (either market

Property PPE under IAS 16
rent or subsidized rent)

Held for capital appreciation / rental*

IP under IAS 40
(Operating lease) / Both

Undetermined purpose IP under IAS 40

Held for use PPE under IAS 16

Held for sale in ordinary course Inventory under IAS 2

Vacant
Property Held for capital appreciation / rental*
IP under IAS 40
(Operating lease) / Both

Undetermined purpose IP under IAS 40

Held for use PPE under IAS 16

Held for sale in ordinary course Inventory under IAS 2

Under-
construction Held for capital appreciation / rental*
Property IP under IAS 40
(Operating lease) / Both

Undetermined purpose IP under IAS 40

*Note: However, if a property is given on finance lease - the property will be derecognised and
hence no need of classification.

5. Recognition Principle

Investment property (IP) shall be recognized as an asset, if and only if:

👉 Probable future economic benefits are expected to flow to entity; and
👉 Costs can be measured reliably
6. Measurement Principle

Initial Measurement Subsequent Measurement

👉 Initial costs
👉 Subsequent costs
Cost Model OR Revaluation Model

7. Measurement Principle - Initial Measurement @ COST

Investment Property that qualifies for recognition shall be measured at its COST.

9. Measurement Principle - Subsequent Measurement

Cost Model (Same as IAS 16: Property, plant and Equipment)

Revaluation Model (Gains or loss on revaluation to PL)

Subsequently, an entity shall adopt an accounting policy to measure all of its Investment
property at either COST MODEL or REVALUATION MODEL.

Disclosure of Fair value

All entities should measure and disclose the fair value of all investment properties. Further, an
entity is encouraged but not required to get the FV of investment propoerty by an independent
valuer who holds a recognised and relevant professional qualification.

There is a rebuttable presumption that FV of IP can be measured on continuing basis.

An entity shall disclose the following facts for investment properties:

👉 Its accounting policy for measurement of investment property;

👉 Fair value of such investment property and estimates used by valuer in valuing the property .

👉 Amounts recognised in P&L for:

> Rental income earned; and
> Direct operating expenses incurred for all investment properties; and
> Depreciation of such investment property
👉 Any restrictions or pledge on investment properties.
👉 All disclosures of PPE.

10. Transfers TO/ FROM Investment Property

An entity shall transfer a property to, or from, investment property when, and only when, there
is a change in use.
A change in use occurs when:
👉 property meets, or ceases to meet, the definition of investment property; and
👉 there is evidence of the change in use.
 Accounting treatment of Transfers

Case 1 PPE (Cost) IP (Cost)

Case 2 PPE (Cost) IP (FV)

Case 3 PPE (FV) IP (Cost)

Case 4 PPE (FV) IP (FV)

Case 5 IP (Cost) PPE (Cost)

Case 6 IP (Cost) PPE (FV)

Case 7 IP (FV) PPE (Cost)

case 8 IP (FV) PPE (FV)

11. Derecognition

Same as IAS 16 on PPE.

 CHAPTER 3
IAS 23: Borrowing costs
1. Core principle

Borrowing costs
that are directly attributable to the Acquisition*,
All others
Construction or Production* of a Qualifying asset

Capitalised to the cost of that asset Expensed off to P&L.

Acquisition: Acquire and develop / Construct

Acquisition: Contract with supplier to construct the asset which will be acquired by entity
Production: Construction / Developement of inventory

2. Scope

This standard applies to all borrowing costs and does not apply to:
👉 Costs of equity

3. Meaning of Borrowing costs

These are interest and other costs that an entity incurs in connection with the borrowing of
funds. It may include:

Interest expense (using

the effective interest
method ) under Ind AS 109

Interest in respect of lease

liabilities under Ind AS 116
Exchange difference arising
foreign currency borrowings

4. Meaning of Qualifying asset

Qualifying asset is an asset that necessarily takes a substantial period of time to get ready for
its intended use or sale.

5. Borrowing Costs eligible for capitalisation

Specific borrowing (Borrows specifically to obtain a qualifying asset)

Investment income on the

Borrowings costs eligible Actual borrowing
less temporary investment of those
for capitalisation = costs incurred
borrowings.

General borrowing (All borrowings other than general borrowings)

Step 1: Calculate Capitalisation rate (CR) =

Weighted average borrowing costs on outstanding borrowings of the entity (excluding specific
borrowing costs)
______________________________________________________________________
 Total outstanding borrowings of the entity during the period (excluding specific borrowings)

Step 2: Borrowing costs eligible for capitalisation

Borrowings costs eligible Expenditure incurred on

for capitalisation =
CR X Qualifying assets

6. Period of capitalisation

Commencement of
Suspension of capitalisation Cessation of capitalisation
capitalisation
Date when entity meets Suspended during the extended when substantially all the
all of the following periods in which the active activities necessary to prepare
conditions cumulatively development of a qualifying asset the qualifying asset (or a part of
on a particular date: is suspended. it) for its intended use or sale
👉 it incurs expenditure Further, Capitalisation of is not are complete.
for the asset; and suspended when temporary delay
is a necessary part of the process.
👉 it incurs borrowing
costs; and
👉 it undertakes
activities to prepare the
asset for its intended use
or sale.
 CHAPTER 4
IAS 38: INTANGIBLE ASSETS
1. Meaning of Intangible assets

An intangible asset is an identifiable non-monetary asset without physical susbtance.

Identifiable Non-monetary No physical substance

An intangible is classified as an INTANGIBLE ASSET , if satisfies:

👉 Identifiability criteria
👉 Control criteria
👉 Benefits criteria

Identifiable
An asset is identifiable if it either:

Separable Arises from legal / contractual rights

Capable of being separated from the entity and regardless of whether those rights are
sold, transferred, licensed, rented or exchanged, transferable or separable from the entity or
regardless of whether entity intends to do so; from other rights and obligations.

Control
An entity controls an asset if entity has:
a. Power to obtain future economic benefits from the underlying resource; and
b. Ability to restrict the access of other to those benefits

Future economic benefits

The future economic benefits flowing from an intangible asset may include:
👉 Increase in revenue, cost savings or any other benefits.

2. Recognition principle
An intangible asset can be recognised in financial statements, if and only if:
👉 Probable that expected future economic benefits will flow to the entity; and
👉 Cost of the asset can be measured reliably.

3. Measurement principle

Initial Measurement Subsequent Measurement

👉 Initial costs
👉 Subsequent costs
Cost Model OR Revaluation Model

4. Measurement Principle - Initial Measurement @ COST

An Intangible asset that qualifies for recognition shall be measured at its COST.
NOTE: Meaning of cost is same as IAS 16 on PPE.
 Subsequent Costs
Same as IAS 16 on PPE.

5. Measurement Principle - Subsequent Measurement

COST MODEL REVALUATION MODEL

Original cost of asset Fair value of asset

Less: Accumulated amortisation Less: Accumulated amortisation subsequent
to date of FV
Less: Accumulated Impairment losses Less: Accumulated Impairment losses
subsequent to date of FV
Net Carrying amount Net Carrying amount
An entity shall choose either the cost model or the revaluation model as its accounting policy
and shall apply that policy to all assets in the same class (Assets of similar nature or use) of
Intangible assets.

6. Subsequent Measurement - REVALUATION MODEL

Scope of Revaluation model

Revaluation model can be applied only if active market exists for that intangible asset. An
active market is a market means the asset is sold in sufficient volume and frequency.

Frequency

Treatment of REVALUATION GAIN / LOSS

REVALUATION APPROACHES

Treatment of REVALUATION RESERVE

Same as IAS 16 on PPE.

Amortisation of revalued assets

Fair value of the asset
Amortisation expense =
Remaining useful life on date of FV

Comparision

PPE @ FV Intangible asset @ FV Investment property @ FV

WHEN: CA differs WHEN: Same as PPE, however for
materially from its FV. an intangible asset - FV model
Generally once in 3-5 years. can be applied only if active
If FV is volatile, then annual market exists for that intangible
asset.

Class of assets basis Same as PPE Not allowed

Revaluation approach Same as PPE
Treatment of Revaluation Same as PPE
gain/ loss
Treatment of Revaluation Same as PPE
reserve
7. Modes of acquisition of an INTANGIBLE ASSET

Separately Internally Exchange of

Self generated
acquired generated assets
Discussed
A B D
above

A. Internally generated Intangible assets (Research and Development phase)

Research phase Development phase

Original and planned investigation undertaken
Application of research findings
for gaining knowledge

Expensed to P&L. Capitalised as Intangible asset, if:

👉 Probable future economic benefits
👉 Intention to complete
👉 Resources to complete
👉 Ability to complete
👉 Technical feasibility
👉 Expenditure can be measured reliably.
EXAMPLE: Expenditure on a new production process in 20X1-20X2:
1st April to 31 st December 20X1 2,700
st st
1 January to 31 March 20X2 900
The production process met the intangible asset recognition criteria for development on 1 Jan,
20X2. The amount estimated to be recoverable from the process is ₹1,000 on 31 Mar 20X2.
Expenditure incurred for development of the process in FY 20X2-20X3 is ₹6,000. Asset was
brought into use on 31 Mar 20X3 and is expected to be useful for 6 years. At 31 Mar 20X4, the
amount estimated to be recoverable from the process is ₹5,000.
Requirement:
i. CA of intangible asset as on 31 March 20X2, 20X3 and 20X4; and
ii. Charge to P&L for the FY ended 31 March 20X2, 20X3 and 20X4.
B. Self generated Intangible assets

Examples: Customer lists

Internally generated goodwill
Brand name
Mastheads or Publishing titles, etc.
Expensed off to SPL as recognition principle is not met (costs cannot be measured reliably).

C. Intangible assets (IA) acquired in Exchange

Same as IAS 16 on PPE.

8. Amortisation of Intangible assets

i. It is the systematic allocation of amortisable amount over its useful life.

ii. Method of amortisation, Residual value and useful life are all estimates and has to be reviewed
at each reporting dates. Any changes in such estimates has to be accounted for prospectively.

Revised depreciable amount

Revised amortisation =
Revised useful life

iii. Amortisation ceases when either the asset is sold or is classified as held for sale.
iv. Amortisation is recognised in SPL unless it can be capitalised to cost of any other assets.

v. Intangible asset with indefinite useful life

Cannot be amortised, rather these intangible assets are tested for impairment annually at the
same time every year.

9. Derecognition of Intangible asset

Same as IAS 16 on PPE.

10. Intangible assets - NOT AMORTISED

These intangible assets are not amortised, rather they are tested for impairment annually at
the same time every year:
Goodwill; and
Intangible asset under development phase; and
Intangible asset with infinite useful life.
 CHAPTER 5
IAS 36: IMPAIRMENT OF ASSETS
1. Meaning
Impairment of assets means reduction in value of assets to bring them down to their
recoverable amount i.e. if recoverable amount falls below the carrying amount, the asset
needs to be tested for impairment.

WHY IMPAIRMENT (Objective of IAS 36):

To ensure carrying amount of the asset is fully recoverable and if not then de-recognise to the
extent it is not recoverable.

2. Scope and applicability

IAS 36 applies to impairment of all assets except for:
👉 Inventories under IAS 2
👉 Contract assets and other assets under IFRS 15
👉 Deferred tax assets under IAS 12
👉 Biological assets measured at fair less cost to sell under IAS 41
👉 Non current assets (or disposal groups) classified as held for sale under IFRS 5
👉 Financial assets under IFRS 9 (refer note below)

NOTE: Further, IAS 36 covers in itself - Financial assets in nature of investments in

subsidiaries/ associates or joint ventures measured at Cost under IAS 27.

3. Timing of Impairment of asset

GENERAL RULE: Whenever impairment indicator gets triggered.

(for all assets Further, an entity shall assess at the end of each reporting period, if
including below 3) any impairment indicator exists.

SPECIFIC RULE:
Annual impairment Intangible asset Intangible asset
Goodwill
.

Testing acquired in not yet with an

(at the SAME TIME business available for use indefinite useful
every year) combination (under life
development)

- Annually; and
- Whenever there is an indication, at the end of the reporting
period, that the asset may be impaired.

Q. Why such treatment for these 3 assets ?

A. As per IAS 38, since these assets are not amortised, hence they needs to be tested for
impairment annually at the same time every year.

NOTE: If any intangible asset was recognised during the current annual period, that shall be
tested for impairment before the end of the current annual period .
4. Impairment indicators

Internal indicators External indicators

Physical damage Significant decline in market value

Significant change in use with adverse Significant changes in technology, market or
effect on entity economic environment with adverse effect on
entity
Worse economic performance Increase in market interest rates or rate of
returns
CA of net assets of entity is more than its market
capitalisation

5. RECOVERABLE AMOUNT

An entity can recover the value of the asset either by using or selling the asset .

Fair value less costs to disposal (value if sold)

Recoverable amount
Value in use (value if used)

At each reporting date, entity shall assess if

impairment indicator gets triggered.

Not triggered (Do not test the asset

Yes, triggered
for impairment)

Test the asset for impairment

(Assess recoverable amount)

If RA < CA, the asset is impaired

Else, the asset is not impaired.
i. FAIR VALUE LESS COSTS OF DISPOSAL
i.e., asset specific value from sale
FAIR VALUE COSTS OF DISPOSAL
Fair value as per IFRS 13 i.e. the price that Incremental costs directly attributable to the
would be received to sell an asset or paid to disposal of an asset or CGU, excluding Finance
transfer a liability in an orderly transaction costs and Tax costs.
between market participants at the Example: legal costs, stamp duty, etc. but does
measurement date. not includes recognised liabilities, termination
Fair value = Market value - Transportation benefits on reorganising a business following the
costs disposal of asset, etc.

NOTE: In exam if question gives you fair value, then ignore transportation costs as it is already
adjusted in arriving at Fair value.
NOTE: In arriving at costs of disposal do not consider financing costs, tax costs.
ii. Value in use (VIU)
i.e., entity specific value from using the asset
Value in use is the present value of estimated future cash flows from use of the asset.

6. ACCOUNTING TREATMENT OF IMPAIRMENT LOSS

Impairment loss - P&L Debit Impairment loss - OCI Debit

To Provision for Impairment loss Credit Impairment loss - P&L Debit
To Prov. for Impairment loss Credit

NOTE: If recoverable amount is negative, an entity cannot recognise impairment loss more
than the carrying amount. In such cases, entity can make a PROVISION if that is required by
another standard (IAS 37).

NOTE: Subsequent to impairment, revised CA of the asset will be depreciated over remaining
useful life (may be re-assessed on impairment) of the asset.

7. CASH GENERATING UNITS (CGU)

Smallest identifiable generating independent cash

Capable of
group of assets flows

A CGU can be:

Group of property, plant and equipment within a production line; or
Production line; or
Departments within an entity; or
An entire entity
8. Reversal of impairment losses

The impairment loss recognised previously (except for Goodwill) can be reversed if there is a
reversal of impairment indicators due to which the asset was impaired previously.

Reversal of impairment loss is restricted to lower of following:

👉 Recoverable amount
👉 CA of asset had there been no impairment earliar

NOTE: Impairment loss cannot be reversed just because of passage of time rather it should be
reversed if and only if the service potential of the asset increases.
NOTE: Impairment loss on Goodwill cannot be reversed.

Reversal of impairment loss

Individual assets CGU Goodwill

Cost Revaluation model Reversal shall be allocated Reversal of

model to the assets of the CGU impairment loss on
P&L OCI (except Goodwil) in the Goodwill is NOT
if any impairment loss was ratio of CA of those assets. ALLOWED.
adjusted with PL earliar then However, in allocating
recognise reversal of impairment reversal of impairment loss,
loss to that extent in PL first. Any increased CA should not
excess is to be recognised in OCI. exceed CA had there been
no impairment earliar.
 CHAPTER 6
IFRS 16 - LEASES
1. MEANING
Contract;
that conveys "Right of use";
LEASE of an Identified asset;
for a specified period of time;
in exchange of consideration.

2. LEASE DATE

LEASE INCEPTION DATE LEASE COMMENCEMENT DATE

Earliar of:
Date when contract is signed; or Date when the asset is made available to the
Date when parties commit to terms and lessee.
conditions of lease.

This is the date when it is assessed whether This is the date when Lessee and Lessor starts
the contract is/ contains a Lease accounting for the lease.

3. LEASE TERM

Particulars Years
Rent free period XXX
Non-cancellable period XXX
Optional renewable periods (where lessee is reasonably
XXX
certain to exercise renewal / extension option)
Periods covered where Lessee has option to terminate (where
XXX
lessee is reasonably certain not to terminate early)
Total Lease term XXXX

Assessment of REASONABLY CERTAINTY

At Lease commencement date, an entity is required to assess reasonably certainty of
exercising / not exercising extension or termination option based on the factor that exercising
the option creates an economic incentive or not for lessee.
Examples:
Substantial costs incurred on Lease rentals in optional
Location of underlying asset
leasehold improvements periods.

Re-assessment of REASONABLY CERTAINTY

Subsequent to lease commencement date, an entity is required to re-assess reasonable
certainty of exercising/ not exercising extension or termination option.

4. LEASE ACCOUNTING - LESSEE'S BOOKS

Initial treatment (A) Subsequent treatment (B)

Right of Use asset Debit

To Lease liability
i) Lease liability (LL)

Present value of FUTURE LEASE PAYMENTS over lease term.

Discount rate:
Priority 1: Interest rate Implicit in the lease;
Priority 2: Incremental borrowing rate of lessee

Future lease payments Treatment

Pure fixed Rs. 1 lakhs per annum. Considered in calculating LL.
Rs. 1 lakhs per annum or 3%
Fixed In-substance
of cash inflow from asset, Considered in calculating LL.
fixed
whichever is higher.
Pure variable 3% of cash inflow from asset NOT considered in calculating
LL.
Variable Variable linked Linked to index or lease
to index or payments increase @ 15% Considered in calculating LL.
rate every 3 years.

Guaranteed Considered in calculating LL.

Residual
NOT considered in calculating
value Unguaranteed
LL.
Purchase PO exists + Lessee is reasonably certain to
Considered in calculating LL.
price exercise such option
Lease incentives Considered in calculating LL.
Penalties (if any) Considered in calculating LL.

Crux
All future lease payments are to be considered in calculating lease liability EXCEPT for:
i. Variable lease payments that do not depend on index or rate
ii. Lease payments allocated to non-lease components of a contract, unless the lessee
elects to not to separate lease and non-lease components.
iii. Unguaranteed residual value

ii) Right of Use asset

Right of Use asset is initially measured at it's COST.

Amount already paid + Amount to be paid

Upfront lease payments Lease liability

(amounts paid on or before (as calculated above)
lease commencement date)
Initial direct costs Provision for decomm. Costs
 Hence, JE at Initial Recognition:
Right of use asset Debit
To Lease liability Credit
To Bank Credit
To Provision for decommissioning liabilities Credit
(Being ROU asset and lease liability recorded.)

Note: Initial direct costs: Incremental costs of obtaining a lease that would not have been
incurred if the lease had not been obtained .

B. Subsequent treatment - Lessee's books

Lease liability Right of use asset - Cost model

Amortise as per IFRS 9 Depreciate in accordance

Closing lease liability = Opening lease with IAS 16/ 40.
liability + Finance costs using discount rate -
Actual lease payments
Finance costs
To Lease Debit - Lease term PO exists + Lessee is reasonably
liability Credit - Useful life certain
Earliar
Lease liability Debit
To Bank Credit Remaining useful life

Lease amortisation schedule (Lease payments in arrears)

Lease
Year Opening LL Finance costs Closing LL
payments
A B C A+B-C

Lease amortisation schedule (Lease payments in advance)

Lease
Year Opening LL Finance costs Closing LL
payments
A B C A-B+C
5. Presentation - Lessee's books
Extracts of Balance Sheet *Lease liability - Classification
Non current assets Step 1: Calculate balance of lease liability at
Right of use asset XXX year end.

XXX Step 2: Calculate balance of lease liability at the

end of next year.

Non current liability Step 3: Calculate the difference between lease

Financial liability liability at end of current year and at end of
next year.
Lease liability* XXX
Step 4: At the end of current year:

Current liability Non current portion = Balance of lease liability

Financial liability at end of next year.
Lease liability* XXX Current portion = Balance of lease liability at
XXX end of current year - non currenty portion.

Extracts of Statement of Profit or loss NOTE: If balance at the end of next year is
Expenses higher than balance at end of current year,
then total balance of lease liability at the end
Depreciation expense XXX
of current year is the non current portion.
Finance costs XXX
Rent expenses* XXX
XXX
*Note: Variable lease payments not considered in calculating lease liability and Lease
payments for Lessee (Recognition exemption) = P&L as rent expense

Statement of Cash flows

- Actual lease payments will form part of cash flow from financing activities.
- Variable lease payments not considered in calculating lease liability will form part of cash
flow from operating activities.
- Lease payments for Lessee (Recognition exemption) will form part of cash flow from
operating activities.
6. RECOGNITION EXEMPTIONS - LESSEE
This exemption is available with LESSEE only. Exemption is available only to:
- Short term leases; OR
- Lease of Low value item (example - Laptop, Tablet, Computer, Mobile, etc.)

If lessee opts for this exemption, then lease payments are to be recorded as EXPENSE in
statement of profit or loss on either straight line method or another systematic basis that is
more respresentative of lessee's benefits.

Short term lease Leases of low value assets

Lease term No purchase The lessee can The underlying

upto 12 option benefit from asset is not
months use of the highly
underlying dependent on,
asset on its or highly
This exemption can be made own or interrelated
by class of underlying asset together with with, other
(assets of a similar nature other assets
and use) to which the right resources that
of use relates. are readily
available to
the lessee

7. SALE & LEASE BACK

sold

Indigo State Bank of India

leaseback

Sale should qualify transfer of CONTROL

criterion as per IFRS 15.
Yes No

Sale and lease back accounting Financing arrangement

Accounting Treatment - SELLER LESSEE

Step 1: Lease liability = Present value of future lease payments
Step 2: ROU asset = CA of Asset X (Lease Liability / Fair Value)
Step 3: Gain on SLB = Gain on sale x (1 - Lease liability) / Fair value

Journal Entry in books of Seller Lessee:

Bank Debit Sale proceeds
ROU asset Debit Refer Step 2
To Lease liability Credit Refer Step 1
To Asset Credit Carrying amount on date of SLB
To Gain/loss on SLB Credit Balancing figure (Refer Step 3)
(Being Sale and leaseback recognised.)
8. IDENTIFICATION OF LEASE (ALL 3 needs to be satisfied):
At the inception of the contract, an entity shall assess whether the contract is or contains a
lease. For a lease to exist, it should satisfy ALL 3 conditions:
Condition A Condition B Condition C
IDENTIFIED ASSET Right to obtain substantially Right to DIRECT the USE
all the ECONOMIC BENEFITS
from USE of the asset.

A. Identified asset
For an identified asset to exist, it must satisfy all the 3 mentioned conditions:

Explicitly/ Implicitly specified Supplier NOT to have substantive substitution rights

B. Right to obtain substantial all of the ECONOMIC BENEFITS from USE

A customer can obtain economic benefits either directly or indirectly. Economic benefits from
use of an asset include:
👉 Asset’s primary outputs (electricity generated) & by-products (renewal energy credits);
👉 By subleasing the asset
NOTE: Economic benefits relating to ownership of the asset (For example – Tax credits) are
not to be considered.

C. Right to DIRECT THE USE of the identified asset

The customer has the right to direct the use of the asset if customer has the right to take
decisions relating to:

how and for what purpose where and when the asset is to
AND
the asset will be used ? be used ?

PROTECTIVE RIGHTS
Protective rights define the scope of the customer’s right to use the asset without removing
the customer’s right to direct the use of the asset. These rights are intended to protect a
supplier’s interest. EXAMPLES ARE:
👉 Limit the use of motor vehicle to only one territory
👉 Limits the number of miles, the motor vehicle can be driven per day, etc.
Existence of these rights have no impact on classification of lease.

Example: Economic benefits should be from USE of the asset and not ownership of asset. For a
solar farm, electricty produced and renewable energy credits are benefits from its use.
Howver, tax credits relating to solar farm arise from ownership of the solar farm.
 CHAPTER 7
FINANCIAL INSTRUMENTS
PART 1: MEANING
1. Meaning of Financial Instruments
A contract that gives rise to:

Financial liability or
Financial asset
Equity

NOTE: Statutory right/ obligation to receive or pay cash or any other financial assets is not a
financial instrument.

2. Financial Assets
Cash
Investment in equity instruments of another entity
Contractual right to receive cash or any financial asset from another entity ;

3. Financial Liability
Contractual obligation to deliver cash or other financial asset to another entity ;

4. Equity
Residual interest in net assets of the entity (i.e. after paying off all its liabilities).
No contractual obligation to deliver cash or any other financial asset ; and

Examples of Financial assets and Financial liabilities

Trade receivables Financial asset
Loans given Financial asset
Investment in Equity shares / preference Financial asset
shares / debentures
PPE, Intangible assets , Investment property Not Financial asset, no contractual right to
receive cash.
Advances given for supply of goods, Prepaid Not FA, contractual right to receive goods or
expenses, etc. services and not cash or any other FA.
Advances received for supply of goods or Not FA, contractual obligation to deliver goods
services or services and not cash or any other FA.
Tax refundable (advance tax paid) Right to receive cash is statutory and not
contractual.
Trade payables Financial liability
Bank loan Financial liability
Redeemable preference shares Financial liability
Tax liability Not a FL, as obligation to pay is statutory and
not contractual.
Income received in advance Not a FL, as there is a contractual obligation to
transfer goods or services.
Contractual obligation to pay cash Financial liability
 FINANCIAL INSTRUMENTS - Part II
FINANCIAL LIABILITIES
Recognition, Classification and Measurement
1. Recognition
An entity can recognise a Financial liability in its financial statements when it becomes party
to a contract which gives rise to:
Contractual obligation 👉 To deliver cash or any other financial assets

2. Classification

FL CLASSIFICATION

Initial Recognition Subsequently

Fair value = Amortised Fair value

cost through P&L
Issue proceeds -
Transaction costs
Exception - 2 Items

Exceptions (i.e. Financial liability measured at Fair value through P&L)

👉 Derivative financial liability Derivative
👉 Contingent consideration Business combination

3. Measurement

Initial measurement @ Fair value

Fair value = Proceeds - Transaction costs

Subsequent measurement @ Amortised cost method

No Transaction costs With TRANSACTION COSTS

Record FL at actual amount received. Record FL at net amount received
Finance costs at Coupon rate. Finance costs at Effective interest rate (EIR).
EIR is a rate where, Outflow = Inflow

Amortisation schedule:
Year Op. FL Finance costs Payments Cl. FL
@ discount rate Actual
Op + Finance costs - Payments
used payments
Journal:
on Initial measurement
Bank Debit Net amount
To Financial liability received

on Subsequent measurement
Finance cost Debit
To Financial liability

Financial liability Debit

To Bank

NOTE: Effective interest rate will be given in the question;

NOTE: FOR YOUR UNDERSTANDING (NOT FOR EXAMS)

Effective interest rate is the coupon rate as adjusted for the transaction costs of issuing the
financial liability. Basically this rate reflects the overall cost of issuing the financial liabilities
i.e. interest costs, transaction costs, etc. It is computed by equating the Fair value of loan
with the Present value of contractual cash flows under the loan agreement. The rate at which
it is equated, is called as effective interest rate.
 FINANCIAL INSTRUMENTS - Part III
COMPOUND FINANCIAL INSTRUMENTS
Recognition and Measurement
1. Meaning of CFI
An instrument which has the features of both Equity and Financial liability

2. Accounting treatment of CFI - SPLIT ACCOUNTING

A. Initial Recognition and measurement

STEP 1: Identify FL and Equity component
STEP 2: Value of FL = Present value of contractual cash flows (obligation - FL) using market
rate of interest for similar instruments without conversion rights.
STEP 3: Value of EQUITY = Issue proceeds (Ignoring transaction cost, if any) - FL (Step 2)

B. Subsequently:
EQUITY is measured at cost.
Financial liability is measured at amortised cost method.

Note: Use of Discount rate while amortising FL subsequently

👉 Use the same rate which you used to calculate FL Component .

C. On settlement date:
Converted to Equity
Equity Debit Carrying amount on settlement date
Financial liability Debit Carrying amount on settlement date
To Equity Capital Credit No of share x Face value
To Securities premium Credit Balancing figure

Redeemed in cash or any financial asset

Financial liability Debit Carrying amount on settlement date
To Bank Credit

Equity Debit Carrying amount on settlement date

To Retained earnings Credit

3. IDENTIFYING EQUITY AND LIABILITY COMPONENT

 FINANCIAL INSTRUMENTS - Part IV
FINANCIAL ASSETS
Recognition, Classification and Measurement
1. Recognition

An entity can recognise a Financial asset in its financial statements when it becomes party to
a contract which gives rise to:
Contractual RIGHT 👉 To RECEIVE cash or any other financial assets

2. Classification

Inv. in equity instruments of

Cash Other financial assets
another entity
Amortised
👉 Cost 👉 FVTPL or FVTOCI* FVTPL FVTPL
cost method

Determined by assessing:
👉 Business model test (BMT)
👉 Contractual cash flow test (CCFT)

Business model TEST

Held to maturity Held to maturity but can be Held for trading

sold
👉 This assessment of business model is not based on management's intention to hold rather it
is based on facts and evidence i.e. how the entity manages the performance of these financial
assets.

Contractual cash flow TEST

👉 Solely payments of principal and interest on specified dates
👉 No other contractual rights i.e. convertible, preference on payments, etc.

CLASSIFICATION RULE:
BMT (Held to maturity) + CCFT pass Amortised cost method (ACM)
BMT (Held to maturity but can be sold) + CCFT pass FV through OCI (FVTOCI)
Any others (Held for trading or CCFT fails) FV through P&L (FVTPL)

NOTE:
Convertible instruments
In the hands of issuer (Entity) In the hands of holder
👉 Equity; or 👉 Financial asset @ FVTPL only.
👉 Financial liability; or
👉 Compound financial instrument.

Examples: BMT CCFT Conclusion

👉 Trade receivables - (To hold)
👉 Investment in debentures (To hold)
 👉 Investment in debentures (To sell if better
returns are available)
👉 Investment in convertible debentures
👉 Investment in equity shares*

3. Measurement

FA @ ACM FA @ FVTOCI FA @ FVTPL

Initial recognition
Financial asset Debit
Same JE Same JE
To Bank
FA @ Purchase price
Purchase price + Transaction costs Any Transaction cost to P&L.

Subsequent treatment
Finance income @ EIR Finance income @ EIR Finance income @ Coupon rate
Ignore FV changes FV changes - OCI FV changes - P&L
Settlement date
Bank Debit
To Financial asset Same JE Same JE
To P&L (G/L on derecog.)

Treatment of OCI on Settlement / re-classification date

FA @ FVTOCI (OCI recycled to P&L) FA @ FVTOCI (OCI NOT recycled to P&L)
OCI Debit OCI Debit
To P&L To Other equity

4. Investment in Equity instruments of another entity

Default classification: FVTPL Optional classification: FVTOCI

Irrevocable option at the time of Initial
recognition
NOTE: Additionally IAS 27 provides an option to measure Investment in equity instruments of
another entity (in nature of Subsidiary/ Associate) to be measured at COST in the financial
statements of Parent company. In such cases, those investments in equity instruments will be
kept out of scope of Financial Instruments.
 FINANCIAL INSTRUMENTS - Part VI
Derecognition of FINANCIAL ASSETS

1. DE-RECOGNITION OF FINANCIAL ASSETS

A. Conditions (When can an entity de-recognise financial asset ?)

FA is de-recognised when:
Right to CF expires Financial asset gets realised
Right to CF are transferred If transferred along with control or substantial risk/rewards

Transfer of substantial risk and rewards

👉 Unconditional sale

Transfer of Control
Purchaser should have the ability to sell/ pledge financial asset without any restriction from
entity.

Transfer of
Financial
Assets

Non resource Recourse

arrangement arrangement

Genuine sale with tranfer of Loan taken from factor by keeping

all risk to Factor Financial asset as a mortgage

Do not
De-recognise
de-recognise Financial
Financial Asset
Asset

2. Accounting treatment of FACTORING / ASSIGNMENT of Financial assets

👉 Do not de-recognise the FA

👉 Recognise proceeds on factoring as loan (Financial liability) on date of factoring; and
👉 Recognise finance costs at each reporting dates.
 FINANCIAL INSTRUMENTS - USE OF DISCOUNTING RATES
Cases Discount rates to be used
FINANCIAL LIABILITY (FL)
Normal Financial liability (FL) Use Coupon rate to calculate finance costs and
contractual payments.
FL @ Transaction cost Use EIR to calculate finance costs and coupon
rate to calculate contractual payments.
COMPOUND FINANCIAL INSTRUMENTS (CFI)
Compound financial instrument (CFI) Use Market interest rate without conversion
option to calculate value of FL component.
CFI - FL Component Use Market interest rate without conversion
option to amortise FL component subsequently.
FINANCIAL ASSETS (FA)
Financial asset (FA) @ ACM Effective interest rate
FA @ ECL Effective interest rate
 CHAPTER 8
GROUP ACCOUNTING
PART I - INTRODUCTION TO GROUPS

1 CLASSIFICATION OF INVESTMENTS

Entity invests
Equity shares of another entity
(INVESTOR)
Investment Relationship
Less than 20% It is a normal investment - Accounted under IFRS 9
20% or more but upto 50% Associate or JV - Accounted under IAS 28
More than 50% Subsidiary, if control exists - Accounted under IFRS 3

2. ACCOUNTING FOR INVESTMENTS - SFS OF INVESTOR (PARENT)

SFS of Investor

At Cost At Fair value (FVTPL or FVTOCI)

3. ACCOUNTING FOR INVESTMENTS - SFS OF INVESTEE (SUBSIDIARY / ASSOCIATE)

No treatment Bank Debit

To Equity capital Credit
To Securities premium Credit

4. ACCOUNTING FOR INVESTMENTS - GROUP FS

Net assets Debit (Recognise all NET ASSETS of Subsidiary)

Goodwill Debit (Any excess is Goodwill / negative is Gain on bargain purchase.)
To Investments Credit (Derecognise Investments)

5. VALUATION OF COST OF INVESTMENTS

A B C D E
Cash Share Deferred Contingent Acquisition
consideration exchange consideration consideration related costs

A. Cash consideration
On DOA @ amount paid Subsequently
Investments Debit No treatment
To Bank Credit

B. Issue of shares by Parent Co (Investor)

On DOA @ Fair value of share exchange Subsequently
Investments Debit No treatment
To Equity capital
To Securities premium

C. Deferred Consideration (DC)

On DOA @ Present value Subsequently at each reporting dates -
Investments Debit Unwind & record finance costs
To Deferred consideration Finance costs Debit P&L
To Deferred consideration
Record it as Financial liability in SOFP at each year end.
D. Contingent consideration
On DOA @ Fair value Subsequently at each reporting dates -

Investments Debit Record FV changes to P&L

To Contingent consideration
Record it as Financial liability in SOFP at each year end.

E. Acquisition related costs - P&L

SUMMARY - PURCHASE CONSIDERATION

Modes of Consideration Investments On DOA Subsequently
Cash Amount paid No treatment
Share exchange Fair value of share exchange. No treatment
Deferred consideration (DC) Present value of DC Unwind DC & record fin. Costs.
Pay off DC on scheduled date.
Contingent consideration (CC) Fair value of CC Record FV changes in P&L.
Acquisition related costs P&L No treatment

Example 1: On 1 July 2021, A Limited acquired 60,000 shares of B Limited (Total no. of shares is
100,000 shares) by paying following consideration:

Cash @ $20 per share acquired; and

Issue of 3 shares of A Limited for every 5 shares acquired. Fair value per share of A Limited and B
Limited is $12 and $8 respectively; and
Cash to be paid after 2 years @ $50,000. Discount rate is 10% per annum; and

A Limited will pay $30,000 in cash after 3 years, if EPS of combined entity is more than 3 per
share. Fair value of this consideration on 1 July 2021 is $12,000 and on 31 March 2021 is $13,500.

Required: Calculate the value of purchase consideration.

6. FAIR VALUE OF NET ASSETS
All identifiable assets and liabilities of acquiree company are to be acquired at their fair values on
date of acquisition.
Further, there can be instances where assets and liabilities not recognised in the books of
subsidiary in accordance with applicable standards - gets recognised in consolidated financial
statements. This topic will be discussed in detail in Part II - Consolidated SOFP.

7. NON CONTROLLING INTEREST

holds 80%
Parent Subsidiary
holds 20%
NCI

Fair value method Proportionate share method

FV of NCI on DOA (given in question); or Fair value of net assets on
FV per share x No. of shares with NCI DOA x NCI %

Presentation in FS: Separate line item in Equity.

8. GOODWILL or GAIN ON BARGAIN PURCHASE (GBP)

Purchase consideration XXX Refer Note 5

Add: Non controlling interest on DOA XXX Refer Note 7
Less: Fair value of Net assets on DOA (XXX) Refer Note 6
Goodwill/ GBP XXX

NCI @ Fair value method NCI @ Proportionate share method

Full goodwill Partial goodwill
Journal in CFS:
Assets of Subsidiary Debit FV on DOA
Goodwill (if any) Debit Balancing figure
To Liabilities of subsidiary Credit FV on DOA
To NCI on DOA Credit Fair value or Proportionate share method
To GBP (if any) Credit Balancing figure
To Investments Credit Cost of investments

9. GAIN ON BARGAIN PURCHASE (GBP)

If in above calculation, gain on bargain purchase is arrived then:

STEP 1: Review processes and procedures for calculation made regarding FV of net identifiable
assets and cost of investments and identify errors (if any).
STEP 2: If values are reliable, recognise GBP in P&L as "Other Income".
 GROUP ACCOUNTING
PART II - CONSOLIDATED SOFP
1. Standard Procedure for Consolidated SOFP
STEP 1 Read the question and identify:
👉 Percentage acquired
👉 Date of acquisition
👉 Reserves on DOA
STEP 2 Calculate or rectify Investments (if required)
STEP 3 Prepare ALLOCATION OF NET ASSETS - PRE/ POST (Refer point 2)
STEP 4 Calculate NCI on DOA
STEP 5 Calculate Goodwill on DOA
STEP 6 At each reporting date, Calculate:
👉 Goodwill
👉 NCI
👉 Consolidated other equity
STEP 7 Prepare Consolidated SOFP

2. Movement in value of net assets i.e. ALLOCATION of profits of Subsidiary

DOA Post-acq. Reporting date

Share Captial XXX XXX XXX
Other equity XXX XXX XXX
CA of Net assets of Subsidiary XXX XXX XXX
FV adj. on DOA XXX
Consequential FV adj. - POST (XXX)
Unrealised profit (S to P) (XXX)
Unrealised profit (P to S) (XXX)
XXX XXX XXX

Goodwill
Allocated to Parent and NCI in the
ratio of their holding
3. FAIR VALUE OF NET ASSETS
All assets and liabilities of acquiree company are to be taken at fair values on DOA.

Recognition Exceptions:
i) Intangible assets: As per IAS 38, self generated intangible assets which does not satisfy the
recognition principle - need not be capitalised as Intangible asset.
Examples : Customer lists, Self-generated Brand name, etc.
As per IFRS 3, the same should be capitalised at their fair value on date of acquisition in group
FS.

ii) Research costs: Acquirer will record the same at its Fair value if it is of value to the acquirer.
In case question is silent, assume acquirer does have value.
iii) Re-acquired rights: Acquired at Fair value on date of acquisition.
iv) Contingent liability and Indemnification asset: As per IAS 37, disclose contingent liability.
However as per IFRS 3, recognise provision for contingent liability.
Further, if any recovery asset exists - Record indemnification asset at its fair value.
v) Non - current assets held for sale: Acquired at FV less costs to sell (IFRS 5).

3. ADJUSTMENTS in POST ACQUISITION PROFITS of SUBSIDIARY

i. CONSEQUENTIAL IMPACT of FV adjustment of net assets on DOA

👉 Assets and liabilities of Subsidiary are recognised at their fair values on DOA. Hence, a fair
value adjustment to the CA amount of net assets is done on DOA.
👉 However, subsequently their FV adjustment will have consequential adjustments in post
acquisition period:
Adjustment on DOA Consequential impact in Post-acquisition profits
FV adj. on PPE Excess / Savings in Depreciation on FV adjustment
FV adj. on Inventory Reversal of FV adjustment to the extent of inventory sold

ii. INTRAGROUP TRADING

Amount of unrealised profit (URP) = Goods lying unsold X Profit %

Parent to Subsidiary Subsidiary to Parent

Group Retained earnings Debit Post-acq. profits of Subsy Debit
To Inventory Credit To Inventory Credit

iii. INTRAGROUP TRANSFER OF NON CURRENT ASSETS

Parent to Subsidiary Subsidiary to Parent

Group Retained earnings Debit Post-acq. profits of Subsy Debit
To Non-current assets Credit To Non-current assets Credit
(By amount of profit earned by Parent.) (By amount of profit earned by Subsidiary.)

Non-current assets Debit Non-current assets Debit

To Post acq profit of S Credit To Group Retained earnings Credit
(By excess depreciation charged by Subsidiary.) (By excess depreciation charged by Parent.)

iv. INTRAGROUP LOANS - FINANCE INCOME / COSTS

Parent (FA) to Subsidiary (FL) Subsidiary (FA) to Parent (FL)

Group retained earnings Debit Post acq profits of S Debit
To Post acq profit of S Credit To Group retained earnings Credit
(By amount of finance income/ costs.) (By amount of finance income/ costs.)

NOTE: Loans are made on DOA + DOA is mid year

👉 Calculate post-acquisition profits after removing the impact of finance costs or finance
income of subsidiary to arrive at correct amount of post-acquisition profits.
👉 Eliminate finance income and finance costs
3. ADJUSTMENTS in CONSOLIDATED SOFP on REPORTING DATE

i. Contra adjustments
👉 Eliminate intra-group trade receivables and trade payables on reporting date.
👉 Any difference can be due to either CASH IN TRANSIT or GOODS IN TRANSIT.
👉 Eliminate intra-group loan receivables and loans payables on reporting date.

4. OTHER ADJUSTMENTS

i. DIVIDEND paid by Subsidiary

👉 Reduce parent's share from group retained earnings.
👉 Reduce NCI's share from NCI.

NOTE: If the question provides you opening and closing balance of Retained earnings of
subsidiary and dividend is paid during the year, then add the amount of dividend to the
movement of retained earnings to arrive at the correct amount of profits earned by subsidiary
in the post-acquisition period.

ii. Dividend paid by Parent

Treatment in CFS = Treatment in SFS of Parent

5. GOODWILL IMPAIRMENT

NCI @ Fair value method NCI @ Proportionate share method

Allocate impairment loss to Parent and NCI both
Allocate impairment loss to Parent only
in the ratio of their holding
 GROUP ACCOUNTING
PART III - CONSOLIDATED PL
1. Standard Procedure for Consolidated PL OCI
STEP 1 Read the question and identify:
👉 Percentage acquired
👉 Date of acquisition
👉 Reserves on DOA
STEP 2 Calculate or rectify Investments (if required)
STEP 3 Prepare ALLOCATION OF NET ASSETS - PRE/ POST (Refer point 2)
STEP 4 Calculate NCI on DOA
STEP 5 Calculate Goodwill on DOA
STEP 6 At each reporting date, prepare Consol PL:
Parent + (S x Time adjustment) X Holding %

2. ADJUSTMENTS in POST ACQUISITION PROFITS of SUBSIDIARY

i. CONSEQUENTIAL IMPACT of FV adjustment of net assets on DOA

Consequential impact in Post-acq. profits Treatment

Excess / Savings in Depreciation on FV Add to cost of sales. Reduce, in case of
adjustment. savings in depreciation.
Reversal of FV adjustment to the extent of Add to cost of sales.
inventory sold

ii. INTRAGROUP TRADING

👉 Reduce entire amount of intra-group trading from Revenue and Cost of Sales
👉 Add amount of unrealised profit to Cost of Sales
Amount of unrealised profit (URP) = Goods lying unsold X Profit %

iii. INTRAGROUP TRANSFER OF NON CURRENT ASSETS

👉 Add net amount of unrealised profit (Profit on sale - Excess depreciation) to Cost of Sales.

iv. INTRAGROUP LOANS

Parent (FA) to Subsidiary (FL)

👉 Reduce finance income earned by Parent from group investment income
👉 Add back finance costs incurred by Subsidiary to group finance costs

Subsidiary (FA) to Parent (FL)

👉 Reduce finance income earned by Subsidiary from group investment income
👉 Add back finance costs incurred by Parent to group finance costs

NOTE: Loans are made on DOA + DOA is mid year

👉 Calculate post-acquisition profits after removing the impact of finance costs or finance
income of subsidiary to arrive at correct amount of post-acquisition profits.
👉 Eliminate finance income and finance costs
4. OTHER ADJUSTMENTS

i. DIVIDEND paid by Subsidiary

👉 Reduce parent's share from group finance income.

ii. Dividend paid by Parent

Treatment in CFS = Treatment in SFS of Parent

5. GOODWILL IMPAIRMENT

Add to Admin expenses, unless specifically mentioned otherwise in question.

6. CONSOLIDATED FS at each REPORTING DATES

Consolidated Profit or Loss

STEP 1: Prepare Consolidated statement of profit or loss considering TIME ADJUSTMENT and
adjustment provided in question
STEP 2: Show allocation of profit after tax to Parent and NCI
STEP 3: Show allocation of total comprehensive income to Parent and NCI

ALLOCATION TO NCI

Particulars Amount
Profit earned by subsidiary during the year XXX
Post-acquisition profit earned by subsidiary XXX
Less: Unrealised profit (if Parent sold goods to Subsidiary) (XXX)
Less: Unrealised profit (if Subsidiary sold goods to Parent) (XXX)
Less: Impairment loss on goodwill (NCI @ Fair value) (XXX)
Net adjusted profits of Subsidiary XXX
NCI %
Profit allocated to NCI XXX
 GROUP ACCOUNTING
PART IV - ACQUISITIONS & DISPOSALS
1. LOSS OF CONTROL

Full Disposal Partial Disposal

Accounting treatment in Consol FS

Net assets on date of LOC
De-recognise Goodwill on date of LOC
NCI on date of LOC

Sale proceeds
Recognise
Investments retained (if any) @ Fair value on such date

Difference (if any) - Gain or loss on loss of control - Consol P&L

Journal: Bank Debit Sale proceeds

NCI Debit Value on date of LOC
Investments retained Debit FV on date of LOC
To Goodwill Credit Value on date of LOC
To Net assets Credit Value on date of LOC
 GROUP ACCOUNTING
PART V - ASSOCIATES
1. MEANING OF ASSOCIATE
An entity on which investor has SIGNIFICANT INFLUENCE.

Voting power of 20% or more.

DEFAULT:
Power to participate in financial / operating decisions

2. ACCOUNTING TREATMENT - ASSOCIATE & JOINT VENTURE

In SFS of Parent In Consol FS

Cost or Fair value EQUITY METHOD

Investment in associate @ COST XXX

Add: Post acq. Profit earned by Associate x A% XXX
Less: Dividend from Associate X A% XXX
Less: Impairment of Investment XXX
Less: Unrealised profit - P to A (URP x A%) XXX
Less: Unrealised profit - A to P (URP x A%) XXX
Value of Investment in associate/ JV XXX

3. ADJUSTMENTS IN EQUITY METHOD

i) DIVIDEND paid by Associate

Add back (whole amount of dividend paid) to statement of net assets; and
Reduce the value of investments in associate (dividend received by Parent) with a corresponding
impact to Consol P&L.

ii) UNREALISED PROFIT ON INVENTORY

Associate to Parent Parent to Associate

Reduce from Share of profit in Consol PL Add to Cost of Sales in Consol PL
Reduce from Inventory in Consol SOFP Reduce from Investment in Consol SOFP
Journal:
Post acq. Profits of S Debit Consol P&L Debit
To Inventory Credit To Investment in associate Credit
Amount: Unrealised profit x Associate %
 GROUP ACCOUNTING
PART VI - THEORY (Very Important)
1. Meaning of BUSINESS COMBINATION

A transaction when an acquirer obtains CONTROL over BUSINESS of other company.

ii) CONTROL
All the 3 conditions needs to be satisfied:
Power over investee; and
Rights or exposure to variable returns; and
Ability to exercise its power to affects returns (Principal vs Agent)

Power over Investee (POI)

Contractual rights Voting rights (VR)

Ability to direct relevant Majority VR Minority VR

activities (RA)

If more than one RA, then VR > 50% VR < 50%

assess which RA most But, other majority SH are:
significantly affect returns. Widespread
Not connected
Investor has POI Investor has POI Not actively participating
Absolute size of shareholding
vs Relative size of others

Investor has POI

2. MEASUREMENT PERIOD CONCEPT

1 Year from DOA
|_____________________________________|____________________________________|
DOA Beyond 1 year

New information becomes available regarding FV New information becomes available regarding FV
of assets and liabilities of assets and liabilities

Facts & Circumstances existed on DOA Facts & Circumstances existed on DOA
Yes No Yes No
Change FV of net assets, NCI on
Do not change value of Goodwill. All changes will be accounted for
DOA and consequently Goodwill
under respective standards.
as well.

3. UNIFORM ACCOUNTING POLICIES

IFRS 10 requires that Consolidated FS should be prepared by following uniform accounting policies for
Parent and Subsidiary i.e. same accounting policy for like transactions for all group companies.
However, if the accounting policies of the subsidiary are different, the same needs to be restated
and made uniform in line with that of Parent.
4. DIFFERENT REPORTING DATES

Difference upto 3 months Difference more than 3 months

Consider latest FS of Investee and adjust the
Prepare FS of Investee as on reporting date of
same for material events and transactions during
Parent.
the difference period.

5. EXEMPTION from GROUP FS

If a parent meets ALL the following condition, then they are exempt from preparing and presenting
consolidated FS:
👉 The entity is a wholly owned or partly owned subsidiary of another entity and all the owners of
the entity are informed, and they do not object to the entity not preparing consolidated financial
statements; AND
👉 The debt or equity instruments of the entity are not traded in a public market (whether domestic
or foreign stock exchange or an over-the-counter market, including local and regional markets); AND

👉 The entity has not filed nor is it in the process of filing its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in a
public market; AND
👉 The entity’s ultimate or any intermediate parent produces financial statements that are available
for public use and comply with IAS, in which subsidiaries are consolidated or are measured at fair
value through profit or loss in accordance with IFRS 10
 `
ACCA FR / SBR - Avoid these mistakes in GROUP ACCOUNTING
SN Topic Name Mistakes to be avoided
1 General Do not get confused if exam uses terms such as Full Goodwill or Partial Goodwill. NCI at FVM
may sometimes be referred to as Full Goodwill and NCI at PSM may sometimes be referred to
as Partial Goodwill.
2 General Calculate FV of Non-controlling interest (at FVM) properly. If FV is not given in question,
calculate using number of shares held by NCI multipled by FV per share of subsidiary.
Do not take FV per share of parent; or
Do not take 100% shares of subsidiary; or
Do not take holding percentage of parent.
3 General FV adjustment of net assets of Subsidiary on DOA is adjusted with Goodwill. However any FV
adjustment of net assets of Subsidiary after DOA is treated in line with respective standards.
Further any FV adjustment of net assets of Parent, whether on DOA or after DOA is treated in
line with respective standards.
FV adj of net assets of Subsidiary on DOA: Impacts GOODWILL
FV adj of net assets of Subsidiary beyond DOA: Respective standards
FV adj of net assets of PARENT on or beyond DOA: Respective standards
Research cost of Subsidiary on DOA: Recognise at FV on DOA
4 General Treatment of FV adj of Inventory and Unrealised profit on Inventory is different. Refer
example 1 below.
5 General Loans issued as part of purchase consideration is different from intra grouploans. PC are
issued to Shareholders of subsidiary and hence there is no elimination and is recorded in
group FS. While intra group loans and their finance costs or income are to be eliminated.
6 General Issue costs on acquisition - PL and not add to cost of investment
7 General Markup is on cost where as Margin is on selling price.
Example: Calculate profit if Sale price is 500 and markup is 25%. Profit = 500 x 25/125 = 100.
Example: Calculate profit if Sale price is 500 and margin is 25%. Profit = 500 x 25% = 125.
8 Group SOFP Group SOFP - take 100% of net assets of Subsidiary irrespective of the holding is 100%. 80% or
even 55%
9 Group SOFP Reduce finance cost on unwinding of Deferred consideration from Group RE and
simultaneously adjust deferred consideration.
10 Group SOFP Adjust FV changes on Contingent consideration from Group RE and simultaneously adjust
contingent consideration.
11 Mid year acquisitions Excess depreciation on FV adj needs to be time approtioned.
12 Mid year acquisitions Be careful while eliminiation finance income with finance costs of intragroup loans in case of
mid year acquisition. As subsidiary's counterpart is wholly post. Refer example 2 below.
13 Group PL (for Mid Do time adjustment for PL line items of Subsidiary.
year acq.) Profit is time apportioned but not dividends paid by subsidiary.
14 Group PL Split the profit (Profit for the year and Total comprehensive income) to Parent and NCI in
group PL.
15 Group PL Do not adjustment Subsidiary PL for holding percentages.
16 Group PL While allocating profit to parent and NCI, do not just proportionately allocate. Rather calcualte
profit attributable to NCI and the rest is of Parent
17 Group PL Reduce only parent's share of dividend from subsidiary from investment income. Further for
dividend paid by parent, there is no treatment in Group PL.
 ACCA FR / SBR - Avoid these mistakes in GROUP ACCOUNTING
SN Topic Name Mistakes to be avoided
18 Group disposal Read question carefully if gain or loss is asked in SFS of Parent or Group FS. If question is silent
then calculate in Group FS.
19 Group disposal While calculating gain or loss on disposal in group PL, compare sale proceeds with values of
net assets, non-controlling interest and Goodwill on date of disposal.
20 Associates Unrealised profit (Parent to Associate)
Group SOFP: Reduce Group RE and Investment in associate
Group PL: Add to Cost of Sales
21 Associates Unrealised profit (Associate to Parent)
Group SOFP: Reduce Group RE and Inventory
Group PL: Reduce Share of profit from associate
22 Associates Unrealised profit = Profit on unsold goods x Associate %
23 Associates For impairment loss on associate, do not multiply by Associate %. It is already the share of
associate.
24 Associates On initial recognition, calculate goodwill on acquisition of associates. If positive goodwill
arrives, no subsequent treatement as it is already added to the cost of investment. However,
if negative goodwill comes then, recognise the same as capital reserve. Following journal
entry will be recognised:
Investment in associate Debit
To Capital reserve
25 Associates Do not knock off contra balances with associates.
 CHAPTER 9
IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS
1. OBJECTIVE (WAH)
This standard deals with Revenue recognition:
👉 When (TIMING) to recognise Revenue ?
👉 Amount (MEASUREMENT) of Revenue to be recognised ?
👉 How (ACCOUNTING TREATMENT) Revenue should be recognised ?

2. MEANING of IFRS 15

REVENUE from CONTRACTS with CUSTOMERS

Income arising from ordinary Valid Party that has contracted with entity to
activities contract obtain goods/ services produced by the entity
in ordinary course in exchange of
consideration

2. APPLICABILITY
IFRS 15 is applicable to ALL contracts with customers except:
- Leases under IFRS 116
- Insurance contracts under IFRS 4
- Financial Instruments under IFRS 9
- Non monetary exchanges (exchange of similar goods between entities in similar line of
business)

3. CORE PRINCIPLE OF IFRS 15

Recognise REVENUE - Consideration that entity will be entitled in exchange of transferred

goods or services.
Consideration entitled ✅
Consideration received ❌

4. FIVE STEP MODEL

Step 1 Identify "CONTRACT"

Step 2 Identify "PERFORMANCE OBLIGATIONS (PO)"

Step 3 Determine "TRANSACTION PRICE (TP)"

Step 4 ALLOCATE TP to each of PO

Step 5 Recognise revenue as and when PO gets SATISFIED.

Example: X Limited entered into a contract with a customer for sale of software and 3 years
technical support services at a price of $ 30,000. Further, Software and 3 years technical
support services are sold separately for $ 20,000 and $ 15,000 respectively. Analyse.

Analysis:
Step 1 Assume Contract exists.

Step 2 Assume 2 PO i.e. PO 1: Sale of software and PO 2: Sale of 3 years technical

support services.

Step 3 Transaction Price =

 Step 4 Allocate TP to 2 PO's :

Step 5 Recognise revenue:

Date of Sale
Year end 1
Year end 2
Year end 3

5. STEP 1: IDENTIFY CONTRACT

i) Contract exists, if ALL of the following conditions are met:

- Approved by both the parties;
- Rights of each party can be identified;
- Payment terms can be identified;
- Transaction has commercial substance (Not an exchange of similar items between entities
in similar line of business );
- Probable that consideration will be collected (Ability & Willingness)

ii) Contract term

It is either a non-cancellable term or number of units (including any period or units which is
expected to be extended or renewed).

6. STEP 2: IDENTIFY PERFORMANCE OBLIGATION (PO)

i) PO is a promise to transfer either:

Distinct Goods or services or Series of distinct goods or services

👉 substantially the same
👉 same pattern of delivery to customer
Eg: Security services, FR LIVE classes, etc.

Revenue to be recognised at a specific Point in Revenue to be recognised over a period of

time when the control of the distinct goods or time when the control is transferred.
service is transferred to the customer.
ii) Meaning of DISTINCT

Condition 1: Customer can benefit from goods Condition 2: Separately identifiable from
or services on its own or with any other other promises in the contract
resources readily available with the customer.

Distinct in relation to other promises in the

Distinct on its OWN
contract.

TIP: Customer can purchase and use TIP: No significant INTEGRATION,

separately. CUSTOMISATION or MODIFICATION or INTER-
REALTION.

Example:
An entity has entered into a contract with a customer to build a water purification plant.
The entity is responsible for project management, engineering, design, site preparation and
physical construction and integration of all components.

Promises in the contract: C1 C2

Project management Yes
Engineering Yes
Design Yes
No
Site preparation Yes
Physical construction Yes
Integration of all components Yes

Promises in a contract

Single promise Multiple promises

Single PO Identify distinct promises

Each distinct promise is a PO

If not distinct, then make a bundle of

promise, till it becomes distinct.

7. STEP 3: Determine TRANSACTION PRICE

Transaction Price = Consideration that entity expects to be entitled from the customer for
the transferred goods or services. It excludes any amount paid or payable to third parties (eg.
GST payable).

A B C D E
Variable Significant Non-cash Customer Consideration
consideration financing consideration provided goods payable to
component customer
A. Variable consideration (VC)
Consideration is variable if:

Amount Entity's right to receive

dependent on future contingencies

Example: Component of refunds, bonus, penalty or similar items, etc.

Q1. Will variable consideration form part of Transaction price ?

Answer: Yes, but only to the extent it is highly probable that a significant reversal in the
amount of cumulative revenue recognised will not occur when the uncertainty associated is
subsequently resolved.

Q2. If answer to Q1 is Yes, then at what amounts ?

Answer: An entity shall estimate the amount of VC by using either of the following methods:

Expected Value Method Most Likely Method

When: Range of possible outcomes. When: Two possible outcomes.
How: Sum of prob. weighted amounts. How: Single most likely amount

Example 1 Example 2 Example 3

Outcome Probability Outcome Probability Outcome Probability
Outcome 1 40% Outcome 1 80% Outcome 1 60%
Outcome 2 35% Outcome 2 20% Outcome 2 25%
Outcome 3 25% Outcome 3 15%
Expected value method Most likely method Most likely method

NOTE: If question specifically mentions use of any method then USE that method only.

B. Significant financing component (SFC)

When either party (entity or customer) provides a benefit of financing to other party, then
transaction price needs to be adjusted for the financing component.

SFC exists in a contract if there is:

gap > 12 months
Transfer of promised goods/ Customer pays
services consideration
 Revenue recognition
When: Control of goods or services are transferred
Amount:
👉 Priority 1: Cash selling price
👉 Priority 2: Value of contractual consideration on the date when control is
transferred (if cash selling price is not available).

Use of Discounting rates

Contractual interest rate is approximately

equal to Market rate of interest Any other cases

Contractual interest rate Entity's Incremental borrowing rate

Case A:

|---------------------------------|---------------------------------|
Control Consideration
transferred received
Revenue Present value
Trade receivable Debit Bank Debit
To Revenue At each reporting date To Trade receivable
Trade receivable Debit
To Finance income

Case B:

|---------------------------------|---------------------------------|
Consideration Control
received transferred
Future value Revenue
Bank Debit Contract liability Debit
To Contract liability At each reporting date To Revenue
Finance costs Debit
To Contract liability

Cases where SFC does NOT EXIST:

👉 Time gap is upto 12 months.
👉 Customer has paid for goods/ services in advance and timing of transfer of those goods/
services is at the discretion of customer; or
👉 Difference between contracted price and cash selling price is for reason other than
financing. Example: High credit risk, etc.

C. Non-cash consideration
Promised goods/ services
Entity Customer
Consideration (Non-cash)

Priority 1: Fair value of non-cash consideration

Priority 2: Fair value of transferred goods or services
D. Customer provided goods/ services

Entity Customer

Obtains control Doesn't obtain control

Increase Transaction price by No adjustment to transaction price

Fair value of those goods or
services.

E. Consideration payable to customer

Distinct G/s No Distinct G/s

Reduce consideration from TP

Consideration = FV of distinct g/s: No adjustment to TP. Record separately.

Consideration > FV of distinct g/s: Reduce excess consideration from TP
Consideration < FV of distinct g/s: Add excess fair value to TP

8. STEP 4: ALLOCATE TP TO EACH OF THE PO

Allocate TP to each PO in the ratio of standalone selling price (SSP) of each PO.

Q1. What if, SSP is not available ?

Answer: If SSP is not available:
Priority 1: Adjusted market assessment approach
Priority 2: Cost + Margin approach
Priority 3: Residual approach

Exceptions: E1 - Allocation of discount

Generally to all PO in the ratio of SSP. However, if discount is given for one or more goods/
services and there is an observable market evidence for that, then we allocate the discount
only to those goods or services.

Example 1: Entity X sells product A, B and C as a combo for $ 100,000, and these products are
sold separately for $ 50,000, $ 25,000, and $ 45,000 respectively. Show how the discount will
be allocated to product A, B and C.

Example 2: Continuing with above example 1, what if Entity X sells product B and C as a
combo for $ 55,000. Show how the discount will be allocated to product A, B and C.
9. STEP 5: RECOGNISE REVENUE AS & WHEN PO GETS SATISFIED

Control of g/s are transferred to

customer.
Q1. Meaning of Control ?
Ability to direct the use + Ability to prevent others from directing the use;
Obtain substantially ALL the economic benefits.

Q2. Indicators of transfer of Control ?

Right to receive consideration; or
Customer has legal title; or
Transfer of physical possession; or
Risk and rewards are transferred; or
Customer has accepted the goods/ services.

Q3. How does Control gets transferred ?

Point in Time Over a period of Time

An entity transfers control of goods/ services overtime, if any one of the following conditions
are met:
Customer simultaneously receives and consumes the benefits, as entity performs.
Entity's performance creates and enhances an asset, that the customer controls.
Entity does not have an alternative use of the asset AND has entity has enforceable right
to payment for work done till date.

Any of the above is SATISFIED ?

Overtime (OT) Point in time (PIT)

Example: C1 C2 C3 Conclusion
Sale of Flat No No No PIT
Construction of building on
No Yes Yes OT
land provided by customer
 Q3. If PO gets satisfied overtime, then how to Measure the progress ?

Input method Output method

Efforts of the entity. Eg: Costs incurred vs Value to the customer. Eg: Survey method,
Total estimated costs, etc Units produced, etc.

NOTE:
Under INPUT method, exclude following costs from assessment of measure of progress :
👉 Abnormal costs

12. SPECIAL BUSINESS MODELS

A. Principal vs Agent
Principal: Gross revenue
Agent: Net revenue

5,500 6000
Indigo Make my trip (MMT) Customer

Revenue = $ 6,000 Revenue = $ 500

Comm. Exp = $ 500

Q. How to identify if an entity is Principal or an Agent?

Indicators are:
Primary responsibility of fulfiling the contract
Inventory risk
Estabilishes price
B. Upfront non-refundable fees

joining fees
Gym

Does this fees relate to specific goods or

services transferred to customer i.e. distinct
goods/ services ?

Yes No

Recognise revenue on transfer Recognise as deposit liability and

of promised goods or services. recognise as revenue over the
period.

C. Sale with a right to return

100 Laptops with right to

return within 30 days
Customer

SP: $ 50,000
Cost: $ 40,000

Sales value = $ 50 lakhs and cost = $ 40 lakhs

Historically, 5% chances of return
Solution:

Recognise revenue to the extent it will not be reversed i.e., do not recognise for expected
returns. Any amount received should be recognised as refund liability.

Recognise cost of sales only to the extent revenue is recognised. For inventory not
recognised as cost of sales, recognise right to return asset.

On expiry of return period, if goods are not returned - then reverse refund liability and
recognise revenue, reverse right to return asset and recognise cost of sales.

On expiry of return period, if goods are returned - then pay off refund liability and, reverse
right to return asset and recognise inventory.
D. Warranties

Warranties as part of product i.e. not a Warranty as distinct G/S

distinct G/S i.e. option to purchase seperately

Not a separate PO Separate PO

Hence, Create provision under IAS 37 Recognise revenue over the warranty period

E. CONSIGNMENT ARRANGEMENT

Consignor Consignee
End Customer
(Entity) (Dealer)

It is a consignment arrangement if it satisfies ALL the below conditions:

👉 Entity can ask the dealer to require the return of the product or transfer the product to a
third party.
👉 Dealer does not have an unconditional obligation to pay for the product until the same is
sold to the customer.

Revenue recognition
> Revenue is recognised when control gets transferred i.e., goods are sold to customer.

G. Bill and Hold arrangements

Bill
Possession
Enity Customer

If ALL of the following conditions are satisfied, then Bill and hold arrangement is a separate
PO. They are:

- customer has requested the arrangement; and

- product must be identified separately as belonging to customer; and
- product is ready for transfer; and
- entity can neither sell or use the product.

Separate PO > Allocate TP > Recognise revenue

H. Repurchase agreements
Sale

Entity Customer

Repurchase at later date

Repurchase price > Original SP; and customer Repurchase price < Original SP; and customer
cannot use the goods/ services can use the goods/ services

Financing transaction Lease transaction

under IFRS 16

Note: If the probability of re-purchase is low or Nil, then recognise it as Sale transaction.

13. CONTRACT COSTS

Contract acquisition costs Contract Execution costs

Costs incurred to obtain a Covered under any other standard

contract that would not be
incurred, if contract not
obtained

Yes No Yes No

Recognise ASSET P&L Account as per Recognise ASSET

and amortise that standard and amortise
over contract over contract
term term
 CHAPTER 10
IAS 20: Accounting for GOVERNMENT GRANTS & Disclosure of
GOVERNMENT ASSISTANCE
1. Applicability

IAS 20 is applicable on:

👉 Accounting and disclosure of Government grants

2. Basic Terms

i) Government
It refers government (central, state or local), government agencies and similar bodies (whether
local, national or international).

ii) Government grants

Government grants means assistance in the form of transfer of resources to an entity in
return for past or future compliances with certain conditions relating to the operating
activities of the entity. It can be unconditional as well.
It can be received in following manner:
👉 In cash
👉 In kind i.e., an asset
👉 Forgivable loans
👉 Reduction of liability

3. Conditions for recognition of Government Grants

Government grants should be recognised only if there is a reasonable assurance that:

👉 Entity will comply with the conditions attached to them; and
👉 Grants will be received

4. TYPES of Government Grants

Grant related to Asset (GRA) Grant related to Income (GRI)

Grant for purchase or construction of long term assets Any other grants

5. ACCOUNTING of Government Grants

i) Grant related to Asset (GRA)

Income approach (NET) Capital approach (GROSS)

Date when grant becomes receivable or is received

Grant receivable (received) Debit Grant receivable (received) Debit
Bank (received) Debit Bank (received) Debit
To Deferred grant income Credit To Asset Credit

Subsequently over life of the asset

Deferred grant income Debit Deferred grant income Debit
 To Grant income Credit To Grant income Credit
(in the ratio of depreciation over useful life of the asset)

NOTE: If the asset is non-depreciable, then use ratio of compliance costs.

NOTE: If the value of the asset becomes ZERO, then asset will be recognised at nominal values
and asset is not depreciated.

NOTE: In exam, follow NET approach only, unless asked otherwise.

ii) Grant related to Income (GRI) - Income approach only

Conditional Grant Unconditional Grant

Date when grant becomes receivable or is Date when grant becomes receivable or is
received received
Grant receivable (received) Debit Grant receivable (received) Debit
Bank (received) Debit Bank (received) Debit
To Deferred grant income Credit To Grant income Credit

Subsequently
Deferred grant income Debit
To Grant income Credit
(in the ratio of compliance costs)

6. Presentation

i. Grant related to Asset - Gross method

Statement of financial position

👉 Recognise asset at its cost as per the respective standards.
👉 Recognise Deferred grant income as liability. Show current & non current classification.
Current = Expected amount to be amortised within next 12 months.
Non current = Total liability - Current liability

Statement of profit or loss

👉 Recognise Grant income as "Other income".

Cash flow Statement

👉 Show purchase or construction of asset as Investing activity.
👉 Show grant received as Financing activity.

ii. Grant related to Asset - Net method

Statement of financial position

👉 Recognise asset at NET AMOUNT i.e., its cost - Grant amount
👉 Recognise Deferred grant income as liability. Show current & non current classification.
Current = Expected amount to be amortised within next 12 months.
 Non-current = Total liability - Current liability

Statement of profit or loss

👉 Recognise Grant income as "Other income" "reduction of depreciation costs".

Cash flow Statement

👉 Show purchase or construction of asset as Investing activity.
👉 Show grant received as Financing activity.

iii. Grant related to Income

Statement of financial position

👉 Recognise Deferred grant income as liability. Show current & non current classification.
Current = Expected amount to be amortised within next 12 months.
Non-current = Total liability - Current liability

Statement of profit or loss

👉 Recognise Grant income as "Other income".

Cash flow Statement

👉 Show grant received as Financing activity.

8. REFUND of Grants

Sometimes grants are to be refunded due to non-compliance of grant conditions. This is a

change in accounting estimate and has to be accounted for prospectively.

Unconditional grant

Journal: PL Debit
To Bank / Grant repayable Credit

Grant related to Income

Journal: Deferred grant income Debit

PL Debit
To Bank / Grant repayable Credit

Grant related to asset - Gross method

Journal: Deferred grant income Debit

PL Debit
To Bank / Grant repayable Credit

Grant related to asset - Net method

Journal: Asset Debit

PL Debit
To Bank / Grant repayable Credit
 CHAPTER 11
IAS 21: EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
1. APPLICABILITY

Foreign exchange Translation of Foreign Translation to Presentation

transactions operations currency
NOT IN ACCA FR SYLLABUS

2. CURRENCY

3. FUNCTIONAL CURRENCY - MEANING

i. Functional Currency is the currency of PRIMARY ECONOMIC ENVIRONMENT in which entity

operates.
ii. An entity can have only ONE functional currency irrespective of the segments of businesses into
which entity operates.

4. FUNCTIONAL CURRENCY - DETERMINATION

An entity should consider following factors in determining appropriate functional currency:

PRIMARY FACTORS

Currency that:
👉 that mainly influences sales price of its goods and services ;
- The currency in which sales price are denominated; and
- Currency of the country whose competitive forces determine sales price.
👉 that mainly influences labour, material and other costs of providing goods and services .

SECONDARY FACTORS
👉 Currency in which funds from financing activities are generated; and
👉 Currency in which receipts from operating activities are retained
5. FOREIGN EXCHANGE TRANSACTIONS

INITIAL RECOGNITION

@ using exchange rate on transaction date (Spot rate).

NOTE: For practical reasons, entity can consider using average or approximate rates, if that is
not substantially different from spot rate.

SUBSEQUENT RECOGNITION - at each reporting dates

Foreign currency Monetary Non-monetary items @ Cost Non-monetary items @

items model Fair value model

Restatement using closing No treatment Restatement using fair value in

exchange rate. foreign currency and exchange
rate on date of fair valuation.
On restatement, any gain or Any gain or loss - as per resp.
loss is recognised in PL. standards.

Foreign currency monetary item (FCMI)

👉 Receivable or payable in foreign currency;

👉 Amount is fixed as per the contract.

NOTE: Forex gain or loss on fair valuation of investment in equity shares of another entity (@
FVTOCI) will always be recognised in PL.
 CHAPTER 12
IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING
ESTIMATES & ERRORS
1. ACCOUNTING POLICY
Accounting policies are specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
Accounting policies are choices provided by the standards, which entities has to select one.

👉 Accounting policy has to be consistent year on year.

CHANGE of ACCOUNTING POLICY

Accounting Treatment: Restrospectively

Disclose
Reasons for change Effect on EPS
👉 Required by law; or Amount of change
👉 Better presentation

2. CHANGE of ACCOUNTING ESTIMATES

👉 Adjustment of the carrying amount of an asset or a liability ,
👉 that results from the assessment of the present status and expected future benefits and
obligations
👉 Changes in accounting estimates result from new information or new developments and ,
accordingly, are not corrections of errors.
Accounting Treatment Prospective effect
Disclosure Nature and amount of change

3. PRIOR PERIOD ERRORS

Prior period errors are omissions, 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 that:

(a) was available when financial statements for those periods were approved 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

NOTE: Such errors include the effects of mathematical mistakes, mistakes in applying
accounting policies, oversights or misinterpretations of facts, and fraud.
Accounting Treatment Disclosure
👉 Retrospective re-statement unless 👉 Nature of the prior period error;
impracticable. 👉 Effect on FS
👉 Restate PY comparatives 👉 Effect on EPS
👉 Provide opening balance sheet 👉 Reasons, if retrospective restatement is
impracticable
 CHAPTER 13
IFRS 5: NON CURRENT ASSETS HELD FOR SALE AND
DISCONTINUED OPERATIONS
1. Meaning and objective
This standard covers:
👉 Non current assets held for sale
👉 Disposal groups (held for sale)
👉 Discontinued operations

IFRS 5 applies to:

Classification and Measurement
Presentation
Applies to all Non current Applies to all Non current assets held for sale and disposal
assets held for sale and groups, except:
disposal groups.
👉 Deferred tax assets
👉 Financial assets
👉 Biological assets in scope of IAS 41

2. Classification of Non current assets as Held for sale

Asset must be AVAILABLE for IMMEDIATE Such sale must be HIGHLY PROBABLE
SALE in its PRESENT CONDITION

Asset must be available for immediate sale in its present condition

If they continue to be a vital part for entity's ongoing operations

Entity intends to sell it in a distant future
Property used as headquarters. It needs to be vacated before it can be sold.
Within time required to vacate the property, can the same be classified as
held for sale ?
In above case, if property can be vacated only when a replacement is
available.
Manufacturing facility with a backlog of uncompleted orders

If a manufacturing facility is sold with a backlog of uncompleted orders

Entity plans to renovate the property before selling

Minor pre-selling activities are pending which are usually performed
immediately before an asset is transferred

Such sale must be highly probable

Five conditions to be satisfied are:
👉 Management must be committed to a plan to sell the asset (No substantial approval
is required from any authority or shareholders)
👉 Active program to trace a buyer must have been initiated
 👉 Asset must be actively marketed at a reasonable price
👉 Sale is expected to be completed within 1 year from date of classification
👉 Significant changes / withdrawal from plan is unlikely.

4. Held for Sale ACCOUNTING

Step 1: Calculate CA of the asset (or disposal group) on date of change in

classification (after considering depreciation, revaluation or impairment
under respective standards)
Step 2: Calculate Fair value less costs to sell (FVLCTS)
NOTE: Fair value is as per Ind AS 113 and Cost to sell are the incremental
costs incurred on sale.
Step 3: If FVLCTS (Step 2) is lower than CA (Step 1), then recognise the difference
as Impairment loss under IFRS 5
Impairment loss Debit
To Asset Credit

Allocation of Impairment loss

Individual Non-current Disposal groups

assets
Allocated to such asset 👉 Firstly to goodwill in that group
👉 Then to all other assets (on which measurement
principle is applicable) in the ratio of their CA.

Important points on Measurement principle

Impairment loss is recognised in PL only irrespective of whether the asset is under

cost model or revaluation model.
👉 Depreciation (IAS 16 / 38 / 40) and Impairment under IAS 36 ceases for non current
assets (or disposal groups) on which measurement principle of IFRS 5 applies.
👉 Impairment loss calculated above can be reversed if FVLCTS increases.
However, the same can be reversed only to the extent impairment loss under IFRS 5 was
recognised earliar.
👉 Impairment loss under IFRS 5 on Gooodwill cannot be reversed.

5. Presentation
👉 Non-current assets held for sale Current asset
👉 Disposal groups - Other current assets

Assets and liabilities within disposal groups should be disclosed separately and should not
be offset and presented as a single amount.

7. Discontinued operations
Component of entity that has been disposed off or classified as held for sale and
represents:
👉 Separate major line of business or geographical area of operations;
👉 Part of a single co-ordinated plan to dispose off a separate major line of business or
geographical area of operations;
👉 Subsidiary acquired exclusively with a view to resale

Presentation of Discontinued operations

👉 An entity should present and disclose information of discontinued information

separate from those of continued operations.

👉 An entity should present a single line item in P&L showing:

- Post tax profit or loss of discontinued items;

👉 However the entity should disclose the following in notes:

- Revenue and expenses of discontinued operations
- Profit before tax of discontinued operations
- Tax expenses of discontinued operations
- Profit after tax of discontinued operations
- Assets and liabilities of discontinued operations
- Cash flows of discontinued operations
- EPS (Basic and Diluted) of discontinued operations

NOTE: If a discontinued operation remains unsold on a reporting date, then it will be

presented as disposal group or a non-current asset held for sale.
 CHAPTER 14
IAS 33: EARNINGS PER SHARE
1. WHY EPS ?
To facilitate performance comparisons between:
👉 different entities in same reporting period (Entity vs Entity); and
👉 different reporting periods of the same entity (Year on Year)

2. TYPES of EPS

Basic EPS Diluted EPS

(Present Scenario) (Future Oriented)

3. BASIC EPS (BEPS)

Profit or loss attributable to ORDINARY shareholders (PATOSH)
BEPS =
Weighted average number of Ordinary shares outstanding during the period

4. Profit or loss attributable to ORDINARY shareholders

Profit or loss after tax XXX

Less: Dividend on cumulative preference shares (declared or not) (XXX)
Less: Dividend on non-cumulative preference shares (declared) (XXX)
Less: Dividend on Equity shares with preferential dividend rights (XXX)
Less: Loss on redemption or conversion of preference shares (XXX)
Less: Accrued discount on preference shares using Effective Interest rate
method (XXX)
Less: Deemed dividend on buyback of preference shares (XXX)
Less: Expenses written off against securities premium which should be
recognised in SPL (Eg: Preliminary expenses, etc.) (XXX)
Earnings attributable to ordinary shareholders XXX

Note on Preference shares:

Preference shares
LIABILITY under IFRS 9 Equity under IFRS 9

Any dividend paid will be charged to PL as Any costs incurred (discount on issue) or dividend
Finance costs, hence the same is already paid will be adjusted from Equity, but since they
adjusted in Profit after Tax. are not Ordinary shares, hence any costs will be
ADJUSTED from Profit after Tax.

5. Weighted average number of Ordinary shares outstanding during the period

Issue at Full market price Bonus issue Rights issue

Issue at Full market price

Use time based weighted average

Situations Weighted average FROM
 Issue of shares for cash Cash is receivable
Issue of shares for cash - partially received Cash is receivable
Issue of shares for consideration other than cash Amount is accrued

Bonus issue / Share split / Share consolidation / reverse share split

👉 Multiply bonus factor to all shares outstanding on date of bonus issue .
👉 Bonus factor / Split factor = (1 + gain of shares per share)
👉 Consolidation factor or reverse share split factor = (1 - loss of shares per share)

Rights issue
Rights issue means the rights to existing shareholders to purchase new shares at a discount to
the market price on a stated future date.

Paid element Bonus element

Multiply Bonus factor to all shares outstanding on
Use time based weighted average
date of rights issue.

Fair value per share immediately before the exercise of rights

Bonus Factor =
Fair value ex-rights per share

(Total shares before exercise of rights X FV per share immediately

Fair value ex-rights per
before the exercise of rights) + Rights proceeds
share =
Total shares after exercise of rights

7. DILUTED EPS (DEPS)

PATOSH + Effect of Dilutive POS on Earnings

DEPS =
W. Avg. no. of OS + Effect of Dilutive POS on OS

NOTE: Dilutive Potentially ordinary shares (POS) are instruments which are not OS but will be
converted to OS in future.
👉 Convertible instruments
👉 Share options and warrants

STEPS TO COMPUTE DILUTED EPS

Step 1 Identify Potential ordinary shares (POS);

Convertible instruments Share warrants Share options
POS = No. of OS it will be POS = Total no. of options x
POS = No. of OS to be issued
converted (1 - Exercise price / Fair value)

Step 2 Assess if the POS (identified in Step 1) is Dilutive or not;

👉 Calculate incremental EPS for each POS = Effect on earnings / Effect on no. of OS
👉 Arrange the POS in increasing order on the basis of incremental EPS
👉 Calculate DEPS for each instrument using the above order
👉 Till the time DEPS keeps on decreasing - DILUTIVE
👉 If DEPS increases - ANTI DILUTIVE

Step 3 Calculate DEPS = the last DEPS where it was decreasing in Step 2.
 CHAPTER 15
IAS 41: AGRICULTURE
1. Meaning and scope

IAS 41 deals with

Biological Assets Agricultural produce

(Living animal and Plants) (From all biological assets

Bearer Plants
in scope of IAS 16

Rest all biological assets

(In scope of IAS 41)

2. Recognition criteria
An entity can recognise biological assets or their agricultural produce in financial statements,
if and only if ALL of the below conditions are met:
👉 Entity controls the asset as a result of past events;
👉 Probable future economic benefits from the asset will flow to the entity;
👉 Fair value or cost can be measured reliably.

3. Measurement

Initial Measurement (A) Subsequent Measurement (B)

A. Initial Measurement

Agricultural produce
Biological assets (within scope of IAS 41) (of Biological assets under IAS 41 and Bearer
plants under IAS 16)
 Fair value less costs to sell (FVLCTS) at the
Fair value less costs to sell (FVLCTS)
point of HARVEST

No such exception available in case of

However, if entity cannot reliably measure
agricultural produce.
FVLCTS, then it should be measured at its
cost less any accumulated depreciation and
any accumulated impairment losses (if any).

NOTE: If any biological asset is measured at FVLCTS at the time of initial recognition then the
difference between purchase price and FVLCTS will be recognised in PL .

B. Subsequent Measurement

Biological assets

If Initial Recognition is at: Subsequent Recognition

👉 FVLCTS, then Continue to measure at FVLCTS and No option
to opt for cost model now.
👉 Cost model, then Continue at Cost model or if FVLCTS becomes
measurable, then measure at FVLCTS

NOTE: If an entity measures biological assets at FVLCTS model - Depreciation not charged.

Agricultural produce

At the point of Harvest Subsequent to Harvesting

It is classified as Inventory and valued in

Fair value less costs to sell (FVLCTS) under IAS
accordance with IAS 2 and FVLCTS at point of
41
harvest becomes costs of such inventory

C. Important points on Measurement

i.
Grouping of biological assets or agricultural produce (according to their significant attributes,
for example by age or quality) is allowed is it facilitates fair value measurement.

ii. Fair value less costs to sell (FVLCTS) of a biological asset can change due to:
👉 Physical changes; and
👉 Price changes

iii. Fair value represents:

👉 Current market prices ✔
👉 Price to sell at a future date ❌

iv. New born assets or agricultural produce

Recognised initially at FVLCTS.
4. Gains and losses

Agricultural produce (of Biological assets

Biological assets (within scope of IAS 41)
under IAS 41 and Bearer plants under IAS 16)

👉 On initial recognition 👉 On initial recognition

👉 Subsequently - change in FVLCTS
Recognised in SPL.

5. Government grants for Biological assets under IAS 41

Biological assets @ FVLCTS Model Biological assets @ Cost Model

Apply IAS 20

Conditional grant Unconditional grant

Recognised in SPL when the Recognised in SPL when the
grant becomes receivable grant becomes receivable
and conditions attached are
met.

6. Disclosures

Disclose the change of FVLCTS between two reporting periods due to:
👉 Change in price
👉 Physical changes (for example, age or quality)
 CHAPTER 16
IAS 2: INVENTORY
1. Meaning of Inventory
Inventories are assets:
👉 Held for sale in the ordinary course of business (Finished goods and stock in trade)
👉 in the process of production for such sale; or (Work in progress)
👉 in the form of materials or supplies to be consumed in the production process or in the
rendering of services. (Raw materials, loose tools, Spares not capitalised to PPE)

2. Scope
IAS 2 is applicable to all inventories, except:
👉 Financial instruments
👉 Biological assets and Agricultural produce (at point of Harvest)

3. Measurement principle

Initial Measurement Subsequent Measurement

@ COST Lower of:

Cost OR Net Realisable Value (NRV)

A. Initial measurement @ COST

Purchase price XXX

Add: Costs of conversion XXX
Add: Any other directly attributable costs incurred to bring (XXX)
the inventory in saleable condition
Costs of inventory XXX

Other costs to bring the inventory in present location and condition

Excludes:
👉 abnormal amounts of wasted materials, labour or other production costs;
👉 storage costs, unless those are necessary in the production process;
👉 administrative overheads that do not contribute to bringing inventories to their present
location and condition;
👉 selling costs

Borrowing costs
Borrowing costs incurred on:
Deferred payment terms Construction of Inventories
The difference between the purchase price for If Inventories are classified as Qualifying
normal credit terms and the contractual assets as per IAS 23, then borrowing costs
payment, is recognised as borrowing costs in incurred during construction period of such
P&L over the period of financing. inventory should be capitalised to the cost of
inventory.
B. Subsequent measurement
👉 Lower of Cost or NRV

NOTE: The valuation has to be tested on an item by item basis.

NOTE: Valuation of cost can be done on either FIFO or weighted average cost method.

Meaning of Net Realisable Value (NRV)

👉 Net realisable value = Estimated SP - Costs to sell

Adjusted with Trade discounts and cash discount

👉 NRV takes into consideration fluctuations of estimated SP or cost to sell directly relating to
events occurring after the end of the period to the extent that such events confirm conditions
existing at the end of the period.
👉 NRV and Fair value is not the same and if question gives data for both . Consider NRV for
inventory valuation.
👉 NRV of the quantity of inventory held to satisfy firm sales or service contracts is based on
the contract price.

👉 NRV for WORK-IN PROGRESS

Net realisable value = Estimated SP - Costs to sell - Costs to complete

👉 NRV for RAW MATERIAL - RM (used in finished goods)

FG sold at or above cost FG sold below cost

RM at Cost RM at Lower of Cost or Replacement cost

C. Write downs and Reversals

NRV < Cost Reversals

👉 Inventory is measured at NRV. 👉 Limited to original write-down.
👉 Decline is recognised in P&L 👉 When the circumstances that previously
caused inventories to be written down below
cost no longer exist or when there is clear
Journal:
evidence of an increase in net realisable value
PL Debit
because of changed economic circumstances.
To Provision for decline in inventory

4. Derecognition
A. When inventory is sold
Such inventory is derecognised at its Carrying amount and is recognised as an expense (cost of
goods sold) in P&L in the period in which related revenue is recognised.

B. When inventory is used in construction of any asset

Such inventory is derecognised at its Carrying amount and is capitalised as part of cost of that
asset and is depreciated over the useful life of that asset.
 CHAPTER 17
IAS 37: PROVISIONS, CONTINGENT LIABILITIES AND
CONTINGENT ASSETS
1. Scope

This standard is applied on all provisions, contingent liabilities and contingent assets
except:

2. Definition of LIABILITY

Liability: 👉 Present obligation

👉 arising from past events
👉 Settlement by outflow of resources with economic benefits

3. Recognition of provisions
Provision should be made, if and only if ALL the following three conditions are satisfied:

👉 Entity has present obligation arising from past event

👉 Probable that obligation will be settled through outflow of resources embodying
economic benefits
👉 Reliable estimate of amount can be made

Present obligation arising from past events

👉 Present obligation means probability is more than 50% (more likely than not).
👉 Past events that lead to present obligation = Obligating event. It makes the entity
bound to settle the contract.

NATURE Legal (enforceable by law) by Contract

by Legislation / Law
Constructive (Valid Past practice
OBLIGATION expectations from entity) Commitment
PROBABILITY Present (P > 50% upto 100%)
of OUTFLOW Possible (P > 5% < 50%)
Remote (P < 5%)

Examples:
Law requires any future expenditure as a result of future events Provision
Law requires any future expenditure as a result of past events Provision

Crux
In determining provision or a liability, an entity assess these three things:
👉 Occurrence of payment
👉 Amount of payment
👉 Timing of payment
 If all three are Certain - LIABILITY
If any of the above is uncertain - PROVISION
If occurrence < 50% or amount cannot be reliably estimated - CONTINGENT LIABILITY

4. Accounting treatment of provisions

Journal Entry: Expenses / Asset Debit
To Provision for expense Credit

5. Measurement of provisions
It can be measured using:
👉 Expected value method: Range of possible outcomes
👉 Most likely method: Limited possible outcomes

NOTE: Where effect of time value of money is material, the amount of provision should be
the present value of the expenditures expected to settle the obligation.

NOTE: Provision should be reviewed at the end of each reporting period and adjusted to
reflect the current best estimate. Further, if it is no longer probable that an outflow of
resources will be required to settle the obligation, then the provision should be reversed.

Reimbursements
When some or all of the expenditure required to settle a provision is expected to be
reimbursed by another party, then:
Entity can recognise the reimbursement as a Separate asset in Balance sheet; and
Expense relating to provision net or reimbursement in P&L.
Provided:
👉 Virtually certain that reimbursement will be received.
👉 Amount of reimbursement should not exceed the amount of provision

6. Special cases

A. Onerous contracts
Bound to execute the contract + Loss making (i.e., Costs > Benefits)
NOTE: If entity has an alternative to cancel the contract by payment of penalty, then
provision should be made for lower of future operating losses or penalties to settle the
contract.

B. Decommissioning, Restoration and other liabilities

Measured as per IAS 16.

C. Restructuring
Restructuring of scope of business or manner in which it is conducted.
Provision is made when:
👉 Detailed formal plan exists; and
👉 Plan is communicated to affected parties

D. Warranties
 Warranties as part of product i.e. not a Warranty as distinct G/S
distinct G/S i.e. option to purchase seperately

Not a separate PO Separate PO

Hence, Create provision under IAS 37 Recognise revenue over the warranty
period

7. Contingent liabilities
Contingent liabilities means:
👉 Possible obligation that arises from past events whose existence will be confirmed
only by the occurrence or non-occurrence of one or more future uncertain events not
wholly within the control of the entity.
👉 Present obligation arising from past events where a liability or a provision cannot be
recognised.

Accounting Treatment: Contingent liabilities are disclosed as part of notes to accounts

in the financial statements.

8. Contingent assets
Contingent asset is a possible asset that arises from past events and whose existence
will be confirmed only by occurrence or non-occurrence of one or more uncertain future
events not wholly within the control of the entity .

Accounting Treatment: Contingent assets cannot be recognised unless the uncertainties

attached are resolved.
 CHAPTER 18
IAS 10: EVENTS AFTER THE REPORTING DATE
1. Objective
👉 Accounting; and
of events after reporting date
👉 Disclosure

2. Meaning

A. Events after reporting date

IAS 10

B. Approval of Financial statements

👉 Company: Approved by BOARD OF DIRECTORS
👉 Any other entity: Corresponding authority (management)

C. Types of events
Adjusting events
Events that provide evidence of conditions existing at the end of reporting date.
Accounting Treatment: Recognise in FS + Disclose in notes to accounts.
Non-adjusting events
Events that are indicative of conditions that arose after the reporting period.
Accounting Treatment: If MATERIAL, disclose in notes to accounts.
👉 Nature of the event; and
👉 Estimate of its financial effect; or
statement that such estimate cannot be made.
3. Examples

Adjusting Events
👉 Settlement of a court case after the reporting period , that confirms that the entity had a
present obligation at the end of the reporting period.
👉 Bankruptcy of a customer that occurs after the reporting period .
👉 Sale of inventories after the reporting period may give evidence about their Net realisable
value at the end of the reporting period.
👉 Purchase / Sale of assets within reporting period but determination of consideration after
the end of the reporting period.
👉 Determination after the reporting period of the amount of profit - sharing or bonus
payments, if entity had a present obligation (legal or constructive).
👉 Discovery of fraud or errors that show that the financial statements are incorrect .

Non - adjusting Events

👉 Decline in fair value of investments after the reporting period ;
👉 a major business combination / disposal of a major subsidiary after the reporting period;
👉 announcing a plan to discontinue an operation;
👉 major purchase of assets, classification of assets as held for sale;
👉 destruction of a major production plant by a fire after the reporting period ;
👉 announcing, or commencing the implementation of a major restructuring;
👉 major ordinary share transactions and potential ordinary share transactions;
👉 abnormally large changes in asset prices or foreign exchange rates ;
👉 changes in tax rates or tax laws enacted or announced after the reporting period that have
a significant effect on current and deferred tax;
👉 entering into a significant commitments or contingent liabilities;
👉 commencing major litigation arising solely out of events that occurred after the reporting
period.
 CHAPTER 19
IAS 12: INCOME TAXES
1. Meaning of Tax expense

Current Tax + Deferred Tax

Current Tax
Amount payable / (recoverable) for the current year in according with the provisions of Income
Tax Act.

Deferred Tax
Amount payable / (recoverable) for the future years in respect of temporary differences
between Tax books and Accounting books.

2. Accounting for CURRENT TAX

Recognition in Balance Sheet

Situation Recognise:
👉 If amount payable > already paid Current tax liability
👉 If amount payable > already paid Current tax asset

Recognition in SPL

Situation Recognise:
👉 Income / Expense in PL Current tax expense in PL
👉 Income / Expense in OCI Current tax expense in OCI
👉 Income / Expense in Other equity Current tax expense in Other equity

Measurement

Current tax expense = Taxable profit (loss) x Enacted tax rates

3. Accounting for DEFERRED TAX

Step 1 Compute carrying amount (CA) of asset and liability (as per respective IAS)
Step 2 Compute Tax base of an asset or a liability
Step 3 Compute Temporary differences (TD) = CA - Tax base
Step 4 Classify temporary differences as Taxable or deductibe TD
Step 5 Determine the tax rate
Step 6 Calculate and recognise deferred tax asset or liability
Step 7 Accounting for Movement in deferred tax during the year
Step 8 Presentation in financial statements (PL, OCI, Equity, BS)

4. Step 2: TAX BASE of Asset and Liability

TAX BASE of an Asset

Tax Base
Future deductions
Future economic benefits are taxable
Asset from the asset
 Future economic benefits are taxable
Asset from the asset
Future economic benefits are not taxable CA of the asset

TAX BASE of a Liability

👉 CA of the liability - Future deductions on settlement of liability

Logic behind Tax base:

IAS 12 requires creation of deferred tax asset (liability) only if it is probable that recovery or
settlement of the carrying amount of asset (liability) will have tax consequences.

5. Step 4: Classify Temporary Differences (TD)

Temporary Differences (TD) = CA - Tax base

Taxable temporary difference Deductible temporary difference

TD increases future tax payments TD decreases future tax payments

👉 CA of asset > Tax base 👉 CA of asset < Tax base

👉 CA of liability < Tax base 👉 CA of liability > Tax base

subject to prudence
limits

Deferred tax liability Deferred tax asset

7. Step 5: Determine Tax rate

👉 Enacted or substantively enacted tax rate at the end of the reporting period.
👉 Manner of recovery

8. Step 6: Calculate and recognise deferred tax asset or liability

Taxable temporary differences (TTD) Deductible temporary differences (DTD)

(subject to prudence limits - step 5)
x Tax rate (step 6) x Tax rate (step 6)

Deferred tax liability Deferred tax asset

9. Step 7: Accounting for Movement in deferred tax during the year

Increase in deferred tax liability Deferred tax charge Movement can be

recognised in PL/
Decrease in deferred tax liability Deferred tax credit
OCI / Other equity,
Increase in deferred tax asset Deferred tax credit depending on base
Increase in deferred tax liability Deferred tax charge transaction.

10. Step 8: Presentation in financial statements (PL, OCI, Equity, BS)

 Balance sheet
Net deferred tax asset / liability (Non-current) XXX

Statement of profit or loss

Tax expense
- Deferred tax (for transaction recognised in PL) XXX

Other comprehensive income

Tax expense
- Deferred tax (for transaction recognised in OCI) XXX

11. Step 10: Offsetting of deferred tax assets and deferred tax liabilities

An entity can offset deferred tax assets and deferred tax liabilities if:
👉 legally enforceable right to set off (same taxable entity and taxation authority); or
👉 intends either to settle on a net basis (different taxable entity but intends to settle net).