DIPLOMA IN INTERNATIONAL FINANCIAL REPORTING files/DipIFR_Sample.pdf · IASB’s 2004 Bound Volume “International Financial Reporting ... a Property plant and equipment ... The

INTERNATIONALATC

DIPLOMA IN INTERNATIONALFINANCIAL REPORTING

Study System

ATC

Administrator

Sample

Sample

ACCA Professional Diploma in International Financial Reporting

Sample

Typesetting by Jana Korcakova

Printed in Romania by Rom Team Solutions, Srl

Sample

ACCA Professional Diploma in International Financial Reporting

Technical Editor

Kim Smith

Accountancy Tuition Centre (International Holdings) Limited 16 Elmtree Road

Teddington TW11 8ST

Telephone: +44 (0)208 943 1596 E-mail: [email protected]

Internet: http://www.atc-global.com

Sample

No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the author, editor or publisher. This training material has been published and prepared by Accountancy Tuition Centre (International Holdings) Limited 16 Elmtree Road Teddington TW11 8ST United Kingdom. Editorial material Copyright Accountancy Tuition Centre (International Holdings) Limited, 2005. All other material copyright as credited.

ISBN for complete set of 3 volumes: 1 903632 19 6. 3rd (revised) edition reprinted (1 903632 13 7. 2nd edition) ISBN for this volume: 1 903632 20 X. 3rd (revised) edition reprinted (1 903632 15 3. 2nd edition) All rights reserved. No part of this training material may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without permission in writing from the Accountancy Tuition Centre (International Holdings) Limited.

IASCF Copyright and Acknowledgement International Financial Reporting Standards, International Accounting Standards, Interpretations, Exposure Drafts, and other IASB publications are copyright of the International Accounting Standards Committee Foundation (IASCF). The approved text of International Financial Reporting Standards, International Accounting Standards and Interpretations is that published by the IASB in the English language and copies may be obtained direct from IASB. Please address publications and copyright matters to: IASCF Publications Department, 30 Cannon Street, London EC4M 6XH, United Kingdom. Telephone: +44 (0)20 7332 2730, Fax: +44 (0)20 7332-2749, Email: [email protected] Internet: http://www.iasb.org.uk All rights reserved. No part of IASB’s publications may be translated, reprinted or reproduced or utilised in any form either in whole or in part or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage and retrieval system, without prior permission in writing from the International Accounting Standards Committee Foundation. The various extracts of International Financial Reporting Standards or International Accounting Standards in this training material, are reproduced by the publisher, ATC (International Holdings) Ltd with the permission of IASCF. “IAS”, “IASB”, “IASCF”, “IASC”, “IFRIC”, “IFRS”, “International Accounting Standards”, “International Financial Reporting Standards” and “SIC” are Trade Marks of the International Accounting Standards Committee Foundation. IASB’s 2004 Bound Volume “International Financial Reporting Standards” contains the full text of all International Financial Reporting Standards including International Accounting Standards and Interpretations at 31 March 2004 (ISBN 1-904230-44-X), price £54 each.

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (i)

Introduction

This Study System is the Association of Chartered Certified Accountants’ Approved Study material specifically written for the Professional Diploma in International Financial Reporting. Together with the Question Bank, it provides comprehensive coverage of the syllabus and is designed to be used both as a reference text and interactively with the ATC Learning System, providing you with the knowledge, skill and confidence to succeed in your Diploma studies.

Syllabus Aim

To provide qualified accountants or graduates, possessing relevant country specific qualifications or work experience with an up to date and relevant conversion course, providing a practical and detailed knowledge of the key international financial reporting standards and how they are interpreted and applied.

Objectives

On completion of the Diploma candidates should be able to:

Understand and explain the structure of the international conceptual framework of accounting.

Apply relevant financial reporting standards to key elements of financial reports.

Identify and apply disclosure requirements for companies relating to the presentation of financial reports and notes.

Prepare financial statements of single entities and account for their key elements complying with specified International Financial Reporting Standards and other related pronouncements.

Prepare group financial statements (excluding group cash flow statements) including subsidiaries, associates, and joint ventures.

Position within the portfolio of ACCA's qualification framework

Dip IFR builds on the technical and/or practical knowledge acquired from recognised country specific accountancy qualifications or relevant work experience. The course introduces the candidate to the wider international framework of accounting and the system of standard setting. This conversion course concentrates on the application of conceptual and technical financial accounting knowledge that candidates have already obtained to the specific requirements of financial reporting under international professional regulation and standards.

Dip IFR also provides essential international financial reporting knowledge and principles that will prepare candidates for the increasingly global market place and keep them abreast of international developments and how they might apply to the companies and businesses.

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (ii)

The prerequisite knowledge for Dip IFR can come from:

a country specific professional qualification; or

possessing a relevant degree (giving exemptions from Part 1 and 2.1 and 2.2 of Part 2 of ACCA’s Professional Scheme) and two years accounting experience; or

having three years full-time relevant accounting experience.

Syllabus content

1 International sources of authority

a The structure of the International Accounting Standards Board (IASB)

b The standard setting process

c The role of the International Financial Reporting Interpretations Committee (IFRIC)

d Progress towards international harmonisation

e The IASB’s “Framework for the Preparation and Presentation of Financial Statements”

f First-time Adoption of International Financial Reporting Standards.

2 Elements of financial statements

a Property plant and equipment

b Intangible assets

c Goodwill

d Current assets including inventories

e Construction contracts

f Liabilities

g Financial instruments

h Provisions and contingencies (including post retirement benefits)

i Current and deferred tax

j Biological assets and agricultural produce

k Share-based payments.

3 Presentation and additional disclosures

a Events after the balance sheet date

b Earnings per share

c Related party disclosures

d Interim financial reporting

e Effects of changes in foreign exchange rates

f Segment reporting.

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (iii)

4 Preparation of external financial reports for single entities

a Income statement and discontinued operations

b Cash flow statements

c Statement of changes in equity.

5 Preparation of external financial reports for combined entities and joint ventures

a Definitions of subsidiaries, investments in associates and joint ventures

b Exclusions from consolidation

c Preparation of consolidated balance sheets and income statements

d Equity accounting

e Proportionate consolidation

f Definition, substance of, and accounting for unitings of interests.

Excluded topics

The following topics are specifically excluded from the syllabus:

Partnership and branch financial statements

Complex group structures including sub-subsidiaries or mixed groups and foreign subsidiaries

Piece-meal acquisitions, disposal of subsidiaries and group reconstructions

Financial statements of banks and similar financial institutions

Accounting and reporting by retirement benefit plans

Information reflecting the effects of changing prices and financial reporting in hyperinflationary economies

Multi-employer pension schemes

Share-based payments with cash alternatives

Group cash flows

Schemes of reorganisation/reconstruction

Company/share valuation

International Financial Reporting Standard Exposure Drafts and Discussion Papers

The international public sector perspective.

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (iv)

Key areas of the syllabus

The key topic area headings are as follows:

International sources of authority

Elements of financial statements

Presentation of accounts and additional disclosures

Preparation of external financial reports of single entities

Preparation of external reports for combined entities and joint ventures.

Approach to examining the syllabus

The examination is a three-hour paper in two sections. It will contain a mix of computational and discursive elements. Some questions will adopt a scenario/case study approach.

Section A comprises a compulsory question requiring the preparation of consolidated group financial statements, and may include a related discussion element. Section B comprises four questions from which the candidate is required to answer three. Computations will be designed to test an understanding of principles. At least one of the optional questions in Section B will be a conceptual/discursive question that may include illustrative numerical calculations.

An individual question may often involve elements that relate to different areas of the syllabus. For example a question on the preparation of financial statements for public issue could include elements relating to several accounting standards. In scenario questions candidates may be expected to comment on management’s chosen accounting treatment and determine a more appropriate one, based on circumstances described in the question.

Some International Financial Reporting Standards are very detailed and complex. In the Dip IFR exam candidates need to be aware of the principles and key elements of these Standards. Candidates will also be expected to have an appreciation of the background and need for international accounting standards and issues related to harmonisation of accounting in a global context.

Examination structure Number of marks Section A: 1 compulsory question 25 Section B: Choice of 3 from 4 questions (25 marks each) 75 _____

100 _____

Additional information

Candidates need to be aware that questions involving knowledge of new examinable regulations will not be set until at least six months after the last day of the month in which the regulation was issued.

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (v)

Examinable documents Session Conceptual framework reference

Framework for the Preparation and Presentation of Financial Statements 2

International Financial Reporting Standards

IAS 1 Presentation of Financial Statements (Revised) 3

IAS 2 Inventories (Revised) 7

IAS 7 Cash Flow Statements 29

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (Revised) 4

IAS 10 Events After the Balance Sheet Date (Revised) 32

IAS 11 Construction Contracts 6

IAS 12 Income Taxes 19

IAS 14 Segment Reporting 30

IAS 16 Property, Plant and Equipment (Revised) 8

IAS 17 Leases (Revised) 11

IAS 18 Revenue 5

IAS 19 Employee Benefits 17

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 9

IAS 21 The Effects of Changes in Foreign Exchange Rates (Revised) 26

IAS 23 Borrowing Costs 10

IAS 24 Related Party Disclosures (Revised) 33

IAS 27 Consolidated and Separate Financial Statements (Revised) 21

IAS 28 Investments in Associates (Revised) 25

IAS 31 Interests In Joint Ventures (Revised) 26

IAS 32 Financial Instruments: Disclosures and Presentation 20

IAS 33 Earnings Per Share (Revised) 28

IAS 34 Interim Financial Reporting 34

IAS 36 Impairment of Assets (Revised) 15

IAS 37 Provisions, Contingent Liabilities and Contingent Assets 16

IAS 38 Intangible Assets (Revised) 12

IAS 39 Financial Instruments: Recognition and Measurement 20

IAS 40 Investment Property (Revised) 13

IAS 41 Agriculture 14

IFRS 1 First-Time Adoption of International Financial Reporting Standards 35

IFRS 2 Share-based Payment 18

IFRS 3 Business Combinations 21 – 24

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 31

SYLLABUS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (vi)

Session SIC Interpretations reference

SIC-10: Government Assistance – No Specific Relation to Operating Activities 9

SIC-12: Consolidation – Special Purpose Entities 21

SIC-13: Jointly Controlled Entities – Non-Monetary Contributions by Venturers 26

SIC-15: Operating Leases – Incentives 11

IFRIC Interpretations

IFRIC-1: Changes in Existing Decommissioning, Restoration and Similar Liabilities 16

Examinable documents are also listed in the “Exam Notes” section of student accountant available on http://www.accaglobal.com/students/dipifr.

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (vii)

Session Page

Introduction

1 Introduction to International Financial Reporting Standards 0101

2 Framework for the Preparation and Presentation of Financial Statements 0201

3 IAS 1 Presentation of Financial Statements 0301

4 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 0401

Income statement

5 IAS 18 Revenue 0501

6 IAS 11 Construction Contracts 0601

Assets

7 IAS 2 Inventories 0701

8 IAS 16 Property, Plant and Equipment 0801

9 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance 0901

10 IAS 23 Borrowing Costs 1001

11 IAS 17 Leases 1101

12 IAS 38 Intangible Assets 1201

13 IAS 40 Investment Properties 1301

14 IAS 41 Agriculture 1401

15 IAS 36 Impairment of Assets 1501

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (viii)

Session Page

Liabilities

16 IAS 37 Provisions, Contingent Liabilities and Contingent Assets 1601

17 IAS 19 Employee Benefits 1701

18 IFRS 2 Share-based Payments 1801

19 IAS 12 Income Taxes 1901

20 IAS 32 and IAS 39 Financial Instruments 2001

Group accounts

21 Regulatory framework 2101

22 Basic principles – Consolidated balance sheet 2201

23 Further adjustments 2301

24 Consolidated income statement 2401

25 IAS 28 Investments in Associates 2501

26 IAS 31 Interests in Joint Ventures 2601

27 IAS 21 The Effects of Changes in Foreign Exchange Rates 2701

Disclosure and analysis

28 IAS 33 Earnings Per Share 2801

29 IAS 7 Cash Flow Statements 2901

30 IAS 14 Segment Reporting 3001

31 IFRS 5 Non-current Assets Held for Sale and Discontinued Operations 3101

32 IAS 10 Events After the Balance Sheet Date 3201

33 IAS 24 Related Party Disclosure 3301

34 IAS 34 Interim Financial Reporting 3401

35 IFRS 1 First-time Adoption of International Financial Reporting Standards 3501

Index 3601

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (ix)

Session 00

Introduction i Syllabus i

Aim i Objectives i Position within the portfolio of ACCA's qualification framework i

Syllabus content ii Excluded topics iii Key areas of the syllabus iv Approach to examining the syllabus iv Additional information iv

Examinable documents v

Session 01

Introduction to International Financial Reporting Standards

1 Introduction 0102 1.1 What is GAAP? 0102 1.2 Sources of GAAP 0102 1.3 Role of statute and standards 0102 1.4 Role of the European Union 0103

2 IASB 0104 2.1 Background 0104 2.2 Objectives 0104 2.3 Structure 0105 2.4 IFRIC 0106 2.5 Standard setting 0108 2.6 Projects and work program 0110

3 International Financial Reporting Standards 0112 3.1 GAAP hierarchy 0112 3.2 Scope 0113 3.3 Role in international harmonisation 0114

Session 02

Framework for the Preparation and Presentation of Financial Statements

1 Purpose and status 0202 1.1 Purpose 0202 1.2 Scope 0202 1.3 Financial statements 0203 1.4 Application 0203 1.5 Users and their information needs 0203

2 The objective of financial statements 0204 2.1 Financial position, performance and changes in financial position 0204

3 Underlying assumptions 0205 3.1 Accrual basis 0205 3.2 Going concern 0205

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (x)

4 Qualitative characteristics 0205 4.1 Principal qualitative characteristics 0205 4.2 Understandability 0206 4.3 Comparability 0206 4.4 Relevance (to decision-making needs of users) 0206 4.5 Reliability 0207

5 Elements of financial statements 0208 5.1 Definitions 0208 5.2 Recognition 0209 5.3 Measurement bases 0210

6 Concepts of capital and capital maintenance 0211 6.1 Capital 0211 6.2 Capital maintenance and the determination of profit 0211

Session 03

IAS 1 Presentation of Financial Statements

1 Scope 0302 1.1 Objective 0302 1.2 General purpose financial statements 0302 1.3 Application of IAS 1 0302

2 Financial statements 0303 2.1 Objectives 0303 2.2 Components 0304 2.3 Supplementary statements 0304

3 Overall considerations 0304 3.1 Fair presentation and compliance with IFRS 0304 3.2 Going concern 0306 3.3 Accrual basis of accounting 0306 3.4 Consistency of presentation 0307 3.5 Materiality and aggregation 0307 3.6 Offsetting 0307 3.7 Comparative information 0308

4 Structure and content 0309 4.1 “Disclosure” 0309 4.2 Identification of financial statements 0309 4.3 Prominently displayed 0309 4.4 Reporting date and period 0309 4.5 Terms used 0309

5 Balance sheet 0310 5.1 Current/non-current distinction 0310 5.2 Current assets 0311 5.3 Current liabilities 0312 5.4 Overall structure 0313 5.5 Presentation of balance sheet items 0314

6 Income statement 0316 6.1 Presentation of income statement items 0316 6.2 Structure of the income statement 0317

7 Statement of changes in equity 0320 7.1 A separate statement 0320 7.2 Function 0320 7.3 Structure 0321 7.4 Items which are taken directly to equity 0324

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xi)

8 Notes to the financial statements 0325 8.1 Definition 0325 8.2 Structure 0325 8.3 Disclosure of accounting policies 0327 8.4 Key assumptions 0327 8.5 Other disclosures 0327

Session 04

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

1 Reporting performance 0402 1.1 Information 0402 1.2 Disaggregation 0402 1.3 Relevant standards on the reporting of performance 0403 1.4 IAS 8 0403

2 Accounting policies 0403 2.1 Definition 0403 2.2 Selection and application 0403 2.3 Consistency of accounting policies 0404

3 Changes in accounting policy 0405 3.1 What? 0405 3.2 When? 0405 3.3 How? 0405 3.4 Disclosure 0406

4 Changes in accounting estimates 0408 4.1 Definition 0408 4.2 Examples 0409 4.3 Accounting treatment 0409 4.4 Disclosure 0409

5 Errors 0410 5.1 Definition 0410 5.2 Accounting treatment 0410 5.3 Disclosures 0410

Session 05

IAS 18 Revenue

1 IAS 18 Revenue 0502 1.1 Scope 0502 1.2 Definitions 0502 1.3 Measurement of revenue 0502 1.4 Sale of goods 0503 1.5 Rendering of services 0504 1.6 Interest, royalties and dividends 0505 1.7 Disclosure 0505

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xii)

2 Specific examples – sale of goods 0506 2.1 Bill and hold sales 0506 2.2 Goods shipped subject to conditions 0506 2.3 Lay away sales 0507 2.4 Advance payment 0507 2.5 Sale and repurchase agreements 0507 2.6 Sales to intermediate parties 0510 2.7 Subscriptions to publications and similar items 0510 2.8 Instalment sales 0511 2.9 Real estate sales 0511

3 Specific examples – rendering of services 0512 3.1 Installation fees 0512 3.2 Servicing fees included in the price of the product 0512 3.3 Advertising commissions 0512 3.4 Insurance agency commissions 0512 3.5 Financial service fees 0512 3.6 Admission fees 0513 3.7 Tuition fees 0513 3.8 Initiation, entrance and membership fees 0513 3.9 Franchise fees 0514 3.10 Fees from the development of customised software 0514

4 Interest, royalties and dividends – examples 0515 4.1 Licence fees and royalties 0515

5 Sales tax 0515 5.1 General principles 0515 5.2 Operation 0515

Session 06

IAS 11 Construction Contracts

1 Construction contracts 0602 1.1 Definitions 0602 1.2 Key issue 0603 1.3 Revenue 0603 1.4 Contract costs 0604

2 Recognition and measurement 0605 2.1 The rules 0605 2.2 Calculations 0608 2.3 Recognition 0612

3 Presentation and disclosure 0613

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xiii)

Session 07

IAS 2 Inventories

1 Basics 0702 1.1 Objective 0702 1.2 Scope 0702 1.3 Definitions 0703 1.4 Measurement 0703

2 Cost 0703 2.1 Meaning of cost 0703 2.2 Components of cost 0703 2.3 Techniques for measurement of cost 0704 2.4 Cost formulas 0705

3 Net realisable value 0709 3.1 Need for 0709 3.2 Considerations 0709 3.3 Materials 0709 3.4 Timing 0709

4 Recognition 0711 4.1 As an expense 0711 4.2 As an asset 0711

5 Disclosure 0713 5.1 In financial statements 0713 5.2 Expense recognition 0714

Session 08

IAS 16 Property, Plant and Equipment

1 Scope 0802 1.1 Scope 0802 1.2 Exclusions 0802 1.3 Definitions 0802

2 Recognition of property, plant and equipment 0803 2.1 Criteria 0803

3 Initial measurement at cost 0804 3.1 Components of cost 0804 3.2 Exchange of assets 0804

4 Subsequent costs 0806 4.1 Accounting treatment 0806 4.2 Part replacement 0806 4.3 Major inspection or overhaul costs 0806

5 Measurement subsequent to initial recognition 0807 5.1 Accounting policy 0807 5.2 Cost model 0807 5.3 Revaluation model 0807

6 Revaluations 0808 6.1 Fair value 0808 6.2 Frequency 0808 6.3 Accumulated depreciation 0808 6.4 Increase/decrease 0810

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xiv)

7 Depreciation 0812 7.1 Accounting standards 0812 7.2 Depreciable amount 0812 7.3 Depreciation methods 0814

8 Recoverability of carrying amount – impairment losses 0814 8.1 Impairment 0814 8.2 Compensation 0814

9 Derecognition 0815 9.1 Accounting treatment 0815 9.2 Derecognition date 0815

10 Disclosure 0816 10.1 For each class 0816 10.2 Others 0817 10.3 Items stated at revalued amounts 0817 10.4 Encouraged 0817

Session 09

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

1 Scope 0902 1.1 Application 0902 1.2 Matters not dealt with 0902

2 Government grants 0902 2.1 Definitions 0902 2.2 Recognition criteria 0903 2.3 Forgivable loans 0903 2.4 Broad approaches to accounting treatment 0903 2.5 Accounting standards 0904 2.6 Non-monetary government grants 0904 2.7 Presentation of grants related to assets 0904 2.8 Presentation of grants related to income 0907 2.9 Repayment of government grants 0908

3 Government assistance 0909 3.1 Definition 0909 3.2 Exclusions from definition government grants 0909 3.3 Loans at nil or low interest rates 0909 3.4 SIC-10: Government Assistance – No Specific Relation to Operating

Activities 0909 4 Disclosure 0910

4.1 Matters 0910

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xv)

Session 10

IAS 23 Borrowing Costs

1 Issue 1002 1.1 Recognition 1002 1.2 Arguments 1002

2 IAS 23 1003 2.1 Treatment 1003 2.2 Definitions 1003

3 Capitalisation 1004 3.1 Borrowing costs eligible for capitalisation 1004 3.2 Commencement of capitalisation 1006 3.3 Suspension of capitalisation 1007 3.4 Cessation of capitalisation 1007

4 Disclosure 1008 Session 11

IAS 17 Leases

1 The issue 1102 1.1 Traditional accounting for leases (pre IAS 17) 1102 1.2 Problem 1102 1.3 Overview 1102

2 Key definitions 1102 3 Types of arrangement 1105

3.1 Lease classification: two types 1105 3.2 Risks and rewards of ownership 1105 3.3 Indicators 1105 3.4 Terms of the lease 1106 3.5 Land and buildings 1107

4 Finance leases 1108 4.1 Principles 1108 4.2 Rentals in arrears 1109 4.3 Rentals in advance 1111 4.4 Disclosures – finance leases 1113

5 Operating leases 1115 5.1 Accounting for an operating lease 1115 5.2 Disclosures 1116 5.3 SIC-15: Operating Leases – Incentives 1116

6 Lessor accounting 1117 6.1 Definitions 1117 6.2 Finance leases 1117 6.3 Allocation of finance income 1118 6.4 Disclosure 1119

7 Sale and leaseback transactions 1120 7.1 Background 1120 7.2 Sale and leaseback as a finance lease 1120 7.3 Sale and leaseback as an operating lease 1122

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xvi)

Session 12

IAS 38 Intangible Assets

1 Introduction to IAS 38 1202 1.1 Scope 1202 1.2 Definitions 1202 1.3 Definition criteria 1203

2 Recognition and initial measurement 1204 2.1 General criteria 1204 2.2 Initial measurement – cost 1205 2.3 Subsequent expenditure 1211

3 Internally generated intangible assets 1212 3.1 Internally generated goodwill 1212 3.2 Other internally generated assets 1212 3.3 Specific recognition criteria for internally generated intangible assets 1212 3.4 Recognition of expenses and costs 1215

4 Measurement after recognition 1217 4.1 Cost model 1217 4.2 Revaluation model 1217 4.3 Active markets 1218 4.4 Accounting entries on revaluation 1219

5 Useful life 1221 5.1 Factors 1221 5.2 Finite useful lives 1222 5.3 Indefinite useful lives 1227

6 Impairment and derecognition 1227 6.1 Impairment losses 1227 6.2 Retirements and disposals 1227

7 Disclosure 1228 7.1 Intangible assets 1228 7.2 Revaluations 1232 7.3 Research and development expenditure 1232

Session 13

IAS 40 Investment Properties

1 Investment properties 1302 1.1 Objective 1302 1.2 Definitions 1302 1.3 Examples 1302 1.4 Scope 1303

2 Recognition 1303 2.1 Rule 1303 2.2 Initial measurement 1303 2.3 Meaning of cost 1304 2.4 Subsequent expenditure 1304

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xvii)

3 Measurement subsequent to initial recognition 1304 3.1 Rule 1304 3.2 Fair value model 1304 3.3 Cost model 1306 3.4 Change in method 1306 3.5 Transfers 1306 3.6 Disposals 1307

4 Disclosure 1309 4.1 All circumstances 1309 4.2 Fair value model 1309 4.3 Cost model 1309

Session 14

IAS 41 Agriculture

1 Agricultural activity 1402 1.1 Objective 1402 1.2 Scope 1402 1.3 Definitions 1402 1.4 Features 1403

2 Recognition and measurement 1403 2.1 Recognition 1403 2.2 Measurement 1403 2.3 Gains and losses 1405 2.4 If fair value cannot be determined 1405

3 Government grants 1407 4 Presentation and disclosure 1407

4.1 Presentation 1407 4.2 Disclosure 1407

Session 15

IAS 36 Impairment of Assets

1 Introduction 1502 1.1 Objective of the standard 1502 1.2 Definitions 1502

2 Basic rules 1503 2.1 All assets 1503 2.2 Intangible assets 1503 2.3 Indications of potential impairment loss 1504

3 Measurement of recoverable amount 1507 3.1 General principles 1507 3.2 Fair value less costs to sell 1508 3.3 Value in use 1510

4 Cash-generating units 1514 4.1 Basic concept 1514 4.2 Allocating shared assets 1516

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xviii)

5 Accounting for impairment loss 1519 5.1 Basics 1519 5.2 Allocation within a cash-generating unit 1520

6 Subsequent review 1523 6.1 Basic provisions 1523 6.2 Reversals of impairment losses 1523

7 Disclosure 1526 7.1 For each class of assets 1526 7.2 Segment reporting 1526 7.3 Material impairment losses recognised or reversed 1526

Session 16

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

1 Introduction 1602 1.1 Objective 1602 1.2 Scope 1602 1.3 Definitions 1602 1.4 The relationship between provisions and contingent liabilities 1604

2 Recognition 1604 2.1 Provisions 1604 2.2 Recognition issues 1605 2.3 Contingent assets and liabilities 1608

3 Measurement 1608 3.1 General rules 1608 3.2 Specific points 1610

4 Double entry 1611 4.1 IAS 37 guidance 1611 4.2 Changes in provisions 1612 4.3 Decommissioning costs 1613

5 IFRIC 1 1615 5.1 Scope 1615 5.2 Issue 1616 5.3 Consensus 1616

6 Application of rules to specific circumstances 1618 6.1 Future operating losses 1618 6.2 Onerous contracts 1619 6.3 Specific application – Restructuring 1619

7 Provisions for repairs and maintenance 1621 7.1 Refurbishment costs – No legislative requirement 1621 7.2 Refurbishment costs – Legislative requirement 1622

8 Disclosures 1622 8.1 Provisions 1622 8.2 Contingent liabilities 1624 8.3 Contingent assets 1624 8.4 Rarely 1624

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xix)

Session 17

IAS 19 Employee Benefits

1 Introduction 1702 1.1 Key problem 1702 1.2 Objective 1702 1.3 Scope 1702 1.4 Definitions 1703

2 Short term benefits 1705 2.1 Types 1705 2.2 Accounting for short-term employee benefits 1705

3 Post retirement benefits 1706 4 Defined contribution schemes 1706

4.1 Introduction 1706 4.2 Accounting for defined contribution schemes 1706 4.3 Recognition and measurement 1707 4.4 Disclosure 1707

5 Defined benefit schemes 1707 5.1 Introduction 1707 5.2 IAS 19 approach 1708 5.3 Accounting basics 1709 5.4 Complication 1710 5.5 Expense 1713

6 Sundry guidance 1717 6.1 Actuarial valuation method 1717 6.2 Discount rate 1718 6.3 Regularity 1718 6.4 Past service cost 1718

7 Presentation and disclosure 1719 7.1 Presentation 1719 7.2 Disclosure – defined benefit plans 1719

Session 18

IFRS 2 Share-based Payments

1 Share-based payments 1802 1.1 Need for a standard 1802 1.2 Key issues 1802 1.3 Objective of IFRS 2 1802 1.4 Scope 1803 1.5 Effective date 1803

2 Definitions 1803 2.1 Share-based payment transaction arrangement 1803 2.2 Types of transactions 1804

3 Recognition 1805 3.1 On receipt or acquisition 1805

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xx)

4 Measurement 1805 4.1 Fair value 1805 4.2 Equity-settled transactions 1805 4.3 Granting of equity instruments 1807 4.4 Indirect measurement 1811 4.5 Valuation technique 1811 4.6 Cash-settled transactions 1812

5 Disclosures 1812 5.1 Purpose 1812 5.2 Nature and extent of schemes in place 1812 5.3 How fair value was determined 1813 5.4 Effect of expenses arising 1814

Session 19

IAS 12 Income Taxes

1 Introduction 1902 1.1 Objective 1902 1.2 Scope 1902 1.3 Definitions 1902

2 Current tax 1903 3 Deferred taxation – an introduction 1904

3.1 The underlying problem 1904 3.2 The concept illustrated 1905 3.3 Tax bases 1908 3.4 Temporary differences 1910

4 Recognition of deferred tax liabilities 1914 4.1 The rule 1914 4.2 Discussion 1914

5 Recognition of deferred tax assets 1915 5.1 The rule 1915 5.2 Discussion 1916

6 Measurement issues 1917 6.1 Rates 1917 6.2 Change in rates 1920 6.3 Accounting for the movement on the deferred tax balance 1921 6.4 Summary of approach 1922

7 Business combinations 1923 7.1 Introduction 1923 7.2 Temporary differences arising on the calculation of goodwill 1924 7.3 Inter-company transactions 1925

8 Presentation and disclosure 1926 8.1 Deferred taxation – presentation 1926 8.2 Deferred taxation − separate disclosure 1927

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxi)

Session 20

IAS 32 and IAS 39 Financial Instruments

1 Background 2002 1.1 Traditional accounting 2002 1.2 Financial instruments 2002 1.3 History 2002

2 Application and scope 2003 2.1 IAS 32 2003 2.2 IAS 39 2004

3 Definitions 2005 3.1 From IAS 32 2005 3.2 From IAS 39 2006

4 Presentation (IAS 32) 2009 4.1 Liabilities and equity 2009 4.2 Settlement in own equity instruments 2009 4.3 Offset 2010 4.4 Interest, dividends, losses and gains 2011 4.5 Compound instruments 2011 4.6 Contingent settlement provisions 2013 4.7 Treasury shares 2013

5 Disclosure (IAS 32) 2014 5.1 Rules 2014 5.2 Illustrative notes – Nokia 2018

6 Recognition (IAS 39) 2022 6.1 Initial recognition 2022 6.2 Examples 2022

7 Derecognition 2022 7.1 Derecognition of a financial asset 2022 7.2 Derecognition of a financial liability 2024

8 Measurement (IAS 39) 2025 8.1 Initial measurement of financial assets and financial liabilities 2025 8.2 Fair value considerations 2025 8.3 Subsequent measurement of financial liabilities 2026 8.4 Subsequent measurement of financial assets 2026

9 Hedging 2027 9.1 IAS 39 definitions 2027 9.2 Hedging instruments 2027 9.3 Hedged items 2027 9.4 Hedge accounting 2028

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxii)

Session 21

Regulatory framework

1 Introduction 2102 1.1 Definitions 2102 1.2 Accounting for subsidiaries in separate financial statements 2102 1.3 Truth and fairness 2102

2 Inclusions 2103 2.1 Parent and control 2103 2.2 SIC-12: Consolidation – Special Purpose Entities 2104 2.3 Purchase method 2106

3 Sundry provisions of IAS 27 2106 3.1 Results of intra-group trading 2106 3.2 Accounting year ends 2106 3.3 Accounting policies 2107 3.4 Date of acquisition or disposal 2107

4 Exemption from preparing group accounts 2107 4.1 Rule 2107 4.2 Rationale 2108

5 Disclosure 2108 5.1 IAS 27 disclosures 2108 5.2 IFRS 3 disclosures 2109

Session 22

Basic principles – Consolidated balance sheet

1 The issue 2202 1.1 Background 2202 1.2 Rule 2202

2 Conceptual background 2203 2.1 Consolidation 2203 2.2 Goodwill 2203

3 Overview of the technique 2205 3.1 Individual company adjustments 2205 3.2 Consolidation adjustments 2205

4 Consolidation 2206 4.1 Basic principles 2206 4.2 Goodwill 2208 4.3 Post acquisition growth in reserves 2210 4.4 Minority interest 2212

5 Complications 2215 5.1 Mid-year acquisitions 2215

6 Adjustments 2217 6.1 Inter-company balances 2217 6.2 Unrealised profit 2218 6.3 Inventory 2219 6.4 Non-current asset transfers 2224

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxiii)

Session 23

Further adjustments

1 Adjustments 2302 2 Items not accounted for 2302

2.1 Background 2302 2.2 Proposed dividends 2302 2.3 Partially recorded dividends 2305 2.4 Dividends paid out of pre-acquisition profits 2305

3 Group accounting policy adjustments 2306 4 Goodwill 2307

4.1 Definition 2307 4.2 Cost of acquisition – Fair value of purchase consideration 2307 4.3 Identifiability 2308 4.4 Fair values – general guidance 2309

5 Accounting for the revaluation in the accounts of subsidiaries 2311 5.1 Exam question complication 2311 5.2 How is the revaluation accounted for? 2311

6 Accounting for goodwill 2315 6.1 Goodwill 2315 6.2 Excess of acquirer’s interest over cost 2315 6.3 Initial accounting determined provisionally 2316

7 Consolidated balance sheet workings 2318 Session 24

Consolidated income statement

1 Introduction 2402 1.1 Income generation 2402 1.2 Control and ownership 2402

2 Inter-company transactions and unrealised profit 2403 2.1 Dividends 2403 2.2 Inter-company items 2403

3 Entitlement of the minority 2406 3.1 Basics 2406

4 Mid-year acquisitions 2408 4.1 Inclusion of subsidiary’s results 2408 4.2 Dividends from subsidiary acquired mid-year 2409

5 Treatment of goodwill 2409 6 Consolidated statement of changes in equity 2409

6.1 IAS 1 2409

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxiv)

Session 25

IAS 28 Investments in Associates

1 Equity accounting 2502 1.1 Background 2502 1.2 Scope 2502 1.3 Definitions 2503 1.4 Significant influence 2503 1.5 Separate financial statements 2504

2 Accounting treatment 2504 2.1 Relationship to a group 2504 2.2 Basic rule 2504 2.3 Equity accounting 2505 2.4 Treatment in a consolidated balance sheet 2505 2.5 Treatment in a consolidated income statement 2510 2.6 Recognition of losses 2512 2.7 Accounting policies and year ends 2513 2.8 Impairment 2513 2.9 Exemptions to equity accounting 2514

3 Inter-company items with an associate 2515 3.1 Inter-company trading 2515 3.2 Dividends 2515 3.3 Unrealised profit 2516

4 Disclosure 2517 4.1 Investments in associates 2517 4.2 Using the equity method 2517

Session 26

IAS 31 Interests in Joint Ventures

1 IAS 31 2602 1.1 Scope 2602

2 Joint ventures 2602 2.1 Definitions 2602 2.2 Forms of joint venture 2603 2.3 Characteristics 2603

3 Jointly controlled operations 2604 3.1 Description 2604 3.2 Presentation and accounting 2604

4 Jointly controlled assets 2608 4.1 Description 2608 4.2 Presentation and accounting 2608

5 Jointly controlled entities 2609 5.1 Description 2609 5.2 Presentation and accounting 2609 5.3 Transactions between venturer and a joint venture 2613 5.4 SIC-13: Jointly Controlled Entities – Non-Monetary Contributions by

Venturers 2614 5.5 Exemptions to proportionate consolidation and equity methods 2615 5.6 Separate financial statements of a venturer 2616 5.7 Reporting the interests of an investor 2616 5.8 Ceasing to be a venturer in a joint venture 2616

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxv)

6 Disclosure 2616 6.1 Contingencies 2616 6.2 Interests 2617

7 Consolidation methods – Summary 2618 Session 27

IAS 21 The Effects of Changes in Foreign Exchange Rates

1 Accounting issues 2702 1.1 Introduction 2702 1.2 Key issues 2702 1.3 Objectives 2702 1.4 Key definitions 2702

2 Functional and Presentation currency 2703 2.1 Functional currency 2703 2.2 Presentation currency 2704

3 Individual entities 2704 3.1 Accounting treatment – basic transactions 2704 3.2 Exceptions to the basic rules 2708

4 Disclosure 2708 4.1 Exchange differences 2708

Session 28

IAS 33 Earnings Per Share

1 Introduction 2802 1.1 Earnings performance 2802 1.2 Scope 2802 1.3 Definitions 2802

2 Earnings per share (EPS) 2803 2.1 Basic EPS 2803 2.2 Which earnings? 2803 2.3 Preference dividends 2803

3 Weighted average number of ordinary shares 2804 3.1 Basic rule 2804 3.2 Issues of shares where no consideration is received 2804 3.3 Multiple capital changes 2807 3.4 Issuable shares 2809

4 Diluted earnings per share 2809 4.1 Purpose 2809 4.2 Method 2810 4.3 Options 2813 4.4 Contingently issuable shares 2814

5 Presentation and disclosure 2814 5.1 Presentation 2814 5.2 Disclosure 2815

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxvi)

Session 29

IAS 7 Cash Flow Statements

1 Scope 2902 1.1 Applies to all entities 2902 1.2 Importance of cash flow 2902 1.3 Benefits of cash flow information 2902 1.4 Definitions 2903

2 Presentation of a cash flow statement 2904 2.1 Classification 2904 2.2 Illustration 2 2905

3 Reporting cash flows from operating activities 2906 3.1 Direct method 2906 3.2 Indirect method 2906 3.3 Techniques 2906

4 Reporting cash flows from investing and financing activities 2907 4.1 Separate reporting 2907 4.2 Investing activities 2907

5 Components of cash and cash equivalents 2909 5.1 Reconciliation 2909

6 Proforma 2909 6.1 Direct method 2909 6.2 Indirect method 2909 6.3 Notes to the cash flow statement (Direct and indirect methods) 2910

7 Additional disclosures 2915 7.1 Analysis of cash and cash equivalents 2915 7.2 Major non cash transactions 2916 7.3 Cash and cash equivalents not held by the group 2916 7.4 Reporting futures, options and swaps 2916 7.5 Voluntary disclosures 2917

Session 30

IAS 14 Segment Reporting

1 Scope and purpose 3002 1.1 “Public” companies 3002 1.2 Group accounts 3002 1.3 Purpose 3002 1.4 Concerns 3002

2 Segments 3003 2.1 Meaning 3003 2.2 Business segments 3003 2.3 Geographical segments 3004

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxvii)

3 Reporting 3006 3.1 Primary vs secondary 3006 3.2 Geographical segments 3008 3.3 Materiality 3008 3.4 Disclosures 3010 3.5 Analysis of revenue 3010 3.6 Analysis of expenses 3012 3.7 Segment result 3012 3.8 Analysis of assets 3012 3.9 Segment liabilities 3014 3.10 Sundry disclosures 3015 Activity 2 3015

4 Summary information reported 3016 4.1 For each reported industry and geographical segment 3016

Session 31

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1 Introduction 3102 1.1 Reasons for issuing IFRS 5 3102

2 Definitions 3102 2.1 Component of an entity 3102 2.2 Disposal group 3103 2.3 Discontinued operation 3103

3 Held for sale classification 3105 3.1 Definitions 3105 3.2 Held for sale non-current assets 3105 3.3 Abandoned non-current assets 3107 3.4 Measurement 3107 3.5 Changes to a plan of sale 3108

4 Presentation and disclosure 3108 4.1 Purpose 3108 4.2 Discontinued operations 3109 4.3 Continuing operations 3110 4.4 Held for sale non-current assets 3110

Session 32

IAS 10 Events After the Balance Sheet Date


2 Recognition and measurement 3203 2.1 Adjusting events 3203 2.2 Non-adjusting events 3203 2.3 Dividends 3204 2.4 Going concern 3205

3 Disclosure 3205 3.1 Authorisation 3205 3.2 Updating 3205 3.3 Non-adjusting events 3206

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxviii)

Session 33

IAS 24 Related Party Disclosure

1 Scope of IAS 24 3302 1.1 Scope 3302 1.2 Parties deemed not to be related 3302

2 Definitions 3303 2.1 Related party 3303 2.2 Related party transaction 3304 2.3 Control 3304 2.4 Significant influence 3304 2.5 Joint control 3304

3 The related party issue 3305 3.1 Effect on reporting entity 3305

4 Disclosure 3306 4.1 Examples of situations 3306 4.2 Disclosure required 3306 4.3 Aggregation 3307

Session 34

IAS 34 Interim Financial Reporting


2 Content of an interim financial report 3404 2.1 Minimum components 3404 2.2 Consolidation 3404 2.3 Condensed balance sheet 3404 2.4 Condensed income statement 3405 2.5 Condensed cash flow statement 3406 2.6 Changes in equity 3406 2.7 Selected note disclosures 3406

3 Recognition and measurement 3407 3.1 General principles 3407 3.2 Tax charge 3407 3.3 Use of estimates 3408 3.4 Application examples 3408

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxix)

Session 35

IFRS 1 First-time Adoption of International Financial Reporting Standards

1 Introduction 3502 1.1 Background 3502 1.2 Objective 3502 1.3 Scope 3503 1.4 Definitions 3503 1.5 Stages in transition to IFRSs 3504 1.6 Transition overview 3506

2 Opening IFRS balance sheet 3507 2.1 Recognition and measurement principles 3507 2.2 Exemptions from other IFRSs 3507 2.3 Property, plant and equipment 3507 2.4 Business combinations 3508 2.5 Employee benefits 3511 2.6 Cumulative translation differences 3512 2.7 Compound financial instruments 3512 2.8 Assets and liabilities of subsidiaries 3512 2.9 Designation of previously recognised financial instruments 3513 2.10 Share-based payment transactions 3513 2.11 Decommissioning liabilities 3514 2.12 Mandatory exceptions to retrospective application 3516

3 Presentation and disclosure 3517 3.1 Explanation of transition 3517 3.2 Reconciliations 3517 3.3 Other disclosures 3517

4 Practical matters 3521 4.1 Overview 3521 4.2 Making the transition 3522

Index

CONTENTS Sample

Accountancy Tuition Centre (International Holdings) Ltd 2005 (xxx)

SESSION 4 – ACCOUNTING POLICIES

Accountancy Tuition Centre (International Holdings) Ltd 2005 0401

Overview Objective

To explain the need for guidance on reporting performance.

To prescribe the criteria for selecting and changing accounting policies.

To account for changes in accounting policies, changes in accounting estimates and the correction of errors.

CHANGES IN ACCOUNTING

POLICY

REPORTING PERFORMANCE

ACCOUNTING POLICIES

ERRORS

Information Disaggregation Relevant standards on the

reporting of performance IAS 8

What? When? How? Disclosure

Definition Selection and

application Consistency of

accounting policies

Definition Accounting treatment Disclosures

CHANGES IN ACCOUNTING

ESTIMATES

Definition Examples Accounting treatment Disclosure

SESSION 4 – ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS


1 Reporting performance 1.1 Information

The objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions.

The economic decisions that are taken by users of financial statements require an evaluation of the ability of an entity to generate cash and cash equivalents and of the timing and certainty of their generation.

Information about the performance of an entity, in particular its profitability, is required in order to:

assess potential changes in the economic resources that it is likely to control in the future;

predict the capacity of the entity to generate cash flows from its existing resource base; and

form judgements about the effectiveness with which the entity might employ additional resources.

Information about variability of performance is important in this respect.

1.2 Disaggregation

In order to make economic decisions, users of financial statements need to understand the make-up of figures in as much detail as possible. There is therefore a tendency in financial reporting towards providing information about the composition of figures.

Commentary

Information may be analysed on the face of the statements or in the notes.

For example:

Disclosure of material and unusual items which are part of ordinary activities;

Information on discontinued operations;

Segment reporting.

Commentary

Users can use such information to make better quality forecasts in respect of the entity.



1.3 Relevant standards on the reporting of performance

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

IAS 1 Presentation of Financial Statements

IAS 14 Segment Reporting

IAS 7 Cash Flow Statements

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

1.4 IAS 8

The standard sets out:

Criteria for selecting and applying accounting policies;

Classification of material items;

How to account for:

– changes in accounting policies; – changes in accounting estimates; and – the correction of errors.

2 Accounting policies 2.1 Definition

These are specific principles, bases, conventions, rules and practices adopted by an entity in preparing and presenting financial statements.

2.2 Selection and application

Applicable standards and interpretations must be applied considering any relevant implementation guidance issued by the IASB.

Commentary

Accounting policies set out in IFRSs need not be applied ONLY when the effect of applying them is immaterial.

If there is no applicable Standard or Interpretation, management uses its judgement to develop and apply an accounting policy resulting in information with the qualitative characteristics of:

relevance; and

reliability;

− faithful representation; − substance over form; − neutrality; − prudence; and − completeness.



In making such judgements management should consider:

Standards and Interpretations dealing with similar and related transactions; then

the definitions and recognition criteria and measurement concepts set out in the Framework; also

recent pronouncements of other standard-setting bodies that use a similar conceptual framework; and

accepted industry practice.

Commentary

This may be thought of as a “GAAP hierarchy”. An accepted industry practice that conflicts with any IASB pronouncement (including the Framework) cannot be judged suitable.

Illustration 1

Kitty has recently purchased a Van Gogh painting to display in their client reception area, with the hope it will lead to more contracts and that the painting will appreciate in value.

There is no specific accounting standard that deals with this type of asset, but IAS 40 Investment Property does deal with a particular type of asset that is held for capital appreciation.

It would therefore seem appropriate to use IAS 40 as justification to value the painting at fair value at each balance sheet date.

2.3 Consistency of accounting policies

Accounting policies must be applied consistently for similar items unless a Standard or Interpretation requires or permits categorisation of items.

When categorisation is required or permitted the most appropriate accounting policy is selected and applied consistently to each category.

Illustration 2

IAS 2 Inventories requires that inventory be valued at lower of cost and net realisable values. In identifying cost it allows alternative cost formulas; first-in first-out and weighted average. The same cost formula must be applied to similar items of inventory, but a different cost formula can be applied to a different classification of inventory.

Illustration 3

IAS 23 Borrowing Costs allows certain borrowing costs to be included in the cost of a qualifying asset. If the capitalisation policy is selected then borrowing costs relating to ALL qualifying assets must be capitalised.



3 Changes in accounting policy 3.1 What?

The first time application of an accounting policy to newly occurring items (or items that were previously immaterial) is not a change.

Adopting the revaluation model of IAS 16 “Property, Plant and Equipment” where the cost model has been followed previously is a change of accounting policy.

Commentary

However, it is accounted for as a revaluation under IAS 16 and not as a change in accounting policy under IAS 8.

3.2 When?

The same accounting policies must be applied within each period and from one period to the next unless a change:

is required by a Standard or Interpretation; or

Commentary

A mandatory change.

would result in the financial statements providing more relevant and reliable information.

Commentary

A voluntary change.

3.3 How?

3.3.1 New Standard or Interpretation

If a new Standard is issued the transitional provisions of that standard will be applied to any change of accounting policy.

Commentary

For example, IFRS 2 “Share-based Payment” is effective for annual periods beginning on or after 1 January 2005. The standard applies to share options granted after 7 November 2002 that have still to vest after the effective date.

If a new Standard does not have transitional provisions, or the change in policy is voluntary, the change is applied retrospectively.

Commentary

Early application of a Standard or Interpretation is not a voluntary change.



3.3.2 Retrospective application

Retrospective application means applying a new accounting policy to transactions, other events and conditions as though that policy had always been applied.

The opening balance of each affected component of equity is adjusted for the earliest prior period presented and the comparative amounts disclosed as if the new policy had always been applied.

If it is not practicable to apply the effects of a change in policy to prior periods IAS 8 allows the change to be made from the earliest period for which retrospective application is practicable.

Commentary

Under IAS 8 impracticable means that the entity cannot apply a requirement after making every reasonable effort to do so.

3.4 Disclosure

Nature of the change in policy.

For the current period and each prior period presented the amount of the adjustment for each line item affected within the financial statements.

The amount of the adjustment relating to periods before those presented.

If retrospective restatement is not practicable:

the circumstances that led to the existence of the condition; and a description of how and from when the change has been applied.

Additionally

New Standard Voluntary change

Title of new Standard or Interpretation

Reasons why the new policy provides more reliable and relevant information



Activity 1

A, an incorporated entity has previously followed a policy of capitalisation of development expenditure. It has recently decided to adopt the provisions of IAS 38 Intangible Assets, for the year ending 31 December 2004. A has been advised by their auditors that the expenditure previously capitalised does not qualify for capitalisation under the recognition criteria set out in the standard.

The notes to the accounts for the year ended 31 December 2003 in respect of the deferred development expenditure was as follows:

$ Balance at 1 January 2003 1,000

Additions 500

Amortisation (400)

Balance at 31 December 2003 1,100

During the year ended 31 December 2004 the company has expensed all expenditure in the period on projects, in respect of which, expenditure had previously been capitalised.

The following are extracts from the draft accounts for the year ended 31 December 2004.

Income statements 2004 2003 (as previously

published) $ $

Sales 1,200 1,100

Expenses (800) (680)

Profit for the year 400 420 Statement of changes in equity (extract) $ $

Balance as at 1 January 2004 3,000 2,580

Profit for the year 400 420

Balance as at 31 December 2004 3,400 3,000 Required:

Show how the income statement and statement of changes in equity would appear in the financial statements for the year ended 31 December 2004 when the change in accounting policy is applied retrospectively.



Solution

Income statements 2004 2003 (As restated)

$ $

Sales

Expenses

Profit for the year

Statement of changes in equity (extract) $ $

Balance as at 1 January 2004

As previously stated

Prior period adjustment

Profit for the year

Balance as at 31 December 2004

4 Changes in accounting estimates 4.1 Definition

Adjustments to the carrying value of an asset or liability that results from the assessment of the present status of, and expected future benefits and obligations associated with, assets and liabilities.

Commentary

A change in useful lives/residual value concerns a change in the pattern of consumption of economic benefits. This is also an estimate. A change in policy would be moving from non-depreciation of assets (which is not permitted under IAS) to depreciating then over finite useful lives.

An estimate may have to be revised:

if changes occur regarding the circumstances on which the estimate was based;

as a result of new information, more experience or subsequent developments.

Commentary

Such changes are not therefore classed as correction of errors.



4.2 Examples

Many items recognised in the financial statements must be measured with an element of estimation attached to them.

Receivables may be measured after allowing for a general bad debt provision;

Inventory is measured at lower of cost or net realisable value but must provide for obsolescence;

A provision under IAS 37 by its very nature may be an estimation of future economic benefits to be paid out;

Non-current assets are depreciated, the expected pattern of consumption and useful life are estimates.

4.3 Accounting treatment

The effect of a change in estimate is recognised prospectively (i.e. by including in the current and future (where relevant) periods profit and loss).

Commentary

A change in estimate is not an error or a change in accounting policy and therefore does not impact upon prior period statements.

A change in estimate that affects the measurement of assets or liabilities is recognised by adjusting the carrying amount of the asset or liability.

The other side of the double entry is to the income statement in the period in which the estimate is changed.

Commentary

In some gaap reversals of provisions for items of expenditure are accounted for as income. Under IFRS, reversals MUST be set off against the relevant expense line item.

4.4 Disclosure

The nature and amount of a change in estimate that has an effect in the current period or is expected to have an effect in future periods.

If it is not possible to estimate the effects on future periods then that fact must be disclosed.



5 Errors 5.1 Definition

Prior period errors are omissions from, and misstatements in, the financial statements for one or more prior periods arising from the failure to use or, misuse of, reliable information that:

was available; and could reasonably be expected to have been obtained,

when those prior period financial statements were authorised for issue.

Examples include:

mathematical mistakes; mistakes in applying accounting policies; misinterpretation of facts; fraud; oversights.

5.2 Accounting treatment

Material prior period errors are corrected retrospectively in the first set of financial statements authorised for issue after their discovery by restating comparative information for the prior period(s) presented in which the error occurred.

Commentary

So the current period financial statements are presented as if the error had been corrected in the period in which it was originally made. However, an entity does not reissue the financial statements of prior periods.

If the error occurred before the earliest prior period presented, the opening balances of assets, liabilities and equity is restated for the earliest prior period presented.

Commentary

If it is not practicable to determine the period-specific effects of an error on comparative information the opening balances are restated for the earliest period practicable.

5.3 Disclosures

Nature of the prior period error.

For each prior period presented the amount of the correction:

for each line item affected within the financial statements; at the beginning of the earliest period presented.

If retrospective restatement is not practicable, the circumstances that led to the existence of the condition and how and from when the error has been corrected.



Key point summary Changes in accounting policies are not changes in estimates.

Changes in accounting estimates are not corrections of errors.

A change in policy may be required by a Standard or voluntary.

A change in estimate is accounted for prospectively.

Changes in accounting policy and the correction of prior period errors are accounted for retrospectively.

Focus You should now be able to:

recognise the circumstances where a change in accounting policy is justified;

define prior period adjustments and errors and account for the correction of errors and changes in accounting policies.



Activity solution Solution 1 – Change in accounting policy

Income statements 2004 2003 (As restated)

$ $ Sales 1,200 1,100

Expenses (800) (780)

Profit for the year 400 320 Statement of changes in equity (extract) $ $

Balance as at 1 January 2004

As previously stated 3,000 2,580

Prior period adjustment (1,100) (1,000)

1,900 1,580

Profit for the year 400 320

Balance as at 31 December 2004 2,300 1,900

Notes 1 The entity amortised $400 in 2003 but spent $500. The policy would have been to

write off the amount expenditure directly to the income statement, therefore the entity needs to adjust last year’s figures by an extra $100 expense.

The adjustment against last year’s income statement ($100) has the effect of restating it to what it would have been if the company had been following the same policy last year. This is important because the income statements as presented should be prepared on a comparable basis.

2 The balance left on the deferred expenditure account at the end of the previous year (1,100) is written off against the accumulated profit that existed at that time.

3 This 1,100 is made up of an amount that arose last year (the difference between the amount spent ($500) and the amount amortised ($400), and the balance that existed at the beginning of the previous year ($1,000).

These amounts are written off against last year’s profit and the opening balance on the accumulated profit last year, respectively.

E-mail [email protected]://www.atc-global.com

Documents

DIPLOMA IN INTERNATIONAL FINANCIAL REPORTING files/DipIFR_Sample.pdf · IASB’s 2004 Bound Volume “International Financial Reporting ... a Property plant and equipment ... The