IAS 1 Presentation of Financial Statements.docx

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IAS 1 Presentation of Financial Statements

XYZ plcStatement of Comprehensive Income for the year ended 31 December !X"

• IAS 1 allows Comprehensive Income to be presented in two ways: [IAS 1: 81]

i. A single Statement of Comprehensive Incomeii. wo separate statements as shown above

• I!"S do not specify whether reven#e can be presented only as a single line item in the statement of comprehensive income$ or whether an entity also may incl#de the individ#al components ofreven#e %for e&ample: vario#s s#b'totals for ban(s).

• *&penses can be classi+ed by: [IAS 1: ,,]' !#nction: more common in practice %as the above statement)' -at#re %e.g. p#rchase of materials$ depreciation$ wages and salaries$ transport costs)

• !inance income cannot be netted against +nance costs it is incl#ded in /0ther income or show

separately in the income statement.' 2here +nance income is an incidental income$ it is acceptable to present +nance income

immediately before +nance costs and incl#de a s#b'total of /-et +nance costs in the incomestatement.' 2here earning interest income is one of the entitys main line of b#siness$ it is presented as

/reven#e.

• #ntities m$st prominently display% [IAS 1: 31]

' name of the reporting entity' whether the statements are for a single entity or a gro#p of entities' date of the end of the reporting period$ or the period covered' presentation c#rrency



' the level of ro#nding #sed in the preparation of the statements

XYZ plc &Statement of Chan'es in #($ity for the year ended 31 December !X"

• IAS 14 %55*) permits and it is best practice to ma(e a transfer between reserves of the e&cessdepreciation arising as a res#lt of reval#ation. [IAS 1: 61]

• 2hen an asset carrying #sing reval#ation model is disposed$ any remaining reval#ation reserverelating to that asset is transferred directly to retained earnings. [IAS 1: 61]

• An entity can present components of changes in e7#ity either in the /Statement of Changes in*7#ity or in the notes to the +nancial statements. [IAS 1: 14]



XYZ plc & Statement of Financial Position as at 31 December !X"

• "eserves other than share capital and retained earnings may be gro#ped as /other componentsof e7#ity.

• *ntities m#st present a set of previo#s years statements for comparison p#rposes.

• An entity shall classify an asset as c$rrent )hen% [IAS 1: 44]

a) It e&pects to realise the asset$ or intends to sell or cons#me it$ in its normal operatingcycle

b) It holds the asset primarily for the p#rpose of trading

c) It e&pects to realise the asset within twelve months after the reporting period or

d) he asset is cash or cash e7#ivalents #nless the asset is restricted from being e&changedor #sed to settle a liability for at least twelve months after the reporting period.

• An entity shall classify a liability as c$rrent )hen% [IAS 1: 4,]

a) It e&pects to settle the liability in its normal operating cycle

b) It holds the liability primarily for the p#rpose of trading

c) he liability is d#e to be settled within twelve months after the reporting period or



d) It does not have #nconditional right to defer settlement of the liability for at least twelvemonths after the reporting period.

IAS 1* Property+ plant and e($ipment

• An asset is a reso#rce controlled by the entity as a res#lt of past events and from which f#t#re

economic bene+ts are e&pected 9ow to the entity.

• 5roperty$ plant and e7#ipment are tangible assets that:

' are held for #se in the prod#ction or s#pply of goods or services$ for rental to others$ or foradministrative p#rposes and

' are e&pected to be #sed d#ring more than one period.

• Initial reco'nition%

' 55* sho#ld initially be recognised in an entitys statement of +nancial position at cost.

Cost is the amo#nt of cash and cash e7#ivalents paid to ac7#ire the asset at the time of its

ac7#isition or constr#ction 5;<S the fair val#e of any other consideration given.

• #lements of Cost% Cost can incl#de:

' 5#rchase price less any trade disco#nt %not prompt payment disco#nt) or rebate' Import d#ties and non'ref#ndable p#rchase ta&es

' =irectly attrib#table costs of bringing the asset to wor(ing condition for its intended #se.

#,amples%' Costs of site preparation

' Initial delivery and handling costs

' Installation and assembly costs

' 5rofessional fees s#ch as legal fees$ architects fees

' Initial costs of testing that asset is f#nctioning correctly%after ded#cting the net proceeds from selling any items prod#ced)

' he initial estimate of dismantlin' and removing the item and restoring the site where it islocated if the entity is obliged to do so %to the e&tent it is recognised as a provision per IAS >?).@ains from the e&pected disposal of assets sho#ld not be ta(en into acco#nt in meas#ring aprovision.

' In case of a land$ if initial estimation of restoration cost is capitalised then this capitalisedrestoration cost shall be depreciated.

' orrowing costs inc#rred in the constr#ction of 7#alifying assets if in accordance with IAS 23Borrowing costs.

Any abnormal costs inc#rred by the entity$ for e&ample those arising from design errors$

wastage or ind#strial disp#tes$ sho#ld be e&pensed as they are inc#rred and do not formpart of the capitalised cost of the 55* asset.

#stimated economic life and resid$al val$e of asset sho#ld be reviewed at the end of

each reporting period. If either changes signi+cantly$ the change sho#ld be acco#nted forover the #sef#l economic life remaining.

he resid$al val$e of an asset is the estimated amo#nt that an entity wo#ld c#rrently

obtain from disposal of the asset$ after ded#cting the estimated costs of disposal$ if theasset were already of the age and in the condition e&pected at the end of its #sef#l life. [IAS14: 4]

2here these costs are inc#rred over aperiod of time$ the period for which thecosts can be incl#ded in the cost of 55*ends )hen the asset is ready for $se$even if not bro#ght into #se.



S#bse7#ent e&pendit#re only to be capitalised if enhances the life of the asset$ or improves

7#ality or 7#antity of o#tp#t$ or red#ces the cost. If not capitalised then recognise ase&pense in IBS.

*&amples of s#bse7#ent e&pendit#re to be capitalised can incl#de:' odi+cation of an item of plant to e&tend its #sef#l life' <pgrade of machine parts to improve the 7#ality of o#tp#t

' Adoption of a new prod#ction process$ leading to large red#ctions in operating costs 2here an asset is made #p of many distinct %i.e. signi+cant) parts %e&amples: aircraft$ ship)$

these sho#ld be separately identi+ed and depreciated.

aDor inspections or overha#ls sho#ld be recognised as part of %i.e. increase) carrying amo#nt

of the item of 55*$ ass#ming that this meets the recognition criteria.' An e&ample is where an aircraft is re7#ired to #ndergo a maDor inspection after so many

9ying ho#rs. 2itho#t the inspection the aircraft wo#ld not be permitted to contin#e 9ying.' As a separate component of 55*$ the capitalised overha#l cost shall be depreciated over

the period to ne&t overha#l.

• -eas$rement after initial reco'nition% After initially recognising an item of property$ plant ande7#ipment in its statement of +nancial position at cost$ an entity has two choices abo#t how itacco#nts for that item going forwards.

• .eval$ation model%' An entity can$ if it chooses$ reval#e assets to their fair val#e %only if the fair val#e of the item

can be meas#red reliably)' !or land and b#ildings this is normally determined based on their mar(et val#es as determinedby an appraisal #nderta(en by professionally 7#ali+ed val#ers.

' If this model is applied to one asset$ it m#st also be applied to all other assets in the sameclass.

' -ote that when the reval#ation model is #sed 55* m#st still be depreciated. he reval#edamo#nt is depreciated over the assets remaining #sef#l life.

' !or a reval#ed asset$ IAS 14 allows %and enco#rage) a reserve transfer in the statement ofchanges in e7#ity %from /reval#ation reserve to /retained earnings) of the /e,cess/depreciation beca#se of an #pward reval#ation.

.eval$ation model%Carrying asset at reval#ed amo#nt less

s#bse7#ent acc#m#lated depreciation and

Cost model%Carrying asset at cost less acc#m#lated

depreciation and impairment losses



• -ethods of depreciation%' Straight line method' "ed#cing balance method' achine ho#r method' S#m'of'the'digits method

• Dereco'nition% 5roperty$ plant and e7#ipment shall be derecognised %i.e. removed from thestatement of +nancial position) either:' 0n disposal or' 2hen no f#t#re economic bene+ts are e&pected from its #se or disposal.

he gain or loss arising from de'recognition is incl#ded in pro+t or loss.

' his gain or loss is calc#lated by comparing the sale proceeds to the assets carrying amo#nt.' he gain or loss is calc#lated in the same way$ regardless of whether the asset is reval#ed or

not.' Any gain sho#ld not be classi+ed as part of the entitys reven#e.

If on disposal of a reval#ed asset there remains a balance on the reval#ation s#rpl#s relating to the

asset$ this balance sho#ld be transferred to retained earnings.

S#m of the years of assets e&pected life E - F %-G1)BH where - is theassets e&pected life

Cost of a lorry was 13$ and e&pected to last for +ve years. -o scrapval#e.

S#m of the years of assets e&pected life E - F %-G1)BH E 3 F %3G1)BH E 13

=epreciation in Jear1 13$ F 3 B13 E 3$H 13$ F 6 B13 E6$> 13$ F > B13 E >$



IAS 3 0orro)in' costs

• An entity shall capitalise %i.e. as part of the asset) borrowing costs that are directly attrib#table tothe ac7#isition$ constr#ction or prod#ction of a 7#alifying asset as part of the costs of that asset.[IAS H>: 8]

• An entity shall cease capitalisation borrowing costs when s#bstantially all the activities necessaryto prepare the 7#alifying asset for its intended #se or sale are complete. [IAS H>: HH]

• he commencement date for capitalisation% [IAS H>: 1?]2hen the following 3 conditions are 2rst met:

' *&pendit#res for the asset are being inc#rred

' orrowing costs are being inc#rred$ and

' Activities that are necessary to prepare the asset for its intended #se are being #nderta(en.

• Capitalisation is s$spended if active development is interr#pted for e&tended periods.

%emporary delays or technicalBadministrative wor( will not ca#se s#spension).

' Interest income from deposit d#ring this period is not ded#ctible from capitalised borrowingcost since cost from this s#spended period is not capitalised. [IAS H>: H1]

orrowing costs eligible forcapitalisation are those that wo#ld havebeen avoided otherwise. [IAS H>: 1]

orrowing costs are interest and othercosts that an entity inc#rs in connectionwith the borrowing of f#nds. [IAS H>: 3]

A 7#alifying asset is an asset that necessarily ta(es as#bstantial period of time to get ready for its intended #se

orrowing cost %i.e. interest e&pense)of > months %i.e. H3$) to be

recognised in Income Statement

orrowing cost of1H months %i.e.

1$) to berecognised in IBS

orrowing cost of ,months %i.e. ?3$) to

be capitalised as part ofasset in Statement of

>1.1H.1> ' ;oanis mat#red and

>1.1H.1H ' Asset isdelivered K read

>1.>.1H '5ayment made to

H8.H.1H '5#rchase order

made to b# the

1.1.1H ' 1mloan L1M for

All three conditions are met at this



• Amo#nt of borrowing costs available for capitalisation is act#al borrowing costs inc#rred less any

investment income from temporary investment of those borrowings. [IAS H>: 1>]

• !or borrowings obtained generally$ apply the capitalisation rate to the e&pendit#re on the asset%weighted average borrowing cost). [IAS H>: 16]

0n 1 Nan#ary HF4 Stremans Co borrowed 1.3m to +nance the prod#ction of two assets$ both ofwhich were e&pected to ta(e a year to b#ild. 2or( started d#ring HF4. he loan facility was drawndown and inc#rred on 1 Nan#ary HF4$ and was #tilised as follows$ with the remaining f#ndsinvested temporarily. Asset A Asset 1 Nan#ary HF4 H3 3 1 N#ly HF4 H3 3 he loan rate was ,M and Stremans Co can invest s#rpl#s f#nds at ?M.

.e($ired% Ignoring compo#nd interest$ calc#late the borrowing costs which may be capitalised for

Asset A Asset

orrowing costs: o >1 =ecember HF4 %3$B1$$ O ,M)63$ ,$;ess investment income: o > N#ne HF4 %H3$B3$ O ?M O 4B1H)%8$?3) %1?$3)

Acr#ni Co had the following loans in place at the beginning and end of HF4.

1 Nan#ary >1=ecember

HF4 HF4m m

1M an( loan repayable HF8 1H 1H,.3M an( loan repayable HF, 8 88.,M debent#re repayable HF? P 13

he 8.,M debent#re was iss#ed to f#nd the constr#ction of a 7#alifying asset %a piece of mininge7#ipment)$ constr#ction of which began on 1 N#ly HF4.

0n 1 Nan#ary HF4$ Acr#ni Co began constr#ction of a 7#alifying asset$ a piece of machinery for a

hydroelectric plant$ #sing e&isting borrowings. *&pendit#re drawn down for the constr#ction was: Q>m on 1 Nan#ary HF4$ Hm on 1 0ctober HF4.

.e($ired% Calc#late the borrowing costs that can be capitalised for the hydro'electric plant

Capitalisation rate E weighted average rate E %1M O %1HB %8 G 1H))) G %,.3M O %8 B %1H G8))) E ,.8M

orrowing costs E %>m O ,.8M) G %Hm O ,.8M O >B1H) E >.6>m



IAS ! Investment property

• Investment property is a property %land or a b#ilding P or part of a b#ilding P or both) held %bythe owner or by the lessee #nder a +nance lease) to earn rentals or for capital appreciation orboth$ rather than for:

' <se in the prod#ction or s#pply of goods or services or for administrative p#rposes or

' Sale in the ordinary co#rse of b#siness. [IAS 6: 3]

• IAS 6 lists the following as e,amples of investment property% [IAS 6: 8]

' ;and held for long'term capital appreciation rather than short'term sale in the ordinary co#rseof b#siness

' ;and held for a c#rrently #ndetermined f#t#re #se

' A b#ilding owned by the entity %or held #nder a +nance lease) and leased to a third party #nderoperating lease

' A b#ilding which is vacant b#t is held to be leased o#t #nder an operating lease

' 5roperty being constr#cted or developed for f#t#re #se as an investment property %propertyconstr#cted for sale is not investment property)

• !ollowings are o$tside the scope of IAS !: [IAS 6: ,]

' 5roperty intended for sale in the ordinary co#rse of b#siness: IAS H Inventories

' 5roperty being constr#cted or developed on behalf of third parties: IAS 11 ConstructionContracts

' 0wner'occ#pied property$ incl#ding property held for f#t#re #se as owner'occ#pied: IAS 14Property, Plant and Equipment

' 5roperty occ#pied by employees whether or not the employees pay rent at mar(et rates: IAS16 PPE

' 5roperty leased to another entity #nder a +nance lease: IAS 1? Leases

• Points to note%

' If a portion of an asset meets investment property criteria and other portion is not$ then anentity acco#nts for the portions separately %e.g. one portion #nder IAS 6 and another #nderIAS 14) if those portions co#ld be sold separately or leased o#t separately #nder +nance lease.[IAS 6: 1]

' 2here an entity owns property that is leased to+ and occ$pied by+ its parent or anothers$bsidiary$ the property is treated as an investment property in the entitys own acco#nts.Rowever$ the property does not 7#alify as investment property in the consolidated +nancialstatements as it is owner'occ#pied from the gro#p perspective. [IAS 6: 13]

• Initial reco'nition and meas$rement%

' An investment property sho#ld be initially meas#red at cost %IAS 14s initial recognition r#les

applies). [IAS 6: H]

• -eas$rement after reco'nition% After initial meas#rement at cost$ an entity can choosebetween two models: [IAS 6: >]

' he IAS 1* cost model

4 he fair val$e model

If the fair val#e model is adopted$ the acco#nting treatment of investment properties will be asfollows:

' All investment properties sho#ld be meas#red at fair val#e at the end of each reportingperiod provided fair val#e can be meas#red reliably.

' Chan'es in fair val$e+ )hether 'ains or losses+ sho$ld be reco'nised in pro2t orloss for the period in )hich they arise5 [IAS 6: >3]

6 7



he policy chosen sho#ld be applied consistently to all of the entitys investment property

IAS 6 enco#rages the assessment of fair val#e by independent$ appropriately 7#ali+ed ande&perienced professionals b#t does not re7#ire it.

IAS ! 8overnment 'rants

• An entity sho#ld not recognise government grants #ntil it has reasonable ass#rance that: [IAS H:?]

' he entity will comply with any conditions attached to the grant

' he entity will act#ally receive the grant

"eceiving the grant not necessarily prove that the conditions attached to it have been or willbe f#l+lled.

he treatment will be same whether the grant is received in cash or given as a red#ction in a

liability to government. [IAS H: 1]

• 8rants relatin' to assets% IAS ! allo)s t)o alternatives%



• 8overnment 'rant reco'nised as 6Deferred income7 9:ption 1; needs to be amortised9i5e5 recycled in I<S as Income; over the $sef$l life of the asset5

• 8rants relatin' to income% S#ch grants sho#ld be recognised in pro+t or loss as other income or

ded#cted from the related e&pense. [IAS H: H,]

' As with grants related to assets$ the bene+t of the grant sho#ld be recognised in pro+t or lossover the periods in which the entity recognises as e&penses the related costs for which thegrants are intended to compensate.

• A non'monetary asset %e&ample: land$ b#ilding$ etc.) may be transferred by government to anentity as a grant.

' he fair val#e of s#ch an asset is #s#ally assessed and this is #sed to acco#nt for both theasset and the grant.

' Alternatively$ both may be val#ed at a nominal %i.e. insigni+cant) amo#nt. [IAS H: H>]

• @overnment grants that cannot reasonably have a val#e placed on them %for e&ample theprovision of free services by a government department) are e&cl#ded from the de+nition of

government grants.

• "epayment of government grant: If a grant m#st be repaid it sho#ld be acco#nted for as a revisionof an acco#nting estimate %IAS 8). [IAS H: >6]

' "epayment of grant related to income: apply +rst against any #namortised deferred incomeset #p in respect of the grant$ any e&cess sho#ld be recognised immediately as an e&pense.[IAS H: >H]

' "epayment of a grant related to an asset: increase the carrying amo#nt of the asset or red#cethe deferred income balance by the amo#nt repayable. he c#m#lative additional depreciationthat wo#ld have been recognised to date in the absence of the grant sho#ld be immediatelyrecognised as an e&pense. [IAS H: >H]

It is possible that the circ#mstances s#rro#nding repayment may re7#ire a review of the asset

val#e and an impairment of the new carrying amo#nt of the asset.

• IAS H does not cover: [IAS H: H]

' Acco#nting for government grants in +nancial statements re9ecting the eects of changingprices

' @overnment assistance given in the form of /ta& brea(s

' @overnment acting as part'owner of the entity



IAS 3= Intan'ible assets

• An intan'ible asset is an identi+able non'monetary asset witho#t physical s#bstance. [IAS >8: 8]

• IAS >8 states that an intangible asset is to be reco'nised if+ and only if+ the following criteriaare met: [IAS >8: H1]' it is probable that f#t#re economic bene+ts from the asset will 9ow to the entity' the cost of the asset can be reliably meas#red.

5 # r c h a s e d

• At reco'nition the intangible sho#ld be recognised at cost. [IAS >8: H6]

• *&amples of e,pendit$res that are not part of the cost of an intan'ible asset

are: [IAS >8: H,]' Costs of advertising and promotional activities) [IAS >8: 4,%c)]

An asset is a reso#rce controlled by theentity as a res#lt of past event%s) and fromwhich f#t#re economic bene+ts aree&pected to 9ow to the entity. [IAS >8: 8]

An asset is identi+able if it either: [IAS >8: 1H]%a) is separable$ i.e. is capable of being

separated or divided from the entityand sold$ transferred$ licensed$ rentedor e&changed$ either individ#ally ortogether with a related contract$identi+able asset or liability$ regardlessof whether the entity intends to do soor

%b) arises from contract#al or other legalrights$ regardless of whether those



I n t e r n a

l l y ' e n e r a t e d

. e s e a r c h

e

• "esearch is original and planned investigation$ #nderta(en with the prospect ofgaining new scienti+c or technical (nowledge and #nderstanding. [IAS >8: 8]

• he res#lt of research is #n(nown and$ so$ no probable f$t$re economic bene2t

D e v e l o p m

e n t

e

• An intangible asset arising from development m#st be capitalised if an entity candemonstrate all of the follo)in' criteria: [IAS >8: 3?]' the technical feasibility of completing the intangible asset %so that it will be

available for #se or sale)' intention to complete and #se or sell the asset' abilit to #se or sell the asset

• Internally generated goodwill sho#ld not be recognised as an asset. [IAS >8: 68]

• Internally generated brands$ mastheads$ p#blishing titles$ c#stomer lists and items similar ins#bstance shall not be recognised as intangible assets. [IAS >8: 4>]

• An intangible asset with a 2nite $sef$l life sho#ld be amortised over its e&pected #sef#l life [IAS >8:8,]

• An intangible asset with an inde2nite life sho#ld not be amortised [IAS >8: 8,]$ b#t sho#ld bereviewed for impairment on an ann#al basis [IAS >8: 18]' here m#st be an ann#al review of whether the inde+nite life assessment is still appropriate. [IAS

>8: 1,]

• .esid$al val$es sho#ld be ass#med to be nil$ e&cept if an active mar(et e&ists or there is acommitment by a third party to p#rchase the asset at the end of its #sef#l life [IAS >8: 1]

IAS 3* Impairment of assets

• An asset is impaired when its /carrying amo#nt is higher than its /recoverable amo#nt. [IAS >4: 4]

• Impairment loss > Carryin' val$e & .ecoverable amo$nt [IAS >4: 3,]

An active mar(et is a mar(et in which all the followingconditions e&ist:

%a) he items traded in the mar(et are homogeneo#s %i.e.similar)

Righer of



• .eco'nition of impairment losses in +nancial statements: [IAS >4: 4$ 41]' Asset carried o#t at historical cost: in pro+t or loss.' "eval#ed assets: +rst against any reval#ation s#rpl#s relating to the asset and then %if amo#nt

left) in pro+t or loss.

If no impairment loss then do nothingT

After impairment revie)% the depreciationBamortisation sho#ld be adD#sted for f#t#re

periods. [IAS >4: 4>] If 'ood)ill is val$ed at fair val$e %in f#ll) the non'controlling share of impairment will be

allocated to non'controlling goodwill %i.e. will red#ce -CI).

• 2here it is not possible to estimate the recoverable amo#nt of an individ#al asset$ the entityestimates the recoverable amo#nt of the cash4'eneratin' $nit to which it belongs. [IAS >4: 44]- A cash'generating #nit is the smallest identi+able gro#p of assets that generates cash in9ows

that are largely independent of the cash in9ows from other assets or gro#ps of assets. [IAS >4:48]- If an active mar(et e&ists for the o#tp#t prod#ced by an asset or a gro#p of assets$ this gro#p

of assets sho#ld be identi+ed as a C@< even if some or all of the o#tp#t is #sed internally. [IAS>4: ?]

- If the cash in9ows are aected by internal transfer pricing$ managements best estimate off#t#re price that co#ld be achieved in arms length transactions are #sed in estimating theC@<s val#e in #se. [IAS >4: ?]

• Impairment loss is allocated amon' the asset<C8? in the follo)in' order% [IAS >4: 16]1. any individ#al asset that is speci+cally impairedH. goodwill allocated to the C@<>. other assets pro rata to their carrying amo#nt in the C@< %s#bDect of the carrying amo#nt of an

asset not being red#ced below its individ#al recoverable amo#nt. [IAS >4: 13]

• .eversal of past impairment%

• I<S% ' An impairment loss reversal on property$ plant and e7#ipment +rst reverses the loss recorded in

pro+t or loss %and any remainder is credited to the reval#ation s#rpl#s$ s#bDect to IAS 14

re7#irements) [IAS >4: 11,]

• SFP%' A reversal for a C@< is allocated to the assets of the C@<$ e&cept for goodwill$ pro rata with the

carrying amo#nts of those assets [IAS >4: 1HH]

@al$e in $se%

4 ased on cash4o) proBections4 Cash 9ows sho#ld incl#de e&pected disposal proceed.

[IAS >4: >1%a)]4 !#t#re cash 9ows shall be estimated for the asset in its

c$rrent condition. *stimates of f#t#re cash 9ows shallnot incl#de estimated f#t#re cash in9ows or o#t9owsthat are e&pected to arise from improving or enhancingthe assets performance. [IAS >4: 66]

4 Cash o#t9ows to maintain the level of economic bene+tsfrom the asset in its c#rrent condition sho#ld beincl#ded %e.g. repair and replacement of parts). [IAS >4:61]

Fair val$e less costs to sell%- Ual#e in a binding sale agreement less

incremental costs directly attrib#table tothe assets disposal. [IAS >4: H3]

- 0therwise$ the assets maret price%where there is an active mar(et)$ oramo#nt obtainable in an arms lengthtransaction %i.e. fair val#e)$ less costs of



0nce recognised$ impairment losses on goodwill are not reversed [IAS >4: 1H6]

In case of a reversal$ the carrying amo#nt of an asset m#st not increase above the lower of:

- Its recoverable amo#nt and- Its depreciated carrying amo#nt had no impairment loss originally been recognised. [IAS

>4: 1H>]

• Impairment indicators% he entity sho#ld loo( for evidence at the end of each period and cond#ct an impairment review

on any asset where there is evidence of impairment. [IAS >4: ,]

' Intangible assets with an inde+nite #sef#l life or not yet available for #se$ and goodwill ac7#ired in

b#siness combination are s#bDect to ann#al impairment test irrespective of whether there are

indications of impairment. [IAS >4: 1]

IAS = Acco$ntin' policies+ chan'es in acco$ntin'

estimates and errors

Internal indicators: [IAS >4: 1H]

' *vidence of obsolescence or

physical damage' Signi+cant changes with an

adverse eect on the entity

' *vidence available that asset

performance will be worse than

e&pected.

#,ternal indicators: [IAS >4: 1H]

' Signi+cant decline in mar(et

val#e of asset' Signi+cant change in

technological$ economic or legal

environment' Increased mar(et interest rate

th#s red#cing val#e in #se

' Carrying amo#nt of net assets

of the entity e&ceeds mar(et



• Chan'es in acco$ntin' policies

he same acco#nting policies are #s#ally adopted from period to period$ to allow #sers to

analyse trends over time in pro+t$ cash 9ows and +nancial position.

*&amples of acco#nting policies:' Alternative presentation of government grant %IAS H)' !I!0 or 2eighted average method of inventory val#ation

4 !air val#e model of cost model for investment properties %IAS 6: >1)

→ A change in acco#nting policy m#st be applied retrospectively.' "etrospective application means that the new acco#nting policy is applied to transactions

and events as if it had always been in #se. In other words$ at the earliest date s#ch

transactions or events occ#rred$ the policy is applied from that date.' his involves restating opening balances of c#rrent year and comparative previo#s year.

→ wo types of event which do not constit#te changes in acco#nting policy:

%i) Adopting an acco#nting policy for a new type of transaction or event not dealt with

previo#sly by the entity.%ii) Adopting a new acco#nting policy for a transaction or event which has not occ#rred in

the past or which was not material.

→ Changes in acco#nting policy will be very rare and sho#ld be made only if:' he change is re7#ired by an I!"S$ or' he change will res#lt in a more appropriate presentation of events or transactions in the

+nancial statements of the entity$ providing more reliable and relevant information.

"eval#ation of non'c#rrent assets sho#ld not be treated as changes in acco#nting policy %i.e.

no retrospective eect for reval#ation).

• Chan'es in acco$ntin' estimates

→ anagement applies D#dgement based on information available at the time

→ *&amples of acco#nting estimates:' <sef#l life or resid#al val#e of a non'c#rrent asset %IAS 14)' 5rovision made for f#t#re loss or e&penses %IAS >?)

→ A change in acco#nting estimate m#st be applied prospectively.

• #rrors%

→ *rrors discovered d#ring a c#rrent period which relate to a prior period may arise thro#gh:

' athematical mista(es' ista(es in the application of acco#nting policies' isinterpretation of facts' 0missions' !ra#d

→ 5rior period errors correct retrospectively.' *ither restating the comparative amo#nts for the prior period%s) in which the error

occ#rred$ or

!rom earliest date of same

transaction

%i.e. retrospective eect)

0n f#t#re

5olicy change

Changes in acco#nting



' when the error occ#rred before the earliest prior period presented$ restating the opening

balances of assets$ liabilities and e7#ity for that period

IAS 1 Eeases

• :peratin' lease% Any lease other than a +nance lease.' reat this as normal rental agreement.

*rrorB fra#d



• Finance lease% A lease that transfers s#bstantially all the ris(s and rewards incidental to

ownership of an asset to the lessee %who too( the lease). itle may or may not event#ally be

transferred.

• IAS 1 identi2es 2ve sit$ations )hich )o$ld normally lead to a lease bein' classi2ed as

a 2nance lease%

i. ransfer of ownership of the asset to the lessee at the end of the lease termii. he lessee has the option to p#rchase the asset at a price s#Vciently below fair val#e at

the option e&ercise date$ that it is reasonably certain the option will be e&ercisediii. he lease term is for a maDor part of the assets economic life even if title is not transferred

at end of lease termiv. 5resent val#e of minim#m lease payment amo#nts to s#bstantially all of the assets fair

val#e at inception

v. he leased asset is so specialised that it co#ld only be #sed by the lessee witho#t maDor

modi+cations being made

• At commencement of a +nance lease$ leasee %i.e. #ser of the asset) recognises a -on'c#rrent asset

and a ;iability in Statement of +nancial position.

• #,ample% Eeasee acco$ntin'% Payment ($arterly in advance

5resent val#e of minim#m lease payments is the payments over the lease term that the lessee is re7#ired to

ma(e disco#nted applying implicit interest rate.

he amo#nt of non'c#rrent asset to be capitaliWed is lower

of: [IAS 1?: H]

' 5resent val#e of minim#m lease payment$ and' !air val#e of the leased asset

In !? #sing cash price %fair val#e) given in the

;iability component comprises a c#rrent

portion and a non'c#rrent portion and

amortised over the lease term.

on4c$rrent asset is s$bse($ently depreciated over shorter of%

' Assets #sef#l life$ and

' ;ease term incl#ding any secondary period

#se #sef#l life if reasonable certainty e&ists that the lessee will obtain



0n 1 0ctober HF> *vans entered into a non'cancellable agreement whereby *vans wo#ld lease a new

roc(et booster. he terms of the agreement were that *vans wo#ld pay H4 rentals of >$ 7#arterly

in advance commencing on 1 0ctober HF>$ and that after this initial period *vans co#ld contin#e$ at

its option$ to #se the roc(et booster for a nominal rental which is not material. he cash price of this

asset wo#ld have been 41$3? and the asset has a #sef#l life of 1 years. *vans has a policy to

charge f#ll years depreciation in the year of p#rchase of a non'c#rrent asset. he rate of interest

implicit in the lease is HM per 7#arter.

.e($ired:

Identify whether this is a +nance lease and show how these transactions wo#ld be re9ected in the

+nancial statements for the year ended >1 =ecember HF>.

Ans)er%

ho#gh the lease term is only 4.3 years %%H4 7#arter F >)B 1H months)$ the lease ass#med to be a

+nance lease beca#se the present val#e of the minim#m lease payment is similar to the fair val#e of

the leased asset.

5resent val#e of the minim#m lease payment:

1st instalment %in advance$ so already at present val#e)

>$5resent val#e Hnd P H4th installment %>$ F 1,.3H>6) %H3 years ann#ity at HM) 38$3?

41$3?

And$ fair val#e of the lease asset at commencement of the lease %Cash price) 41$3?

Eeaseee acco$ntin'%



• #,ample% Eeasee acco$ntin'% Payment ann$ally in arrears

ranch ac7#ired an item of plant and e7#ipment on a +nance lease on 1 Nan#ary HF1. he terms ofthe agreement were as follows:

=eposit : 1$13 %non'ref#ndable)Instalments : 6$ per ann#m for seven years payable in arrearsCash price : H$ %!air val#e of the lease asset at commencement of the

lease)

he asset has #sef#l life of fo#r years and the interest rate implicit in the lease is 11M.

.e($ired% 5repare e&tracts from the income statement and statement of the +nancial position of

ranch for the year ending >1 =ecember HF1.

Ans)er%

It is ass#med that fair val#e of the leased asset and present val#e of minim#m lease payments aresame at the commencement of the lease.



• #,ample% Eeasee acco$ntin'% Comple,

owtoc( has leased an item of plant. Commencement of the lease was 1 Nan#ary HFH and term of the

lease is 3 years. 5ayments of 1H$ to be made ann#ally in advance. Cash price and fair val#e of the

asset ' 3H$ at 1 Nan#ary HFH P e7#ivalent to the present val#e of the minim#m lease payments.

Implicit interest rate within the lease 8M per ann#m. he companys depreciation policy for this type of

plant is HM per ann#m on cost %apportioned on a time basis where relevant).

.e($ired% 5repare e&tracts of the income statement and statement of +nancial position for owtoc(for the year to > September HF> for the above lease.

Ans)er%

Eeaseee acco$ntin'%



IAS 1= .even$e

Income is increases in economic bene+ts d#ring the acco#nting period in theform of in9ows or enhancements of assets or decreases of liabilities that

res#lt in increases in e7#ity$ other than those relating to contrib#tions from

Income

"even#e is income that arises in the co#rse of ordinary activities of an entity."even#e

From sale of 'oods sho#ld only be recognised

when all of the +ve criteria are met: [IAS 18: 16]

' It is probable that f#t#re economic bene+ts will

9ow to the entity.' he amo#nt of reven#e can be meas#red

reliably.' he costs inc#rred in relation to the transaction

can be reliably meas#red.' he seller no longer has management

involvement or eective control of the goods.' he seller m#st have transferred to the b#yer all

of the signi+cant ris(s and rewards of

From renderin' of services sho#ld only be

recognised when all of the fo#r criteria are met: [IAS

18: H]

' It is probable that f#t#re economic bene+ts will

9ow to the entity.' he amo#nt of reven#e can be meas#red

reliably.' he costs inc#rred and the costs to complete in

relation to the transaction can be reliably

meas#red.

' he stage of completion can be meas#red

reliabl .



• Amo#nts collected on behalf of third parties s#ch as sales ta&es$ goods and services ta&es andval#e added ta&es are not part of reven#e. [IAS 18: 8]

• In an agency relationship$ for an agent$ reven#e is only the amo#nt of his commission. [IAS 18: 8]

• In certain circ#mstances$ it is necessary to apply the reven#e recognition criteria to theseparately identi+able components of a single transaction in order to re9ect the s#bstanceof the transaction. !or e&ample$ when the selling price of a prod#ct incl#des anidenti+able amo#nt for s#bse7#ent servicing$ that amo#nt is deferred and recognised as reven#eover the period d#ring which the service is performed. [IAS 18: 1>]

• In some cases two or more transactions are considered together. !or e&ample$ an entity may sellgoods and$ at the same time$ enter into a separate agreement to rep#rchase the goods at a laterdate. his sale and rep#rchase agreement may constit#te a sec#red loan and recognised as loanliability instead of sales reven#e. [IAS 18: 1>]

IAS Inventories

•

Inventories are assets:' held for sale in the ordinary co#rse of b#siness' in the process of prod#ction for s#ch sale or' in the form of materials or s#pplies to be cons#med in the prod#ction process or in the

rendering of services.

• Inventories needs to be val#ed lower of:

G G

Seller transfer signi+cant ris(s and

rewards:

' In most cases the transfer of

signi+cant ris(s and rewards ofownership coincides with the

2here consideration %e.g. money) from sales is received b#t above

reven#e recognition criteria are not met:

=" Asset: Cash

C" ;iability: =eferred income

2hen reven#e recognition criteria are met:

=" ;iability: =eferred income

C" IBS: "even#eBIncome

S#ppliers gross price

for raw materials

G

Import d#ties$ etc

G

Costs of transporting

materials to b#siness

premises

'

rade disco#nts

*stimated selling price in the ordinary

co#rse of b#siness$ when completed

'

*stimated costs to completion and the

estimated costs necessary to ma(e the sale.

Cost of conversionCost of p#rchase

Cost -et "ealisable Ual#e %-"U)

Costs directly relatedto the #nits of

prod#ction %e.g. direct

materials$ direct

labo#rs)

G

!i&ed and variable

prod#ction overheads

inc#rred in converting

materials to +nished

goods$ allocated on a

systematic basis

G

orrowing costs %if met

IAS H> criteria)



• Costs sho#ld not incl#de:' Abnormal waste$ +nished goods storage$ #nrelated administrative overheads

• 2rite'down to -"U:' If inventories are write'down to their -"U$ this will res#lt closing inventory with lower carrying

val#e$ which will have a#tomatic eect on cost of sales %i.e. cost of sales will be increased).

• IAS H does not apply to inventories covered by other standards$ s#ch as:

' 2or( in progress #nder constr#ction contracts %IAS 11 Constr#ction contracts)

IAS 3 Provisions+ contin'ent liabilities and contin'ent

assets

• 5rovision: is a liability where there is #ncertainty over its timing or the amo#nt at which it will be

settled. A provision sho#ld be recognised where:

' An entity has a present obligation %legal or constr#ctive) as a res#lt of a past event' It is probable %i.e. more li(ely than not) that there will be an o#t9ow of reso#rces in the form of

cash or other assets' A reliable estimate can be made of the amo#nt [IAS >?: 1]

• A provision sho#ld not be recognised in respect of f#t#re operating losses since there is no present

obligation arising from a past event. [IAS >?: 4>]

• An entity can be re7#ired to recognise a provision and capitalise %=" -on'c#rrent asset: 5roperty$

plant K e7#ipment C" ;iability: 5rovision) initial estimation of f#t#re dismantling and restoration

cost if above provision recognition criteria and IAS 14 capitalisation criteria are met. [IAS 14: 14$ 18]' @ains from the e&pected disposal of assets shall not be ta(en into acco#nt in meas#ring a

provision. [IAS >?: 31]

• If an entity sells goods with a warranty$ a provision recognition %=" IBS: *&pense C" ;iability:

5rovision) can be re7#ired based on the best estimate of the e&pendit#re re7#ired to settle the

present obligation at the end of the reporting period. [IAS >?: >4]

' 2hen the selling price incl#des an identi+able %i.e. disting#ishable) amo#nt for s#bse7#ent

servicing$ that amo#nt is deferred %=" Asset: CashB "eceivable C" ;iability: =eferred income)

and recognised as reven#e over the period d#ring which the service is performed %=" ;iability:

=eferred income C" IBS: "even#e). [IAS 18: 1>]

i.e. established ast



2here the provision being meas#red involves a large pop#lation of items$ the obligation is

estimated by /e&pected val#e calc#lation. [IAS >?: >,]

• .estr$ct$rin' costs% A constr#ctive obligation$ re7#iring a provision$ only arises in respect of

restr#ct#ring costs where the following criteria are met:

' A detailed formal plan has been made$ identifying the areas of the b#siness and n#mber of

employees aected with an estimate of li(ely costs an timescales and' An anno#ncement has been made to those who will e aected by the restr#ct#ring.

A restr#ct#ring provision does not incl#de costs of retraining or relocating contin#ing sta$

mar(eting$ or investment in new systems [IAS >?: 81]

• Disco$ntin' to present val$e: 2hen there is a signi+cant period of time between the end of

reporting period and settlement of the obligation$ the amo#nt of provision sho#ld be disco#nted to

present val#e. [IAS >?: 63]

' =isco#nt factor: %1Gr)XY' he disco#nt rate shall be a pre'ta& rate that re9ects c#rrent mar(et assessment of the time val#e

of money and the ris(s speci+c to the liability.

*&ample: If a provision of 1$ is re7#ired to settle a liability after H years at 1M disco#nt rate

the provision will be recognised at Jear' is 8H? %1$ F .8H?).

• ?n)indin' of disco$nt: 2hen a provision is incl#ded in the statement of +nancial position at a

disco#nt val#e %i.e. at present val#e) the amo#nt of the provision will increase over time$ to re9ect the

passage of time.

' <nwinding of disco#nt will be incl#ded in the +nance cost.' <nwinding of disco#nt %i.e. the amo#nt to be charged in +nance cost and by the amo#nt the

provision needs to be increased) can be fo#nd by applying /disco#nt rate on opening balance of

the provision.

At end of Jear'1: 8> %8H?F1M) =" IBS: !inance cost C" ;iability: 5rovision %that ma(es closing

provision liability E ,1 %8H?G8>)) At end of Jear'H: ,1 %,1F1M) =" IBS: !inance cost C" ;iabilit : 5rovision %that ma(es closin

• "eimb#rsement: An entity may be entitled to reimb#rsement from a third party for all or part of the

e&pendit#re re7#ired to settle a provision. S#ch a reimb#rsement:

' Sho#ld only be recognised %=" Assets: "eceivable C" IBS: 0ther income) where receipt is /virt#ally

certain$ and' Sho#ld be treated as a separate asset in the statement of +nancial position %i.e. not netted o

against the provision) at an amo#nt no greater than that provision.'



• Contingent liability: is a possible obligation that arises from past events and whose e&istence will

be con+rmed only by occ#rrence or non'occ#rrence of one or more #ncertain f#t#re events not

wholly within the control of the entity.

' Contingent liability is not recognised in the +nancial statements beca#se either it is notprobable$ or the amo#nt cannot be meas#red with s#Vcient reliability.

' Contingent liability is only disclosed in the notes of +nancial statements. [IAS >?: 1$ 1>]

• Contingent asset: is a possible asset that arises from past events and whose e&istence will be

con+rmed only by occ#rrence or non'occ#rrence of one or more #ncertain f#t#re events not wholly

within the control of the entity.

' A contingent asset sho#ld not be recognised in the +nancial statements' Contingent assets sho#ld only be disclosed in the notes of +nancial statements when the

e&pected in9ow of economic bene+ts is probable. [IAS >?: >1$ >6]

• 2hen the realisation of income is virt#ally certain$ then the related receivable is recognised in the

+nancial statements %=" Asset: "eceivable C" IBS: 0ther income) [IAS >?: >>]

Disclos$re let o$t: IAS >? permits reporting entities to avoid disclos#re re7#irements relating to

provisions$ contingent liabilities and contingent assets if they wo#ld be e&pected to be serio#sly preD#dicial

%i.e. will ca#se serio#s disadvantage) to the position of the entity in disp#te with other parties.



IF.S G on4c$rrent assets held for sale and discontin$ed

operations

Held for sale%

• An entity shall classify a non'c#rrent asset %or disposal gro#p) as held for sale if its carrying

amo#nt will be recovered principally thro#gh a sale transaction rather than thro#gh contin#ing #se.[I!"S 3: 4]

• o be classi+ed as held for sale$ the following conditions m#st be met:

' Available for immediate sale in present condition [I!"S 3: ?].' Sale is highly probable [I!"S 3: 8].

' he sale sho#ld be e&pected to ta(e place within one year from the date of classi+cation [I!"S

3: 8].

• 0nce an asset or gro#p of assets and related liabilities is classi+ed as held for sale$ the following

r#les sho#ld be followed:

A gro#p of assets and liabilities that will be

disposed of in a single transaction are referred to

he assets c#rrent condition

sho#ld be ade7#ate to be

!or a sale to be highly probable$ the following m#st apply:

' anagement m#st be committed to a plan to sell the

asset' here m#st be an active programme to locate a b#yer

' he asset m#st be mar(eted for sale at a price that is

!air val#e less cost to sell is e7#ivalent to net



' Carry at lower of its carrying amo#nt and fair val#e less cost to sell$ which may give rise to an

impairment loss [I!"S 3: 13].

' =o not depreciate even if still being #sed by the entity. [I!"S 3: 1]' 5resent separately in the statement of +nancial position. [I!"S 3: 1]' -on'c#rrent asset held for sale recognise #nder c#rrent asset. [I!"S 3: >]

• Presentation of a non4c$rrent asset or a disposal 'ro$p classi2ed as held for sale: [I!"S

3: >8]-on'c#rrent assets and disposal gro#ps classi+ed as held for sale sho#ld be presented separately

from other assets in the statements of +nancial position. he liabilities of a disposal gro#p sho#ld

be presented separately from other liabilities in the statement of +nancial position.' Assets and liabilities held for sale sho#ld not be oset.' he maDor classes of assets and liabilities held for sale sho#ld be separately disclosed either

on the face of the statement of +nancial position or in the notes.

• :n $ltimate disposal of an asset classi+ed as held for sale$ any dierence between its carrying

amo#nt and the disposal proceeds is treated as a loss or gain recognised in income statement.

• A non4c$rrent asset or disposal 'ro$p that is no lon'er classi2ed as held for sale %for

e&ample$ beca#se the sale has not ta(en place within one year) is meas#red at the lo)er of% [I!"S

3: H?]

' Its carryin' amo$nt before it was classi+ed as held for sale$ adD#sted for any depreciation

that wo#ld have been charged had the asset not been held for sale.' Its recoverable amo$nt at the date of the decision not to sell.

An asset that is to be abandoned sho#ld not be classi+ed as held for sale. [I!"S 3: 1>]

Disco$nted operation%

• =iscontin#ed operation is a component of an entity that has either been disposed of$ or is

classi+ed as /held for sale$ and:' represents a separate maDor line of b#siness or geographical area of operations' is part of a single co'ordinated plan to dispose of a separate maDor line of b#siness or

geographical area of operations$ or' is a s#bsidiary ac7#ired e&cl#sively with a view to resale. [I!"S 3: >H]

• !or discontin$ed operations$ an entity sho#ld disclose a sin'le amo$nt in the statement ofcomprehensive income comprising the total of: [I!"S 3: >>]

' he post'ta& pro+t or loss from discontin#ed operations and' he post'ta& gain or loss on the re'meas#rement to /fair val#e less costs to sell or on the

disposal of the discontin#ed operation.

An entity sho#ld also disclose an analysis of the above single amo#nt either on the face of the

statement of comprehensive income or in the notes.

his is an e&ception to the normal IAS >4 r#le.

IAS >4 impairment of assets re7#ires an entity

to recognise an impairment loss only when an

assets recoverable amo#nt is lower than its

. . . can incl#de transport costs and costs to

advertise that the asset is available for sale



An entity shall disclose the amo#nt of income from contin#ing operations and from

discontin#ing operations attrib#table to owners of the parent. An entity sho#ld also disclose the net cash 9ows attrib#table to the operating$ investing and

+nancing activities of discontin#ed operations. hese disclos#res may be presented either onthe face of the statement of cash 9ows or in the notes.

• @ains and losses on the re'meas#rement of a non4c$rrent asset or disposal 'ro$p that is not a

discontin#ed operation b#t is held for sale sho#ld be incl#ded in pro+t or loss from contin#ingoperations. [I!"S 3: >?]

IAS 11 Constr$ction contracts

• .even$e and cost% sho#ld be recognised according to the stage of completion of the contract at

the end of the reporting period$ b#t only when the o#tcome of the activity can be estimated

reliably.

• hen o$tcome of the contract cannot be reliably estimated%' .even$e% 0nly recognise reven#e to the e&tent of contract costs inc#rred which are e&pected

to be recoverable' Cost% "ecognise contract costs as an e&pense in the period they are inc#rred

• Contract costs which cannot be recovered sho#ld be recognised as an e&pense straight away.

• If a loss is predicted %i.e. the contract val#e Z total contract cost) on a contract then it sho#ld berecognised immediately in IBS.

• Costs that sho$ld be #XCE?D#D from constr$ction contract costs%' @eneral administration costs %#nless reimb#rsement is speci+ed to the contract)' Selling costs' "esearch and development %#nless reimb#rsement is speci+ed to the contract)' =epreciation of idle plant and e7#ipment not #sed on in the contract

FJ plc ' Consolidated statement of comprehensive income for the year ended >1 =ecember

HF,

"even#e

F

Cost of sales

%F)

@ross pro+tF

0ther income

F

=istrib#tion costs

%F)

Administrative e&penses

%F)

0ther e&penses

' 5robable that economic bene+t of the

contract will 9ow to the entity.

' Costs and reven#e can be identi+ed

clearl and be reliabl meas#red.

' *ither$ proportion of total contract costs

inc#rred for wor( carried o#t to date

' 0r$ physical proportion of the contract wor(

Costs inc#rred to date G costs will



5enalty charged by client %may be for delay) will red#ce the reven#e will not increase the cost.

!inance costs sho#ld be incl#ded in contract costs #nder IAS H> orrowing Costs.

• Acco$ntin' treatments%Income Statement%"even#e

F %%otal contract val#e F M completed) P "even#e recognised in previo#s periods )Cost of sales

%F)%%otal contract costs F M completed) P Costs and losses charged in previo#s periods)

Foreseeable loss not previo$sly reco'nised 9AEAYS test for foreseeable loss; %F)

%%%otal contract val#e P otal contract cost) F M yet to complete)P Any of this loss previo#sly recognised)

Pro2t<9loss; %before non'reimb#rsable abnormal cost)

FB%F)

Abnormal cost %e.g. recti+cation cost which is not reimb#rsed by client)

%F)

et pro2t<9loss;

FB%F)

%Any recti+cation cost which will be reimb#rsed by client will increase

both /total contract val#e and /total contract costs)

Statement of 2nancial position%

Contract costs inc#rred to date

F

5ro+tsB%losses) recognised to date %before ded#cting non'reimb#rsable abnormal cost)

FB%F)

F5rogress billing to date

%F)

.eceivables < 9payables; %c#rrent assetBliability)

FB%F)

IAS 1 Income ta,es

AF

Income ta& =eferred ta&Sales ta&

• Also (nown as c#rrent ta&.

• his is the ta& on /ta&able pro+t %-0 on

/acco#nting pro+t).

• Companies prepare pro+t or loss acco#nt

based on acco#nting standards b#t ta&able

pro+t is calc#lated based on ta& r#les.

• If ta&able pro+t for the year is 1

%acco#nting pro+t can be dierent) and

applicable ta& rate is >M then the

acco#nting treatment will be:

=" IBS: *&pense: Income ta&

>

C" S!5: C#rrent liability: a& payable >

%If ta& is paid as inc#rred then C" S!5: Cash)

• If there is a ta& loss for the year is 1 then

the acco#nting treatment will be:

=" S!5: C#rrent asset: a& recoverable >

%or$ =" S!5: C#rrent liability: a& payable$

if there is already a ta& payable balance)

C" IBS: Income ta& %will red#ce e&penses) >

• <nder'provision or over'provision of ta&: he

act#al ta& liability for the year and the ta&charge in the income statement are not

necessarily the same amo#nt. he act#al ta&

liability for the year is agreed with ta&

a#thorities$ may be$ in a later year.

' If ta& charge in Jear'1 on Jear'1 ta&able pro+t

is 1 and in Jear'H the act#al ta& charge for

Jear'1 determined 1H then the ta& charge

for Jear'H will be increased by H %this is the

/#nder'provision made in Jear'1). I.e. if ta&

charge in Jear'H on Jear'H ta&able pro+t is

13$ the ta& e&pense amo#nt in Jear'H IBS will

be 13GHE1?.

→ An over'provision of ta& from year 1 is

• Also (nown as UA %val#e added ta&).

• Seller collect /sales ta& at the point of saleand the p#rchaser pays /sales ta& at the point

of p#rchase.

• If 13M sales ta& applicable on sales made by

Company / the acco#nting for 1 sales

will be:

=" S!5: Cash

113

C" IBS: "even#e

1

C" S!5: C#rrent liability: Sales ta& payable 13

%eca#se as per IAS 18$ reven#e cannot be

recognised for the amo#nt %13) collected on

behalf of others %i.e. sales ta& collected on behalf

of government).

• If 13M sales ta& applicable on p#rchases made

by Company / and if the sales ta&es paid by

Company / is recoverable the acco#nting for

8 p#rchase will be:

=" 5#rchase

8

=" S!5: C#rrent asset: Sales ta& recoverable

1H%or$ =" S!5: C#rrent liability: Sales ta& payable$



• Deferred ta,: his is an acco#nting meas#re rather than a ta& levied by government it

represents ta& payable or recoverable in f#t#re acco#nting periods in relation to transactions which

have already ta(en place.

• emporary diJerences are dierences between the carrying amo#nt of an asset or liability in the

statement of +nancial position and its ta& base. emporary dierences may be either ta,able or

ded$ctible.

' a,able temporary diJerences will res#lt in ta&able amo#nts in determining ta&able pro+t

%loss) of f#t#re periods when the carrying amo#nt of the asset or liability is recovered orsettled.

Deferred ta, liabilities: are the amo#nts of income ta&es payable in f#t#re periods in

respect of ta&able temporary dierences.

=" a& charge

C" S!5: -on'c#rrent liabilities: =eferred ta& liability



' Ded$ctible temporary diJerences will res#lt in amo#nts that are ded#ctible in determining

ta&able pro+t %ta& loss) of f#t#re periods when the carrying amo#nt of the asset is recovered or

settled.

Deferred ta, assets: are the amo#nts of income ta&es recoverable in f#t#re periods in

respect of ded#ctible temporary dierences %and in respect of the carry forward of #n#sed

ta& losses or ta& credits).

=" S!5: -on'c#rrent assets: =eferred ta& asset

C" a& charge

• "ecognise deferred ta& %that is the dierence between the opening and closing deferred ta&

balances in the S!5) normally in pro+t or loss. #t$ e&ceptions are:

' =eferred ta& relating to items dealt with as other comprehensive income %s#ch as reval#ation)

sho#ld be recognised as ta& relating to other comprehensive income within the statement of

comprehensive income

' =eferred ta& relating to items dealt with directly in e7#ity %s#ch as the correction of an error

or retrospective application of a change in acco#nting policy) sho#ld also be recognised

directly in e7#ity

• Steps to follow in determining deferred ta& balances:

→ Step 1: =etermine the items carrying amo#nt %i.e. boo( val#e i.e. S!5 val#e) and ta& base

val#e as at year beginning and year end.

→ Step % Calc#late the temporary dierence %i.e. dierence between carrying val#e and ta&

base val#e) at year beginning and at year end.' emporary dierence will be either /ta&able temporary dierence or /ded#ctible temporary

dierence. Chec( the decision tree below.' In the 7#estion sometime the temporary dierences are given. In that case yo# dont need

to apply Step 1.

→ Step 3: Apply ta& rate on temporary dierences to identify deferred ta& asset or liability at

year beginning and at year end.' he deferred ta& asset or liability identi+ed from year end balances is the amo#nt to be

shown in Statement of !inancial 5osition.' he movement from year beginning deferred ta& asset or liability to year end deferred ta&

asset or liability to be shown in IBS %in other comprehensive income if the portion related to

reval#ation).

' he ta& rate to be #sed in the calc#lation for determining a deferred ta& asset or liability is

the rate that is e&pected to apply when the asset is realised$ or the liability is settled.

Income:

Asset

*&pense:

Asset



\#estion:Company b#ys e7#ipment for 3$ and depreciates it on a straight line basis over its e&pected

#sef#l life of +ve years %i.e. LHM). !or ta& p#rposes$ the e7#ipment is depreciated at H3M per ann#m

on a straight line basis %i.e. will be f#lly depreciated at end of Jear'6). Acco#nting pro+t before ta& is

3$ for each of Jear 1 to 3. he ta& rate is 6M. Show c#rrent and deferred ta& impacts from Jear 1

to 3.

Answer:

he most important temporary dierence is that between depreciation charged in the

+nancial statements and capital allowances in the ta& comp#tation. In practice capital

allowances tend to be higher than depreciation charges$ res#lting in acco#nting pro+ts being

higher than ta&able pro+ts. his means that the act#al ta& charge %c#rrent ta&) is too low in

comparison with acco#nting pro+ts. Rowever$ these dierences even o#t over the life of an

asset$ and so at some point in the f#t#re the acco#nting pro+ts will be lower than the ta&ablepro+ts$ res#lting in a relatively high c#rrent ta& charge.

hese dierences are misleading for investors who val#e companies on the basis of their

post'ta& pro+ts %by #sing *5S for e&ample). =eferred ta& adD#sts the reported ta& e&pense for

these dierences. As a res#lt the reported ta& e&pense %the c#rrent ta& pl#s the deferred ta&)

will be comparable to the reported pro+ts$ and in the statement of +nancial position a

provision is b#ilt #p for the e&pected increase in the ta& charge in the f#t#re.

here are dierent ways that deferred ta& co#ld be calc#lated. IAS 1H states that the balance



• =etermining ta& base of assets:

→ he ta& base of an asset is the amo#nt that will be ded#ctible for ta& p#rposes against any

ta&able economic bene+ts that will 9ow to an entity when it recovers the carrying amo#nt of

the asset. If those economic bene+ts are not ta&able$ the ta& base of the asset is e7#al to its

carrying amo#nt. [IAS 1H: ?]

→ 5#tting above into a form#la: a& base E Carrying amo#nt P !#t#re ta&able amo#nts G !#t#re ded#ctible amo#nts



-ote:

1.

' !#t#re ta&able amo#nt considered as e7#ivalent to the Carrying amo#nt since the economic

bene+t %e.g. operations of the b#siness which will generate income) from #sing the 5K* yet to be

ta&able.' !#t#re ded#ctible amo#nt is >$3 since 4$3 already claimed as ta& depreciation in ta&able

pro+t calc#lation. >$3 will be ded#ctible in the f#t#re periods ta&able pro+t calc#lation.

H.

' he amo#nt will be ta&able on cash basis i.e. when the cash will be received in the f#t#re. So$

the whole 1$ amo#nt is !#t#re ta&able amo#nt.' he amo#nt will never be ded#ctible in ta&able pro+t calc#lation. So$ /-il !#t#re ded#ctible

amo#nt.

>.

' he amo#nt already been ta&ed so will not be ta&ed f#rther. hat is why !#t#re ta&able amo#nt

is /-il. ' he amo#nt will never be ded#ctible in ta&able pro+t calc#lation. So$ /-il !#t#re

ded#ctible amo#nt.

6.

' he amo#nt not ta&able and not ded#ctible in the f#t#re. So$ !#t#re ta&able amo#nt and !#t#re

ded#ctible amo#nt both are -il.

3.

' he amo#nt will not be ta&ed or ded#ctible in the f#t#re. So$ both of the val#es are /-il.

• =etermining ta& base of liabilities:

→ he ta& base of a liability is its carrying amo#nt$ less any amo#nt that will be ded#ctible for ta&

p#rposes in respect of that liability in f#t#re periods. In the case of reven#e which is received

in advance$ the ta& base of the res#lting liability is its carrying amo#nt$ less any amo#nt of the

reven#e that will not be ta&able in f#t#re periods. [IAS 1H: 8]



→ 5#tting this into a form#la: a& base E Carrying amo#nt G !#t#re ta&able amo#nt P !#t#re

ded#ctible amo#nt

*&ception applies for #nearned reven#e %i.e. reven#e received in advance) %see following -ote'H)

-ote:

1.

' he related e&pense will be ded#cted for ta& p#rposes on a cash basis. Since the amo#nt yet to

be paid$ the 1$ will be !#t#re ded#ctible amo#nt.' he amo#nt is an e&pense$ so will not the ta&able in the f#t#re.

H.

' he amo#nt is charged for ta& on cash basis. Since the cash is already received$ the amo#nt is

already ta&ed and will not be ta&ed again. hat is why !#t#re ta&able amo#nt is ta(en as a

negative +g#re$ instead of positive %as given in the form#la). his is e&ception to the general

form#la$ b#t in compliance with IAS 1H re7#irements.

' Alternative way of calc#lating a& base of <nearned reven#e is: Carryin' amo$nt & Amo$ntthat )ill not be ta,able in the f$t$re. h#s the calc#lation will be: 1$ ' 1$ E -il

>. he amo#nt will not be ded#ctible$ or chargeable for ta& p#rposes.

6. he amo#nt will not be ded#ctible$ or chargeable for ta& p#rposes.

Financial instr$ments

• !o#r standards on +nancial instr#ments:



→ IAS >H !inancial instr#ments: 5resentation' IAS >H deals with classi+cation of +nancial instr#ments between liabilities and e7#ity$ and

presentation of certain compo#nd instr#ments

→ I!"S ? !inancial instr#ments: =isclos#res' I!"S ? revised$ simpli+ed and incorporated disclos#re re7#irements previo#sly in IAS >H

→ IAS >, !inancial instr#ments: "ecognition and meas#rement' IAS >, deals with recognition$ derecognition and meas#rement of +nancial instr#ments

and hedge acco#nting

→ I!"S , !inancial instr#ments' I!"S , is a wor( in progress and will replace IAS >,. It will come into force for acco#nting

periods ending in H1>.

• Compo$nd 2nancial instr$ments%



A compo#nd or /hybrid +nancial instr#ment is one that contains both a liability component and an

e7#ity component. As an e&ample$ an iss#er of a convertible bond has:

' he obligation to pay ann#al interest and event#ally repay the capital P the liability component' he possibility of iss#ing e7#ity$ sho#ld bondholders choose the conversion option P the e7#ity

component.

In s#bstance the iss#e of s#ch a bond is the same as iss#ing separately a non'convertible bond and anoption to p#rchase shares. At the date of iss#e the components of s#ch instr#ments sho#ld be

classi+ed separately according to their s#bstance. his is often called /split acco#nting.

he amo#nt received on the iss#e %net of any iss#e e&pense) sho#ld be allocated between the

separate components as follows:

' he fair val#e of the liability component sho#ld be meas#red at the present val#e of the

periodic interest payments and the event#al capital repayment ass#ming the bond is

redeemed.

' he fair val#e of the e7#ity component sho#ld be meas#red as the remainder of the net

proceeds.

-ote that the rate of interest on the convertible will be lower than the rate of interest on the

comparable instr#ment witho#t the convertibility option$ beca#se of the val#e of the option to

ac7#ire e7#ity.

he present val#e sho#ld be disco#nted at the mar(et rate for an instr#ment of comparable credit

stat#s and the same cash 9ows b#t witho#t the conversion option.







Consolidated statement of 2nancial position

• =ierent types of investment and re7#ired acco#nting:

I@#S-# C.I#.IA .#K?I.#D .#A-# I

8.:?P ACC:?SS#bsidiary Control %^ 3M r#le) !#ll consolidation$ i.e. single

entity IAS H? Consolidated and

Separate !inancial Statements

I!"S > #siness Combinations

I!"S 1 Consolidated !inancial

StatementsAssociate Signi+cant in9#ence %3M ^

HM r#le)

*7#ity acco#nting

IAS H8 Investment in Associates

and Noint Uent#res

Noint vent#re %Dointly controlled

entity)

Contract#al agreement 5roportionate consolidation or

e7#ity acco#nting IAS H8

Investment in Associates and

Noint Uent#res I!"S 11 Noint

ArrangementsInvestments which is none of

the above

Asset held for accretion %i.e.

increase) of wealth

As for single company acco#nts

%I!"S ,: !inancial instr#ments)

Investments /held for sale

%I!"S 3: -on'C#rrent Asset Reld

for Sale and =iscontin#ed

0perations)

Sale is highly probable G r#le 5resent assets or gro#p of

assets separately in Statement

of !inancial 5osition and res#lts

of discontin#ed operations to

be presented separately in the

Statement of Comprehensive

Income.

• Investments in S#bsidiary:

' Control achieved by owning more than 3M voting power. #t$ control can still e&ist with lessthan 3M voting power.

' Control may be lost even witho#t changing the ownership levels when s#bsidiary becomess#bDect to control of a government$ co#rt administration or reg#lator.

• #,emptions from preparin' 'ro$p acco$nts% A parent need not present consolidated +nancial

statements if A;; of the following conditions are satis+ed:' It is a wholly'owned s#bsidiary or a partially'owned s#bsidiary of another entity and its other

owners have not obDected to the parent not presenting consolidated +nancial statements' Its sec#rities are not p#blicly traded' It is not in the process of iss#ing sec#rities in p#blic sec#rities mar(ets

2hen parent has:

' 5ower over more than 3M of the voting rights by virt#e of agreement with other

investors.

' he power to govern the +nancial and operating policies of the entity by stat#e or

#nder an agreement.

' he power to appoint or remove a maDority of members of the board of directors.



' he #ltimate or intermediate parent p#blishes consolidated +nancial statements that comply

with I!"S

• DiJerent reportin' dates: If a s#bsidiarys reporting date is dierent then parent and b#l( of

other s#bsidiaries in the gro#p:' the s#bsidiary may prepare another set of +nancial statements' 0"$ if it is not possible$ the s#bsidiarys acco#nts may still be #sed provided that the gap is

not more than three months and adD#stments are made to re9ect signi+cant transactions orother events.

• DiJerin' acco$ntin' policies: <niform acco#nting policies sho#ld be #sed. AdD#stments sho#ld

be made where acco#nting policies of s#bsidiary dier from parent.

1. @"0<5 S"<C<"*:

5arent

3M G %control) HM G %signi+cant in9#ence)

S#bsidiary Associate

H. -* ASS*S A !AI" UA;<* A R* =A* 0!:

>. C0S 0! I-U*S*-:

' =o not incl#de costs li(e professional fees$ legal fees in the cost of investment these m#st berecognised in the 5ro+t or ;oss acco#nt as e&pense as inc#rred. Also$ in cost of investment do not

incl#de loan iss#ed to s#bsidiary.

' Any contingent consideration payable m#st be incl#ded even at the date of ac7#isition if it is not

deemed probable that it will be paid

' It is possible that the !U of the contingent consideration may change after the ac7#isition date. If

it is d#e to additional information obtained that aects the position at ac7#isition date$ goodwill



sho#ld be remeas#red %one year 7#alifying period applies). If the change is d#e to events after the

ac7#isition date %s#ch as earnings target met) then the goodwill will not be remeas#red %gainBloss

from remeas#rement will be recognised in IBS)

6. @00=2I;;:

i. e) method: 2hen e&aminer will re7#ire to #se the new method$ he will mention /f#ll$

/gross$ /new$ or /calc#late -CI at fair val#e. In this case !U of -CI %val#e of shares notac7#ired) at ac7#isition date will be given.

ii. :ld method: 2here an e&am 7#estion re7#ires #se of the old method$ it will state that /it is

gro#p policy to val#e the non'controlling interest at its proportionate share of the fair val#e of

the s#bsidiarys identi+able net assets.

3. -0-'C0-"0;;I-@ I-*"*S %-CI) I- S<SI=IA"J:

' -CI is not applicable for associates.



4. C0-S0;I=A*= "*S*"U*:

?. I-U*S*- I- ASS0CIA*:



Consolidated statement of comprehensive income

If s#bsidiary is ac7#ired part way thro#gh the year then all income and e&penses of s#bsidiary shall

be time apportioned

F1: ransaction val#e of inter'company trading %i.e. the total selling price in inter'company trading)

FH: 2ho is the seller_ %only ded#ct the #nrealised pro+t)



F>: Interest on inter'company loan

IAS Statement of cash o)s









he formats are not comprehensive. All information in the formats may not be re7#ired in every

sit#ation. It is very important to #nderstand the #nderlying concept than mere memorising the format.

.atio analysis



Ei($idity .atios: ;i7#idity ratio meas#res a companys ability to pay short'term obligations

1. C#rrent ratio E C#rrent Asset

C#rrent ;iabilities E F : 1

→ C#rrent ratio is mainly #sed to give an idea of the companys ability to pay bac( its short'term

liabilities %debt and payables) with its short'term assets %cash$ inventory$ receivables).

→ he higher the c#rrent ratio$ the more capable the company is of paying its obligations.

→ A c#rrent ratio of 1.3:1 to H:1 can mean s#Vcient c#rrent asset to cover its c#rrent liabilities.

→ A c#rrent ratio of above H:1 may mean over investment in wor(ing capital %i.e. in c#rrent

assets). S#rpl#s assets can be #sed to

' to e&pand the b#siness operation or to increase capacity which will earn additional pro+t$' to repay debt which will save interest e&penses$

' distrib#te to shareholders as dividend.

→ A c#rrent ratio below 1 s#ggests that the company wo#ld be #nable to pay o all of its c#rrent

liabilities if they came d#e at that point.

→ C#rrent ratio can be improved by

' selling of #n#sed non'c#rrent assets$' ta(ing long'term loan$' speeding #p the receivables collection$' slowing payables payment

→ A wea( c#rrent ratio shows that the company is not in good +nancial health$ b#t it does not

necessarily mean that it will go ban(r#pt as there are many ways to access +nancing b#t it is

de+nitely not a good sign.

→ Companies that have tro#ble getting paid by its receivables or have long inventory t#rnovercan r#n into li7#idity problems

H. \#ic( or \#ic( asset or Acid test ratio E C#rrent Asset ' Closing Inventory

C#rrent ;iabilities E F : 1



→ he 7#ic( ratio meas#res a companys ability to meet its short'term obligations with its most

li7#id assets %as it e&cl#des inventory).

→ Inventory is e&cl#ded beca#se some companies %specially man#fact#ring companies with high

inventory holding period) have diVc#lty t#rning their inventory into cash.

→ he higher the 7#ic( ratio$ the better the position of the company.

→ A 7#ic( ratio of 1:1 is normally most appropriate. !or companies with a high inventory t#rnover

ratio %i.e. short inventory holding period) can have a less than 1 7#ic( ratio witho#t s#ggesting

that the company co#ld be cash 9ow tro#ble.

→ If 7#ic( ratio is too low than the c#rrent ratio this co#ld mean that high amo#nt of wor(ing

capital is tied #p in inventory. Righ amo#nt of inventory means high inventory holding costs.

Pro2tibality .atios%

1. .et$rn on capital employed 9.:C#; > 5ro+t efore Interest and a&

Capital *mployed F 1M E FM

→ Capital employed > otal asset & C$rrent liabilities

> Share capital L .eserves L Eon'4term liabilities

→ =eferred a& ;iability or Asset normally e&cl#ded from Capital *mployed.In that case$ Capital employed E otal asset P C#rrent liabilities P =eferred ta& liability or asset

E Share capital G "eserves G ;ong'term liabilities P

=eferred ta& liability or asset

→ C#rrent ;iability portion of ;ong'term liabilities and a constant amo#nt of 0verdraft normally

also considered as -on'c#rrent liability for Capital employed calc#lation

→ etter to #se average Capital *mployed %0pening G Closing B H ) where possible.

' If yo# are re7#ired to compare ratios between two dierent years and cannot calc#late

average for both of the years$ then ta(e only the S!5 val#e of the year %i.e. do not

average). his is for comparability p#rpose.

→ If mar(et val#e of e7#ity is ta(en then do not incl#de /"eserves.

here is a lot other conte&ts to de+ne capital employed. his is basically the capital re7#ired

for a b#siness to f#nction.

→ "0C* is the prime meas#re of operating performance. his ratio indicates how eVciently a

b#siness %i.e. managers) is #sing the f#nds invested %e7#ity and long'term debt).

→ It is the ratio over which operations management has most control.

→ "0C* increase from previo#s year or above ind#stry average means a good sign and re9ects

the fact that the company %by managers) has managed to increase the sales witho#t a

proportionate increase in costs.

→ "0C* decrease from previo#s year or below ind#stry average shows problem with controlling

of costs. ;evel of dividend may also fall as a conse7#ence.

→ he val#e of capital employed is lower where company mainly #ses rented assets %i.e.

thoro#gh operating lease) rather owning or +nance lease. his is also possible where assets

carrying val#e is lot less than the cost %remember in that case assets will need replacement).

hese may res#lt a higher "0C*.



→ Asset reval#ation %especially land) will res#lt a higher amo#nt of Capital employed$ which will

give a lower "0C* witho#t indicating company performance became poorer.

→ "0C* sho#ld always be higher than the rate at which the company borrows otherwise any

increase in borrowing will red#ce shareholders earnings.

H. .et$rn on e($ity 9.:#;+ or .et$rn on Shareholders7 Capital 9.:SC; >

5ro+t After a& and 5reference =ividend

0rdinary Share Capital and "eserve F 1M E FM

→ 5ro+t after ta& and preference dividend is the /5ro+t attrib#table to ordinary shareholders

→ It is common to #se boo( val#es rather mar(et val#e of shares %if mar(et val#e #sed then

remember to e&cl#de "eserves)

→ etter to #se average of Shareholders Capital %0pening G Closing 0rdinary Share Capital and

"eserves B H ) where possible specially$ when closing balance signi+cantly diers from

opening balance.


average for both of the years$ then ta(e only the S!5 val#e of the year %i.e. do not average).

his is for comparability p#rpose.

→ "et#rn on e7#ity %"0*) indicates to ordinary shareholders how well their investments have

performed meas#ring how m#ch pro+t the company has generated for them with their money.

→ A good +g#re res#lts in a high share price and ma(es it easy to attract new f#nds.

→ 2ith a similar level of "0C*$ a fall in "0* may mean increased +nance cost beca#se of new

loans.

→ An improved "0* with a similar "0C* may mean some of the loans are repaid which res#lted alower +nance cost and$ so$ improved pro+t attrib#table to ordinary shareholders.

→ If new share iss#ed sometime at period end$ this may res#lt a declined "0* witho#t indicating

poor performance of the company beca#se company really did not get time to #tilise the new

capital.

35 8ross pro2t mar'in > @ross 5ro+t

Sales F 1M E FM

→ Righ gross pro+t margin may indicate eective p#rchasing strategy which res#lts a lower

material KB prod#ction cost %i.e. lower cost of sales). A high gross pro+t margin may also

indicate concentration on low vol#me'high margin sales.

→ ;ow gross pro+t margin may be an indication of selling prod#cts cheaply %i.e. at disco#nt) in

order to generate high vol#me of sales. his may also indicate increased prod#ction cost

%incl#ding material and labo#r cost) witho#t a proportionate increase in selling price.

5 :peratin' pro2t mar'in > 5ro+t before Interest and a&

Sales F 1M E FM



→ 0perating pro+t margin gives analysts an idea of how m#ch pro+t %before interest and ta&) the

company is ma(ing from each dollar of sales.

→ ypically operational management has f#ll control over operating costs %the amo#nt of loan

capital and$ so$ interest e&pense normally depends on more higher level of management and

the amo#nt of ta& payable depends on government policy). So$ operating pro+t margin

eectively meas#res performance of operational management.

→ A poor or declining 0perating pro+t margin may indicate b#siness is str#ggling in controlling

the costs. his may also happen beca#se of decrease in selling price.

→ A healthy operating pro+t margin is re7#ired for a company to be able to pay interest on loans.

G5 et pro2t mar'in > 5ro+t After a&

Sales F 1M E FM

→ -et pro+t margin sometimes calc#lated based on /5ro+t before ta& %after interest). Chec(

7#estion for indication.

→ A higher percentage than last year or ind#stry average indicates costs are being controlled

better. his may also indicate prod#cts are sold at higher price.

→ A wea(en -et pro+t margin may indicate management is str#ggling in controlling the costs.

→ Company can sell at a disco#nt to retain mar(et share d#ring economic downt#rn %andBor

beca#se of intense competition). If costs remain at similar level this will res#lt a lower -et

5ro+t argin. Companies trading cheaper prod#cts can gain d#ring economic downt#rn when

c#stomers generally stop b#ying l#&#ry prod#cts and t#rn to cheaper ones.

→ In large companies$ where higher level of economies of scale can be achieved %i.e. lower level

of per #nit cost) the net pro+t margin can be higher as a res#lt.

→

#ltinational companies can gain or loss from favo#rable or adverse e&change ratemovements.

*5 Asset t$rnover or Asset $tilisation ratio > Sales

Capital *mployed E F:1

→ <se of /-on'c#rrent assets instead of /Capital employed is also correct. Chec( 7#estion for

indication. If 7#estion says nothing$ then #se /Capital employed.

→ his shows the sales that is generated from each 1 worth of Capital %or asset) employed. he

higher the sales per 1 invested the more eVcient #se of the capital was.

→ If b#siness is selling l#&#ry prod#cts or prod#cts with higher pro+t margin that may res#lt alower Asset t#rnover ratio witho#t a wea(en "0C* or -et pro+t margin ratio.

#Mciency .atios%

1. Avera'e receivables collection period > Average rade "eceivables

Credit Sales F >43 E F days



→ <se only C"*=I SA;*S. If 7#estion gives #s only a Sales +g#re %i.e. does not split between

credit and cash sales) then #se the given Sales +g#re.

→ 2e need only "A=* "*C*IUA;*S %i.e. receivables derived from credit sales). -ontrade

receivables %e.g. advance$ damage claim$ receivables of government grant) shall not be

incl#ded. If 7#estion gives #s only a "eceivables +g#re$ and does not give any other indication

abo#t its components then ass#me that is the rade receivables +g#re.

→ etter to #se average trade receivables %0pening G Closing BH ) where possible specially$

when closing balance signi+cantly diers from opening balance.

→ An alternative of #sing Average "eceivables is #sing year'end receivables +g#re where amo#nt

of receivables did not change signi+cantly from year'beginning to year'end.


average for both of the years$ then ta(e only the S!5 val#e of the year %i.e. do not average).

his is for comparability p#rpose.

→ "eceivables collection period is an appro&imate meas#re of the length of time c#stomers ta(e

to pay what they owe.

→ A "eceivables Collection 5eriod similar to 5ayables 5ayment 5eriod may be an indication of

good credit control policy.

→ Collection 5eriod of less than > days may seem normal. Signi+cantly in e&cess of > days

might be representative of poor management of f#nds of the b#siness. Rowever$ some

b#sinesses s#ch as e&port oriented b#sinesses normally needs to allow genero#s credit terms

%may be 4 days) to win c#stomers whereas retailer may sell only or mainly on cash %may be

collection period of not more than 1 days).

→ A high or increasing collection period may mean poorly managed credit control f#nction$ and

increased ris( of bad debts. his also may mean over investment in receivables.

→ Rowever$ increase in collection period might be a deliberate policy to increase sales byoering better credit terms than competitors.

→ =ecreasing or low collection period may mean tighten credit control policy which may ca#se

declining c#stomer n#mbers %i.e. red#ction of sales).

→ "eceivables collection days can be improved by oering disco#nt to c#stomers for early

payment.

5 Avera'e payables payment period > Average rade 5ayables

Credit 5#rchase F >43 E F days

→ If Credit p#rchase or p#rchase amo#nt cannot be identi+ed from the 7#estion$ #se Cost of sales

as it serves as an appro&imation.

→ <se only rade payables i.e. payables generated from credit p#rchase.

→ Increasing or long payment period may indicate li7#idity problem and also may indicate

loosing opport#nity of prompt payment disco#nts.

→ A longer payment period may also mean company has s#cceeded in obtaining very favo#rable

credit terms from its s#ppliers contradictorily$ this may also mean #nethical b#siness practice.



→ ;ong credit term from s#ppliers is a so#rce of interest free +nancing. #t$ some s#ppliers may

charge interest if payment period e&ceeds a certain d#ration.

→ =eclining or short payment period may indicate b#siness has s#Vcient cash to meet payables.

A short payment period may p#t companys credit ratings in higher position.

→ If receivables collection period is longer than the payables payment period then it can ca#se

cash 9ow diVc#lties.

>. Inventory t$rnover< holdin' period E Average Inventory

Cost of Sales F >43 days E F days

or$

Cost of Sales

Average Inventory E F imes

→ etter to #se Average Inventory +g#re to ta(e into acco#nt the variation between 0pening

inventory and Closing inventory. #t$ instead of Average Inventory the closing inventory +g#re

can be #sed where opening inventory level cannot be determined in that case comparable

+g#re has to derive from same approach.

→ his ratio is an estimate of the average time that inventory is held before it is #sed or sold. If

average inventory holding period is > days$ this means that the inventory is /t#rned over %i.e.

sold) on average 1H.14 times %E >43B>) in a year

→ A low t#rnover %i.e. high holding period) implies slow sales and$ therefore$ e&cess inventory

andB or high level of inventory holding costs.

→ Righ inventory levels are #nhealthy beca#se they represent an investment with a Wero rate of

ret#rn. It may also p#t company at a great loss if prices start to decline %thin( abo#t

technological prod#cts).

In !,:

1. !inished goods inventory t#rnover period E Average !@ InventoryCost of Sales F >43 days E F days

H. "aw materials inventory t#rnover period E Average " Inventory

Ann#l 5#rchases F >43 days E F days

>. Average prod#ction %2I5) period E Average 2I5

Cost of Sales F >43 days E F days

6. 2or(ing capital cycle$ or$ Cash operating cycle %in days) E

Inventory holding period %days) G "eceivables collection period P 5ayables payment period

In !,:

=ays

!inished goods inventory t#rnover period F"aw materials inventory t#rnover period F

Average prod#ction %2I5) period F

Average receivables collection period F

Average payables payment period %F)

0perating cycle FB%F)

→ his cycle is the length of time between cash payment to s#ppliers and cash received form

c#stomers. his meas#red how long a +rm will be deprived of cash.



→ A company co#ld even achieve a negative cycle by collecting from c#stomers before paying

s#ppliers. his policy of strict collections and delay payments is not always s#stainable or

appreciable by c#stomers %beca#se they have to pay early) and s#ppliers %beca#se they are

being paid late).

Investment .atios%

1. #arnin's per share 9#PS; E *arnings %i.e. 5ro+t) Attrib#table le to 0rdinary Shareholders

2eighted Avg. -#mber of 0rdinary Shares

E F

or$

ar(et 5rice per Share

5rice *arnings "atio E F

→ *5S is generally considered to be the single most important variable in determining a shares

price. his is a (ey meas#re of company performance from ordinary shareholders point of

view.

→ *5S shows the amo#nt of pro+t attrib#table to each ordinary share. #t$ it does not represent

act#al income of the ordinary shareholders.

→ Increase in *5S generally indicates s#ccess whereas a decrease is not welcomed by

shareholders.

→ A constant growth in *5S may res#lt in favo#rable movements %i.e. increase) in share price.

→ oth right iss#e and bon#s iss#e of shares res#lt in a fall of *5S. So$ care m#st be ta(en while

interpreting.

→ *5S often ignores the amo#nt of capital employed to generate the earnings. wo companies

co#ld generate the same *5S$ b#t one co#ld do so with less investment this co#ld mean that

this company was more eVcient at #sing its capital.

H. Dividend per share 9DPS; > 0rdinary =ividend =eclared and 5aid for he Jear

2eighted Avg. -#mber of 0rdinary Shares E F

→ =5S is the act#al portion of income received by the ordinary shareholders from *5S.

→ =5S is important for shareholders who are see(ing income from shares rather capital gain.

→ @rowth in dividend per share #sed in share price val#ation. So$ companies may have a policy

of achieving steady growth in dividend pay'o#t per share. A steady growth normally creates

positive mar(et reaction %i.e. increase in share price).

35 Dividend pay4o$t ratio > =ividend 5er Share

*arnings 5er Share F 1M E FM

or$

0rdinary =ividend =eclared and 5aid for he Jear

*arnings %i e 5ro+t) Attrib#table to 0rdinary Shareholders F 1M E

FM

→ =ividend pay'o#t ratio is the percentage of earnings paid to shareholders as dividends. his

shows how well earnings s#pport the dividend payments.



→ Righ dividend pay'o#t ratio may mean company con+dence on f#t#re earnings. #t$ where

maDority of shares are held by a small n#mber of shareholders$ it may also mean that

shareholders are ta(ing o#t as m#ch pro+t as they can and this does not necessarily serve

companys long'term interest.

→ ;ow dividend pay'o#t ratio may mean company is e&pecting diVc#lties in the f#t#re so now

interested in retaining earnings. #t$ it can also mean e&pansion %by reinvesting the retained

earnings) of b#siness in the f#t#re.

→ at#re companies tend to have a higher pay'o#t ratio.

6. Dividend cover > *arnings 5er Share

=ividend 5er Share E F imes

or$

*arnings %i.e. 5ro+t) Attrib#table to 0rdinary Shareholders

0rdinary =ividend for the Jear E F imes

→ =ividend cover represents how many times dividend co#ld have paid from the pro+t

attrib#table to ordinary shareholders.

→ =ividend cover is a meas#re of the ability of a company to maintain the level of dividend paid

o#t. he higher the cover$ the better the ability to maintain dividend pay'o#t if pro+ts drop.

→ ypically$ a ratio of H or higher is considered safe in the sense that the company can well aord

the dividend b#t dividend cover below 1.3 may seem ris(y.

→ If the dividend cover is below 1 then the company is #sing its retained earnings from previo#s

years to pay c#rrent years dividend

→ A low level of dividend cover might be acceptable in a company with very stable pro+ts$ b#t

the same level of cover for a company with volatile pro+ts wo#ld indicate that company may

not able to maintain the c#rrent level of dividend pay'o#t.

G5 Price<#arnin' 9P<#; ratio > ar(et 5rice 5er Share*arnings 5er Share E F imes

or$

Companys ar(et Capitalisation

*arnings %i.e.5ro+t) Attrib#table to 0rdinary Shareholders E F imes

→ ar(et capitalisation is the total mar(et val#e of all the iss#ed ordinary shares of the company.

→ 5B* ratio also (nows as /5rice #ltiple or /*arnings #ltiple ratio

→ 5B* ratio is a meas#re of company performance from the mar(ets point of view.

→ 5B* ratio shows how m#ch money investors are c#rrently willing to pay for each dollar of

earnings. It gives an indication of the con+dence that the investors have in the f#t#re s#ccess

%i.e. earnings) of the b#siness.

→ In a very basic term$ a 5B* ratio of H means investors are paying e7#ivalent of H years

earnings %at c#rrent *5S level) to own a share in the company.

→ A 5B* ratio of 1 means mar(et is c#rrently willing to pay 1 for each dollar of earnings c#rrently

made by the company this shows very little con+dence on the companys f#t#re prosperity.

2hereas$ a 5B* ratio of H e&presses a great deal of optimism abo#t the f#t#re of the company



since investors are c#rrently willing to pay H for each dollar of companys earnings. Investors

paying H times of c#rrent earnings believe that company will do signi+cantly better in coming

years$ and this will not ta(e long to get the H earnings.

→ ar(et can over'val#e or #nder'val#e company shares depending of information available.

*5 Dividend yield > =ividend 5er Share

ar(et 5rice 5er Share F 1M E FM

→ =ividend Jield is a +nancial ratio that shows how m#ch a company pays o#t in dividends

relative to its share price.

→ In the absence of any capital gains$ the =ividend Jield is the ret#rn on investment for a share.

→ Investors can sec#re a minim#m stream of cash 9ow from their investment portfolio by

investing in shares which is paying relatively high and stable dividend yields.

→ at#re and well'established companies tend to have higher dividend yields while yo#ng and

growth oriented companies tend to have lower yield. any fast growing companies do not

have a dividend yield at all beca#se they do not pay'o#t any dividend.

Eon'4erm Solvency .atios%

1. =ebt ratio E otal =ebt

otal Assets F 1M E FM

→ otal assets consist of non'c#rrent and c#rrent assets.

→ =ebts consist of all c#rrent and non'c#rrent liabilities %=eferred ta& liabilities can be ignored).

→ his ratio represents how m#ch money company owes compared to its otal assets.

→ If =ebt ratio is greater than 3M$ the b#siness can be considered as a ris(y company. #t$ a

high =ebt ratio may also mean companys ability to raise debt +nance which shows con+dence

of debt holders on the company.

H. @earing ratios:

a. =ebt to *7#ity ratio E

=ebt Capital "edeemable 5reference Share Capital G ;ong'term

;iabilities

*7#ity Capital F 1M E 0rdinary Share Capital Irredeemable 5reference Share

Capital G "eserves F 1M E FM

b. =ebt to otal capital ratio E

=ebt Capital =ebt Capital

otal Capital F 1M E *7#ity Capital G =ebt Capital F 1M E FM



>. ;everage ratio :

*7#ity Capital*7#ity Capital G =ebt Capital F 1M

→ a(e c#rrent liability portion as well of long'term liabilities in =ebt capital calc#lation.

→ -ormally do not incl#de =eferred ta& liability within =ebt capital.

→ In !, 5reference share considered as =ebt capital not *7#ity capital.

→ Also in !,$ val#es for @earing ratio can be either boo( val#es or mar(et val#es. If #sing mar(et

val#es remember mar(et val#e of ordinary shares ta(e acco#nt of reserves %i.e. do not add

reserve amo#nt with total mar(et val#e of ordinary shares)

→ A gearing level of more than 3M %where =ebt Capital to otal Capital #sed) or more than

1M %where =ebt Capital to *7#ity Capital #sed) or ;everage ratio of less than 3M means

company is highly geared %i.e. ris(y).

→ "is( is high for investors in a high geared company beca#se of obligation to pay the interest

and repaying capital on time.

→ he standard level of gearing depends on ind#stry sector.

→ A relatively higher gearing may mean company adopted an aggressive strategy to e&pand its

operation. his has to be D#sti+ed with sales and pro+t growth. A higher gearing may also

mean company is having +nancial diVc#lties so may be a going concern iss#e.

→ A low or declining gearing may mean company is getting stronger +nancially and con+dent on

f#t#re earnings.

→ 2here gearing is high$ shareholders re7#ired rate of ret#rn will increase beca#se of high level

of ris( involve in the investment.

→ o lend money in a highly geared company$ lenders may impose some covenants on thecompany %e&ample: a ma&im#m limit of gearing$ a minim#m level of interest cover$ pledge on

some assets)

6. Interest cover > 5ro+t before Interest and a&

Interest Charge E F imes

→ Interest cover is a meas#re of the ade7#acy of a companys pro+t relative to interest payment

on its debt.

→ A high interest cover ratio means that the b#siness is easily able to meet its interest

obligations from pro+ts. Similarly$ a low level of interest cover ratio means that the b#siness is

potentially in danger of not being able to meet its interest obligations.

→ Interest cover of more than H is normally considered reasonably safe. #t$ companies with very

volatile earnings may re7#ire an even higher level of Interest cover.

→ Interest cover of less than 1 means the company did not earn s#Vcient earning %i.e. pro+t) to

meet its interest charge. his means company will have to pay some of its interest from

retained pro+t from previo#s years. his may also raise 7#estion abo#t companys going

concern.



IAS 33 #arnin's per share

• An entity is re7#ired to calc#late and present a basic *5S and a dil#ted *5S amo#nt based on

the pro+tB %loss) attrib#table to the ordinary shareholders %of the parent entity).

• asic and dil#ted *5S +g#res sho#ld be presented on the face of the statement of

comprehensive income with e7#al prominence.

• asic *5S E -et pro+t or %loss) attrib#table to ordinary shareholdersweighted average n#mber of ordinary shares

→ 2eighted average n#mber of shares can be calc#lated as:

→ 0asic #PS )ith bon$s iss$e 9scrip iss$e+ capitalisation iss$e; and share split% increases n#mber of shares witho#t any consideration. As a res#lt$ this distorts the comparison

of *5S in the c#rrent year with the *5S in the previo#s year. So$ to ens#re that the distortion

does not occ#r:' he *5S of the c#rrent year is calc#lated as if the bon#s iss#e was in e&istence of the

beginning too( place at the start of the year and$' he corresponding previo#s years *5S also restated as that bon#s iss#e was in e&istence

thro#gho#t that previo#s year.

Simple e,ample% 0on$s iss$e

At year beginning %1.1.H11)$ company A has a share capital of 6$ ordinary shares$ when it

decides to ma(e a bon#s iss#e of 1 for 6 on 1 April H11. Its pro+t for the year to >1 =ecember H1

and H11 was 4$ and 43$ respectively. Calc#late the *5S for the year ending H11 and for

corresponding previo#s year.

Shares are #s#ally incl#ded in the

weighted average n#mber of

shares from the date consideration

is receivable.



Comple, e,ample% 0on$s iss$e after a f$ll maret price iss$e

At year beginning %1.1.H11)$ company A has a share capital of 6$ ordinary shares. It made a

f#ll mar(et price iss#e on 1 arch H11 of 1$ shares and a bon#s iss#e of 1 for 6 on 1 April

H11. Its pro+t for the year to >1 =ecember H1 and H11 was 4$ and 43$ respectively.

Calc#late the *5S for the year ending H11 and for corresponding previo#s year.



→ asic #PS )ith ri'ht iss$e%' A rights iss#e oers e&isting shareholders the right to b#y new shares in proportion of their

e&isting holding at a price slightly below the mar(et price.' o calc#late *5S when right iss#e is made we need to (now:

he c$m ri'ht price: his is the mar(et price of a share D#st before the right iss#e

he e,4ri'ht price% his is the price of a share after the right iss#e. In theory the e&'right

price sho#ld be the weighted average of the c#m right price of the shares and iss#e price of

corresponding n#mber of share. his price is called the /theoretical e,4ri'ht price7.

' In a right iss#e$ shares are sold at a red#ced price so$ we need to divide the total n#mber

of shares iss#ed into /bon#s shares and /f#lly paid shares and treat as s#ch.

' Steps to follo) in a ri'ht iss$e%

Step 1: Calc#late the theoretical e&'rights price

Step H: Split the n#mber of shares in the rights iss#e into bon#s shares and f#ll price

shares.

:ri'inal shares pl$s bon$s shares > :ri'inal n$mber of shares X C$m ri'ht

price

heoretical e, ri'ht price

=ed#ct original n#mber of shares from the res#lt of the above form#la to get the /bon#s

shares

he res#lted /0riginal shares pl#s bon#s shares will be a higher

n#mber of shares as we are m#ltiplying by a bigger +g#re and

!rom above heoretical e&'right price e&ample:

i. -#mber of rights share iss#ed: 1$$B6 E H$3$ii. Amo#nt received from rights iss#e: H$3$ F > E ?$3$ iii. ?$3$ can be

raised by iss#ing %?$3$B >.3) E H$16H$83? shares at f#ll mar(et price iv. So$ we cansay$ H$16H$83? shares were iss#ed at f#ll mar(et price and %H$3$ P H$16H$83?) E

>3?$16> shares were bon#s iss#e

o verify the form#la in Step H: %0riginal shares G on#s shares) F *"5 E 0riginal shares F C#m right

price %1$$ G >3?$16>) F >.6 E 1$$ F >.3 >3$H16$H84 E >3$$

So$ there is a mismatch of %>3$H16$H84 ' >3$$) E H16$H84 %.4M) if we #se above form#laT



Step >: Calc#late c#rrent years *5S

Step 6: Calc#late corresponding previo#s years *5S ta(ing the bon#s share eect. 2e can#se following form#la:

"e'stated *5S of the previo#s year E

0riginal *5S of the previo#s year F

Rolding ratio to have the bon#s share%s) heoretical e& right price

Share ratio with bon#s shares F C#m right price

0asic #PS )ith ri'ht and bon$s iss$e%

!enton had 3$$ ordinary shares in iss#e on 1 Nan#ary HF1. 0n >1 Nan#ary HF1$ the company

made a rights iss#e of 1 for 6 at 1.?3. he c#m rights price was H per share. 0n > N#ne HF1$ the

company made an iss#e at f#ll mar(et price of 1H3$ shares. !inally$ on > -ovember HF1$ the

company made a 1 for 1 bon#s iss#e. 5ro+t for the year was H$,$. he reported *5S for year

ended >1 =ecember HF was 64.6c.

.e($ired% hat )as the earnin's per share 2'$re for year ended 31 December !X1 andthe restated #PS for year ended 31 December !X!N

Ans)er% %a 7#ic(er$ smarter b#t comple& way)

5"0;*TT

' when there will be m#ltiple

iss#es

he res#lted /"e'stated *5S will be a

smaller +g#re as we are m#ltiplying by

a smaller +g#re and dividing by a

' <se this part of the form#la only

if there is a bon#s iss#e in the

c#rrent year.



→ =il#ted *5S:' =il#ted *5S warns e&isting shareholders that the *5S may fall in f#t#re years beca#se of

potential new ordinary shares that have been iss#ed.

' he dil#ted *5S is calc#lated by revising the original earnings %e.g. cancelling interest and

its ta& eect in case of convertible bond) and weighted average n#mber of shares as

tho#gh the potential ordinary shares had already been iss#ed.

#,ample% Dil$ted #PS )ith convertible bond

In H1 !arrah Co had a basic *5S of 13c based on earnings of 13$ and 1$ ordinary 1

shares. It also had in iss#e 6$ 13M convertible bond which is convertible in two years time at the

rate of 6 ordinary shares for every 3 of bond. a& is >M of /pro+t before ta&. In H1 gross pro+t of

H$ and e&penses of 3$ were recorded$ incl#ding interest payable of 4$. Calc#late the

dil#ted *5S.

Sol$tion%

@ross pro+t

H$

*&penses

%3$)

Add'bac(: Interest %6$F13M)

4$

5ro+t before ta&

134$

a& e&pense %>M)

%64$8)

*arnings attrib#table to ordinary shareholders

1,$H

-#mber of shares iss#ed

1$Additional shares from conversation %6$F6B3)

>H$

1>H$

=il#ted *5S E %1,$B1>H$) E .8H.4$ i.e. 8H.4c

=il#tion %i.e. decrease) in earnings wo#ld be %13c P 8H.4c) E HH.6c per share

→ =il#tive or antidil#tive:

5otential ordinary shares may be iss#ed in the following forms:

' Convertible bonds %bonds and debent#res that can be converted into ordinary shares)' Convertible preference shares %5reference shares that can be converted into ordinary shares)' 0ptions and warrants %0ption holders has right$ b#t not obligation$ to b#y ordinary shares in a f#t#re

date at a predetermined price)

' Contingently iss#able shares %these are ordinary shares will be iss#ed if certain conditions are met)

2hen calc#lating the revised weighted average n#mber of shares$ the convertible instr#ment %e.g.

convertible bond) is deemed to have been converted into ordinary shares at the beginning of the period



' 0nly dil#ted shares sho#ld be incl#ded in the dil#ted *5S calc#lation.' 5otential new ordinary shares are not dil#tive if *5S wo#ld have been higher if the potential

shares had been act#al shares in the period.

#,ample%

Ardent Co has 3$$ ordinary shares of H3 cents each in iss#e. he total earnings in H1 were

1$?3$. he rate of income ta& is >3M. =ecide which one of the following will dil#te the *5S and

will be incl#ded in dil#ted *5S calc#lation:

%a) 1$$ of 16M convertible loan stoc($ convertible in three years time at the rate of H shares

per 1of stoc(

%b) H$$ of 1M convertible loan stoc($ convertible in one years time at the rate of > shares per

3 of stoc(

Sol$tion%

asic *5S E 1$?3$B3$$ E >3 cents

%a) *arnings increased %i.e. interest e&pense saves): i F%1 P t) E 1$$ F .16 %1 P .>3) E

,1$5otential ordinary shares: %1$$ F H)B 1 E H$ sharesSo$ incremental *5S E ,1$BH$ E 63.3c

Incremental *5S is higher than basic *5S so -0 dil#ted and do not incl#de in the dil#ted *5S

calc#lation.

%b) *arnings increased %i.e. interest e&pense saves): i F%1 P t) E H$$ F .1 %1 P .>3) E

1>$

5otential ordinary shares: %H$$ F >)B 3 E 1$H$ sharesSo$ incremental *5S E 1>$B1$H$ E 1.8c

Incremental *5S is lower than basic *5S so dil#ted %i.e. wea(ened) and need to incl#de in the

dil#ted *5S calc#lation.

Dil$ted #PS )ith option%' 0ptions and warrants are dil#tive when they wo#ld res#lt in the iss#e of ordinary shares for

less than the average mar(et price of ordinary shares d#ring the period %i.e. when they

are /in the money).' he shares that wo#ld be iss#ed if the options or warrants are e&ercised are divided into

f#ll priced shares and free shares. he free fraction is the dil#tive.

#,ample% rand Co had net pro+t of 1$H$ for the year ending >1 =ecember H1. 2eighted

average n#mber of ordinary shares o#tstanding d#ring the year was 3$. Average fair

' Ade7#ate to #se a simple average of wee(ly or

monthly prices or$' Average of closing mar(et prices or$' Average of high and low prices when prices 9#ct#ate



val#e of one ordinary share d#ring the year was H. rand Co iss#ed share option of 1$

shares with e&ercise price applicable of 13. Calc#late both basic and dil#ted *5S.

Sol$tion% If the options are e&ercised$ the company will raise cash of %1$ shares F 13) E

1$3$. hat is %1$3$ B H) E ?3$ shares if iss#ed f#ll price. So$ the company is

giving away %1$ P ?3$) E H3$ shares for free. hese H3$ shares will dil#te the

basic *5S.

-#mber of shares 5ro+t after ta&asic 3$ 1$H$=il#tive eect H3$ -o eect

3H3$ 1$H$

asic *5S in H1 E 1$H$ B 3$ E H.6=il#ted *5S in H1 E 1$H$ B 3H3$ E H.H,

→ Contingently iss#able shares:' hese are ordinary shares iss#ed for little or no cash when another party satis+es

performance related conditions %e.g. pro+t target is met) rather mere passing of time.' hese shares can be a part of consideration for ac7#isitions or iss#ed to senior stas.' S#ch shares need to be incl#ded in the dil#ted *5S calc#lation if and only if the conditions

are met' If m#ltiple performance related criteria e&ists then dil#ted eect e&ists when all

performance related criteria are met.' his sho#ld be incl#ded from the beginning of the period$ or$ if later$ from the date of the

contingent agreement.

*mployee share option

Uesting conditions: Stay with the company 5erformance related

=il#tive eect e&ists from: @rant date 2hen performance criteria are

met

→ If shares are partly paid %i.e. less than shares mar(et val#e is paid):' he e7#ivalent n#mber of f#lly paid shares m#st be established to the e&tent that partly

paid shares are entitled to participate in dividends d#ring the period and the e7#ivalent

f#ll n#mber is incl#ded in the basic *5S calc#lation.' o the e&tent that partly paid shares are not entitled to participate in dividends d#ring the

period they are treated as the e7#ivalent of warrants or options in the calc#lation of dil#ted

*5S.

→ Dil$ted losses% when loss per share wo#ld be higher if potential shares were in iss#e.

→ Post reportin' date iss$es% ' on#s iss#e$ share splits and share consolidations after the year end b#t before the

+nancial statements are a#thorised for iss#e$ the n#mber of shares in the *5S calc#lation

is adD#sted for the period D#st ended and prior periods presented.



.eceivables factorin'

%"elevant acco#nting standard: I!"S , !inancial instr#ments$ para >.H.>'>.H.,)

• .eceivables factorin'% Companies sometimes need cash before c#stomers pay their acco#nt

balances. In s#ch sit#ations$ the company may choose to sell acco#nts receivable to another

company that specialiWes in collections. his process is called factoring$ and the company thatp#rchases acco#nts receivable is often called a /factor.

• Factorin' )ith reco$rse%

' he seller retains the ris( of any #nder'collection of receivables by the /factor. If the /factor

fails to collect any amo#nt of receivables then the seller reimb#rses that #ncollected amo#nt

to the factor.

' Acco#nting:i. 2hen the seller receives money from factor$ the do#ble entry is: =" S!5: an($ C" S!5:

;iabilityii. Interest charged by /factor to the seller: =" IBS: !inance cost$ C" S!5: an(iii. Amo#nt received by /factor from /"eceivables: =" S!5: ;iability$ C": S!5: "eceivablesiv. Any remaining receivables amo#nt reimb#rsed by the seller: =" S!5: ;iability$ C": S!5:

an(

• Factorin' )itho$t reco$rse%

' he seller transfers ris( associated with collection of receivables to the /factor. If the /factor

fails to collect any amo#nt of receivables$ the seller does -0 reimb#rse that amo#nt.

' Acco#nting:i. Amo#nt received by the seller from /factor: =" S!5: an($ C": "eceivablesii. Any cash commission charged by the /factor: =" IBS: !inance cost$ C" S!5: an(iii. If /factor charge commission by paying a lower amo#nt of "eceivables the seller: ="

S!5: an($ =" IBS: !inance cost: amo#nt #nder'received by seller$ C" S!5: "eceivables

• *&ercise 7#estion:

0n 1 0ctober HF$ Nedders signed a receivables factoring agreement with a company !ab !actors.

Nedders trade receivables are to be split into three gro#ps$ as follows.

@ro#p A receivables will not be factored or administered by !ab !actors #nder the agreement$ b#t

instead will be collected as #s#al by Nedders.

@ro#p receivables are to be factored and collected by !ab !actors on a /with reco#rse basis.



!ab !actors will charge a 1M per month +nance charge on the balance o#tstanding at the beginning of

the month. Nedders will reimb#rse in f#ll any individ#al balance o#tstanding after three months.

@ro#p C receivables will be factored and collected by !ab !actors /witho#t reco#rse !ab !actors will

pay Nedders ,3M of the boo( val#e of the debtors.

Nedders has a policy of ma(ing a receivables allowance of HM of a trade receivables balance when it

becomes three months old.

he receivables gro#ps have been analysed as follows:

.e($ired%

!or the acco#nts of Nedders$ calc#late the +nance costs and receivables allowance for each gro#p of

trade receivables for the period 1 0ctober P >1 =ecember HF and show the +nancial position val#es

for those trade receivables as at >1 =ecember HF.

Sol$tion%

@ro#p A: -o factoring

y >1 =ecember HF$ 8M %>MG>MGHM) of the receivables collected by Nedders. So$ "eceivables

allowance of HM to be recognised on remaining HM receivables balance.

L >1 0ctober HF:

=" S!5: an( %1$H3$ F >M) >?3$

C" S!5: "eceivables >?3$

%>M of receivables collected by Nedders. So$ decrease in receivables)

L > -ovember HF:

=" S!5: an( %1$H3$ F >M) >?3$

C" S!5: "eceivables >?3$

%!#rther >M of receivables collected by Nedders. So$ decrease in receivables)

L >1 =ecember HF:

=" S!5: an( %1$H3$ F HM) H3$

C" S!5: "eceivables H3$

%!#rther HM of receivables collected by Nedders. So$ decrease in receivables)

=" IBS: *&pense: Increase in receivables allowance

%%1$H3$ F HM) F HM) 3$

C" S!5: "eceivables: Allowance for receivables 3$

%"eceivables allowance of HM recognised on remaining HM receivables balance.

his is provision for do#btf#l debts and presented as decrease in receivables in S!5.)



So$ @ro#p A receivables balance to be presented in S!5 as at >1 =ecember HF: %%1$H3$ '

>?3$ ' >?3$ ' H3$) ' 3$) E H$.

@ro#p : !actoring with reco#rse"is( associated with any #nder'collection of receivables is retained with Nedders. So$ the amo#nt

received by Nedders from !ab !actors in advance shall be treated as a loan in Nedders acco#nt.

L 1 0ctober HF:=" S!5: an(

1$3$

C" S!5: ;iability1$3$%1$3$ received from !ab !actors by Nedders so$ increase in liability)

L >1 0ctober HF:=" IBS: !inance cost %1$3$ F 1M)

13$C" S!5: an(

13$%Interest charged by !ab !actors on o#tstanding balance at month beginning)

=" S!5: ;iability %1$3$ F 6M)

4$C" S!5: "eceivables

4$%6M of receivables collected by !ab !actors. So$ decrease in receivables and liability)

L > -ovember HF:=" IBS: !inance cost %1$3$'4$) F 1M)

,$C" S!5: an(

,$%Interest charged by !ab !actors on o#tstanding balance at month beginning)

=" S!5: ;iability %1$3$ F >M)

63$C" S!5: "eceivables

63$

%!#rther >M of receivables collected by !ab !actors. So$ decrease in receivables and liability)

L >1 =ecember HF:

=" IBS: !inance cost %1$3$'4$'63$) F 1M)

6$3

C" S!5: an(

6$3

%Interest charged by !ab !actors on o#tstanding balance at month beginning)



=" S!5: ;iability %1$3$ F HM)

>$C" S!5: "eceivables

>$%!#rther HM of receivables collected by !ab !actors. So$ decrease in receivables and liability)

=" S!5: ;iability %1$3$'4$'63$'>$)

13$=" S!5: an(

13$

%"eceivables balance #ncollected by !ab !actors reimb#rsed by Nedders to !ab !actors.So$ decrease in liability. -ow$ Nedders is responsible in collecting the remaining receivables

balance$ not !ab !actors.)

=" IBS: *&pense: Increase in receivables allowance%%13$ F HM)

>$C" S!5: "eceivables: Allowance for receivables

>$%"eceivables allowance of HM recognised on remaining 13$ receivables balance.

his is provision for do#btf#l debts and presented as decrease in receivables in S!5.)

So$ @ro#p receivables balance to be presented in S!5 as at >1 =ecember HF: %%1$3$ '

4$ ' 63$ ' >$) ' >$) E 1H$. And$ +nance cost charged in IBS: %13$ G

,$ G 6$3 E H8$3.

@ro#p : !actoring witho#t reco#rse"is( associated with any #nder'collection of receivables is transferred to !ab !actors. So$ receivables

balance shall be derecognised %i.e. removed from S!5) at the point of cash received from !ab !actors.

Any commission charged by !ab !actors %may be by #nder'payment of receivables balance to Nedders

or cash) shall be recognised as !inance cost.

L 1 0ctober HF:=" S!5: an( %H$$ F ,3M) 1$,$=" IBS: !inance cost: !actors commission %H$$ F 3M) 1$C" S!5: "eceivables %decrease in receivables) H$$

here is no need for recognising any allowance for receivables on >1 =ecember HF$ since all the

receivables balance derecognised on 1 0ctober HF. Nedders transferred the ris( of any #nder'

collection to !ab !actors that is$ Nedders has no more right on receivables balance.

%Shortc#t answer is in the boo(T Chec( \'33'Nedders of 55 7#estion ban(.)



IAS 1! #vents after reportin' period

• *vents after the reporting period are split into:

• he c$t4oJ date for the consideration of events after the reporting period is the date on which the

+nancial statements are a#thorised for iss#e.

' -ormally the +nancial statements are a#thorised by the directors before being iss#ed to the

shareholders for approval.

' 2here a s#pervisory board is made #p wholly of non'e&ec#tive directors$ the +nancial

statements will +rst be a#thorised by the e&ec#tive directors for iss#e to that s#pervisory

AdB$stin' events: are events that provide

evidence of conditions that e&isted at the

reporting date$ and the +nancial statements

sho#ld be adD#sted to re9ect them. *&amples

incl#de:

' Settlement of a co#rt case that con+rmsthat the entity had an obligation at the

reporting date.' *vidence that an asset was impaired at the

reporting date %e.g. ban(r#ptcy of a

c#stomer).' !inalisations of prices for assets sold or

p#rchased before year end.' he discovery of fra#d or errors that show

that the +nancial statements are misstated

' An adD#stment to the disclosed *5S %as par

IAS >>) for transactions where the n#mber

of shares altered witho#t an increase in

reso#rces %e.g. bon#s iss#e$ share split or

on4adB$stin' events: are events that are

indicative of conditions that arose after the

reporting date. =isclos#re sho#ld be made in

the +nancial statements where the o#tcome of

a nonadD#sting event wo#ld in9#ence the

economic decisions made by #sers of the

+nancial statements.

' A maDor b#siness combination after the

reporting date %I!"S > or the disposing of a

maDor s#bsidiary).' Anno#ncement of plan to discontin#e an

operation' aDor p#rchases and disposals of assets' Classi+cation of assets as held for sale' =estr#ction of assets$ for e&ample by +re or

9ood' aDor ordinary share transactions %#nless

capitalisation or bon#s iss#e)

' =ecline in mar(et val#e of investments



board for its approval. he relevant c#t'o date is the date on which the +nancial statements

are a#thorised for iss#e to the s#pervisory board.

' he date on which the +nancial statements were a#thorised for iss#e sho#ld be disclosed.

• If a si'ni2cant event occ$rs after the a$thorisation of the +nancial statements b#t before the

ann#al report is p#blished$ then the entity is not re7#ired to apply the re7#irements of IAS 1.

' Rowever$ if the event was so material that it aects the entitys b#siness and operations inthe f#t#re$ the entity may wish to disc#ss the event in the narrative section at the front of the

Ann#al "eview b#t o#tside of the +nancial statements themselves.

• #($ity dividend %i.e. dividend to ordinary and irredeemable non'c#m#lative preference shares)

sho#ld only be recognised as a liability where they have been declared before the reporting date$

as this is the date on which the entity has an obligation.' 2here e7#ity dividends are declared after the reporting date$ this fact sho#ld be disclosed b#t

no liability recognised at the reporting date.

• here the 'oin'4concern basis is clearly not appropriate$ /brea('#p basis sho#ld be

adopted.' he /brea('#p meas#res the assets at their recoverable amo#nt in a non trading environment$

and a provision is recognised for f#t#re costs that will be inc#rred to /brea('#p the b#siness.

Important de2nitions

• Asset%A reso#rce controlled by an entity as a res#lt of past events and from which f#t#re economic

bene+ts are e&pected to 9ow to the entity. [Concept#al !ramewor(: 6.6a]

• Eiability%A present obligation of the entity arising from past events$ the settlement of which is e&pected to

res#lt in an o#t9ow from the entity of reso#rces embodying economic bene+ts. [Concept#al

!ramewor(: 6.6b]

• #($ity% he resid#al interest in the assets of the entity after ded#cting all its liabilities. [Concept#al

!ramewor(: 6.6c]

• Income%Increases in economic bene+ts d#ring the acco#nting period in the form of in9ows or

enhancements of assets or decrease of liabilities that res#lt in increases in e7#ity$ other than those

relating to contrib#tions from e7#ity participants. [Concept#al !ramewor(: 6.H3a]

• #,penses%=ecrease in economic bene+ts d#ring the acco#nting period in the form of o#t9ow or depletions of

assets or inc#rrences of liabilities that res#lt in decrease in e7#ity$ other than those relating to

distrib#tions to e7#ity participants. [Concept#al !ramewor(: 6.H3b]

•

Ei($idity% he availability of s#Vcient f#nds to meet deposit withdrawals and other short'term +nancial

commitments as they fall d#e.

• Solvency% he availability of cash over the longer term to meet +nancial commitments as they fall d#e.

• ?nderlyin' ass$mptions in preparin' 2nancial statements%' Accr$als basis% he eects of transactions and other events are recognised when they occ#r

%and not as cash or its e7#ivalent is received or paid) and they are recorded in the acco#nting



records and reported in the +nancial statements of the periods to which they relate.

[Concept#al !ramewor(: 01?]

' 8oin' concern: he entity is normally viewed as a going concern$ that is$ as contin#ing in

operation for the foreseeable f#t#re. It is ass#med that the entity has neither the intention nor

the necessity of li7#idation or of c#rtailing materially the scale of its operations. [Concept#al

!ramewor(: 6.1]

• -ateriality%Information is material if its omissions or misstatements co#ld in9#ence the economic decisions of

#sers ta(en on the basis of the +nancial statements. [Concept#al !ramewor(: \C11]

• S$bstance over form% he principle that transactions and other events are acco#nted for and presented in accordance

with their s#bstance and economic reality and not merely their legal form.

• K$alitative characteristics% he attrib#tes which ma(e the information provided in +nancial statements #sef#l to the #sers.

[Concept#al !ramewor(: \C1,]' Comparability ' imeliness %"elevance)

' Ueri+ability %"eliability) ' <nderstandability

Documents

IAS 1 Presentation of Financial Statements.docx