CORPORATE REPORTING
P2 SHORT NOTES
References:
1. Ms. C. Menon notes on Corporate Reporting
2. Open Tuition ACCA P2 J17 Notes
Muhammad Hazmizal Abd. Halil | ACCA |June 2017
Table of Content
CONTENT
PAGE
Consolidated Statement of Financial Position ……………………………………………………………………………....….……….
Consolidated Statement of Profit or Loss and Other Comprehensive Income ….……………………………….……...
Consolidated Statement of Retained Earnings ……………………………………………………………………………………………
Consolidated Statement of Cash Flow (IAS 7) ……………………………………….……………………………………………….....
Changes in Group Structure ……………………………………………………………………………………………………………………….
Group Reconstruction ………………………………………………………………………………………………………………………………...
Answering Case Study Guide ………………………………………………………………………………………………………………………
1
3
5
6
9
13
14
IAS 1
IAS 2
IAS 8
IAS 10
IAS 12
IAS 16
IAS 17
IAS 19
IAS 20
IAS 21
IAS 23
IAS 24
IAS 27
IAS 28
IAS 32
IAS 33
IAS 34
IAS 36
IAS 37
IAS 38
IAS 40
IAS 41
IFRS 2
IFRS 3
IFRS 5
IFRS 7
IFRS 8
IFRS 9
IFRS 10
IFRS 11
IFRS 12
IFRS 13
IFRS 15
IFRS (SME)
15
16
17
18
18
20
21
22
24
25
26
27
29
30
32
33
33
34
37
38
39
40
41
42
45
46
47
48
52
54
56
57
58
59
Presentation of Financial Statements …………………………………………………………………………….
Inventories …………………………………………………………………………………………………………………….
Accounting Policies, Changes in Accounting Estimates and Errors ………………………………
Events after the Reporting Period ………………………………………………………………………………….
Income Taxes …………………………………………………………………………………………………………………
Property, Plant and Equipment ……………………………………………………………………………………..
Leases …………………………………………………………………………………………………………………………….
Employee Benefits ………………………………………………………………………………………………………….
Accounting for Government Grant and Disclosure of Government Assistance …………….
The Effects of Changes in Foreign Exchange Rates ……………………………………………………….
Borrowing Costs …………………………………………………………………………………………………………….
Related Party Disclosures ………………………………………………………………………………………………
Separate Financial Statement ………………………………………………………………………………………..
Investment in Associates and Joint Ventures ………………………………………………………………..
Financial Instruments: Presentation ……………………………………………………………………………..
Earnings Per Share …………………………………………………………………………………………………………
Interim Financial Reporting ………………………………………………………………………………………….
Impairment of Assets …………………………………………………………………………………………………….
Provisions, Contingent Liabilities and Contingent Assets …………………………………………….
Intangible Assets ……………………………………………………………………………………………………………
Investment Property ………………………………………………………………………………………………………
Agriculture …………………………………………………………………………………………………………………….
Share-based Payment …………………………………………………………………………………………………….
Business Combination ……………………………………………………………………………………………………
Non-Current Assets Held for Sale and Discontinued Operations …………………………………
Financial Instruments: Disclosures ……………………………………………………………………………….
Operating Segments ………………………………………………………………………………………………………
Financial Instruments ……………………………………………………………………………………………………
Consolidated Financial Statements ……………………………………………………………………………….
Joint Arrangements ……………………………………………………………………………………………………….
Disclosure of Interest in Other Entities …………………………………………………………………………
Fair Value Measurement ……………………………………………………………………………………………….
Revenue from Contracts with Customers ……………………………………………………………………..
IFRS for Small and Medium Sized Entities ……………………………………………………………………
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
A.
STEP IN EXAM
1.
Read the requirement and identify the statement to be prepared
•
Cumulative (DOA  DOR)
•
Any subsidiaries adjustment  Net Asset Table
•
Identify all dates (all dates are important)
•
Establish Group Structure
➢ Illustrate Group Structure Diagram (for vertical and mixed group)
I.
Percentage of Holding (%)
II.
Cost of Investment
III.
Date of Acquisition (DOA)
IV.
Amount in Reserves and total Net Asset at DOA
2.
Create worksheet:
(a) Consolidated Statement of Financial Position
(b) Net Asset table for each subsidiary
(c) Calculation of Goodwill
(d) Calculation of Impairment on Goodwill (if any)
(e) Calculation of Non-Controlling Interest
(f) Calculation of Retained Earnings of Parent (CRE)
(g) Calculation of Other Component of Equity (COCEq)
(h) Workings for Additional Adjustment
3.
Transfer information from the Group Structure Diagram
4.
Transfer information from the question paper
•
Assets – Line by Line
•
Equity – Column by column: Parents
OSC
(a)
RE
(f)
SP
(a)
RS
(g)
•
Liabilities – Line by Line
Subsidiary 1
(b)
(b)
(b)
(b)
Subsidiary 2
(b)
(b)
(b)
(b)
Sub-Subsidiary
(b)
(b)
(b)
(b)
Assoc.
irrelevant
(b)
irrelevant
irrelevant
5.
Work on Additional Adjustment of Group includes all subsidiaries adjustment. (Ignore Parent individual related
adjustment)
6.
Close the first subsidiary NA table and calculate Goodwill, Impairment on Goodwill, NCIn and straightway transfer
the related figure to CSOFP (a)
7.
Close the second subsidiary NA table and calculate Goodwill, Impairment on Goodwill, NCIn and straightway
transfer the related figure to CSOFP (a)
8.
Work on Parent individual related adjustment
9.
Close CRE and COCEq account and transfer the related figure to CSOFP (a)
10. Balance off the CSOFP
Hazmizal Halil
P2 Short Notes | 1
B.
FORMAT
(a) CSOFP
H Group
Consolidated Statement of Financial Position for the year ended 31st December X1
‘000
‘000
NON-CURRENT ASSETS
Property, Plant and Equipment
Goodwill
Other Intangible Assets
Financial Assets
X
X
X
X
XX
CURRENT ASSETS
Inventories
Trade and Other Receivables
Financial Assets
Cash and Cash Equivalents
Non-current Asset Held for Sale
X
X
X
X
X
XX
ASSETS
TOTAL ASSETS
XXX
Financed by;
EQUITY AND LIABILITIES
EQUITY
Ordinary Shares Capital
Retained Earnings
Other Component of Equity
X
X
X
XX
NON-CURRENT LIABILITIES
Long term borrowing
Finance lease liability
Deferred tax liability
Retirement benefit liability
X
X
X
X
XX
CURRENT LIABILITIES
Trade and Other Payables
Dividends Payable
Tax Payable
Finance lease liability
X
X
X
X
XX
TOTAL EQUITY AND LIBILITIES
XXX
(b) Net Asset Table
NET ASSETS ITEM
OSC
DOR
DOA
POST RE
POST OCEq
RE
OCEq
FV Adjustment
Additional depreciation
Cancel of depreciation
TOTAL
Post for calculation of:
Hazmizal Halil
XX
XX
XX
XX
NCIn
GW
CRE
COCEq
P2 Short Notes | 2
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
A.
STEP IN EXAM
1.
Read the requirement and identify the statement to be prepared.
•
Current year figure only  Rule 1
•
Post period figure only  Rule 2
•
Subsidiaries adjustment  Rule 7
•
Identify Group Structure (Subsidiary or Associates)
•
Identify all dates (all dates are important)
2.
Create worksheet:
(a) Consolidated Statement of Profit or Loss and Other Comprehensive Income
(b) Workings for Additional Adjustment
3.
Transfer information from the question paper
Line by line
Subsidiaries – 100% consol
Associates – H% single line equity method
4.
Work on Additional Adjustment
5.
Close CSOPL and transfer the related figure to total comprehensive income in CSORE
Hazmizal Halil
P2 Short Notes | 3
B.
FORMAT
(a) CSOPL
Rule 1:
Rule 2:
Only Current Year items are recorded
Only Post Period results of sub are consolidated (pro-rata results of sub if acquired during the year)
𝑥
12
H Group
Consolidated Statement of Profit or Loss and Other Comprehensive Income as at
31st December X1
‘000
Revenue
XXX
(-) Cost of sales
(XX)
GROSS PROFIT
XX
(+) Other Income
(-) Distribution expenses
(-) Administration expenses
(-) Other expenses
(-) Cash Flow hedges ineffective portion
(-) Finance costs (net: Interest expenses – Interest income)
(+) Share of Associates / Joint Venture Profit (W1)
PROFIT BEFORE TAX
X
(X)
(X)
(X)
(X)
(X)
X
XX
(-) Income Tax expense
(-) Loss for the year from Discontinued Operations
PROFIT FOR THE YEAR
(X)
(X)
A
OTHER COMPREHENSIVE INCOME (Net of tax)
Rule 6: Maintain
column by column
for each subsidiary
H S1 S2 SS
IAS 16 X X X X
IAS 19 X X X X
IAS 21 X X X X
IFRS 9
X X X X
E F G H
Rule 7: NCIn Profit
(Sub PAT +/(-) Adj. of
Sub in current year)
X NCIn % of the Sub
S1 PAT X NCIn % = I
S2 PAT X NCIn % = J
SS PAT X NCIn % = K
L
#Refer to the
question paper for
the Sub PAT figure.
Items that will NOT BE reclassified to Profit or Loss
IAS 16: Gain / (Loss) on Property Revaluation
IAS 19: Re-measurement Gain / (Loss) on Defined Benefit Schemed Plans
IFRS 9: Fair value changes Gain / (Loss) on Investment in Equity
X
D
X
Items that will MAY BE reclassified to Profit or Loss
IAS 21: Exchange different on translating foreign operations
IAS 39/IFRS 9: Cash Flow hedges effective portion and reclassify adjust.
Share of Associate/Joint Venture Other Comprehensive Income (W2)
OTHER COMPREHENSIVE INCOME FOR THE YEAR
X
X
X
B
TOTAL COMPREHENSIVE INCOME FOR THE YEAR
C
Profit attributable to:
Owners of the parent
Non-Controlling Interest
Total Comprehensive Income attributable to:
Owners of the parent
Non-Controlling Interest
Rule 8: Total Comprehensive Income of NCIn
Rule 7 + (Rule 6 X NCIn %)
S1 = I
+ ( F X NCIn %)
=X
S2 = J
+ ( G X NCIn %)
=X
SS = K
+ ( H X NCIn %)
=X
N
(A+B)
Rule 3: Full Consol
H 100% + S 100%
(-) Inter-Co. trans.
Rule 4: Income Tax expense
Full Consol: H 100% + S 100%
No Inter-Co. Adj.
Rule 5: Disc. Operations
Only if FULL DISPOSAL of sub
during the year
Rule 6: Full Consol
H 100% + S 100%
+/(-) Adj. from stds.
M+D = Total Comprehensive
Income in CSORE
(B/F)
(B/F)
M
L
A
O
N
C
Workings:
1. Share of Assoc. /JV profit:
𝑥
PAT Assoc. /JV X
12
X
X H%
Rule 2
(-) Goodwill
impaired in current
(X)
year (Rule 1)
X
2. Share of Assoc. /JV OCI:
Assoc. /JV OCI net of tax
X H%
:
Hazmizal Halil
P2 Short Notes | 4
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
A.
STEP IN EXAM
1.
Read the requirement and identify the statement to be prepared.
•
Previous year figure only  Rule 12
•
Post period figure only  Rule 2
•
Attributable to Parents  Rule 9
•
Identify all dates (all dates are important)
2.
Create worksheet:
(a) Consolidated Statement of Retained Earnings
(b) Workings for Opening Balance  Rule 11
3.
Close CSORE.
B.
FORMAT
(a) CSORE
Rule 12: Only Previous Year items are recorded
H Group
Consolidated Statement of Retained Earnings as at 31st December X1
Attributable to Owners of the Parent
Balance as at 1st Jan X1 (Opening)
(Rule 11)
Changes in Equity
Owner Movements:
Dividend paid and proposed
Non-Owner Movements:
Total Comprehensive Income for the year
Balance as at 31st Dec X1 (Closing)
‘000
W1
(X)
(from CSOPL)
Rule 9: Attributable
to Owners of the
Parent (H only)
Rule 10: Dividend
paid and proposed by
H only
M+D
XX
Rule 11
WORKING 1
Retained Earnings brought forward (H only)
(+) Sub Post Acquisition Retained Earnings X H%
(S RE b/f – pre-reserves) only if acq in prev yrs
Hazmizal Halil
‘000
X
X
Adjustment relating to previous years:
Goodwill Impairment
Additional Depreciation
Cancellation of Depreciation
URP on Opening Inventory (previous year inventory)
(X)
(X)
X
(X)
Balance as at 1st Jan X1 (Opening)
XX
P2 Short Notes | 5
CONSOLIDATED STATEMENT OF CASH FLOW
A.
STEP IN EXAM
1.
Read the requirement and identify the statement to be prepared.
•
Annotate the basic format of cash flow statement
Operating Activities
Investing Activities
Residual Category
NCA/Subs/Assoc/JV/IIE/IID
Financing Activities
Equity + Debt
2.
Read the Adjustment and prepare the double entry.
3.
Start with SOFP to decide each of the line item:
•
Line item with adjustment  Open up “T” account
•
Line item with no adjustment  Throw in CSOCF (i.e. Working Capital Changes items – CA and CL)
•
For unsure treatment of a line item, better to open up “T” account.
4.
Start with Profit Before Tax in SOPL.
•
Work Backward to eliminate:
I.
Finance cost
II.
Non-Cash items
5.
Analyse all line item in SOPL and OCI, decide on the line item that has “T” account.
6.
Create worksheet:
(a) Consolidated Statement of Cash Flow
(b) Note A – Acquisition / Disposal of Subsidiaries / Associate (net) of cash acquired / paid
(as part of the working if it is not required by the examiner)
(c) Note B – Analysis of Changes in Cash and Cash Equivalent
(d) “T” account (relevant)
7.
Settle step 3 then step 4 then step 5 in order and lastly adjust for step 2.
Hazmizal Halil
P2 Short Notes | 6
B.
FORMAT
(a) CSOCF
H Group
Consolidated Statement of Cash Flow for the year ended 31st December X1
‘000
CASH FLOW FROM OPERATING ACTIVITIES
Profit before tax
XX
Adjustment:
i) Finance Cost in SOPL
(+) Interest payables
X
(-) Interest receivables
(X)
ii) Non-Cash Items to SOPL
(+) Depreciation / Amortization / Impairment loss
X
(+/-) Increase / Decrease in provision
X / (X)
(-/+) Exchange Gain / Loss
(X) / X
(-) Share of Associate profit / Joint Venture income
(X)
(-/+) Gain / Loss on disposal of PPE
(X) / X
(-/+) Gain / Loss on disposal of subsidiaries
(X) / X
Operating profit before working capital changes
XX
Working Capital Changes: (Closing bal. – Opening bal.)
Inventories changes
X
Trade Receivables changes
X
Trade Payables changes
X
Cash Generated from Operating
XX
(+/-) Residual Items
X / (X)
(-) Income Tax paid
(X)
(-) Interest paid
(X)
Net cash flow from / (used) in OPERATING ACTIVITIES
CASH FLOW FROM INVESTING ACTIVITIES
Acquisition / Disposal of Subsidiaries
Acquisition / Disposal of Associate / Joint Venture
Purchase of new Non-Current Assets
Disposal of Non-Current Assets (Sales Value)
Dividend Received from IIE
Interest Received from IID
Dividend Received from Associate
Income Received from Joint Venture
Net cash flow from / (used) in INVESTING ACTIVITIES
CASH FLOW FROM FINANCING ACTIVITIES
New issuance of OSC / PSC / Debentures / Long term Loan
Repayment of Redeemable PSC / Debentures / Long term Loan
Dividend paid:
By Parent
To Non-Controlling Interest
Finance Lease Instalment paid
Net cash flow from / (used) in INVESTING ACTIVITIES
Net increase / (decrease) in Cash and Cash Equivalent
(+) Cash and Cash Equivalent at beginning of the year
Cash and Cash Equivalent at the end of the year
Hazmizal Halil
‘000
XX
(X) / X
(X) / X
(X)
X
X
X
X
X
XX
X
(X)
(X)
(X)
(X)
XX
XX
XX
XX
P2 Short Notes | 7
(b) Note A – Acquisition / Disposal of Subsidiaries / Associate (net) of cash acquired / paid
i)
Acquisition (3 Rules)
‘000
Assets Acquired:
PPE
Inventory
Receivables
Cash Acquired
Liabilities Acquired:
Payables
Tax
Net Asset Acquired at Fair Value
(-) Non-Controlling Interest (FV/NA Basis)
Group shares of Net Asset Acquired
Goodwill (balancing figure)
Fair Value of Consideration Paid
Settled by:
OSC
SP
Cash Paid
Total Cash Paid
Total Cash Acquired
Net Cash Paid
ii)
X
X
X
A
(X)
(X)
XX
(X)
XX
X
FV
Rule 1: Eliminate all net asset balance form closing balance
(-)
(-)
(-)
Except cash
(-)
(-)
(-)
Note: for fair value basis, NCI should include GW
(-)
X
X
B
FV
Rule 2: Account for the Cost of Investment
DR Investment in Subsidiaries X
CR OSC
X
CR SP
X
CR Cash
X
B
(A)
XX
Rule 3: Post in Investing Activities
Disposal (3 Rules)
‘000
Assets Disposed:
PPE
Inventory
Receivables
Cash transfer out
Liabilities Disposed:
Payables
Tax
Fair Value of Net Asset at DOD
(+) Goodwill not impaired at DOD
(-) Non-Controlling Interest (FV/NA Basis) at DOD
Net Assets belong to Parent that are disposed
Gain on disposal (balancing figure)
Sales Value
Settled by:
Total Cash Received
Total Cash Transfer out
Net Cash Received
X
X
X
A
(X)
(X)
XX
X
(X)
XX
X
B
B
(A)
XX
Rule 1: Add Back all net asset balance form closing balance
(+)
(+)
(+)
Except cash
(+)
(+)
(+)
(+)
Note: for fair value basis, NCI should include GW
Post in Operating Activities under non-cash items adjustment
Rule 2: Account for the Cash Received
DR Cash
X
CR Disposal
X
Rule 3: Post in Investing Activities
(c) Note B – Analysis of changes in Cash and Cash Equivalent
Cash in Hand
Cash at Bank
Bank Overdraft
Short Term Investment (maturity less than 3 months)
Short Term Loan (maturity less than 3 months)
Hazmizal Halil
Closing Balance
X
X
(X)
X
(X)
XX
Opening Balance
X
X
(X)
X
(X)
XX
P2 Short Notes | 8
CHANGES IN GROUP STRUCTURE
PIECEMEAL ACQUISITION
*It is important to identify and classify the question into the first piece information and second piece information.
SITUATION 1: CROSS 50% FOR THE 1ST TIME
TRADE INVESTMENT / ASSOCIATE  SUBSIDIARIES
1.
Prepare Special Net Asset table.
1st Piece
30%
Post
RE
OCI
+ 30%
2nd Piece
60%
Post
RE
DOR
OCI
OSC
RE
*If the 1st piece is a trade investment, the post between 1st piece and 2nd piece is irrelevant.
2.
Calculate Gain or Loss on previously held investment.
FV of previously held investment (now)
(-) CV of previously held investment
Gain or loss recognised in CPL
3.
4.
FV
Cost/ Eq M/ FVTPL/ FVTOCI
X
(X)
X
Calculate Goodwill at DOA (the date the entity cross 50% for the first time – 2nd Piece).
FV of consideration paid (now)
FV of previously held investment (now)
Non-controlling interest (FV/NA Basis)
(-) FV of net asset acquired
Goodwill
X
X
X
(X)
X
FV Basis
(-) NA Basis
Goodwill attributable to non-controlling interest
X
(X)
X
Follow the basic instruction of preparing the required statement.
Hazmizal Halil
P2 Short Notes | 9
SITUATION 2: ALREADY CROSS 50%
SUBSIDIARIES  SUBSIDIARIES
1.
Prepare Special Net Asset table.
2.
Calculate Goodwill at DOA (the date the entity cross 50% for the first time – 1st Piece).
3.
FV of consideration paid (now)
Non-controlling interest (FV/NA Basis)
(-) FV of net asset acquired
Goodwill
X
X
(X)
X
FV Basis
(-) NA Basis
Goodwill attributable to non-controlling interest
X
(X)
X
Do an equity adjustment.
FV of consideration paid
(-) Decrease in non-controlling interest
Equity Adjustment
Calculation of decrease in NCIn
NA Basis
FV of NA of 2nd Piece X NCIn % bought by the parent
4.
X
(X)
X
X
FV Basis
FV of NA of 2nd Piece X NCIn % bought by the parent
(+) GW attributable to NCIn bought by the parent
X
X
X
Follow the basic instruction of preparing the required statement.
SITUATION 3: DO NOT CROSS 50%
TRADE INVESTMENT  ASSOCIATE
1.
Prepare Special Net Asset table.
2.
Calculate Gain or Loss on previously held investment.
FV of previously held investment (now)
(-) CV of previously held investment
Gain or loss recognised in CPL
3.
FV
Cost/ Eq M/ FVTPL/ FVTOCI
Calculate FV of investment in Associate using Equity Method
FV of consideration paid / Cost of investment of newly acquired interest
FV of previously held investment (now)
Share of Associate Profit
Share of Associate OCI
(-) Impairment loss
Investment in Associate (CSOFP)
4.
X
(X)
X
X
X
X
X
(X)
X
Follow the basic instruction of preparing the required statement.
Hazmizal Halil
P2 Short Notes | 10
DISPOSAL OF SHARES
*It is important to identify and classify the question into Acquisition accounting and Disposal Accounting and establish the
group structure before, disposal and after disposal.
BEFORE
DISPOSAL
AFTER
H%
NCIn%
Months
Method
CSOPL
CSOCI
CSOFP
SITUATION 1: LOSS OF CONTROL (TARGET: Calculation of Gain/ Loss on disposal for consol purposes)
1.
Calculation of Gain/Loss on disposal for consol purposes.
Step 1: Calculate Goodwill at DOA
Step 4: Calculate Gain/Loss in holder books (tax
purposes or reversal adjustment only)
FV of consideration paid
X
Non-controlling interest (FV/NA Basis)
X
Sales Value
X
(-) FV of net asset acquired
(X)
(-) Proportionate cost of investment
(X)
Gross Gain/Loss
X
Goodwill
A
(-) Tax (Gross Gain X Tax %)
(T)
Net Gain/Loss
X
FV Basis
X
(-) NA Basis
(X)
Goodwill attributable to NCIn
C
Goodwill
(-) Imp.
GW not imp.
Total
A
100%
D
H%
B/F
H%
E
NCIn%
C
NCIn%
F
.
Step 2: Calculate FV of Net Asset up to DOD
Step 5: Calculate Gain/Loss on disposal for consol
purposes
DOD
X
X
X
G
OSC
RE
FV adjustment
RECOGNISED
Consideration Received
FV of Retained interest
Reclassification adjustment
.
Step 3: Calculate non-controlling interest at DOD
NA Basis
FV of NA at DOD
(Step 2) X NCIn %
H
FV Basis
FV of NA at DOD
(Step 2) X NCIn %
(+) Goodwill not
impaired
DERECOGNISED
(2) NA at DOD (full)
(1) GW not impaired (full)
(-) (3) NCIn at DOD
X
F
X
G
D
(H)
(X)
Gross Gain/Loss on Disposal
(-) Tax on disposal paid by the parent
Net Gain on Disposal
H
.
2.
X
X
X
X
(T)
X
Follow the basic instruction of preparing the required statement.
Calculate Equity Method. Check whether DOD=DOR or DOD ≠ DOR
DOD = DOR
DOD ≠ DOR
Investment in Associate (CSOFP) = FV of retained interest
Calculate Equity Method at DOR
3.
FV of retained interest
Share of Associate Profit
Share of Associate OCI
(-) Impairment loss
Investment in Associate (CSOFP)
X
X
X
(X)
X
.
Hazmizal Halil
P2 Short Notes | 11
SITUATION 2: NO LOSS OF CONTROL (TARGET: Calculation of Equity Adjustment)
1. Calculation of Equity Adjustment.
Step 1: Calculate Goodwill at DOA
FV of consideration paid
Non-controlling interest (FV/NA Basis)
(-) FV of net asset acquired
Goodwill
(-) Impairment
Goodwill not impaired
Step 4: Equity Adjustment
X
X
(X)
X
(X)
X
X
(X)
X
Calculation of increase in NCIn
NA Basis
FV of NA at DOD X % int. that parent sell to NCIn
.
Step 2: Calculate FV of Net Asset up to DOD
OSC
RE
FV adjustment
Sales Value
(-) Increase in non-controlling interest
Equity Adjustment
DOD
X
X
X
X
FV Basis
FV of NA at DOD X % int. that parent sell to NCIn
(+) Total GW not imp. X % int. that parent sell to NCIn
X
X
X
X
.
Step 3: Calculate Gain/Loss in holder books (tax
purposes or reversal adjustment only)
Sales Value
(-) Proportionate cost of investment
Gross Gain/Loss
(-) Tax (Gross Gain X Tax %)
Net Gain/Loss
X
(X)
X
(T)
X
.
2.
Follow the basic instruction of preparing the required statement.
Hazmizal Halil
P2 Short Notes | 12
GROUP RECONSTRUCTION - Not examinable in JUNE 2017 sitting
SITUATION 1: FORMATION OF NEW PARENT – Merger Accounting
SAME
Ultimate Shareholder
A
↓
B
*Entitled to full merger relief
*Only due to share for share exchange
Ultimate Shareholder
NP
↓
A
↓
B
DR Investment in A
CR OSC
X
X
Investment is account at cost (nominal
value) thus no share premium is
recognised due to full merger relief
SITUATION 2: VH – SUBS MOVES UP – Acquisition Accounting
BY WAY OF DISTRIBUTING DIVIDEND
BY WAY OF CASH
A
A Recepient
↓
B
B
C
↓
Distributor
C
1ST Step: Move all IIE to RE
2nd Step: Distribute Dividend
A
A Buyer
↓
B
B
C
↓
Seller
C
1ST Step: Revalue to its Fair Value
2nd Step: Sell
SITUATION 3: SUBS MOVE ALONG
A
A
Seller B
↓
D
C
B
C Buyer
↓
D
SITUATION 4: HV – SUBS MOVES DOWN
BY WAY OF CASH
BY SHARE FOR SHARE EXCHANGE
A
B
A
↓
B
↓
C
C
A
B
C
*Entitled to partial merger relief
A
↓
B
↓
C
(A must sell C to B)
SITUATION 5: THE CREATION OF A SHELL CO.
A
A
B
DR Asset
DR Goodwill
CR Liabilities
CR Payables
Book of Transferee
Hazmizal Halil
C
X
X
X
X
B
↓
Business B + Business C
C
↓
Shell Co.
DR Liabilities
X
DR Receivables
X
CR Asset
X
CR Profit or Loss X
Book of Transferor
DR Retained Earnings
CR Investment in C
X
X
Book of Investor
P2 Short Notes | 13
ANSWERING CASE STUDY GUIDE
SECTION B: QUESTION 2 AND 3 (25 MARKS)
1.
Annotation Time = 3 Min
Step 1: Read the requirement and identify the 6 types of question.
•
Opinion based question  In your opinion… easy question  Standards requirement – no calculation
•
Question testing on Scope  Confusing – decide on which standards to apply
•
Principles and Accounting Treatment Question  Few marks for application, more marks on knowledge
•
Advisory Question on validity  what was done – in compliance or not in compliance – correction entry
•
Topical based question  the whole case study is based on one standards
•
Effect to Financial Statement question
Clue:
•
If the Q ask for Principles/Accounting Treatment  Recognition Criteria and Measurement Criteria
•
If the Q ask for Validity  In compliance or not in compliance (Identify what was done)
•
If Q wanted an Advice  Need to provide a conclusion
Step 2: refer 1st paragraph and identify the nature of industry. (Specialised industry are affected by the standards)
Step 3: Read through the paragraph and identify the reporting entity, dates, and relevant standards. Cross out the
3rd party point of view and focus on the reporting entity point of view.
2.
Writing Time = 45 Min
Step 1: read the paragraph in detail to identify the width (no. of issue raised by the examiner) of the question and
Identify what was done by the entity or will be done that affected Financial Statement.
 1 issue raised by the examiner = 1 marks.
Step 2: Plan the answer accordingly based on the marks given. Decide on the depth of the answer.
Step 3: Begin writing.
3.
Writing the answer:
KNOWLEDGE MARKS
APPLICATION MARKS
THE DEPTH
THE WIDTH: no. of issue raised by the examiner
STANDARDS:
No., title of the standard and scope of the standard
RULES/PRINCIPLES:
I.
Definition
II.
Recognition Criteria – Initial Recognition (When to recognise to SOFP – A/L/E)
III.
Measurement Criteria
Initial Measurement at DOA (at Cost)
Subsequent Measurement at DOR (Model)
•
Amortised Cost Model
•
Revaluation Model
•
Fair Value Model
▪
Fair Value through Profit or Loss
▪
Fair Value through Other Comprehensive Income
IV.
Derecognition
APPLICATION:
In this case…
•
Calculation
•
Justification
•
Correct Treatment
•
Was Done Should be Done  Correction Entry
EFFECT TO FINANCIAL STATEMENT:
SOFP
- NCA | CA
- NCL | CL
- EQUITY
SOPL and OCI
- COS
- ADMIN and DIST
- UNUSUAL ITEM
SOCE
CONCLUSION:
Advise what should be done
Hazmizal Halil
P2 Short Notes | 14
IAS 1: PRESENTATION OF FINANCIAL STATEMENTS
1.
Statement of Comprehensive Income and Other Comprehensive Income (CURRENT YEAR)
INCOME
EXPENSE
- Increase in asset
- Reduction in asset
- Reduction in liability
- Increase in liability
OTHER COMPREHENSIVE INCOME
- IAS 16 Fair value Gain and Loss upon revaluation
- IAS 19 Re-measurement Gain and Loss from Defined Benefit Plan
- IAS 21 Foreign exchange Gain and Loss
- IAS 39 Cash Flow Hedges (has been moved to IFRS 9)
- IFRS 9 Financial Instrument – Investment in Equity Shares (FVTOCI)
2.
Upon Disposal
*subject for reclassification adjustment to SOPL
Statement of Changes in Equity (CUMMULATIVE)
Cumulative balance of – Owners movement
– Non-Owners movement (IAS 16 | IAS 19 | IAS 21 | IAS 39 | IFRS 9)
– Others cumulated amount will be transfer to RE upon disposal (within SOCE statement)
– Must be presented net of tax
3.
Statement of Financial Position (CLOSING BALANCE)
ASSET
(a) A resource controlled by the entity
(b) As a result of past events and from which
(c) Future economic benefits are expected to flow to the entity
NCA
An entity shall
classify
all
other assets as
non-current
LIABILITY
(a) Present obligation of an entity (can be in form of
contractual or constructive obligation)
(b) Results in transfer of economic benefits from the entity (in
cash or assets or any other manner)
(c) As a result of past events or transactions
NCL
CL
An entity shall An entity shall classify a liability as current
classify all other when:
liabilities as non- (a) It is expected to settle the liability in
current.
its normal operating cycle
(b) it is holds the liability primarily for the
purpose of trading
(c) it is due to be settled within twelve
months after the reporting period
(d) the entity does not have an
unconditional
right
to
defer
settlement of the liability for at least
twelve months after the reporting
period.
CA
An entity shall classify an asset as current when:
(a) It is expected to be realised in, or is intends
to sell or consume it in, its normal
operating cycle
(b) it is holds the asset primarily for the
purpose of trading
(c) it is expected to realise the asset within
twelve months after the reporting period
(d) the asset is cash or cash equivalent unless
the asset is restricted from being exchanged
or used to settle a liability for at least twelve
months after the reporting period.
EQUITY
- Residual value after deducting all liabilities from the entity’s total assets (A-L)
NCA can be further classified into
NCA
Biological Assets
Hazmizal Halil
Tangible Assets
Intangible Assets
Investments
P2 Short Notes | 15
IAS 2: INVENTORIES
MEASUREMENT CRITERIA
- Inventories should be measured at the lower of cost and net realisable value.
- Any write-down of the inventories should be recognised as an expense in SOPL in the period which the write-down
occurs.
- Any reversal should be recognised in the SOPL in the period in which the reversal occurs.
COST
Allowable costs as per IAS2:
The cost of inventories shall comprise all of the cost of
purchase, cost of conversion, and other cost incurred in
bringing the inventories to their present location and
condition (Materials, Labour, Manufacturing overheads based on normal output)
Cost of conversion include a systematic allocation of fixed
and variable production overheads incurred in converting
materials into finished goods.
However, cost of inventories exclude costs of storing the
finished goods and selling them, which should be expensed
to SOPL.
Allowable in determination of cost:
- FIFO (First in, First out)
Assumption: the quantities in hand represent the
latest purchases or production
- Weighted Average Cost
Total cost divided by the total number purchased /
produced. The unit cost is recalculated on a periodic
basis or as each additional shipment is received.
NET REALISABLE VALUE
Net realisable value (NRV) is the estimated selling price
(ESP) in the ordinary course of business less estimated
costs of completion (ECTC), and estimated costs necessary
to make the sale (ECTS).
NRV = ESP – ECTC – ECTS
NRV is based on the contracted price rather than ordinary
selling price if the inventory is held to meet a firm contract.
The selling price in the specific market in which the
inventory is intended to be sold are used to calculate NRV.
Specific Market = do not look at principal / most
advantageous market price.
- Fair value is not used as the basis for measuring
inventory. Thus, IFRS 13 (Measurement of Fair Value)
excluded IAS 2 from its scope.
- This is due to the fair value takes account of prices in the
market as a whole, whereas, as noted above, the
estimated selling price in the ordinary course of business
takes account of prices in the particular market in which
the inventory is intended to be sold.
Not permitted:
- LIFO (Last in, First out)
# Consistency: An entity should use the same cost formula
for all inventories having a similar nature and use to the
entity.
Hazmizal Halil
P2 Short Notes | 16
TYPE
CHANGES
DEFINITION
IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS
CHANGES IN ACCOUNTING POLICIES
CHANGES IN ACCOUNTING ESTIMATES
CORRECTION OF ERRORS
The
specific
principles,
bases,
conventions, rules and practices
applied by an entity in preparing and
presenting the financial statements.
An adjustment of the carrying value of
an asset or liabilities (provision) or
amount of periodic consumption
(depreciation) of an asset that results
from the assessment of the present
status of, and expected future
economic benefit and obligation
associate with asset and liabilities.
Only due to:
• Follow treatment given in New
IFRS; required by the standard or
interpretation, or statute, or;
• Apply a new policy that gives more
relevant and reliable information:
Voluntary change
Change in Accounting Estimates results
from new information or new
development and accordingly, are not
correction of errors
Prior period errors are omission from,
and misstatements in the entity’s
financial statements for one or more
prior periods arising from failure to use
or misuse of reliable information that:
i) Was available when financial
statements for those periods were
authorised for issued, and;
ii) Could reasonably be expected to
have been obtained and taken into
account in those financial statements.
Accounting errors (omissions and
misstatements) include:
• Errors in applying accounting
policies
• Oversights
• Fraud and the effects of fraud
Material
errors
are
corrected
retrospectively, the same as for a
change in accounting policy.
• Potential current period errors
Adjusted in current year Fin. Stat.
• Material errors that are not
discovered until a subsequent
period
Adjusted in opening balance of RE in
SOCE and opening balance of the
respective A/L/E
Change in Accounting Policies has
occurred if its affect the:
• recognition criteria
• measurement basis
• method of presentation
SELECTION
•
ADJUSTMENT
CONSISTENCY
•
•
•
•
•
In the absence of a standard, the
management should use their
judgement that are relevant and
reliable. If it is not possible, the
policies should be selected based
on the hierarchy as follow:
- Follow any Similar Standards
- Guideline from Framework
- Most recent pronouncements of
Other Standard-Setting Bodies
An entity shall select and apply its
Accounting Policies consistently for
similar transaction, unless a
standard
or
interpretation
specifically required or permits
categorisation. (year to year basis,
similar items)
Retrospectively
Affect the previous year Financial
Statement
Restated balance need to be
calculated
Adjusted in CSOCIE
Hazmizal Halil
•
•
•
•
Prospectively
Adjustment only affect current year
and future estimation in future
period
Did not affect the previous year
Financial Statement
No adjustment in CSOCIE
•
•
•
•
Retrospectively
Affect the previous year Financial
Statement
Restated balance need to be
calculated
Adjusted in CSOCIE
P2 Short Notes | 17
IAS 10: EVENTS AFTER THE REPORTING PERIOD
Events after the reporting period are those events:
•
Favourable and unfavourable
•
That occur between the end of the reporting period
•
The date when the financial statements are authorised for issue
ADJUSTING EVENTS
Information that provide evidence to a condition that
existed at the reporting date (at the end of the reporting
period):
• Settlement of outstanding court case
• Bankruptcy of a customer
• Sale of inventory at below cost
• Evidence concerning the NRV of inventory
• The discovery of fraud or errors that show that the
financial statements are incorrect
• Determination of purchase/sale price of PPE
Requires adjustment in the financial statement by:
• Adjusted to amount recognised in the financial
statement
• Recognition of items previously not recognised
NON-ADJUSTING EVENTS
Information that are indicative of conditions that arose
after the reporting period. Doesn’t reflect conditions that
existed at the reporting date:
• Fall in value of investments
• Losses of NCA or inventory as a result of catastrophe
like fire / flood
• Entity declared dividend after year end
• Major purchase of assets
• Announcing a discontinued operation
• Announcing a restructuring
Requires additional disclosures only
IAS 12: INCOME TAXES
7 ITEMS OF INCOME TAXES:
Income Tax Expense in SOPL comprise of:
-1- Corporate Tax of current year
-2- Over or under provision for Current Tax of previous year
-3- Transfer to / (from) deferred tax
-6- Income tax relating to component of Other Comprehensive Income
-4- Closing balance of Corporate Tax (Current Liabilities)
-5- Closing balance of Deferred tax (Non-Current Liabilities)
-7- All items in Other Component of Equity which presented net of tax
I.
SOPL
SOCI
Item 1 = 4
Item 3 ≠ 5
Items 1,2,4  Current Tax
Items 3,5  Deferred Tax
SOFP
SOCIE
Calculation of Closing Balance of Deferred Tax
Procedure to do an exam question for deferred tax; Read the question and split all information into Accounting
Rules (Accounting Based) and Tax Rules (Tax Based).
1.
For Asset and Liabilities recognised in the SOFP
▪
identify any temporary difference (TD)
▪
If there is no difference between AB and TB or the difference is permanent, the item should
be ignored and it will not affect the calculation of Closing Balance of Deferred Tax
2.
Look out for unrecognised Asset and Liabilities that may still have a tax based. (Example; fully depreciate
asset, Research expenditure, Share-settled based payment – will not appear in the financial statement,
Accounting Based = 0, but still taxable under tax rules)
3.
Calculate the temporary difference
Line Items
Assets
Liabilities
Accounting Based
XX
XX
Tax Based
XX
XX
X Tax Rate
-5- Closing Balance of Deferred Tax
Hazmizal Halil
Taxable TD
Deductible TD
AB > TB
AB < TB
AB < TB
AB > TB
TTD
DTD
25%
25%
DTL
DTA
In SOFP: Offset Rule
DTL – Non-Current Liabilities
DTA – Non-Current Assets
P2 Short Notes | 18
II.
Movement of Deferred Tax
Calculate: -3- Transfer to / (from) Deferred Tax
Opening Balance of Deferred Tax
XX
Adjustment:
Changes in tax rates
Other temporary difference
Compare to:
Closing balance of Deferred Tax
Difference
-6- Charged to OCI
-7- Charged to Equity
-3- Charged to Profit or Loss
III.
XX
XX
A
B
C
Difference
Increase in provision: Expense - transfer to Deferred Tax
Decrease in provision: Income - transfer (from) Deferred Tax
IAS 16/19/21/29/IFRS9
IAS 8/32/21/IFRS 2
Balancing Figure
Recognition Criteria of Deferred Tax Assets and Deferred Tax Liabilities
RECOGNITION CRITERIA
DEFERRED TAX ASSETS
DTA will arise due to
•
Deductible Temporary Difference (DTD)
•
Carried forward of unused tax losses
•
Carried forward of unused tax credit
A DTA should be recognised to the extent that it is highly
probable that sufficient taxable profit which will be
available which the Deferred Tax Asset can be utilised.
HIGHLY PROBABLE TEST:
1. entity has sufficient Taxable Temporary Difference
2. entity has the taxable profit before the carried forward
of unused tax losses or unused tax credits expired
3. entity has identified the reason for the loss and it is
unlikely to recur
4. entity has the opportunity for tax planning that will
create taxable profit in which the unused tax losses or
unused tax credit can be utilised
If the above criteria are not met, the deferred tax asset is
not recognised.
Exception: DTA will not be recognised for Bargain Purchase
that is not taxable for tax purposes
IV.
DEFERRED TAX LIABILITIES
DTL will arise due to
•
Taxable Temporary Difference (TTD)
Exception: except to the extent that the deferred tax
liability arises from:
a. The initial recognition of goodwill; or
b. The initial recognition of an asset or liability in a
transaction which:
i. is not a business combination; and
ii. at the time of the transaction, affects neither
accounting profit nor taxable profit (tax loss)
the deferred tax liabilities are not recognised.
Measurement Criteria
Current tax rates on
the Current Tax
Current tax rates on
the Deferred Tax
Tax rates are
announced in
advance
Different tax bracket
Future tax
consequences
(expectation 
decision to buy / sell)
Hazmizal Halil
MEASUREMENT CRITERIA
shall be measured at the amount expected to be paid to or recovered from the taxation
authorities, using the tax rates and tax rules/laws that have been enacted or substantively
enacted by the end of the reporting period
shall be measured at the tax rates that are expected to apply to the period when the asset is
realised or the liability is settled, based on the tax rates and tax rules/laws that have been
enacted or substantively enacted by the end of the reporting period
usually measured using the tax rates and tax rules/laws that have been enacted. However, in
some jurisdictions, announcements of tax rates and tax rules/laws by the government have
substantive effect of actual enactment, which may follow the announcement by a period of
several months. In these circumstances, tax assets and liabilities are measure using the
announced tax rate and tax rules/laws.
When different tax rates apply to different levels of taxable income, deferred tax assets and
liabilities are measured using the average rates that are expected to apply to the taxable profit
or tax loss of the periods in which the temporary differences are expected to reverse.
The measurement of deferred tax liabilities and deferred tax assets shall reflect the tax
consequences that would follow from the manner in which the entity expects, at the end of the
reporting period, to recover or settle the carrying amount of its assets and liabilities.
The recoverable amount is based on IAS 36 – Impairment of Assets
P2 Short Notes | 19
IAS 16: PROPERTY, PLANT AND EQUIPMENT
I.
Definition
Property, Plant and
Equipment
Estimated Residual
Value
Estimated Salvage
Value
Estimated Useful
Life
II.
DEFINITION
PPE are tangible items that are held for use in the production or supply of goods or services
(manufacturing), for rental to others (rent to employees), or for administrative purposes and are
expected to be used during more than one period.
The residual value of an asset is the estimated amount that an entity would currently obtain from
disposal of the asset, after deducting the estimated costs of disposal, if the asset were already
of the age and in the condition expected at the end of its useful life.
The salvage value is the estimated amount that an entity would currently obtain from the sale of
the scrap of the asset at the end of the asset useful life. For example; metal scrap.
Useful life is the period over which an asset is expected to be available for use by an entity or the
number of production or similar units expected to be obtained from the asset by an entity.
Recognition Criteria
RECOGNITION CRITERIA
The cost of an item of PPE shall be recognised as an asset if and only if:
•
It is probable that future economic benefits associated with that item will flow to the entity; and
•
The cost of the item can be reliably measured
The recognition of costs in the carrying amount of an item of PPE ceases when the item is in the location and condition
necessary for it to be capable of operating in the manner intended by the management. Therefore, the costs incurred in
using or redeploying an item are not included in the carrying amount of that item and should be expensed off in the
SOPL. Example of the costs mentioned;
a) Costs incurred while an item are capable of operating in the manner intended by the management has yet to
be brought into use or is operated at less than full capacity;
b) Initial operating losses such as those incurred while demand for the item’s output builds up;
c) Costs of relocating or reorganizing part or all an entity’s operations.
III.
Measurement Criteria
MEASUREMENT CRITERIA
SUBSEQUENT MEASUREMENT
•
• Cost Model
In SOFP: Historical Cost – Accumulated Depreciation – Accumulated
IAS 16 Purchase Price + Direct Cost +
Impairment Loss = Net Book Value
IAS 37 Provision of Dismantling Cost
In SOPL: Charge depreciation per annum (Straight Line Method/
Reducing Balance Method/ Sum of Year Method)
Direct cost:
• Revaluation Model
• Costs of employee benefits
Consider fair value changes of the PPE and need to bring up the
historical cost to its revalued amount.
• Costs of site preparation
In SOFP: Revalued Amount – Subsequent Depreciation – Subsequent
• Initial delivery and handling costs
Impairment Loss = Net Book Value
• Costs of testing
In SOPL: Charge depreciation based on the new depreciation amount
• Professional fees
of the revalued amount of PPE. (using the remaining EUL)
Not a Direct Cost:
Any gain on fair value changes is sent to OCI and transfer to revaluation
• Cost of opening a new facility
• Cost of introducing new product or services reserves in the equity. If the asset were impaired or there is loss on
• Costs of conducting business in a new revaluation, the loss incurred should be set off against the revaluation
reserves balance first before it can be charged to SOPL.
location
INTIAL MEASUREMENT
Capitalised amount:
•
IV.
SUBSEQUENT EXPENDITURE
To be Expensed off in the SOPL
To be Capitalised as the cost of the asset in SOFP
Expenditure incurred for the day-to-day • Expenditure incurred to enhance the earning capacity and meet
maintain and usage of the Non-Current
the recognition criteria.
Asset termed as ‘repairs and maintenance’ • The carrying value of assets that require certain parts to be
to maintain the operating capacity.
replaced in regular intervals will be derecognised in accordance
with the derecognition provisions of this standard and the new
costs will be recognised as Non-Current Asset in the SOFP.
Derecognition - The asset should be derecognised from the SOFP when the asset is sold, dispose or if there are
no further future economic benefits that are probable to flow in the entity.
Hazmizal Halil
P2 Short Notes | 20
IAS 17: LEASES
A lease is an agreement whereby the lessor (owns the asset) conveys to the lessee (user of the asset) the right to use an
asset for an agreed period of time in return for a series of payments.
OWNERSHIP
RISK AND REWARDS
FINANCE LEASE
Remain with the lessor
Transferred to the lessee
OPERATING LEASE
Remain with the lessor
Remain with the lessor
RECOGNITION CRITERIA
The lease should be recognised as a finance lease when:
•
Lease term represents the major part of assets economic life
•
PV of minimum lease payments represents substantially all of the asset’s fair value
•
Ownership passes at end of the lease term
•
Peppercorn rental in secondary period
•
Option to purchase asset at below MV at end of lease
•
Leased asset is specialised in nature; which the lessee can use the lease asset without major modification
OPERATING LEASES
Operating lease – lessee accounting
•
Operating lease rentals are recognised over the lease term on a straight-line basis.
•
The amount charged to profit and loss is calculated as:
Total payments made over the life of the lease (rentals, non-refundable deposits etc.)
Lease term
•
If the lease payments are not made evenly, for example if there is an initial deposit or lease holiday, then an accrual
or prepayment will be recorded on the statement of financial position.
Operating lease – lessor accounting
•
Operating lease income receipts are recognised as income through profit or loss on a straight-line basis.
•
Depreciation on the asset continues over its useful life.
FINANCE LEASES
Finance lease – lessee accounting
•
Record acquisition of asset and finance lease payable (@ lower of PVMLP and FV)
•
Depreciate asset (over shorter of lease term and useful life)
•
Record finance lease payments (advance or arrears)
•
Record interest on finance lease payable (actuarial % - ‘rate implicit in the lease’)
Finance lease – lessor accounting
•
Derecognise asset and record a receivable (@ net investment in the lease”)
•
Record finance lease receipts as a reduction in the receivable
•
Record interest income on the receivable
Net investment in the lease = Gross investment in the lease discounted at the implicit rate of interest
Gross investment in the lease = Minimum lease payments receivable plus any unguaranteed residual value
SALE AND LEASEBACK
The legal form of the transaction is always a sale of an asset, followed by the signing of a lease agreement to rent it back
again. Legally the asset is derecognised upon sale and then the rent on the asset under the terms of the lease agreement is
charged to the income statement. The economic substance depends upon the type of lease agreement involved.
Sale and Operating Leaseback
The economic substance for an operating lease is no ownership. Therefore, the asset is derecognised and the rental charges
go to the income statement. In other words, legal form and economic substance are the same. With a sale and operating
leaseback, there is a need to be careful with the proceeds and the market value. If they are the same then there’s no problem.
If they are different the treatment will vary.
Sale and Finance Leaseback
The economic substance of a finance lease is ownership so there is no derecognition of the asset. It simply gets reclassified
from owned to leased, and the proceeds received are separately recognised as a long-term loan repayable over the lease
period.
Hazmizal Halil
P2 Short Notes | 21
IAS 19: EMPLOYEE BENEFITS
Basic Rule: A liability should be recognised when an employee has provided a service in exchange for benefits to be received
by the employee at some time in the future and an expense should be recognised when the enterprise enjoys the economic
benefit from a service provided by an employee regardless of when the employee received or will receive the benefits from
providing the services.
SHORT-TERM EMPLOYEE BENEFITS
OTHER LONG-TERM EMPLOYEE BENEFIT
• Benefit provided to employee (other than termination • All benefits other than short-term employee benefits,
benefits) that are expected to be settled wholly before
post-employment benefits and termination benefits.
twelve (12) months after the end of the annual reporting • Example: long-service leave or sabbatical leave, jubilee
period in which the employees render the related
or other long-service benefits, long-term disability
service. Example:
benefits and etc. (more than one year – need to
• Basic: wages, salaries and social security contributions
calculate the present value by applying discount factor
and unwind it to SOPL)
• Leave: paid annual leave and paid sick leave
- Accumulating: can be carried forward to the next
TERMINATION BENEFIT
period; charged as an expense for the unused leave. • Benefits provided in exchange for termination of an
- Non-Accumulating: entitlement of absences does
employee’s employment as a result of either:
not accumulate; no liability nor expenses are recog.
(a) An entity’s decision to terminate an employee’s
• Others: profit-sharing and bonuses and non-monetary
employment before the normal retirement date: or
benefits (such as medical care, insurance and etc.)
(b) An employee’s decision to accept an offer of
Entity should recognise only when they have a present
benefits in exchange for the termination of
legal or constructive obligation to make such payment
employment.
and a reliable estimate of the obligation can be made. • An entity shall recognise a liability and expense at the
• Unpaid short-term employee benefits as at the end of an
earlier of the following dates:
accounting period should be recognised as an accrued
- When the entity can no longer withdraw the offer; and
expense and any payment in advance is recognised as
- When the entity recognises costs for a restructuring
prepayment. (matching concept)
POST-EMPLOYMENT BENEFIT
• Benefits plans that are either formal or informal arrangements which the entity provide to employee (other than
termination benefits and short -term employee benefits) that are payable after the completion of employment.
DEFINED BENEFIT SCHEME
DEFINED CONTRIBUTION SCHEME
• DBS are post-employment benefit plans other than DCS. • DCS are post-employment benefits plan under which an
entity pays fixed contribution into a separate entity (a
• Clue of DBS:
fund) and will have no legal or constructive obligation
I. A fixed benefit paid based on last drawn salary by
to pay further contributions if the fund does not hold
the employer to the employee.
sufficient assets to pay all employee benefits relating to
II. The plan is complicated which require the service of
employee service in the current and prior periods.
Actuary to estimate the closing fair value of Plan
Asset and closing present value of Defined Benefit • Clue of DCS:
Obligation at the end of each financial year.
I. A fixed contribution based on basic salary is placed
III. Contribution place in the fund fluctuate and not
to the fund.
fixed. The risk is bear by the employer to ensure
II. The plan is simple with no complication which do
there is sufficient enough Plan Asset to settled the
not need the service of Actuary.
Defined Benefit Obligation.
III. Once employer puts in contribution, there is no
IV. Guarantee given by the employer. Employer
longer obligation bear by the employer. Thus,
promised to pay the obligation in the uncertain
employee will bear the risk.
future.
IV. No guarantee given by the employer.
V. The benefit paid to the employee depends on how
• Contribution will increase or decrease based on
much is available to the credit of the employee
Actuary advise upon estimating. (contribution is in a
account.
deficit position if the closing balance is a NCL – Increase
contribution, contribution is in a surplus position if the • Employee contribution is part of salary, it is already
closing balance is a NCA – decrease contribution/ take a
charged to SOPL under short-term employee benefits.
contribution holiday/ refund).
• Accounting Treatment:
• Rule: IAS19 will not permit contribution to be recognised
DR DCS / EPF
X
as expense in DBS as it will distort the calculation of
CR Cash/Accruals (CL)
X
profit. Instead standard identifies and splits the scheme
DR SOPL
X
into smaller components and for each component,
CR DCS/EPF
X
accounting is based on matching concept. Please refer
DR SOPL (12mnths Contr. due) X
next page for the component mention earlier.
CR CASH (Contr. Paid)
X
CR CL (Outstanding Contr.)
X
Hazmizal Halil
P2 Short Notes | 22
Calculation for Defined Benefit Scheme
I. Reconciliation of PV of Defined Benefit Obligation
$
$
X2
X1
Op. PV of DBO
XX
XX
Int. Exp. on Op. PV
X
X
CSC
X
X
PSC
X
X
Benefit Paid
X
X
Settlement due
XX
XX
Re-measurement G/L
X
X
Cl. PV of DBO
XX
XX
II. Reconciliation of FV of Plan Asset
III. SOPL / SOCI
SOPL
Service Cost:
CSC
PSC
Settlement G/L
Finance Cost
IV. SOFP
(Int. Exp. – Int. Inc.)
SOCI
Re-measurement G/L:
DBO
PA
Effect of Asset Ceiling Test
$
X2
X
X
$
X1
X
X
X
XX
X
XX
$
X2
X
X
X
XX
$
X1
X
X
X
XX
Op. FV of PA
Int. Inc. on Op. PA
Contribution
Benefit Paid
Settlement
$
X2
XX
X
X
X
X
$
X1
XX
X
X
X
X
Re-measurement G/L
Cl. FV of PA
XX
X
XX
XX
X
XX
$
X2
$
X1
X
(X)
X
X
(X)
X
Offset:
Cl PV of DBO
(-) Cl FV of PA
(NCA) / NCL
SOCI
Contribution
Bal c/d (NCL)
Pension A/C
X
Bal b/d (NCL)
B/F
SOPL
X
X
X
XX
XX
Effect of Asset Ceiling
If a company has an overall pension asset on its statement of financial position then the asset can only be recognised up to
the level of the asset ceiling. The asset ceiling is the present value of any future cash savings of not having to contribute to
the scheme as it is in surplus. If the asset needs to be reduced to the asset ceiling limit then the reduction in the asset is
shown as an expense in profit or loss.
Hazmizal Halil
P2 Short Notes | 23
IAS 20: ACCOUNTING FOR GOVERNMENT GRANT AND DISCLOSURE OF GOVERNMENT ASSISTANCE
I.
Definition
Government Assistance
Government Grants
II.
DEFINITION
Action by the government designed to provide an economic benefit specific to an
enterprise or range of enterprise qualifying under certain criteria. Government assistance
for the purpose of the standard does not include benefits provided only indirectly through
action affecting general trading conditions, such as the provision of infrastructure in
development areas or the imposition of trading constraint on competitors.
Government grants are assistance by government in the form of transfers of resources to
an enterprise in return for past or future compliance with certain condition relating to the
operating activities of the enterprise. They exclude those forms of government assistance
which cannot be distinguished from the normal trading transactions of the enterprise.
Recognition Criteria
RECOGNITION CRITERIA
Government grants, including non-monetary grants at fair value, should not be recognized until there is a reasonable
assurance that:
a) The enterprise will comply with the conditions attaching to them; and
b) The grants will be received,
Once a government grant is recognised, any related contingency would be treated in accordance with IAS 37.
Government grants should be recognised as income over the periods necessary to match them with the related costs
which they are intended to compensate, on a systematic basis (matching concept). They should not be credited directly
to shareholders’ interest.
III.
Accounting Treatment
ACCOUNTIMG TREATMENT
RECOGNISED IN SOCI
REVENUE BASED GRANT (RBG)
IAS 20 requires that government grants be RBG is recognised as income in
recognised in the SOCI, and not credited directly period it is received. In most
to shareholders’ interest. A government grant cases the periods over which an
that relates to an extended period of time should enterprise recognizes the costs
be recognised in income over the periods or expenses related to a
necessary to match it with the related costs which government grant are readily
it is intended to compensate, on a systematic ascertainable and thus grants in
basis; the unamortised amount at the end of each recognition
of
specific
accounting period should be presented in the expenses are recognised as
SOFP either by setting up the grant as deferred income in the same period as
income by deducting the grant from the carrying the relevant expense.
amount if the related asset.
CAPITAL BASED GRANT (CBG)
CBG for depreciable non-current
assets are spread over the life of
the specific non-current asset.
Similarly, grants related to
depreciable assets are usually
recognised as income over the
periods and in the proportion on
those assets is charged or by
setting up the grant as deferred
income or by deducting the
grant from the carrying amount
of the related asset.
Note: If a government grant becomes repayable, it is treated as a change in accounting estimate. The payment is first shown
against any remaining deferred income balance. If the payment exceeds the deferred income balance, then the excess
payment is treated as an expense.
Hazmizal Halil
P2 Short Notes | 24
IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES
I.
Definition
Closing Rate
Exchange Difference
Exchange Rate
Foreign Currency
Functional Currency
Presentation Currency
Spot Exchange Rate
DEFINITION
The spot exchange rate at the balance sheet date
The difference resulting from translating a given no. of units of one currency into another
currency at difference exchange rates
The ratio of exchange for 2 currencies
A currency other than the functional currency of the entity
The currency of the primary economic environment in which the entity operates
The currency in which the financial standards are presented
The exchange rate for immediate delivery
II.
Determination of Functional Currency (need to fulfil all steps)
1st Step: Determine Primary Economic Environment (PEE). Follow the local currency.
2nd Step: Primary indicators – determine on which currency the entity generates cash, expends cash and that
mainly influence labour, material and other costs of providing goods or services.
3rd Step: Secondary indicators – refer to Cash Flow, determine the currency in which receipts from operating are
usually retained and funds from financing activities are generated.
4th Step: For group, determine whether subsidiary is dependent or independent to the parent. If dependent,
follow parent currency.
III.
Individual Co. Stage
(a) Exchange Rate Used
Spot / Specific Rate
Average Rate
Opening Rate / Historical Rate
Closing Rate
The date the transaction occurred
The transaction occurs throughout the year (recurring events)
Beginning of financial year
Date of reporting
(b) Non-monetary items vs. Monetary items
Non-monetary items – prices will fluctuate
Example; NCA and Inventory
Assets
Monetary items – No. of units of currency fixed / constant
Ex; Assets other than NCA and inventory
Liabilities ALL liabilities are monetary items
IV.
If assets carried at HC, it will be
translated ONCE
Generally, no exchange G/L
Translate STAGE BY STAGE until
settled
Exchange G/L are recognised in SOPL
Group Stage
(a) An entity with foreign operations
Dependent subsidiaries, the functional currency will be same as the parents. No translation needed.
Independent subsidiaries, for consol purposes, the functional currency of the subsidiaries need to be
translated to those of the parents by using:
SOPL
Average Rate
SOFP
Closing Rate
(b) Consolidation Purpose
•
Calculation of Goodwill: Goodwill need to be calculated in the subsidiaries functional currency and
translated to those of the parents for consol purposes. The difference of opening rate and closing rate
is recognised as exchange gain or loss.
•
Determination of independency of the subsidiaries
DEPENDENT
Resources are received and controlled by the
parent
Decision on investment come from the parent
Income are send back to the parent
Hazmizal Halil
INDEPENDENT
Resources are control by the subsidiaries entity
Autonomy power to make decision is given
Not necessarily sent back income to the parent
P2 Short Notes | 25
IAS 23: BORROWING COSTS
I.
Objective and Definition
OBJECTIVE
The objective of the standard is to prescribe the accounting
treatment for borrowing costs that are directly
attributable to the acquisition, construction or production
of a qualifying asset which should form a part of the cost
of the asset (Capitalisation of Borrowing Costs). Other
Borrowing Costs are recognised as an expense.
Qualifying Asset is an asset that necessarily takes a
substantial period or time to get ready for its intended use
or sale such as Inventories, Manufacturing Plants, Power
Generation Facilities, Investment Properties and etc.
II.
DEFINITION
Borrowing Costs are interest and other costs that an entity
incurs in connection with the borrowing of funds.
Examples;
•
Interest on bank overdrafts and borrowings,
•
Amortisation of borrowing discount or premium
•
Amortisation of borrowing ancillary costs
•
Finance charges – Finance Leases
•
Exchange difference due to interest of a foreign
currency borrowing
•
Dividends on preferred capital
Recognition Criteria
RECOGNITION CRITERIA
Borrowing Costs is capitalised when it is probable that a future economic benefit will flow in the entity and the cost are
reliably measured. Other Borrowing Costs are recognised as an expense in the period which the entity incurs them.
III.
Measurement Criteria
•
•
•
•
MEASUREMENT CRITERIA
SPECIFIC BORROWINGS
GENERAL BORROWINGS
These are loans that are borrowed for the
•
These are loans borrowed from different sources
construction of a specific qualifying asset. When
carrying different term periods and different
an entity borrows funds specifically for the
interest rates for the construction of a qualifying
purpose of obtaining a particular qualifying
asset or different qualifying assets such that it is
asset, the borrowing cost that are directly relate
not possible to identify which borrowing relates
to that qualifying asset can be readily identified.
to which project. In example; the funds are part
of a general pool, then it is recognised as a
For specific borrowings, the cost is calculated
general borrowing
based on the specific rate of the borrowing to
be capitalised.
•
Amount of borrowing costs eligible for
capitalisation should be determined by applying
Amount of borrowing costs eligible for
the capitalisation rate. The capitalisation rate
capitalisation are the actual borrowing costs
shall be the weighted average of the borrowing
incurred during the period less any investment
costs applicable to the borrowings of the entity
income on the temporary investment of these
that are outstanding during the period, other
borrowings.
than borrowings made specifically for the
Investment income are the income that are
purpose of obtaining a Qualifying Assets.
received from temporarily invested investment
when the funds for the qualifying asset are
Weighted Average rates of interest =
obtain earlier than the construction period.
Interest costs incurred during the year
x100
Total amount of borrowing outstanding at the year end
An Illustration
Loan Period: 1 Jan 20X5 – 31 Dec 20X8 (4 years)
Construction of NCA Period: 1 Jan 20X6 – 31 Dec 20X7 (2 years)
1 Jan 20X5
31 Dec 20X5
1
Period before construction
Expensed off
31 Dec 20X6
2
31 Dec 20X7
3
Construction Period
Capitalised
31 Dec 20X8
4
Period after construction
Expensed off
Borrowing cost is subject to be capitalised only during the period of construction from commencement to the cessation. It
should cease when substantially all the activities necessary to prepare the qualifying assets for its intended use or sale are
completed. Capitalisation of borrowing costs should be suspended during extended period in which the development is
interrupted. All borrowing cost incurred after the cessation of the construction should be expensed off to SOPL. All borrowing
cost to be capitalised should net off any investment income obtain using the fund which are invested in the temporary
investment in the period the entity incurred them.
Hazmizal Halil
P2 Short Notes | 26
IAS 24: RELATED PARTY DISCLOSURES
I.
The need to disclose Related Party Transaction
• A related party relationship could have an effect on the profit or loss and financial position since the related
parties may enter into transactions that unrelated parties would not. (i.e.; SP at cost and not at market value)
• The profit or loss and financial position of an entity may be affected by a related party relationship even if
related party transaction does not occur. The mere existence of the relationship may be sufficient to affect
the transactions of the entity with other parties.
• For these reasons, knowledge of an entity’s transactions¹, outstanding balances², including commitments³,
and relationship with related parties may affect assessments of its operations by user of financial statements,
including assessments of the risk and opportunities⁴ facing the entity.
II.
Who are Related Parties?
I. GROUP
- Control (Direct and Indirect)
- Significant Influence
- Joint Control
Government
Related Entity
Parent of
Reporting Entity
Control
both ways
II. KEY MANAGEMENT PERSONNEL (KMP)
- Plan - Control - Direct - Includes all Directors
Key Management
of the Parent
Mr. A
Fellow Subsidiary
Common
control
Direct
control
Reporting Entity
Significant
Influence
Subsidiary
Joint
control
Key Management
of the Reporting
Entity
Associate
Joint Venture
IV. POST EMPLOYMENTBENEFIT SCHEME (IAS 19)
- Defined Contribution Scheme
- Defined Benefit Scheme
III.
III. CLOSE FAMILY MEMBER OF KMP
- Control
- Significant Influence
- Joint Control
Mrs. A
Definition
Related Party Transaction
Related Party
Key Management Personnel
Hazmizal Halil
DEFINITION
A transfer of resources, services or obligations between related parties, regardless of
whether a price is charged. It is common practice for employee to receive goods or
services at reduced prices or for free. If the employees fall within the definition of KMP,
such transactions are between related parties and the entity need to disclose it.
A person or entity that is related to the reporting entity that is preparing its FS.
• A person or a close member of that person’s family is related to a reporting entity
if the person has control or joint control of the reporting entity, has significant
influence over the reporting entity or is a member of the KMP of the reporting
entity or of a parent of the reporting entity.
• An entity is related to a reporting entity if the entity and the reporting entity are
members of the same group, one entity is an associate or joint venture of the other
entity, both entities are joint ventures of the same third party, one entity is a joint
venture of a third party and the other entity is an associate of that third party, the
entity is a post-employment benefit plan, the entity is controlled or jointly
controlled by a person identified above, or a person identified above has significant
influence over the entity or is a member of the KMP of the entity or a parent of the
entity.
Those persons having authority and responsibility for planning, directing, and
controlling the activities of the entity, directly or indirectly, including any director
whether executive or otherwise of that entity.
P2 Short Notes | 27
Close Member
Those family members who may be expected to influence, or be influenced by, that
person in their dealings with the entity and include:
a) That person’s children and spouse or domestic partner;
b) Children of that person’s spouse or domestic partner; and
c) Dependants of that person or that person’s spouse or domestic partner.
Includes all employee benefits (IAS 19) and share-based payment (IFRS 2)
Compensation
IV.
May or may not be Related Party Transaction
IAS 24 lists the following which are NOT necessarily related parties. They are:
• Two entities simply because they have a director or other member of KMP is common or because a member
of KMP of one entity has significant influence over the other entity.
• Two joint ventures simply because they share joint control of a joint venture.
• (i) providers of finance; (ii) trade unions; (iii) public utilities; and (iv) departments and agencies of a government
that does not control, jointly control or significant influence the reporting entity, simply by virtue of their
normal dealings with an entity even though they may affect the freedom of action of an entity or participate in
its decision-making process.
• A customer, supplier, franchisor, distributor or general agent with whom an entity transacts a significant
volume of business, simply by virtue of the resulting economic independence.
a)
b)
Mr. A (Director)
Mr. B (Director)
Co. A
Co. B
RP
RP
50% Joint Control
50% Joint Control
(Co. A and Co. X are RP)
(Co. B and Co. X are RP)
Co. A
Co. B
Co. X
Issue: Are Co. A and Co. B related? -May or May not be
Issue: Are Co. A and Co. B related? -May or May not be
V.
Disclosure Requirement
I. GROUP
Relationship between a
parent and its subsidiaries
shall
be
disclosed
irrespective of whether
there has been transaction
between them.
(a) name of the parent; and
(b) if different, the ultimate
controlling party
If neither the parent nor the
ultimate controlling party
produces FS for public use,
the name of the next most
senior parent that does so
shall be disclosed.
VI.
II. KMP
An entity shall disclose
KMP compensation in
total and for each of the
following categories:
(a) Short-term EB
(b) Post-employment B
(c) Other long-term B
(d) Termination B
(e) Equity compensation B
Compensation includes
amounts paid on behalf of
a parent of the entity in
respect of the entity.
III. OTHER RELATED PARTIES
Where transactions have
taken place between RPs, the
entity shall disclose the:
(a) Nature of the RP rship
(b) Amt of the transaction
(c) Amt of outstanding bal. & :
(i) their terms and conditions
(ii) nature of the consdn. to be
provided in settlement
(iii) details of any guarantee
given or received
(d) Provisions for doubtful
debts related to the amount
of outstanding balances
(e) Any bad or doubtful debts
due to RPs.
IV. DIFFERENT CATEGORIES
The different categories for
which separate disclosures
are required are identified
as:
(a) the parent;
(b) entities with joint
control
or
significant
influence over the entity;
(c) subsidiaries
(d) associates;
(e) joint ventures in which
the entity is a venture;
(f) KMP of the entity or its
parent; and
(g) other RPs
Similar nature  aggregate
Special Disclosures
A government-related entity is an entity that is controlled, jointly controlled or significant influence by a
government. A reporting entity is exempt from the disclosure commitments with:
(a) A government that has controlled, joint control or significant influence over the reporting entity; and
(b) Another entity that is related party because the same government has control or joint control of, or significant
influence over, both the reporting entity and the other entity.
If a reporting entity applies above exemption, it shall disclose the following about the transaction and related
outstanding balances:
(a) The name of the government and the nature of its relationship with the repowering entity (i.e.; control, joint
control or significant influence)
(b) The following information in sufficient detail to enable users of the entity’s financial statements to understand
the effect of related party transaction; and
i.
The nature and amount of each individual significant transaction; and
ii.
For other transactions that are collectively, but not individually, significant, a qualitative or quantitative
indication of their extent.
Hazmizal Halil
P2 Short Notes | 28
IAS 27: SEPARATE FINANCIAL STATEMENT
I.
Objective and Scope of the standards
OBJECTIVE
The objective of the standard is to prescribe the accounting
and disclosure requirements for investments in
subsidiaries, joint venture and associates when an entity
prepares separate financial statements.
II.
Definition
Consolidated Financial Statements
Separate Financial Statements
III.
SCOPE
This standard shall be applied in accounting for investment
in subsidiaries, joint venture and associate when an entity
elects or is required by local regulations to present
separate financial statements. This standard does not
mandate which entities produce separate financial
statements. It applies when an entity prepares separate
financial statements that comply with IFRS.
DEFINITION
Financial statements of a group in which the assets, liabilities, equity, income,
expenses and cash flows of the parent and its subsidiaries are presented as those
of a single economic entity.
Financial statements that those presented by a parent (i.e.; an investor with
control of a subsidiary) or an investor with joint control of or significant influence
over an investee in which the investments are accounted for at cost or in
accordance with IFRS 9; Financial Instruments.
What are separate Financial Statements
Separate financial statements are those presented by a parent (i.e.; an investor with control of a subsidiary) or an
investor with joint control of or significant influence over an investee in addition to consolidated financial
statements (full consolidation of holding and subsidiary / sub-subsidiary) or in addition to financial statements in
which investments in associates or joint ventures are accounted for using the equity method.
Simple Investment
IIE / IID
Choice of method:
Cost / FV Model
For consol purposes,
need a reversal entry
IFRS 9
Parent
> 50%
Subsidiary
NCI (3rd Party)
Full Consol
IFRS 3 / IFRS 10
Separate Financial Statements
Investor
≥ 20% < 50 %
Associate
Investor / Venturer
= 50 %
Joint Ventures
Other Venturer
Equity Method
IAS 28
Separate financial statements can but are not required to be presented in addition of Consolidate Financial
Statements or where an entity does not have subsidiaries, individual financial statements in which investments in
associates and joint ventures are accounted for using the equity method. Separate financial statement does not
need to be attached to or accompany those consolidated or individual financial statements.
An entity that is exempted in accordance IFRS 10 from consolidation or IAS 28 from applying the equity method
may present separate financial statements as its only financial statements.
IV.
What are not separate Financial Statements
Financial statements in which the equity method is applied are not separate financial statements. Similarly, the
financial statements of an entity do not have a subsidiary, associate or joint venturer’s interest in a joint venture
are not separate financial statements.
V.
Dividend Receivable
An entity shall recognise a dividend from a subsidiary, joint venture or associate in profit or loss in its separate
financial statements when its right to receive the dividend is established.
Hazmizal Halil
P2 Short Notes | 29
IAS 28: INVESTMENT IN ASSOCIATES AND JOINT VENTURES
I.
Objective and Scope
OBJECTIVE
The objective of the standard is to prescribe the accounting
for investments in associates and to set out the
requirements for the application of the equity method
when accounting for investments in associates and joint
venture.
II.
Definition
Associate
Significant Influence
Equity Method
III.
SCOPE
AS 28 applies to all entities that are investors with joint
control of, or significant influence over, an investee
(associate or joint venture). The only financial statements
to which an entity does not apply equity method are
separate financial statements it presents in accordance
with IAS 27; Separate Financial Statements.
DEFINITION
An entity over which the investor has significant influence
The power to participate in the financial and operating policy decisions of the investee but is
not control or joint control of those policies
A method of accounting whereby the investment is initially recognised at cost and adjusted
thereafter for the post-acquisition change in the investor's share of the investee's net assets.
The investor's profit or loss includes its share of the investee's profit or loss and the investor's
other comprehensive income includes its share of the investee's other comprehensive income
Significant Influence
Where an entity holds 20% or more of the voting power (directly or through subsidiaries) on an investee, it will be
presumed the investor has significant influence unless it can be clearly demonstrated that this is not the case. If
the holding is less than 20%, the entity will be presumed not to have significant influence unless such influence can
be clearly demonstrated. A substantial or majority ownership by another investor does not necessarily preclude
an entity from having significant influence.
The existence of significant influence by an entity is usually evidenced in one or more of the following ways:
•
Representation on the board of directors or equivalent governing body of the investee;
•
Participation in the policy-making process, including participation in decisions about dividends or other
distributions;
•
Material transactions between the entity and the investee;
•
Interchange of managerial personnel; or
•
Provision of essential technical information
The existence and effect of potential voting rights that are currently exercisable or convertible, including potential
voting rights held by other entities, are considered when assessing whether an entity has significant influence. In
assessing whether potential voting rights contribute to significant influence, the entity examines all facts and
circumstances that affect potential rights. An entity loses significant influence over an investee when it loses the
power to participate in the financial and operating policy decisions of that investee. The loss of significant influence
can occur with or without a change in absolute or relative ownership levels.
IV.
Equity Method of Accounting
Basic principle. Under the equity method, on initial recognition the investment in an associate or a joint venture is
recognised at cost, and the carrying amount is increased or decreased to recognise the investor's share of the profit
or loss of the investee after the date of acquisition.
Distributions and other adjustments to carrying amount. The investor's share of the investee's profit or loss is
recognised in the investor's profit or loss. Distributions received from an investee reduce the carrying amount of
the investment. Adjustments to the carrying amount may also be necessary for changes in the investor's
proportionate interest in the investee arising from changes in the investee's other comprehensive income (e.g. to
account for changes arising from revaluations of property, plant and equipment and foreign currency translations.)
Potential voting rights. An entity's interest in an associate or a joint venture is determined solely on the basis of
existing ownership interests and, generally, does not reflect the possible exercise or conversion of potential voting
rights and other derivative instruments.
Hazmizal Halil
P2 Short Notes | 30
Classification as non-current asset. An investment in an associate or a joint venture is generally classified as noncurrent asset, unless it is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and
Discontinued Operations.
Equity Method Calculation:
Cost of Investment
+ Share of Associate/Joint Venture profit
+ Share of Associate/Joint Venture OCI
- Impairment
- Dividend Received
+ Long term loan (H to A/JV)
- URP on closing stock (H to A/JV)
Investment in Associate/Joint Venture at year end
V.
X
X
X
(X)
(X)
X
X
X
Goodwill for Associate
An investment is accounted for using the equity method from the date on which it becomes an associate or a joint
venture. On acquisition of the investment, any difference between the cost of the investment and the entity’s
share of the net fair value of the investee’s identifiable assets and liabilities is accounted as follow:
a) Goodwill relating to an associate or a joint venture is included in the carrying amount of the investment.
Amortisation of that goodwill is not permitted.
b) Any excess of the entity’s share of the net fair value of the investee’s identifiable assets and liabilities
over the cost of the investment (gain on bargain purchase) is included as income in the determination
of the entity’s share of the associate or joint venture’s profit or loss in the period in which the investment
is acquired.
Appropriate adjustment to the entity’s share of the associate’s or joint venture’s profit or loss after the acquisition
are made in order to account, for example, for depreciation of depreciable assets based on their fair value at the
acquisition date. Similarly, appropriate adjustments to the entity’s share of the associate’s or joint venture’s profit
or loss after acquisition are made for impairment losses such as goodwill or property, plant and equipment.
VI.
Impairment Test for Associates
Because goodwill that forms part of the carrying amount of an investment in an associate or a joint venture is not
separately recognised, it is not tested for impairment separately by applying the requirement for impairment
testing goodwill in IAS 36; Impairment of Assets. Instead, the entire carrying amount of the investment is tested
for impairment in accordance with IAS 36 as a single asset, by comparing its recoverable amount with its carrying
amount. An impairment loss recognised in those circumstances is not allocated to any asset, including goodwill,
that forms part of the carrying amount of the investment in the associate or joint venture. Accordingly, any reversal
of that impairment loss in the recognised in accordance with IAS 36 to the extent that the recoverable amount of
the investment subsequently increases.
In determining the value in use of the investment, an entity estimates:
a) Its share of the present value of the estimated future cash flow expected to be generated by the
associate or joint venture, including the cash flow from the operations of the associate or joint venture
and the proceeds from the ultimate disposal of the investment; or
b) The present value of the estimated future cash flow expected to arise from dividend to be received
from the investment and from its ultimate disposal.
IMPAIRMENT TEST OF AN ASSOCIATE OR JOINT VENTURE
Cost of Investment
X
FV of Net Asset of A/JV X H%
Add: Post reserves of A/JV X H%
X
Add: Goodwill not impaired
Add: Long term loan (H to A/JV)
X
Add: Long term loan (H to A/JV)
Add: URP on closing stock (H to A/JV)
X
Add: URP on closing stock (H to A/JV)
CV of Associate/Joint Venture
XX
CV of Associate/Joint Venture
Compare to: RA of Associate/Joint Venture
XX
Compare to: RA of Associate/Joint Venture
Impairment Loss
X
Impairment Loss
.
Hazmizal Halil
X
X
X
X
XX
XX
X
P2 Short Notes | 31
IAS 32: FINANCIAL INSTRUMENTS: PRESENTATION
I.
Definitions
Financial Instruments
Financial Assets
Financial Liability
Equity Instrument
Puttable Instrument
II.
DEFINITION
Any contract that gives rise to both a financial asset of one enterprise and a financial liability
or equity instrument of another enterprise
Any asset that is cash, an equity instrument of another entity and a contractual right to
receive cash or another financial asset from another entity or a contractual right to exchange
financial asset or financial liabilities with another entity under conditions that are potentially
favourable to the entity
Any liability that is a contractual obligation to deliver cash or another financial asset from
another entity or a contractual obligation to exchange financial asset or financial liabilities
with another entity under conditions that are potentially unfavourable to the entity
Any contract that evidences a residual interest in the asset of an entity after deducting all of
its liabilities
Financial instrument that gives the holder the right to put the instrument back to the issuer
for cash or another financial asset or is automatically put back to the issuer on the occurrence
of an uncertain future event or the death or retirement of the instrument holder
Financial Assets and Financial Liabilities
WITHIN THE SCOPE
i. Currency (Cash) is a financial asset because it
represents the medium of exchange and is
therefore the basis on which all transactions are
measured and recognised in financial statements.
ii. Credit transaction which form out of a contract
and create the contractual right or obligation:
• Trade Receivable  Trade Payable
• Notes Receivable  Notes Payable
• Loans Receivable  Loan Payable
• Bonds Receivable  Bonds Payable
iii. Perpetual debt instruments such as perpetual
bonds, debentures, non-redeemable preferences
share and capital notes.
iv. Financial guarantee is a contractual right of the
lender to receive cash from the guarantor, and a
corresponding contractual obligation of the
guarantor to pay the lender, if the borrower
defaults.
v. Finance Lease is regarded as primarily an entity of
the lessor to receive and an obligation of the lessee
to pay, a stream of payments that are substantially
the same as blended payments of principal and
interest under a loan agreement.
vi. Derivatives Financial Instruments
III.
OUTSIDE THE SCOPE
i. Operating Lease is an uncompleted contract as the
lessor continues to account for the leased asset itself
rather than any amount receivable in the future
under the contract.
ii. Physical Assets such as inventories, PPE, leased
assets and intangibles asset are not financial assets
as control of such physical and intangible assets
creates an opportunity to generate an inflow of cash
or another financial asset, but it does not give rise to
a present right to receive cash or another financial
asset.
iii. Assets such as Prepaid Expenses for which the
future economic benefit is the receipt of goods or
services rather than the right to receive cash or
another financial asset are not financial assets.
iv. Similarly, items such as Deferred Revenue and most
Warranty Obligations are not financial liabilities
because the outflow of economic benefits
associated with them is the delivery of goods or
services rather than a contractual obligation to pay
cash or another financial asset.
v. Liabilities or Assets that are not contractual such as
income taxes or Provision are not financial liabilities
or financial assets.
Presentation of Financial Instrument – BOOK OF ISSUER
(a) Classification of Equity or Liability – Look on the substance over form and the critical feature. CCCOSO
Critical Features
Choice of Payment
Contingent Settlement
Option to Redeem
Settlement in Shares
Other Factors
Hazmizal Halil
LIABILITY
Mandatory redemption – contractual
obligation
Issuer can or will be forced to redeem
the instrument
Beyond the control of both issuer and
the holder or it is within the control of
holder
Held by the holder
Variable number of shares
Fixed maturity – limited life
EQUITY
Discretionary payment – no contractual
obligation
Issuer can avoid the payment
Within the control of issuer
Held by the issuer
Fixed number of shares
No liquidation date and the shares are
non-redeemable
P2 Short Notes | 32
(b) Presentation of Interest, Dividends, Gain and Loss, Premium, Discounts and Transaction Costs
•
If instrument is classified as liability  It will be presented as Income or Expense in SOPL
•
If instrument is classified as equity  It will be presented as Distribution in SOCE
•
Transaction Costs of an equity instrument shall be accounted for as a deduction from equity, net of any
related income tax benefit.
(c) Classification of a Compound Instrument (Convertible Debenture)
The issuer of a financial instrument that contains both a liability and an equity element such as convertible
debentures should classify the instrument’s component parts separately and present them separately in the
financial statements.
Initial measurement:
FV of consideration received –
Transaction Cost (TC)
Subsequent measurement
Settlement
FINANCIAL LIABILITY COMPONENT
First
calculate
the
liability
component using the present value
of future cash flows (using ERI).
TC is split proportionately.
Remeasured under ACM
In cash
EQUITY COMPONENT
Next calculate the equity portion by
deducting the liability component
from the total proceeds (residual).
TC is split proportionately.
Measured once only
In shares
(d) Offsetting rule
IAS 32 also prescribes rules for the offsetting of financial assets and financial liabilities. It specifies that the
offset which resulted that the net amount reported in the SOFP when and only when, an enterprise has legally
enforceable right to set off the amounts and intends either to settle on a net basis or to realize the asset and
settle the liability simultaneously.
IAS 33: EARNINGS PER SHARE
I.
BASIC EARNINGS PER SHARE
Basic Earnings per Share = Profit attributable to ordinary shareholders of the parent
Weighted average number of shares
If the number of shares has changed during the period, the following assumptions are made regarding the
weighted average number of shares:
Normal weighted average calculation
• Full price issue
Assume that the bonus shares have always been in issue (and therefore alter the
• Bonus issues
comparative EPS amount)
Assume that the shares issued are a mix of bonus and full price shares. For the bonus
• Rights issue
element assume that they have always been in issue and therefore adjust the
comparative
If bonus issues or rights issues occur after the reporting date, but before the date of approval of the accounts the
EPS should be calculated based on the number of shares following the issue.
II.
DILUTED EARNINGS PER SHARE
This is calculated where potential ordinary shares have been outstanding during the period which would cause EPS
to fall if exercised (dilutive instruments). The earnings should be adjusted by adding back any costs that will not be
incurred once the dilutive instruments have been exercised. This will include for post-tax interest saved on
convertible debt. The number of shares will be adjusted to take account of the exercise of the dilutive instrument.
This means that adjustment is made:
By adding the maximum number of shares to be issued in the future
• For convertible instruments
By adding the number of effectively “free” shares to be issued when the
• or options
options are exercised
IAS 34: INTERIM FINANCIAL REPORTING
IAS 34 requires only condensed financial statements (headings and sub-totals) and selected explanatory note disclosures,
with particular focus on new events, activities and circumstances. The minimum content specified is as follows:
• Statement of financial position at interim date and previous reporting date.
• Statement of profit or loss and other comprehensive income for both interim/cumulatively to date for the year and
previous interim/cumulatively to date for previous year (incl. EPS and diluted EPS)
• Statement of changes in equity cumulatively to interim date and direct comparative
• Statement of cash flows cumulatively to date and comparable period.
Hazmizal Halil
P2 Short Notes | 33
IAS 36: IMPAIRMENT OF ASSETS
I.
Definition and Scope
DEFINITION
Impairment Loss  is the amount by which the carrying
amount of an asset or a cash-generating unit exceeds its
recoverable amount.
Recoverable Amount  is the higher of the fair value less
cost of disposal and the value in use.
Fair Value  refer IFRS 13.
Cost of Disposal  are incremental costs directly
attributable to the disposal of an asset or cash-generating
unit excluding finance costs and income tax expense.
Value in use  is the present value of the future cash
flows expected to be derived from an asset or cashgenerating unit.
II.
IAS 36 DOES APPLY to:
• IAS 16; Land, Building,
Machinery
• IAS 40; Investment Property
at Cost
• IAS 38; Intangible Assets
• Goodwill
• Subsidiaries, Associates, Joint
Venture at Cost
• Assets at revalued amount
SCOPE
IAS 36 DOES NOT APPLY to:
•
•
•
•
•
•
•
•
•
IAS 2; Inventories
IFRS 9; Financial Assets
IAS 12; Deferred Tax
IAS 19; Employee Benefits
IAS 11; Construction contracts
IAS 40; Investment Property at FV
IAS 41; Agriculture assets at FV
IFRS 4; Insurance contracts
IFRS 5; NCA Held for Sale
When to conduct Impairment Test
Basic Rule: An entity shall assess at each reporting date whether there is any indication from the internal or
external sources that an asset may be impaired. Exception to Basic Rule: There are 3 assets that are tested for
impairment annually irrespective of whether there is any indication of impairment:
•
Intangible asset with an indefinite useful life
•
Intangible asset not yet available for use
•
Goodwill
III.
Indication / evidence for impairment
•
•
•
IV.
Internal Sources
Obsolescence or physical damage of an
asset
Significant changes with an adverse effect
to the entity such as asset becoming idle,
plans to discontinue or restructure the
operation to which an asset belongs, plans
to dispose of an asset before the previously
expected date and reassessing the useful
life of an asset as finite rather than
indefinite
Evidence is available from internal reporting
that indicates that the economic
performance of an asset is or will be worse
than expected
•
•
•
•
•
External Sources
Known as market-based evidence
Asset market value has declined
significantly more than expected
Significant changes with an adverse effect in
the technological, market, economic or
legal environment
Increased of market interest rate or other
market rates of return on investments
which are likely to affect the discount rate
used in calculating the value in use
The carrying amount of the net assets of the
entity is more than its market capitalization
Measurement of Recoverable Amount
HIGHER OF
Value in Use
Value in Use
IFRS 5; NCA held for sale exclude the calculation of Value
in Use as part of the Recoverable amount due to the entity
intention to sell of the assets.
Estimating the value in use should be done by estimating
the future cash inflows and outflows to be derived from
continuing use of the asset and from its ultimate disposal
and applying the appropriate discount rate to those future
cash flows.
Hazmizal Halil
Fair value (IFRS 13) – Cost of Disposal
Fair Value Less Cost of Disposal
Should be calculated first as it is easier. The Fair value is
calculated by following IFRS 13 rules where it can be
obtained either at level 1, level 2 or level 3.
Cost of disposal is the cost that are attributable to a
disposal of an asset including legal costs stamp duty and
similar transaction taxes, costs of removing the asset, and
direct incremental costs to bring an asset into condition for
its sale. However, termination benefits (IAS 19) and costs
associated with reducing or reorganising a business
following the disposal of an asset are not direct
incremental costs to dispose of the asset.
P2 Short Notes | 34
Calculating Value in Use:
1.
Basis to estimates the Future Cash Flows:
Cash Flows projection must be based on reasonable and supportable assumption that represent the
managements’ best estimate of the range of economic conditions that will exists over remaining useful life of the
asset, most recent financial budget or forecasts approved by the management which cover a maximum period of
five years unless a longer period can be justified and exclude any estimated future cash inflows or outflows
expected to arise from future restructuring or from improving or enhancing the assets performance. Greater
weight shall be given to external evidence. Estimated cash flow projections beyond five years’ period are
extrapolate using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
2.
Estimates of future cash flows shall:
Include
Projection of cash inflows from the continuing use of
the asset
Projections of cash outflows that are necessary
incurred to generate the cash inflows including cash
outflows to prepare the asset for use and can be
directly attributed or allocated on a reasonable and
consistent basis to the asset
Net cash flows, if any, to be received or paid for the
disposal of the asset at the end of its useful life
3.
V.
Exclude
Any cash inflows or outflows from financing activities
and associated income tax receipts or payment
Estimated future cash inflows or outflows that are
expected to arise from a future restructuring to which
an entity is not yet committed (IAS 37) or improving or
enhancing the asset’s performance
Discount rate to be used:
The discount rate shall be a pre-tax rate that reflect current market assessment of the time value of money and
the risk specific to the asset for which the future cash flow estimates have not been adjusted. Hierarchy of rate to
be used: 1st  Market rate of interest 2nd  ERI, WAC, Incremental borrowing rate
Recognition and Measurement of Impairment Loss
Impairment of asset are recognised if and only if the recoverable amount of an asset is less than its carrying
amount. The carrying amount of the asset shall be reduced to its recoverable amount in the financial statement.
A.
B.
Individual Asset carried at HISTORICAL COSTS
DR SOPL
X
• IAS 36 – All impairment loss must be charged to SOPL
CR NCA
• IAS 1 – All material item that are impaired requires appropriate disclosure
• Presentation of CV in SOFP shall be: Historical Cost – Accumulated Depreciation – Accumulated
Impairment Loss.
• Calculation of depreciation: Recoverable amount – Revised scrap value
DR OCI
X
Revised remaining useful life
DR SOPL
X
CR
NCA
Individual Asset carried at REVALUED AMOUNT
•
•
•
•
•
Hazmizal Halil
X
X
IAS 36 – Impairment loss of a revalued asset shall be treated in accordance with IAS 16. An impairment
loss on a revalued asset is recognised in OCI to the extent that the impairment loss does not exceed the
amount in the revaluation surplus for that same asset. Such an impairment loss on a revalued asset
reduces the revaluation surplus for the asset which it will be charged against the revaluation surplus
reserved after adjusting for excess depreciation adjustment and tax adjustment.
Presentation of CV in SOFP shall be at Recoverable Amount.
DR OCI
X
Calculation of depreciation: Recoverable amount – Revised scrap value
CR Prov. of DT
X
Remaining useful life
IAS 12 – If an impairment loss is recognised, any related deferred tax assets or liabilities are determined
in accordance with IAS 12 Income Taxes by comparing the revised carrying amount of the asset with its
tax base.
Illustration:
Charged to OCI
Cut-off point
(HC – AD = NBV)
Charged to SOPL
P2 Short Notes | 35
-
C.
If the asset revalued up then revalued down  impairment loss should be charge using the balance in
revaluation surplus reserves first then the remaining impairment loss is charge to SOPL.
If the asset revalued down then revalued up  calculate cut-off point (HC – AD = NBV) and charged
impairment loss to SOPL when the recoverable amount is below the cut-off point.
CASH-GENERATING UNIT (CGU)
• CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent
of the cash inflows from other assets or group of assets. If it is not possible to estimate the recoverable
amount of the individual asset, an entity shall determine the recoverable amount of the CGU to which
the asset belongs. The carrying amount of a CGU shall be determined on a basis that are consistent with
the way the recoverable amount is determined. It may be necessary to consider some recognised
liabilities to determine the recoverable amount of CGU. This may occur if the disposal of a CGU would
require the buyer to assume the liability.
• In this case, the fair value less cost of disposal of the CGU is the estimated selling price and the liability
together less cost of disposal. To perform a meaningful comparison between the carrying amount of the
CGU and its recoverable amount, the carrying amount of the liability is deducted in determining both the
CGU value in use and its carrying amount.
• Accounting treatment for impairment loss of CGU
CGU with no Goodwill
The entity must reorganize an
impairment loss if the carrying amount
exceeds the recoverable amount.
Imp Test:
CV of identified asset
X
Comp to: RA of CGU
X
Imp. Loss
X
DR SOPL
CR Asset imp. In CGU
(pro-rata)
X
X
CGU with allocated Goodwill
If the carrying amount of the unit exceeds the recoverable amount, the entity must
recognise an impairment loss.
Imp Test:
CV of identified asset
X
(+) GW allocated
X
CV of CGU
X
Comp to: RA of CGU
X
Imp. Loss
X
Rule I: Within GW
If total impairment
loss is within the
goodwill, then:
DR SOPL
X
CR Goodwill
X
Rule II: Not within GW
If total impairment loss is
more than the goodwill,
then:
DR SOPL
X
1ST CR Goodwill
X
B/F CR Other Asset
X
Rule III: Specific Asset
If it is identified that the
impairment loss occurs due
to specific asset, then:
DR SOPL
X
1ST CR Specific Asset
X
2ND CR Goodwill
X
B/F CR Other Asset
X
VI.
Reversal of Impairment Loss
An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if and only if
there has been a change in the estimates used to determine the asset’s recoverable amount since the last
impairment loss was recognised. The indication of reversal is the opposite indication of impairment loss. The
increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall
not exceed the carrying amount (net of amortisation or depreciation) which had no impairment loss been
recognised for the asset in prior years (cut-off point).
VII.
Impact of impairment loss on Group Account
Full Goodwill / Fair Value Basis
Need not to gross up goodwill before calculate impairment
loss of a CGU
Distribute impairment to parent and NCIn based on % of
interest
VIII.
Deferred Tax effect on Impairment Loss
Impairment loss will create a temporary difference.
Hazmizal Halil
Partial Goodwill / Net Asset Basis
Need to gross up the carrying amount of goodwill allocated to
CGU before calculate the impairment loss
Only parent will bear the total impairment loss
AB =
TB =
IAS 16
HC – Acc. Dep.
HC – Acc. Cap. Allow.
IAS 36
– Acc. Imp. Loss
– nil
P2 Short Notes | 36
IAS 37: PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
PROVISIONS
Provisions are a subdivision of
liabilities which are probable of an
uncertain timing and amount of
future expenditure
•
•
Present obligation as a result of a
legal or constructive obligation
Past event
Highly Probable of transfer or
outflow of economic benefit
+
Measure the outcome Reliably
If meet all, the provision should be
recognised in the financial
statement
•
•
•
•
•
•
Best estimate of expenditure/
rational/ entity has past experience
Expected values – Future events
(various different outcomes)
Risk and uncertainty determined
by the professionals/ lawyers
Discount to present value if
materially different
Large population  weighted
average
Single obligation  most likely
outcome
IAS 37  Create provision and
charged to SOPL and recognised in
SOPL as liabilities (CL or NCL)
IFRS 3  Recognised at FV (IFRS13)
•
DEFINITION
•
RECOGNITION
•
•
•
•
•
MEASUREMENT
•
•
•
•
•
•
ACCOUTING
TREATMENT
CONTINGENT LIABILITIES
•
•
•
•
•
•
•
•
•
DISCLOSURE
•
Hazmizal Halil
A possible obligation that arises
from past events and whose
existence will be confirmed only by
the occurrence or non-occurrence
of one or more, uncertain, future
events not wholly within the
enterprise’s control
Failed 3P + R
Possible obligation
Past event
Not probable of outflow, or
Cannot measure reliably (rare)
A contingent liability that are
remote/possible/probable should
not be recognised in the financial
statement
Best estimate of expenditure/
rational/ entity has past experience
Expected values – Future events
(various different outcomes)
Risk and uncertainty determined
by the professionals/ lawyers
Discount to present value if
materially different
Large population  weighted
average
Single obligation  most likely
outcome
Remote  no disclosure required
Possible  50/50 chances or less
than 50  disclose
Probable  dealt with under
provision i.e.; if obligation is
probable it is not a contingent
liability
Contingent liabilities should not be
recognised in financial statement
but they should be disclosed. The
required disclosure is:
• A brief description of the nature
of the contingent liability
• An estimate of its financial effect
• An
indication
of
the
uncertainties that exist. If not
practical state the fact
• The
possibility
of
any
reimbursement
CONTINGENT ASSETS
•
A possible asset that arises from
past events and whose existence
will be confirmed by the
occurrence of one or more
uncertain future events not wholly
within the enterprise’s control
•
•
•
•
Failed 3P + R
Possible asset
Past event
Confirmed on occurrence or nonoccurrence of uncertain future
events
Cannot measure reliably (rare)
A contingent asset that are
remote/possible/probable should
not be recognised in the financial
statement
•
•
•
•
•
•
Remote  no disclosure required
Possible  no disclosure required
Probable  notes to account
Virtually certain  Not a
contingent asset anymore 
Recognised
•
Contingent asset must only be
disclosed in the notes if they are
probable. In that case a brief
description of the contingent asset
should be provided along with an
estimate of its likely financial
effect.
P2 Short Notes | 37
IAS 38: INTANGIBLE ASSETS
Purchase
Separately
Recognised as NonCurrent Asset in the
SOFP – Intangible
Assets. Subject to
meets
all
the
recognition criteria.
I.
Purchase as a Bus.
Combination
• Subsumed
in
Goodwill; or
• Recognised as NonCurrent Asset in the
SOFP – Intangible
Assets.
Research
Development
Research
expenditure
is charged to
profit or loss
in the year in
which it is
incurred.
Cannot be
capitalised.
Development expenditure must be
capitalised when it meets all the
criteria.
• Sell/use
• Commercially viable
• Technically feasible
• Resources to complete
• Measure cost reliably (expense)
• Probable future economic
benefits (overall)
Internally
generated
Internally
generate brands,
mastheads
cannot
be
capitalised
as
their cost cannot
be
separated
from the overall
cost
of
developing the
business.
Definition
DEFINITION
Intangible assets are identifiable non-monetary asset (prices will fluctuate) without physical substance which are
controlled by the entity, relates to a past event and highly probable a future economic benefit with flow to the entity.
II.
Recognition Criteria
RECOGNITION CRITERIA
Intangible assets are recognised in the SOFP as Non-Current Asset if it meets all the recognition criteria. The asset must
be ¹identifiable, ²controlled by the entity where the entity will highly probable obtain ³future economic benefit and the
cost is ¹reliably measured. (3+1)
III.
Measurement Criteria
MEASUREMENT CRITERIA
INTIAL MEASUREMENT
•
Capitalised amount:
IAS 38
Purchase Price + Direct Cost
SUBSEQUENT MEASUREMENT
Cost Model
Definite Useful Life
Indefinite Useful Life
Revaluation Model
Consider fair value changes of the
intangibles assets and need to bring up the
historical cost to its revalued amount.
• The asset should be amortised over the • No amortisation is
shorter of its useful life or the expected life
allowed.
over which the company intends to use the • Need to conduct
In SOFP: Revalued Amount – Subsequent
asset.
impairment
test
Amortisation – Subsequent Impairment
• Tested for impairment when there is
annually.
Loss = Net Book Value
indication of impairment.
• Reviewed annually if
In SOPL: Charge depreciation based on the
• If the co has the option to renew or extend
there is a possibility
new depreciation amount of the revalued
the useful life and it is highly probable and
that the indefinite life
amount of PPE. (using the remaining
reasonably certain, then, co should
become definite life.
estimated useful life)
amortised the intangible over the extended
life if the cost to renew is minimal. If the cost
Any gain on fair value changes is sent to
to renew is major, the previous asset should
Other Comprehensive Income and transfer
be derecognised and new intangible asset are
to revaluation reserves in the equity. If the
recognised in the financial statement.
asset were impaired or there is loss on
• ERV of the asset remains zero (0) unless there is a clear evidence that revaluation, the loss incurred should be set
there is commitment from a third party willing to purchase it with a off against the revaluation reserves
reliably measured amount or it is highly probable there is an active balance first before it can be charged to
market at the end of its useful life.
SOPL.
• Amortisation method is the same as depreciation method under IAS 16.
SUBSEQUENT EXPENDITURE
All subsequent expenditure is to be expensed to SOPL as there are no capacity enhancement of an intangible assets.
IV.
Derecognition
Similar to IAS 16 – no future economic benefits are expected. Gain and losses are taken to SOPL.
Hazmizal Halil
P2 Short Notes | 38
IAS 40: INVESTMENT PROPERTY (IP)
I.
Definition
DEFINITION
Investment property (IP) is property; land or a building or part of a building or both which are held to earn rentals or for
capital appreciation or both, AND NOT for:
• Use in the production or supply of goods and services or for administrative purposes (IAS 16); or
• Sale in the ordinary course of business (IAS 2); or
• Future use as an investment property (IAS 16 until completed)
II.
Recognition Criteria
RECOGNITION CRITERIA
The cost of an item of IP shall be recognised as an asset if and only if:
•
It is probable that future economic benefits associated with that item will flow to the entity; and
•
The cost of the item can be reliably measured
III.
•
•
•
IV.
Measurement Criteria
MEASUREMENT CRITERIA
INTIAL MEASUREMENT
Investment properties (IP) should initially be measured at cost plus directly attributable costs.
SUBSEQUENT MEASUREMENT
Cost Model
Fair Value Model
The investment properties are revalued to fair value
• The investment properties are held using the
at each reporting date.
benchmark method in IAS 16 (cost).
Gains or losses on revaluation are recognised directly
• The properties are depreciated like any other asset
through profit or loss.
• Need to disclose the FV in the notes to the account.
The properties are not depreciated.
Transfers
Transfers into and out of IP should only be made when supported by a change of use of the property.
TRANSFER
IAS 40 to IAS 16
IAS 40 to IAS 2
IAS 16 to IAS 40
IAS 2 to IAS 40
V.
EVIDENCE
Commencement of owner occupation, change from IP to
owner occupied property.
Commencement of development with a view to sale,
transfer from IP to inventory.
End of owner occupation for a transfer from owner
occupied property to IP.
End of construction or development for a transfer from
property in the course of construction to IP.
Commencement of operating lease to another party,
change from inventory to IP.
ACCOUNTING TREATMENT
Fair value at date of change
Fair value at date of transfer
Revalue under IAS 16 and then
treat as IP
Fair value at date of transfer
Fair value on change and gain/loss
to profit or loss
IAS 40 VS. IAS 17
OPERATING LEASE (LESSOR BOOK)
Owner has a choice to adopt IAS 40 or IAS 17
If owner choose IAS 40, then it should only follow FV
Model
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FINANCE LEASE (LESSEE BOOK)
Lessee will capitalise the leased asset as NCA
Lessee can follow IAS 40 and IAS 40 require lessee to
adopt IAS 17 rules.
Measurement: Lower of FV (Cash price - not IFRS 13) and
PV of MLP
P2 Short Notes | 39
IAS 41: AGRICULTURE
SCOPE OF THE STANDARD
- Standard should be applied to:
i. Biological Asset (living ‘managed’ animal and ‘consumable’ plants)
ii. Agriculture produces up to the point of harvest (if detached, falls within IAS 2; Inventories)
- Outside the scope:
i. Bearer plant, land related to agricultural activities (IAS 16)
ii. Agricultural produces at the point of harvest (IAS 2)
iii. Government grants related to those biological assets (IAS 20)
iv. Intangible assets related to agricultural activity (IAS 38)
v. Minerals, oils, natural gas and similar non-regenerative resources (IFRS 6)
vi. Agricultural activity which are not managed such as ocean fishing and deforestation.
Agricultural Activity
Agricultural Produce
Harvest
Bearer Plant
(IAS 16)
Subjected to
impairment loss
under IAS 36
Biological
Transformation
DEFINITION
It is the management by an enterprise of the biological transformation of asset for sale into
agricultural produce, or into additional biological asset
The harvested product from biological assets (Example: wool, logs, cotton and etc.)
It is the detachment of produce from a biological asset or the cessation of a biological asset’s
life
A living plant:
i. That is used in the production or supply of agricultural produce
ii. That is expected to bear produce for more than one period, and
iii. That has a remote likelihood of being sold as agricultural produce, except for incidental
scrap sales.
BT is a result in the following type of outcomes:
(a) asset changes through:
i.
growth (an increase in quantity or improvement in quality of an animal or plant)
ii.
degeneration (a decrease in the quantity or deterioration in quality of an animal or
plant) -death
iii. procreation (creation of additional living animal or plants) -birth
(b) production of agricultural produce. It comprises the process of growth, degeneration,
production and procreation that cause qualitative or quantitative changes in a biological
asset.
i. Capability to change
ii. Management of change
iii. Measurement of change
RECOGNITION CRITERIA
Biological assets are capable of biological transformation.
Management facilities biological transformation by enhancing, or at least stabilizing,
conditions necessary for the process to take place (for example, nutrient levels,
moisture, temperature, fertility, and light). – Manipulate.
The change in quality (like genetic merit, density, ripeness, fat cover, protein content,
and fiber strength) or quantity (like weight, cubic meters, fiber length and diameter,
number of buds) brought about by biological transformation is measured and monitored
as a routine management function.
MEASUREMENT CRITERIA
BIOLOGICAL ASSET (NCA)
Initial and subsequent measurement
FV – ECTS
•
Fair value is obtained from IFRS 13; Fair Value
Measurement
FV = Exit Price (EP) – Transportation Price (TP)
•
•
Estimated cost to sell is the incremental costs directly
attributable to the disposal of an asset excluding
finance cost, income tax and transportation price (to
avoid double counting)
Estimated costs to sell includes commissions to brokers
and dealers, levies by regulatory agencies and
commodity exchanges, and transfer taxes and duties.
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AGRICULTURAL PRODUCE (CA)
At the point of harvest (NCA):
Initial and subsequent measurement
FV – ECTS
Harvested: Transition from IAS 41 to IAS 2 (CA: Inventory)
LOWER OF: COSTS & NRV
FVTPL: Gain and losses on initial recognition and fair value
changes is recognise Statement of Profit or Loss (SOPL).
Fair value changes occur due to:
i) Physical Growth – includes birth and death (Vertical
movement)
ii) Price movements (Horizontal movement)
P2 Short Notes | 40
IFRS 2: Share-based Payment
Purchase
Goods / NCA / Intangibles
Services
(3rd Party)
(Employee)
DR. Purchases / NCA/
DR. SOPL
Intangibles
Items is capitalised (if meet The amount is charges to
the recognition criteria)
SOPL
Consideration Paid
Issue of Equity Instrument
Cash equivalent to the
increase in share price
CR. Equity (Shares Option)
CR. Liability (Share
Shares yet to be issued
Appreciation Rights)
Equity-settled Share Based Cash-settled Share Based
Payment
Payment
Vesting Condition imposed to employee
1.Service Condition
The employee is required to remain in service for specific number
of years. For vesting purposes, the condition of 3 years’ service
must be met.
2.Non-Market Related
3. Market Related Performance
Performance condition
condition
• Performance
based • Relate to market price of shares
condition are not taken
which already been factored in
into
account
to
determining FV using Option
determine the FV using
Pricing Model.
Option Pricing Model. • i.e.; attainment of specific share
(does not factor nonprice, attainment of specific
market condition)
intrinsic value, or attainment of a
• i.e.;
Increase
in
specified target that is based on
company earnings by
market price of company’s share
10% per annum or
relative to an index of share of
remain for 3 years.
other company.
• For vesting purposes, • For vesting purposes, regardless
the condition of 3 years
of whether it is satisfied or not, it
must be satisfied.
shall be treated as vested.
Equity-Settled Share Based Payment
Direct and Indirect method for equity-settled share
based (ESSBP) payment transaction. The
measurement of goods or services received are
based on: (Depending on which is readily available)
• Direct: Fair Value of the goods or services
received which are measured at the date the
entity obtain these goods or services based on
rebuttable presumption where this basis is used
for transaction with parties other than
employees (3rd Party)
• Indirect: Fair Value of Equity instrument issued
which are measured at the grant date where
this basis is used for transaction with employee
only.
For services from employee, if equity instruments
granted vest immediately, the amount are to be
recognised in full at the grant date. If it does not
vest immediately, entity shall account the services
over its vesting period with a corresponding
increase in equity (vesting fraction).
MEASUREMENT
Equity-Settled SBP (ESSBP)
Cash-Settled SBP (CSSBP)
In SOFP: until it is vested – measured once only
In SOFP: until it is settled – remeasured at year end
Closing FV of Equity Instrument =
Closing FV of liability =
No of employee estimate to remain X No. of options per
No of employee estimate to remain X No. of options per
employee X FV at grant date X Vesting fraction
employee X FV at year end X Vesting fraction
Movement recognised in SOPL:
Movement recognised in SOPL:
Closing Equity – Opening Equity
Closing Liability + Cash Paid – Opening Liability
No of employee estimate to remain = Total no of employee – Total estimate to leave (left + estimate to leave in future)
Total no. of employee granted
(-) No. of employee left
(-) No. of employee expected to leave
Total no. of employee expected to remain
Multiplied with:
No. of shares option granted
FV of shares option granted
Vesting fraction
Closing Equity / Liability
Hazmizal Halil
ESSBP
XX
(X)
(X)
X
CSSBP
XX
(X)
(X)
X
XX
At Grant Date – measured once
1/3 2/3 3/3
XXX
XX
At year end - remeasured
1/3 2/3 3/3
XXX
P2 Short Notes | 41
OPTION TO ISSUE EQUITY OR CASH
Similar to IAS 32 – CCCOSO (Refer page 32)
MODIFICATION, CANCELLATION AND SETTLEMENT OF EQUITY INSTRUMENT (ESSBP)
An entity may alter / modified the term and conditions of share option scheme during the vesting period by increasing or
decreasing the exercise price of the options, which makes the scheme less favourable or more favourable to employee, it
may also change the vesting conditions to make it more likely or less likely that the options will vest.
Basic Rule: Entity must always recognise at least the amount that would have been recognised if the terms and conditions
had not been modified, unless due to failure to meet vesting condition, i.e.; original terms must be accounted as though
there is no modification.
CANCELLATION AND SETTLEMENT (IN CASH)
Rule: if cancelled during the vesting period, the
cancellation is accounted for as an acceleration of vesting
period – any amount unrecognised must be recognised
immediately and charged to SOPL.
On the date of cancellation, check if:
1. Settlement paid is up to the balance in Equity:
Rule: Deduction in equity (DR Equity CR Bank)
2. Settlement paid is more than the balance in Equity:
Rule: Deduction up to the balance in Equity and the excess
are charge to SOPL (DR Equity DR SOPL CR Bank)
MODIFICATION (SETTLEMENT IN SHARES)
If the modification is not beneficial to the employees:
Rule: Ignore modification and recognise the amount based
on original contract as though the modification did not take
place. (same as Basic Rule)
If the modification is beneficial to the employee:
Rule: Recognise amount based on original contract
(expense over the original vesting period) + additional cost
(expense over period from modification to vesting period
(date). Such additional cost is as follow:
1. Modification resulting in replacement shares =
Incremental value: FV of repriced option > FV of original
option at the date of modification.
2. Modification with a fresh issue of shares = Total value:
FV of new shares.
IFRS 3: Business Combination
I.
Identifying the Acquirer
IFRS 3 does not allow combinations to be accounted for as a uniting of interest, merger or pooling of interest
method. All combination must be treated as acquisitions. This IFRS defines a business combination as a transaction
or other event in which an acquirer obtains control of one or more businesses.
In identifying the acquirer:
Step 1: Determine whether the entity possess Control over the investee. The guidance in IFRS 10 Consolidated
Financial Statements is used to identify an acquirer in a business combination, i.e. the entity that obtains
'control' of the acquiree. (Refer page 52)
Step 2: Determine whether it is a Business acquisition or merely an asset acquisition only. Business is an
integrated set of activities and assets capable of being conducted and managed for the purpose of
providing a return in the form of dividend or lower costs or other economic benefits directly to investors
or other owners. A business generally consists of inputs, process applied to those inputs and resulting
output that are or will be used to generate revenue. If goodwill is present in a transferred set of activities
and assets, the transferred set is presumed to be a business. If the assets acquired are not a business,
the reporting entity shall account for the transaction or other event as an asset acquisition and follow its
respective standards (i.e.; IAS 16, IAS 38, IAS 37 and etc.).
Step 3: Take into consideration other factors such as:
a) Who pays the cost of investment?
b) Which party has the major voting rights?
c) Among the large minority shareholder, who has the significant voting interest (majority)?
d) Whether the entity has representative of BOD in the investee?
e) Whether the entity has or dominates the senior management (CEO/supervisor/top
management) of the investee?
II.
Determining the Acquisition date
The entity shall calculate goodwill on the date of acquisition when its obtain control over the investee. The goodwill
is calculated once only.
DOA = DOC
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P2 Short Notes | 42
III.
IV.
FV of Consideration paid or payable - The consideration paid or payable can be in many forms such as:
Paid on DOA
Cash paid
Amount of cash paid
Assets transferred
Market Value: Fin A – level 1/2/3
Non-Fin A – HABU level 2/3
Issuance of shares in Market Price (treatment of trans. cost – IAS 32) TC goes
parent company
to equity
Issuance of debentures
Nominal Value (treatment of trans. cost – IFRS 9) TC
goes to SOPL
Payable in future with no condition Cash – Provision
PV of future cash flow  subsequently re-measured at
Deferred Consideration
year ends
Shares yet to be issued
Market price at DOA  measured once
Payable in future with condition
Cash – Provision
PV of future cash flow  subsequently re-measured at
Contingent Consideration
year ends
Shares yet to be issued
Market price at DOA  measured once
Recognition and Measurement of Assets and Liabilities acquired
IFRS 3 establishes the following principles in relation to the recognition and measurement of items arising in a
business combination:
•
Recognition principle. Identifiable assets acquired, liabilities assumed, and non-controlling interests in
the acquiree, are recognised separately from goodwill. Acquisition related costs (legal fees, professional
fees, valuation and etc.) which the costs the acquirer incurs in a business combination shall be expense
in the post periods and not to be capitalise.
•
Measurement principle. All assets acquired and liabilities assumed in a business combination are
measured at acquisition-date fair value.
Exceptions to the recognition and measurement principles:
IFRS 3 overrides other standards
IFRS 3 overrides IAS 17 Leases – The acquirer shall
recognise no assets or liabilities related to an
operating lease in which the acquiree is the lessee
except when the acquirer determines the terms of
each operating lease in which the acquiree is the
lessee are favourable or unfavourable. The acquirer
shall recognise an intangible asset if it is favourable
and recognise a liability if the terms are unfavourable
relative to market terms.
IFRS 3 overrides IAS 37 Contingent liabilities – the
requirements of IAS 37 Provisions, Contingent
Liabilities and Contingent Assets do not apply to the
recognition of contingent liabilities arising in a
business combination.
IFRS 3 overrides IAS 38 Intangible Assets – the
acquirer shall recognise separately from goodwill the
identifiable intangible assets acquired in a business
combination. An intangible asset is identifiable if it
meets either the separability criterion or the
contractual legal criterion. Assembled workforce and
other items that are not identifiable are subsumes
into goodwill.
IFRS 3 adapt other standards
IFRS 3 adapts IFRS 5 Assets held for sale – IFRS 5 Noncurrent Assets Held for Sale and Discontinued
Operations is applied in measuring acquired noncurrent assets and disposal groups classified as held
for sale at the acquisition date.
IFRS 3 adapts IAS 19 Employee benefits – assets and
liabilities arising from an acquiree's employee
benefits arrangements are recognised and measured
in accordance with IAS 19 Employee Benefits.
IFRS 3 adapts IAS 12 Income taxes – the recognition
and measurement of income taxes is in accordance
with IAS 12 Income Taxes
IFRS 3 adapts IFRS 2 Share-based payment
transactions - these are measured by reference to the
method in IFRS 2 Share-based Payment.
Indemnification assets - an acquirer recognises
indemnification assets at the same time and on the
same basis as the indemnified item.
Reacquired rights – the measurement of reacquired
rights is by reference to the remaining contractual
term without renewals.
Provision for restructuring cost – cannot be charges to pre-profits if the parent intends to restructure the
subsidiary in post period, then a provision for restructuring may be charged to post profit only if the recognition
criteria is met. The recognition criteria are as follow:
•
Detail formal plan and implemented as soon as possible
•
Legal or constructive obligation exist at the DOR
•
Highly probable transfer of economic benefit
•
No realistic possibility of withdrawal
•
The provision can only cover the cost of restructuring
Exception: A provision for restructuring can be charged to pre-profit if subsidiary already has the plan to restructure
itself before the DOA and will do so irrespective of whether Parent acquired subsidiary or not.
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P2 Short Notes | 43
V.
Recognition and Measurement of Non-Controlling Interest (NCI)
NCI is the equity in a subsidiary not attributable, directly or indirectly, to a parent. It is presented separately in the
consolidated financial statements in the equity section of SOFP, clearly identified the profit and total other
comprehensive income attributable to NCI in SOPL and presented in one separate column in the SOCE. IFRS 3
allows an accounting policy choice, available on a transaction by transaction basis, to measure non-controlling
interests (NCI) either at:
•
fair value (sometimes called the full goodwill method), or
•
the NCI's proportionate share of net assets of the acquiree.
The fair value basis need to use fair value which are obtain as accordance with IFRS 13; fair value measurement
and calculated with the NCI proportionate portion. The choice in accounting policy applies only to present
ownership interests in the acquiree that entitle holders to a proportionate share of the entity's net assets in the
event of a liquidation (i.e.; outside holdings of an acquiree's ordinary shares). Other components of non-controlling
interests must be measured at acquisition date at fair values or in accordance with other IFRSs (i.e.; IFRS 2).
VI.
VII.
VIII.
IX.
Recognition and Measurement of Goodwill
The entity shall calculate goodwill on the date of acquisition when its obtain control over the investee. The goodwill
is calculated once only. No amortisation is permitted on goodwill. In some cases, entity may encounter with a
negative goodwill due to error in calculation cost of business combination or error in fair value of net asset. For a
negative goodwill (gain on bargain purchase), it must be credited in full to SOPL in the year acquisition.
Calculation of Goodwill:
FV of consideration paid
+ Non-Controlling Interest (NA basis / FV basis)
- FV of Net Asset at DOA
Goodwill
X
X
(X)
X
Goodwill attributable to NCI:
FV basis
- NA basis
Goodwill of NCI
X
(X)
X
Impairment of Goodwill
PARTIAL GOODWILL
FV of Net Asset at DOR
X
+ Allocated Goodwill (gross-up) (GW/80 x 100)
X
CV of Cash Generating Unit
XX
Compare to: RA of Cash Generating Unit
XX
Impairment Loss
X
The total impairment loss on goodwill is bear by the parent
only
If NCI is valued using NA basis
 Goodwill are valued at partial basis
If NCI is valued using FV basis
 Goodwill are valued at full basis
Goodwill attributable to parent:
Total Goodwill
- Goodwill attributable to NCI
Goodwill of Parent
X
(X)
X
FULL GOODWILL
FV of Net Asset at DOR
X
+ Allocated Goodwill (no need to gross up)
X
CV of Cash Generating Unit
XX
Compare to: RA of Cash Generating Unit
XX
Impairment Loss
X
The total impairment loss on goodwill is bear by both
the parent and NCI on proportionate basis
Accounting treatment of Provisional Values
If the initial accounting for a business combination can be determined only provisionally by the end of the first
reporting period, the business combination is accounted for using provisional amounts. Adjustments to provisional
amounts, and the recognition of newly identified asset and liabilities, must be made within the 'measurement
period' where they reflect new information obtained about facts and circumstances that were in existence at the
acquisition date. The measurement period cannot exceed one (1) year from the acquisition date and no
adjustments are permitted after one year except to correct an error in accordance with IAS 8.
IFRS 3 vs. IAS 12 – Deferred tax arising on a business combination
FV ADJUSTMENT
GOODWILL
URP ON STOCK / NCA
AB – using Fair Value
AB – recognise Goodwill
AB – eliminate URP
TB – using cost basis
TB – not subjected to tax
TB – stock remain at cost
AB ≠ TB = TTD / DTD
Goodwill created TTD
URP created DTD
UNDISTRIBUTED PROFIT
If subsidiary has undistributed
profit, it may become payable
as dividend in future and has tax
impact which create TTD.
Parent not required to provide deferred tax if they can control the dividend policy and does not intend, for
subsidiary, to pay out dividend in foreseeable future. If the criteria are fails, parent will need to provide for deferred
tax.
Hazmizal Halil
P2 Short Notes | 44
IFRS 5: Non-Current Assets Held for Sale and Discontinued Operations
SECTION A: Non-Current Asset Held for Sale (NCA HFS)
I.
Definition and Presentation
DEFINITION
Disposal Group (DG) – A group asset to be disposed of, by sale
or otherwise together as a group in a single transaction, and
liabilities directly associated with those assets that will be
transferred in the transaction. The group includes goodwill
acquired in a business combination if the group is a CGU to
which goodwill has been allocated in accordance with the
requirements if IAS 36. (minimum: 2 Assets)
II.
Recognition Criteria
1 •
2P •
5 •
3 •
III.
•
PRESENTATION
SOFP:
▪ Individual Asset:
Current Asset – NCA HFS (last line item)
▪ Disposal Group:
Current Asset – Asset associated with DG HFS
Current Liabilities – Liabilities associated with DG HFS
Equity – Equity component of investment HFS
RECOGNITION CRITERIA
A NCA or DG should be classified as HFS is its carrying amount to be recovered principally through a sale
transaction rather than through continuing use. (Entity has the intention to sell the asset)
Detailed criteria must be met:
▪ The assets must be available for immediate sale in its PRESENT CONDITION
▪ Its sale must be highly PROBABLE (i.e.; significantly more likely than not)
For the sale to be highly PROBABLE, the following must apply;
▪ Management must be committed to a plan to sell the asset
▪ There must be an active programmed to locate a buyer
▪ The asset must be marketed for sale at a price that is reasonable in relation to its current fair value
▪ The sale should be expected to take place within 12 months from the date of classification
▪ It is unlikely that significant changes to the plan will be made or that the plan will be withdrawn
Exception to the one year / 12 months’ rule:
▪ An asset or DG can continue to be classified as HFS, even if the sale has not actually year place within one
year. However, the delay must have been caused by events or circumstances beyond the entity’s control
and there must be sufficient evidence that the entity is still committed to sell the asset or DG. Otherwise
the entity must cease to classify the asset as HFS. Such events and circumstances are:
i.
Due to conditions imposed by a party other than a buyer (i.e.; governments)
ii.
Buyers or others unexpectedly impose conditions on transfer of the asset
iii. Circumstances arise that were previously considered unlikely (i.e.; changes in market condition)
Measurement Criteria
Exemption from IAS 16
An asset or disposal group classified
as HFS should Not be depreciated
MEASUREMENT CRITERIA
Exemption from IAS 36
• Since the entity already intend to sell the asset, they are no longer
required to calculate value in use
• The impairment is tested by comparing lower of carrying amount
to its fair value less cost of disposal
SECTION B: Discontinued Operations (DC)
DEFINITION
A DC is an item that are withdrawn from IAS 35 and a component of an entity that has been disposed-off or is classified
as HFS and represents a separate major line of business or geographical area of operations OR is a part of a single
coordinated plan to dispose of a separate major line of business or geographical area of operations OR is a subsidiary
acquired exclusively with a view to resale.
A DC is a component that:
HAS BEEN DISPOSED
Disclosure first to be made in the
accounting period in which disposal
takes place
No longer appears in the SOFP
presentation, will only affect SOPL and
presented in a single line
Hazmizal Halil
IS HELD FOR SALE
Disclosure first on the accounting
period in which the decision to
dispose is made (maybe 12 months
before actual disposal takes place)
Will affect both SOFP and SOPL
presentation
HAS BEEN ABONDEND
No longer appears in the SOFP, will
only affect SOPL if its meet the
definition of a DC
P2 Short Notes | 45
IFRS 7: Financial Instruments: Disclosures
Financial instruments, particularly derivatives, often require little initial investment, though may result in substantial losses
or gains and as such stakeholders need to be informed of their existence. The objective of IFRS7 is to allow users of the
accounts to evaluate:
•
The significance of the financial instruments for the entity’s financial position and performance
I.
Statement of Financial Position
Disclose the financial assets measured at fair value through profit and loss, showing separately those held for
trading and those designated at initial recognition held-to-maturity investments loans and receivables availablefor-sale assets and financial liabilities at fair value through profit and loss, showing separately those held for trading
and those designated at initial recognition and financial liabilities measured at amortised cost.
II.
Statement of Profit or Loss and Other Comprehensive Income
Disclose items of income, expense, gains, and losses, with separate disclosure of gains and losses from financial
assets measured at fair value through profit and loss, showing separately those held for trading and those
designated at initial recognition, held-to-maturity investments, loans and receivables, available-for-sale assets,
financial liabilities measured at fair value through profit and loss, showing separately those held for trading and
those designated at initial recognition and financial liabilities measured at amortised cost.
III.
Other disclosures
Accounting policies for financial instruments, Information about hedge accounting, including the description of
each hedge, hedging instrument, and fair values of those instruments, and nature of risks being hedged for cash
flow hedges and etc.
•
The nature and extent of risks arising from financial instruments
I.
Risk of Financial Instrument
•
Credit risk – the risk that one party to a financial instrument will cause a loss for the other party by failing to
pay for its obligation. Disclosures about the credit risk include maximum amount of exposure (before
deducting the value of collateral), description of collateral, information about credit quality of financial assets
that are neither past due nor impaired, and information about credit quality of financial assets whose terms
have been renegotiated, for financial assets that are past due or impaired, analytical disclosures are required
and information about collateral or other credit enhancements obtained or called.
•
Liquidity risk – the risk that an entity will have difficulties in paying its financial liabilities. Disclosures about
liquidity risk include a maturity analysis of financial liabilities and description of approach to risk management.
•
Market risk – the risk that the fair value or cash flows of a financial instrument will fluctuate due to changes
in market prices. Market risk reflects interest rate risk, currency risk and other price risks. Disclosures about
market risk include a sensitivity analysis of each type of market risk to which the entity is exposed, additional
information if the sensitivity analysis is not representative of the entity's risk exposure (for example because
exposures during the year were different to exposures at year-end). IFRS 7 provides that if an entity prepares
a sensitivity analysis such as value-at-risk for management purposes that reflects interdependencies of more
than one component of market risk (for instance, interest risk and foreign currency risk combined), it may
disclose that analysis instead of a separate sensitivity analysis for each type of market risk
II.
Qualitative Disclosures
The qualitative disclosures describe risk exposures for each type of financial instrument management's objectives,
policies, and processes for managing those risks changes from the prior period.
III.
Quantitative Disclosures
The quantitative disclosures provide information about the extent to which the entity is exposed to risk, based on
information provided internally to the entity's key management personnel. These disclosures include summary
quantitative data about exposure to each risk at the reporting date disclosures about credit risk, liquidity risk, and
market risk and how these risks are managed as further described below concentrations of risk.
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P2 Short Notes | 46
IFRS 8: Operating Segments
I.
Core Principle
An entity must disclose information to enable users of its financial statements to evaluate the nature and financial
effects of the different business activities (based on product or geographical area) in which it engages and the
economic environments in which it operates. Where an entity with a matrix organisational structure is unable to
clearly identify operating segment, it is required to look to the core principle in determining the appropriate basis
of segmentation.
II.
Scope
SCOPE OF THE STANDARD
- Standard should be applied by all entities that:
i.
Have filed, or are in the process of filing their financial statement with a security commission or other
regulatory organisation for the purpose of issuing any class of instruments in a public market; or
ii.
Hold assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance co., security
broker or dealer, pension fund, mutual fund or investment banking entity. (entity that use public fund)
III.
Operating Segment
An operating segment is a component of an entity that engages in business activities from which it may earn
revenue and incur expense including revenue and expenses relating to transaction with other components of the
same entity and external sales. In order to identify an operating segment, a few factors need to be analyse. One of
the factor is that the nature of the business activities of each component of the entity which has the existence of
managers responsible for them and information of the business activities are presented to the board of directors.
The manager also is directly accountable to and has a regular contact with the Chief Operating Decision Maker
(CODM) to discuss the performance of each segment. Further four decision steps to identify an operating segment
are required as follow:
Step 1: Identify the CODM which a function rather than an individual with a specific title. Function of CODM is
to allocate resources and assess the operating results of the segments of an entity.
Step 2: Can the component generate revenue and incur expenses from its business activities?
Step 3: Are the component’s operating results regularly reviewed by the CODM as a basis for resource
allocation and performance assessment?
Step 4: Is discrete financial information available for the component? This refers to the financial information
made available to the CODM for the purpose of reviewing performance and in determining how
resources should be allocated.
IV.
Reportable Segment
An entity shall report separately information about each operating segment that has been identified in accordance
with the definition of operating segment or results from aggregating two or more of those segments which exceeds
the quantitative threshold.
AGGREGATION CRITERIA
QUANTITATIVE THRESHOLD
Multiple operating segment may be An entity shall report separately information about an operating
aggregated into a single reportable segment that meets any of the following quantitative threshold:
segment if aggregation is consistent with (a.k.a. 10% test)
the core principle of IFRS 8, the segment (a) Total Revenue is 10% or more of the combined total revenue
has similar economic characteristics, and of all operating segment.
the segments are similar in the nature of (b) Absolute amount of the reported Profit or Loss is 10% or
the product and services, the nature of the more of the combined total Profit of all operating segment that
production process, the type or class of did not report a loss or combined reported Loss of all operating
customer, the distribution method and if segment that reported a loss.
applicable, the nature of the regulatory (c) Assets are 10% or more of the combined assets of all
environment.
operating assets.
Exception to the 10% threshold test:
1.
75% Rule
If the total external revenue reported by operating segment constitutes less than 75% of the entity’s revenue,
additional operating segment shall be identified as reportable segment even if the segment does not meet the
10% threshold test until at least 75% of the entity’s revenue is included in reportable segment.
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P2 Short Notes | 47
2.
Comparison purposes
If an operating segment which previously pass the 10% threshold test and are a reportable segment however does
not pass 10% threshold test for the current year, the entity shall continue to be reported as reportable segment
in the current period for comparison purposes.
3.
Restating previous year
If an operating segment which previously failed the 10% threshold test however pass 10% threshold test for the
current year, the entity shall restate the previous year result to be reported as reportable segment for comparison
purposes.
4.
Management approach
Operating segment that do not meet any of the quantitative threshold may be considered reportable and
separately disclosed if the management believes that information about the segment would be useful to users of
the financial statement and the segment may be a major segment in the future.
All other segment result which failed the 10% threshold test are aggregate and reported as ‘all other segments’ category.
There may be a practical limit to the no. of reportable segment that an entity separately discloses beyond which information
may become too detailed. Although no precise limit has been determined as the no. of operating segment that are reportable
increased above 10, the entity should consider whether a practical limit has been reached.
IFRS 9: Financial Instruments
I.
Measurement of Financial Instruments
Initial
Recognition
Initial
Measurement
Subsequent
Measurement
Derecognition
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FINANCIAL ASSET (BOOK OF INVESTOR)
An entity shall recognise a financial asset in its statement of
financial position when and only when the entity becomes
party to the contractual provision of the instrument.
Buying a Financial Asset (outflow) =
FV of consideration paid + Transaction cost
• Determination of method for IID only:
BMT – Business Model Test
CCT – Cash Flow Characteristics Test
ACM
FVTOCI
FVTPL
1. BMT: Hold
1. BMT: Hold,
1. Residual
and Collect the
Collect the
category – Buy
asset cash flows
assets cash flow
and Sell
2. CCT: Solely
and Sell the
2. Fail BMT &
Payment of
asset
CCT
Principal and
2. CCT: SPPI
3. Reduce
Interest (SPPI)
3. Interest:
Accounting
3. Interest:
TVOM & Credit
Mismatch
TVOM & Credit
Risk
Risk
• Accounting Treatment
IID
IIE
ACM
FVTOCI FVTPL FVTOCI FVTPL
Int./Div. SOPL
SOPL
SOPL
FV G/L
Ignored OCI
SOPL
OCI
SOPL
Derecog SOPL
SOPL
SOPL
RE
SOPL
If entity opt to use FVTOCI method for IIE, it is an irrevocable
selection
Entity shall derecognise a financial asset when:
• The contractual right to cash flow has Expired
• Entity Transfer the right to receive cash flows
• Entity assumed an Obligation to pay cash flows
• Entity Transfer substantially all Risk & Reward
However, the entity should not derecognise when:
• Entity still Retained substantially all Risk & Reward of the
asset
• Entity still Retained control of the Asset
FINANCIAL LIABILITY (BOOK OF ISSUER)
same as Financial Asset
Issuing a Financial Instrument (inflow) =
FV of consideration received – Transaction cost
• Determination of method
FVTPL
ACM
SPECIAL
1. Derivatives Others
Other Financial
2. Held for
Financial Liability must
Trading
Liability
use ACM
(NORM) method. If
company opt
to use FVTPL, it
should be
treated
differently.
• Accounting Treatment
FVTPL
ACM
SPECIAL
FV G/L
SOPL
Ignored SOPL
G/L
due OCI
entity own
Credit Risk
Others G/L SOPL
SOPL
SOPL
Derecog
RE
RE
RE
Financial Liability is derecognise when it is
Extinguished by way of:
• Discharge (paid)
• Cancelled by the holder (gain to the
borrower)
• Expires (not exercised)
P2 Short Notes | 48
II.
Debt Factoring
Factoring without recourse
The transferor does not provide guarantee about the performance of the receivables. In such transaction, the
entity has transferred the risk and rewards of ownership and should derecognise the receivables.
Factoring with recourse
The transferor fully or partially guarantees the performance of the receivables. The transferor has not therefore
transferred fully the risks to another party. In most factoring with recourse transactions, the transferor does not
allow the transferee to sell the receivables, in which the case is that the transferor still retains control over the
asset. In this case, the criteria for derecognition are not satisfied and the should not be derecognised.
III.
Impairment of Financial Assets
•
Only apply to:
a) IID only (loan receivables, investment in debentures, trade receivables) which are measured at ACM and
FVTOCI
b) Loan commitments and Financial guarantee (no receivables)
c) Contract Asset receivables (IFRS 15)
d) Lease receivables (IAS 17).
•
Presented as reduction in financial asset (less: Loss Allowance) in the SOFP and Impairment Loss Expenses of
financial Assets in SOPL.
•
Impairment Model
a) General three stage Approach
STAGE
CREDIT RISK
EXPECTED CREDIT LOSS
EFFECTIVE INTEREST
REVENUE RECOGNISED
Stage 1
At initial recognition of a financial asset, an
entity recognises a loss allowance equal to 12
month expected credit losses that are
expected to result from default events.
After initial recognition
Credit risk has not increased significantly
since initial recognition.
PERFORMING
Credit risk has significantly increased since
initial recognition (rebuttable presumptions if
more than 30 days past due)
UNDERPERFORMING
Credit impaired financial asset (triggered by
objective evidence) (rebuttable presumptions
if more than 90 days past due)
NON-PERFORMING
Recognise
12-month
expected credit losses.
PD% X Gross Receivables
Recognise
life
time
expected losses
PD% X Gross Receivables
Gross Basis
Effective interest on gross
carrying amount
Gross Basis
Effective interest on gross
carrying amount
Recognise
life
time
expected losses
PD% X Gross Receivables
Net Basis
Effective interest on
amortised cost carrying
amount (that is, net of
credit allowance)
Stage 2
Stage 3
b) Simplified Approach
IFRS 9 permits the use of a provision matrix where trade receivables are grouped based on different customer
bases and different historical loss patterns. Under this model, entities could adjust the historical provision
rates (Closing balance of loss allowance – Opening balance of loss allowance) for their receivables to reflect
relevant information about current condition and reasonable and supportable forecasts about the future. A
similar approach might be followed for contract assets.
Current
1 – 30 days past due
31 – 60 days past due
61 – 90 days past due
More than 90 days
TOTAL
Hazmizal Halil
EXPECTED
DEFAULT RATE
0.3%
1.6%
3.6%
6.6%
10.6%
GROSS CARRYING
AMOUNT
XX
XX
XX
XX
XX
XX
CREDIT LOSS
ALLOWANCE
X
X
X
X
X
(X)
Default rate X Gross
carrying amount)
P2 Short Notes | 49
•
IV.
Situation of Impairment
1
Situation
Receivables
2
No Receivables
3
4
Purchased Financial Asset
in Stage 3
Investment in Debt
Instrument
Financial Asset (IID) @ ACM
Contract Assets
Lease Receivables
Loan Commitments
Financial Guarantee
Originated credit impaired
financial assets
Financial Asset (IID) @ FVTOCI
5
Confirm cannot recover
Instrument written-off
6
Financial Asset Grade A
Low credit risk (AAA rated bond)
Method of Impairment
ST – Simplified Model
LT – Choose General or Simplified Model
SOFP: CA less Loss Allowance
General Model
SOFP: Liability (Provision for G.)
Don’t conduct general impairment test
Credit-adjusted effective interest rate
General Model
Impairment Loss – SOPL
FV G/L – OCI / Equity
SOFP: CA – Receivables
(gross – written-off amount)
No need to follow General Model
1st Stage only (12 months ECL only)
Derivatives and Hedge Accounting
A derivative is an instrument whose value is derived from the value of one or more underlying, which can be
commodities, precious metals, currency, bonds, stocks, stocks indices and etc.
a)
Types of Derivatives
OPTIONS
An options contract, binds
one party which it has the
obligation to buy or sell at a
later date whereas the other
party has the right to make a
choice. Obviously, the party
that makes a choice has to pay
a premium for the privilege.
Call option allows the right
but not the obligation to buy
something at a later date at a
given price whereas put
option gives the right but not
the obligation to
sell
something at a later date at a
given pre-decided price
If the option is favourable to
the holder, it will normally be
exercise. If it is unfavourable,
the holder lets the option
lapse. Irrespective either the
option is exercised or lapse,
the entity must derecognised
the option.
If traded – will have a FV from
active market (IFRS 13 level 1).
If not traded – no FV but can
be calculated based on Option
Pricing Model (IFRS 13 level 3)
Initial
Measurement
–
Premium paid
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FORWARDS
An agreement or contract
to buy / sell an underlying
asset at a future date. The
price at which this
transaction will take place
is decided in the present.
Since a forward contract
takes place between two
counterparties, there is an
increase
chance
of
counterparty credit risk.
Normally entity enter into
the forward contract to
lock in price and hedge
their risk towards the
fluctuation of fair value
Forward contracts are
settled at market by
actual delivery of item
specified in the contract
or by a net cash
settlement. Upon delivery
of the underlying assets,
the contract is exercised
and derecognised.
It is a private agreement –
no FV. The price is
customised generally for
trading purposes.
FUTURES
Future contract is similar to
forwards
contract
except
futures contracts are listed on
the exchange. This means that
the
exchange
is
an
intermediary. Thus, size and
volume of transaction in a
contract is pre-determined
which the agreement cannot be
modified in any way. These
contracts are traded on the
daily settlement procedure
meaning that any gains or losses
realized on this contract on a
given day have to be settled on
that very day.
Since it is traded in the
exchange, the cash receive or
paid every day is not recorded
but the entity will recognised
the financial asset or financial
obligation instead.
INTEREST RATE SWAP
Swaps enable the participants
to exchange their streams of
cash flows. For instance, at a
later date, one party may switch
an uncertain cash flow for a
certain one. The most common
example is swapping a fixed
interest rate for a floating one.
Swaps enable companies to
avoid foreign exchange risks
amongst other risks. Swap
contracts are private contracts
which are negotiated between
two parties. Usually investment
bankers act as middlemen to
these contracts
In Swaps, the gain or loss is net
settled in cash. Double entries
will be recorded separately for
original contract.
Traded – will have a FV (IFRS 13
level 1).
Private contract
Initial Measurement - 0
Initial Measurement - 0
Initial Measurement – 0
P2 Short Notes | 50
b)
Qualifying criteria for Hedge Accounting – EDERRR
A hedging relationship qualifies for hedge accounting only if all the following criteria are met:
•
The hedging relationship consists only of ELIGIBLE hedging instruments and hedged items.
•
At the inception of the hedging relationship, there is a formal designation and DOCUMENTATION
of the hedging relationship and the entity’s risk management objective and strategy for undertaking
the hedge. The documentation shall include the identification of the:
i. Hedging instrument
ii. Hedge items
iii. Nature of the risk being hedged and how the entity will assess whether the hedging
relationship meets the hedge
iv. Effectiveness requirements including its analysis of the sources of hedge ineffectiveness
and how it determines the hedge ratio
•
The hedge relationship meets all of the following hedge EFFECTIVENESS requirements:
i.
There is economic RELATIONSHIP between the hedged item and the hedging instrument
ii.
The effect of credit RISK does not dominate the value change that result from the
economic relationship
iii.
The hedge RATIO of the hedging relationship is the same as that resulting from the
quantity of the hedged item that the entity actually hedges and the quantity of the
hedging instrument that the entity actually uses to hedge that quantity of hedged item.
c)
Type of Hedging
FAIR VALUE HEDGE
Fair value hedge is a hedge of the exposure to changes in fair
value of a recognized asset or liability or unrecognized firm
commitment, or a component of any such item, that is
attributable to a particular risk and could affect profit or loss.
How to account?
• Step 1: Determine the fair value of both your hedged item
and hedging instrument at the reporting date;
• Step 2: Recognize any change in fair value (gain or loss) on
the hedging instrument in profit or loss (in most cases it is
norms anyway for derivatives).
• Step 3: Recognize the hedging gain or loss on the hedged
item in its carrying amount and to SOPL.
Accounting Treatment:
G/L
DEBIT
CREDIT
CASH FLOW HEDGE
Cash flow hedge is a hedge of the exposure to variability in cash
flows that is attributable to a particular risk associated with all or
a component of a recognized asset or liability or a highly probable
forecast transaction, and could affect profit or loss.
How to account?
• Step 1: Determine the gain or loss on your hedging instrument
and hedge item at the reporting date;
• Step 2: Calculate the effective and ineffective portions of the
gain or loss on the hedging instrument;
• Step 3: Recognize the effective portion of the gain or loss on
the hedging instrument in other comprehensive income (OCI).
This item in OCI will be called “Cash flow hedge reserve”.
• Step 4: Recognize the ineffective portion of the gain or loss on
the hedging instrument in profit or loss. (need to conduct
EFFECTIVENESS TEST)
• Step 5: When the hedged expected future cash flows affect
profit or loss, or when a hedged forecast transaction occurs in
the future, do a reclassification adjustment.
Accounting Treatment:
DESCRIPTION
Hedging instrument:
DEBIT
CREDIT
Hedging instrument:
Loss
SOPL – FV loss
SOFP – Financial liabilities
Loss – effective
portion
OCI – Cash flow
hedge reserve
SOFP – Financial
liabilities
Gain
SOFP – Financial assets
SOPL – FV gain
Loss – ineffective
portion
SOPL – Ineffective
portion
SOFP – Financial
liabilities
Gain – effective
portion
SOFP – Financial
assets
OCI – Cash flow
hedge reserve
Gain – ineffective
portion
SOFP – Financial
assets
SOPL – Ineffective
portion
Hedged item:
Gain
SOFP – Hedged item
SOPL – Gain
Loss
SOPL – Loss
SOFP – Hedged item
EFFECTIVENESS TEST:
•
Over Hedging (split into effective portion to OCI and ineffective portion to SOPL)
G/L of hedging instrument (recognised) > estimate L/G of the hedged items (unrecognised)
•
Under Hedging (effective portion to OCI)
G/L of hedging instrument (recognised) < estimate L/G of the hedged items (unrecognised)
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P2 Short Notes | 51
IFRS 10: Consolidated Financial Statements
I.
Consolidation of Financial Statements
A. Who must prepare Group A/C?
An entity that is a PARENT shall present consolidated financial statements. This IFRS applies to all entities except:
a) A parent need not to present consolidated financial statement if it meets all the following condition:
i. It is a wholly-owned subsidiary or is a partially-owned subsidiary of another entity and all its other
owners, including those not otherwise entitled to vote, have been informed about and do not object
to the parent nit presenting consolidated financial statements;
ii. Its debt or equity instrument are not traded in a public market
iii. It did not file nor is it in the process of filing its financial statements with a securities commission or
other regulatory organisation for the purpose of issuing any class of instruments in a public market;
iv. Its ultimate or any intermediate parent produces consolidated financial statements that are available
for public use and comply with IFRSs.
b) Post-employment benefit plans or other long-term employee benefit plans provider.
c) Investment entities that are required to measure subsidiaries at FVTPL.
B. Should all subsidiaries be consolidated?
General rule: All subsidiaries need to be consolidated without any exemption.
PARTICULAR SITUATIONS
INVALID REASON OF EXEMPTION
Severe long-term restrictions: subsidiary is The subsidiaries undertake different activities than
restricted to transfer funds to parent, still need to those of parents or they are operating in different
consol as IFRS 10 no longer permit such exemption location.
Acquired for resale: IFRS 5 still need consol as a The subsidiaries have made losses or has significant
single line item – NCA held for sale/ Disposal Group liabilities.
Materiality: accounting standards do not normally The directors mat seeks to disguise the true
apply to immaterial items; therefore, an immaterial ownership of the subsidiary (i.e.; quasi subsidiaries)
subsidiary need not be consolidated. Ideally a perhaps to avoid disclosures of particular activities
parent should consolidate all subsidiaries which it or events or to avoid disclosures of ownership of
controls in all accounting period.
assets.
II.
Control – P / ERV / A
An investor controls an investee when it is exposed or has rights to variable returns from its involvement with the
investee and has the ability to affect those returns through its power over the investee.
A.
Power over the investee
An investor has power over an investee when the investor has existing rights that give it the current ability
to direct the relevant activities, specifically the activities that significantly affect the investee’s returns.
Example or relevant activities are selling and purchasing goods and services, managing financial assets and
etc. Rights can sometime be assessing in straightforward manner by way of voting rights granted by equity
instruments own by the investor. However, in other cases, the assessment will be more complex. IFRS 10 gives
the following examples of rights other than voting or potential voting rights, which individually can give the
investor power.
• Rights to appoint, re-assign or remove key management personnel who can direct the relevant activities
• Rights to appoint or remove another entity that directs the relevant activities
• Rights to direct the investee to enter into or veto changes to transactions for the benefit of the investor
• Other rights such as those specified in a management contract
B.
Exposure to Returns Variability
An investor is exposed, or has rights, to variable returns from its involvement with the investee when the
investor’s return from its involvement have the potential to vary as a result of the investee’s performance.
The investor’s returns can be only positive, only negative or wholly positive and negative. Returns include
not only dividends and other distributions form holding equity instruments in the investee, but may also
include upfront fees, access to cash, servicing fee, returns not available to non-controlling interest, cost
savings and etc.
C.
Ability to link between power and returns
An investor also need to has the ability to use its power to affect the investor’s returns from its involvement
with investee. Returns are often an indicator of control.
Hazmizal Halil
P2 Short Notes | 52
III.
Application of Principle of Control
i.
Control by circumstances
a) Control by Voting Rights
IFRS 10 retains the presumption in the former IAS 27 that an investor who can exercise more than a
majority of the voting rights has control of the investee (unless circumstances indicate otherwise). The
more than a majority criterion can be attained by holding directly or indirectly more than half the voting
equity instruments of an investee or by holding voting equity instruments and having contractual
arrangements with other investors.
b)
Less than a majority of voting rights (de facto control)
In assessing whether de facto control exists, the following should be considered:
•
Size of the investor’s holding of voting rights relative to the size and dispersion of other vote holders
– specifically, it is more likely that the investor has power over the investee
•
The more voting rights an investor holds
•
The more voting rights an investor holds relative to other vote holder
•
The more parties that would need to act together to outvote the investor (i.e.; the more widely
dispersed the other parties are)
•
Voting patterns at the investee’s previous shareholders’ meetings (i.e.; the percentage of voters
who turned up at past meetings, and whether the pattern is expected to be indicative of current
voting behaviour)
c)
Potential voting rights
Potential voting rights are defined as rights to obtain voting rights of an investee, such as those within
an option or convertible instrument. IFRS 10 specifies 3 issues to consider:
•
Substantive or protective? - Only substantive voting rights are considered in assessing power.
(Protective rights explanation – Refer page 55)
•
Purpose and design if instrument and other involvement.
•
Other voting or decision rights held by the investor.
Potential voting rights are more likely to be substantive if they are in the money or the investor will
benefit for other reasons from exercise (i.e.; realise synergies).
ii.
Control by contractual agreement
When an investee is designed, or structured in a manner that voting rights relate to administrative tasks only
but contractual arrangements dictate how the investee should carry out its activities, the assessment of
control would need to consider those contractual arrangements to decide who is able to direct the relevant
activities. These entities are described as structured entities. An investee may be designed so that voting
rights are not the dominant factor in deciding who controls the investee. In such cases, an investor’s
consideration of the purpose and design of the investee shall also include consideration of the risks to which
the investee was designed to be exposed, the risk it was designed to pass on to the parties involved with the
investee and whether the investor is exposed to some or all of those risks. Consideration of the risk includes
not only the downside risk but also the potential for upside. Examples of structured entity include
securitisation vehicles and some investment funds. A structured entity often has some or all of the following
features:
•
Restricted activities
•
A narrow and well defined objective such as carrying out research and development activities or
funding an entity.
iii.
Agency relationship
An agent is a party engaged to act on behalf of another party, the principal. A principal may delegate decisionmaking authority on some specific issues or on all relevant activities to the agent but ultimately the principal
still retains that power. The terms and conditions of the arrangement that are considered to assess whether
an entity is an agent or a principal include the following:
•
Scope of decision-making authority
•
Rights held by others (i.e.; existence of removal rights or ‘kick-out’ rights)
•
Remuneration of the decision-maker
•
Exposure to variability of returns through other interest.
The decision-making rights of the agent should be treated as being held by the principal directly in assessing
control. Power resides with the principal rather than the agent.
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P2 Short Notes | 53
IFRS 11: Joint Arrangements
I.
Scope of the standards
SCOPE OF THE STANDARD
- Standard should be applied by all entities that are party to a joint arrangement.
- For joint operations, this means that its scope goes beyond the joint operators and can extend to include entities
that do not have joint control.
- A party that participates in a joint venture should accounts for its interest in the arrangement in accordance with the
standard applicable to that interest.
•
IFRS 11 – If exert joint control
•
IAS 28 – if exert significant influence
•
IFRS 9 – If no significant influence
II.
Definition
Joint Arrangement
Joint Control
Joint Operation
Joint Operator
Joint Venture
Joint Venturer
Party to a joint
arrangement
Separate vehicle
DEFINITION
An arrangement of which two or more parties have joint control
The contractually agreed sharing of control of an arrangement, which exists only when decisions
about the relevant activities require the unanimous consent of the parties sharing control
A joint arrangement whereby the parties that have joint control of the arrangement have rights
to the assets and obligations for the liabilities relating to the arrangement
A party to a joint operation that has joint control of that joint operation
A joint arrangement whereby the parties that have joint control of the arrangement have rights
to the net assets of the arrangement
A party to a joint venture that has joint control of that joint venture
An entity that participates in a joint arrangement, regardless of whether that entity has joint
control of the arrangement
A separately identifiable financial structure, including separate legal entities or entities recognised
by statute, regardless of whether those entities have a legal personality
III.
Joint Arrangement
A joint arrangement is an arrangement under which two or more parties have joint control. A joint arrangement
has the following characteristics:
a) The parties are bound by a contractual arrangement.
b) The contractual arrangement gives two or more of those parties joint control of the arrangement.
A joint arrangement give rise to either a joint operation or a joint venture.
IV.
Joint Control
IFRS 11 describes the key aspects of joint control as follows: (CCU)
•
Contractually Agreed – contractual arrangements are usually, but not always written and provide the terms
of arrangement.
•
Control and relevant activities – For this purpose, relevant activities are as defined in IFRS 10 being activities
of the arrangement that significantly affect its returns.
•
Unanimous Consent – It exists only when decisions about the relevant activities of the arrangement require
the unanimous consent of the parties sharing the control of the arrangement. i.e.; when the parties to an
arrangement have collective control over the arrangement and no single party has control.
Two steps approach in assessing whether an entity has joint control of an arrangement:
Step 1: an entity assesses whether all the parties or a subset of the parties which control the arrangement. When
all the parties or a subset of the parties considered collectively are able to direct the activities that
significantly affect the returns of the arrangement (i.e.; the relevant activities) they control the
arrangement collectively.
Step 2: an entity assesses whether it has joint control of the arrangement. Joint control exists only when
decisions about the relevant activities require the unanimous consent of the parties that collectively
control the arrangement.
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P2 Short Notes | 54
V.
Difference between Joint Operation and Joint Venture
DIFFERENCES
Terms of the contractual
arrangement
Legally registered entity
Right to assets
Obligations for liabilities
The parties share all interest in the
liabilities in a specific proportion
Unlimited Liability
Revenues and expenses
and profits or losses
The
arrangement
establishes
an
allocation of revenue and expenses based
on relative performance of each party
Its share method on asset, liabilities,
equity, revenue and expenses
Accounting Treatment
VI.
JOINT OPERATION
Operators have right to the asset and
obligations for the liabilities
No legally registered entity but sometimes
may has legally registered entity (SOF)
The parties share all interest in the assets
in a specific proportion
JOINT VENTURE
Venturer have rights to the net assets
relating to the arrangement
Has legally registered entity
The assets belong to the arrangement.
The parties do not own direct right, title
or ownership of the assets
The arrangement is liable for the debts
and the parties only liable to the extent
of their respective investment
Limited Liability
The arrangement establishes each
party’s share in the profit or loss of the
arrangement
H% single line equity method
Structure of the Joint Arrangement
a) Not through a separate vehicle
Normally is a joint operation. In such cases, the contractual arrangement establishes the parties’ rights to the
assets and obligations for the liabilities relating to the arrangement and the parties’ right to the corresponding
revenues and obligations for the corresponding expenses.
b)
Structured through a separate vehicle
A joint arrangement in which the assets and liabilities relating to the arrangement are held in a separate
vehicle can be either a joint venture or a joint operation. An entity shall consider whether the legal form of
the separate vehicle, the terms of the contractual arrangement and, when relevant, other facts and
circumstances gives them the rights to the assets and obligations for the liabilities of the arrangement (Joint
Operation) or give them the rights to the net assets of the arrangement (Joint Venture).
c)
Protective rights
If the requirement for unanimous consent relates only to decisions that give a party protective rights and not
to decisions about the relevant activities of the arrangement, that party is not a party with joint control of
the arrangement. Protective rights are defined in IFRS 10 and are rights that are designed to protect the
interest of the party that holds them without giving that party control over the entity to which those rights
relate. Example of protective rights are:
•
A lender’s right to restrict the activities of a borrower from undertaking activities that could
significantly change the credit risk of the borrower to the detriment of the lender.
•
The right of a party holding a non-controlling interest in another to approve that other entity’s
capital expenditure of amounts greater than a specified threshold or to approve the issue of equity
of debt instruments.
•
The right of a lender to seize the assets of a borrower if the borrower fails to meet specified loan
repayment conditions.
Hazmizal Halil
P2 Short Notes | 55
IFRS 12: Disclosure of Interest in Other Entities
I.
Requirement of the Standards
IFRS 12 requires that a parent discloses the significant assumptions and judgement used in determining whether control
exists over an investee. The parent will therefore list all the entities it has a relationship with and explain the basis of the
accounting treatment.
II.
Objectives and Scope
OBJECTIVES
To require the disclosure of information that enables users
of financial statement to evaluate:
• The nature and risk associated with its interest in other
parties
• The effects of those interest on its financial position,
financial performance and cash flows.
III.
SCOPE
OUTSIDE OF THE SCOPE
Certain Employee Benefits Plan
Certain interest in Joint Venture
Separate Financial Statements
Unconsolidated
structured entities
Majority of interest in another
entity accounted under IFRS 9
Definitions
Interest in another entity
Structured entity
IV.
WITHIN: Interest in
Subsidiaries
Joint Arrangement
Associates
DEFINITION
Refers to contractual and non-contractual involvement that expense an entity to variability
of returns from the performance of the other entity. An interest in another entity can be
evidenced by, but is not limited to, the holding of equity or debt instruments as well as other
forms of involvement such as the provision of funding, liquidity support, credit
enhancement and guarantees. It includes the means by which an entity has control or joint
control or significant influence over another entity. An entity does not necessarily have an
interest in another entity solely because of a typical customer supplier relationship.
An entity that has been designed so that voting or similar rights are not the dominant factor
in deciding who controls the entity, such as when any voting rights relate to administrative
tasks only and the relevant activities are directed by means of contractual arrangements.
Disclosures requirement
•
Significant judgements and assumptions
An entity discloses information about significant judgements and assumptions it has made (and changes in those
judgements and assumptions) in determining that it controls another entity that it has joint control of an
arrangement or significant influence over another entity the type of joint arrangement (i.e. joint operation or joint
venture) when the arrangement has been structured through a separate vehicle.
•
Interests in subsidiaries
An entity shall disclose information that enables users of its consolidated financial statements to understand the
composition of the group understand the interest that non-controlling interests have in the group's activities and
cash flows evaluate the nature and extent of significant restrictions on its ability to access or use assets, and settle
liabilities, of the group evaluate the nature of, and changes in, the risks associated with its interests in consolidated
structured entities evaluate the consequences of changes in its ownership interest in a subsidiary that do not result
in a loss of control evaluate the consequences of losing control of a subsidiary during the reporting period.
•
Interests in joint arrangements and associates
An entity shall disclose information that enables users of its financial statements to evaluate the nature, extent
and financial effects of its interests in joint arrangements and associates, including the nature and effects of its
contractual relationship with the other investors with joint control of, or significant influence over, joint
arrangements and associates the nature of, and changes in, the risks associated with its interests in joint ventures
and associates.
•
Interests in unconsolidated structured entities
An entity shall disclose information that enables users of its financial statements to understand the nature and
extent of its interests in unconsolidated structured entities evaluate the nature of, and changes in, the risks
associated with its interests in unconsolidated structured entities.
Hazmizal Halil
P2 Short Notes | 56
IFRS 13: Fair Value Measurement
•
IFRS 13 excluded the following in measuring the fair value (outside scope):
IAS 2
Calculation of NRV
IFRS 2
FV at Grant Date / DOR of SBP
IAS 17 FV of leased assets
IAS 36 Value in use
I.
Definition (PSTOMM)
DEFINITION
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Use only the EXIT price (selling price) which are considered from the perspective of a market
PRICE
participant that holds the asset or owes the liability.
SCLR -Size, Condition, Location of the asset and liability as well as the Restrictions on the
SELL AN ASSET
sale or use of the asset should be considered and adjusted in measuring the fair value.
Restriction on sale of liability is prohibited to be adjusted to the fair value of a liability. The
fair value is also to be adjusted for premium and discount (excluded blockage discounts).
The measurement can be for stand-alone asset/liability, a group of asset/ liability or a
TRANSFER A LIABILITY
group of asset and liabilities.
Entity shall FIRST, identify the Principal Market which are the market with the greatest
ORDERLY TRANSACTION
volume and level of activity in determining the fair value. In the absence of a principal
FV = Exit Price(EP) –
market, the entity THEN, shall look at the Most Advantageous Market which maximises the
Transportation Price (TP)
amount that would be received for an Asset and minimised the amount that would be paid
only. (no TC)
for a liability after considering Transaction Cost and Transportation Price).
Market participants are the buyers and sellers in the principal or most advantageous market
who are: IKAW
MARKET PARTICIPANT
Independent to each other, Knowledgeable about the asset or liability, and Able and Willing
to enter into a transaction for the asset or liability.
Recurring Transaction – Date of Reporting
MEASUREMENT DATE
Non-recurring Transaction – Specific Dates
Business Combination – Date of Acquisition
II.
Hierarchy
LEVEL
LEVEL 1
QAIRN
LEVEL 2
O-Min Adj.
LEVEL 3
UO-Maj Adj.
III.
CHARACTERISTICS
Level 1 inputs are Quoted prices in Active Market for Identical assets or liabilities. A quoted market
price in an active market provides the most Reliable evidence of fair value and is used No adjustment.
Level 2 inputs (other than quoted prices included in level 1) are Observable either directly or indirectly.
It includes quoted price for Identical or Similar assets or liabilities in Inactive Market, Observable input
other than quoted price or inputs that are derived principally from or Corroborated by observable
market data by correlation or other means which require no significant adjustment. (Min Adj.)
Level 3 are Unobservable inputs for the asset or liability. An entity develops unobservable inputs using
the Best Information available in the circumstances, which might include the entity’s Own Data, taking
into account all information about Market Participant Assumption that is reasonably available.
Assumptions about risk include the Risk (which need to be adjusted – Maj Adj.) inherent in a particular
valuation technique used to measure the fair value and the Risk inherent in the Inputs to the valuation
technique. Valuation Technique that can be used are as follow:
1. Income Approach – PV of future cash flows.
2. Cost Approach – Gross Replacement Cost – Accumulated Depreciation = Net Replacement Cost  FV
3. Market Approach – Use the most recent market transaction price ± necessary adjustment.
Measurement
SOFP
IFRS 13
Non-financial Assets
Other than FA
HABU – Level 2/3
Asset
Financial Assets (FA)
IIE and IID (IFRS 9) – Investor
Listed – Level 1
Unlisted – Level
Equity
Equity
Equity
Equity instrument
2/3
Non-current Liabilities Financial Liabilities (FL)
Debt instrument – (IAS 32) Issuer
Liabilities
and Current Liabilities Non-Financial Liabilities Other than FL (i.e.; decomm. cost) Level 3
HABU – Highest and Best Use are to be subjected to the adjustment of (i) Physically Possible – Size, Conditions and Location
(ii) Legally Permissible – Legal Restrictions and (iii) Financially Feasible – Conversion Cost.
Hazmizal Halil
IAS 1
Non-current Assets
and Current Assets
P2 Short Notes | 57
IFRS 15: Revenue from Contracts with Customers
Step 1: Identify the Contract
A contract is an agreement between two or more parties that creates enforceable rights and obligations and sets out the
criteria for every contract that must be met.
Criteria of a
Contract
AP²RS
Criteria to
Combine Contract
PDS
Criteria for
Modification
SASP
•
•
•
•
•
•
•
Approval of a contract by all parties
Payment terms can be identified
Probable of Cash Flow (revenue is collected)
Right of each party can be identified
The contract has commercial Substance (Risk and Reward)
The contract is negotiated as a Package with a single commercial objective;
The amount of consideration to be paid in one contract is Dependent on the price or
performance of another contract;
• The goods or services promised in the contract are a Single Performance Obligation (PO)
Stand Alone Selling Price is available:
• Contact are to be separate since the contract can be distinct from the original contract.
Stand Alone Selling Price is not available:
• Distinct – Original contract shall lapse/cancelled/terminate and a new contract is created to
include the modification.
• Not Distinct – Adjustment are to be made to the original contract. No new contract is created.
Step 2: Identify the Performance Obligation (PO)
A PO is a promise in a contract with a customer to transfer a good or service to the customer. If those goods or services are
distinct, the promises are performance obligation and are accounted for separately. A goods or services is distinct if the:
•
Customer can benefit from the good or service on its own or together with other resources that are readily
available to the customer; and
•
The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises
in the contract
Step 3: Identify the Transaction Price
Transaction price is the amount of consideration in a contract to which the entity expects to be entitled in exchange for
transferring promised goods or service to a customer. The transaction price can be a fixed amount of customer
consideration, but it may sometime include variable consideration or consideration in a form other than cash.
Variable consideration is the incentives for early completion, performance bonuses, penalties for late completion or other
similar items. It also includes the contingent consideration which are the amount of consideration that would be variable if
either a product was sold with a right of return. Constraint is place on the variable consideration to prevent over-recognition
of revenue. Criteria for including variable consideration in the recognition of revenue is as follow:
•
It is highly probable that the entity is able to receive the variable consideration; and
•
A significant reversal in the amount of cumulative revenue recognised will not occur
The transaction price that are to be recognised as revenue should consider time value of money when the payment terms
is more than one year. For a non-cash consideration where the entity is subject to receive goods or service as a consideration,
IFRS 13; fair value measurement is to be used in determining the transaction price. The entity also shall take into account
any consideration payable to a customer such as rebates/ refunds/ discount or voucher.
Step 4: Allocate Transaction Price to the Performance Obligation
The price is allocated proportionately to the separate performance obligations based upon the stand-alone selling price.
Step 5: Recognise Revenue when condition has been Satisfied
Once control of goods or services transfers to the customer, the performance obligation is satisfied and revenue is
recognised. This may occur at a single point in time, or over a period of time. If a performance obligation is satisfied at a
single point in time, we should consider the following in assessing the transfer of control:
•
Present right to payment for the asset
•
Transferred legal title to the asset
•
Transferred physical possession of the asset
•
Transferred the risks and rewards of ownership to the customer
•
Customer has accepted the asset.
Hazmizal Halil
P2 Short Notes | 58
Principal vs
agent
Repurchase
agreements
Bill and hold
arrangements
Consignments
When a third party is involved in providing goods or services to a customer, the seller is required to
determine whether the nature of its promise is a performance obligation to:
•
Provide the specified goods or services itself (principal) or
•
Arrange for a third party to provide those goods or services (agent)
When a vendor sells an asset to a customer and is either required, or has an option, to repurchase the
asset. The legal form here is always a sale followed by a purchase at a later date. The economic
substance is more likely to be a loan secured against an asset that is never actually being sold.
an entity bills a customer for a product but the entity retains physical possession of the product until
it is transferred to the customer at a point in time in the future.
arises where a vendor delivers a product to another party, such as a dealer or retailer, for sale to end
customers. The inventory is recognised in the books of the entity that bears the significant risk and
reward of ownership (e.g. risk of damage, obsolescence, lack of demand for vehicles, no opportunity
to return them, the showroom-owner must buy within a specified time if not sold to public)
IFRS (SME): IFRS for Small and Medium Sized Entities
Small and medium sized entities are entities that do not have public accountability. This can be either unlisted entities or a
non-financial institution.
IFRSs for Small and Medium-sized entities
The IFRS for SMEs is a self-contained Standard (less than 250 pages), designed to meet the needs and capabilities of small
and medium-sized entities (SMEs), which are estimated to account for over 95 % of all companies around the world.
Compared with full IFRS (and many national GAAPs), the IFRS for SMEs is less complex in a number of ways:
• Topics not relevant for SMEs are omitted; for example, earnings per share, interim financial reporting and segment
reporting.
• Many principles for recognising and measuring assets, liabilities, income and expenses in full IFRS are simplified. For
example, amortise goodwill; recognise all borrowing and development costs as expenses; cost model for associates and
jointly-controlled entities; and undue cost or effort exemptions for specific requirements.
• Significantly fewer disclosures are required (roughly a 90 per cent reduction).
• The Standard has been written in clear, easily translatable language.
• To further reduce the burden for SMEs, revisions are expected to be limited to once every three years.
Accounting standard
Property, plant and equipment
Intangibles
Investment property
Borrowing costs
Business combinations
Simplifications
Cost model only
Expense research and development
Fair value model only
No capitalisation
Partial goodwill only and amortised over 10 years
GOODLUCK ON YOUR ACCA EXAM!
Hazmizal Halil
P2 Short Notes | 59