Table of Contents
1- IAS 36 - Class notes
5
15
20
30
31
34
35
37
42
47
49
53
58
63
65
68
69
82
85
89
92
94
97
101
112
115
121
130
133
136
140
145
149
161
169
172
183
184
186
2- IAS 36 - Class Practice (questions)
3- IAS 36 - Class Practice (solutions)
4-Q-1 Dec-07 (Solution)
5-Q-2 Dec-16 SOLUTION
6- IFRIC 1 - Class notes
7- IFRIC 1 - Class practice (Questions)
8-IFRIC 1 - Class practice (Solutions)
9-IFRS 5 - Class notes
10-IFRS 5 - Class practice (Questions)
11-IFRS 5 - Class practice (Solutions)
12-Discontinued operations (disclosure practice)
13-IAS 40 - Class notes
14-IAS 40 - Class practice [Questions]
15-IAS 40 - Class practice [Solutions]
16-Q-6 (a) Jun-12 (SOLUTION)
17- IAS 19 - Class notes
18- IAS 19 - Class practice (Questions)
19- IAS 19 - Class practice (Solutions)
20- Tanzeem Ltd Q-3(a) [Jun-15]
21- IFRIC 14 - Class notes
22- IFRIC 14 - Class practice [Questions]
23- IFRIC 14 - Class practice [Solutions]
24- IFRS 2 - Class notes
25- IFRS 2 - Correct Solutions of Past paper questions
26- IFRS 2 - Questions
27- IFRS 2 - Solutions
28- IAS 21 (separate FS) - Class notes
29- IAS 21 (separate FS) - Class practice [Questions]
30- IAS 21 (separate FS) - Class practice [Solutions]
31- IFRS 9 (Recognition, Classification and Measurement) - Class notes
32- IFRS 9 (Recognition, Classification and Measurement) - Class practice [Questions]
33- IFRS 9 (Recognition, Classification and Measurement) - Class practice [Solutions]
34- IFRS 9 (Regular way transactions and Impairment) - Class notes
35- IFRS 9 (Regular way transactions and Impairment) - Class practice [Questions]
36- IFRS 9 (Regular way transactions and Impairment) - Class practice [Solutions]
37- Global Investment (Q-2 Dec-11) Correct solution
38- French Ltd Q-5 Jun-19
39- IFRS 9 (Re-classification and De-recognition) - Class notes
1
40- IFRS 9 (Re-classification and De-recognition) - Class practice [Questions]
193
197
207
217
223
224
227
229
243
258
281
283
290
299
316
319
321
324
325
327
336
344
355
359
361
363
366
368
371
373
376
377
378
379
382
385
387
389
394
395
397
399
41- IFRS 9 (Re-classification and De-recognition) - Class practice [Solutions]
42- IFRS 9 (Re-classification and De-recognition) - Class practice [Solutions] (1)
43- IAS 32 - Class notes
44- IAS 32 - Class practice [Questions]
45- IAS 32 - Class practice [Solutions]
46- LSL Q-4 Dec-17 SOLUTION
47- Basic Consolidation [SOFP with one subsidiary] - Class notes
48- Basic Consolidation [SOFP with one subsidiary] - Class practice [Questions]
49- Basic Consolidation [SOFP with one subsidiary] - Class practice [Solutions]
50- Master question [Consolidation SOFP]
51- Basic consolidation [SOCI with one subsidiary] - Class notes
52- Basic consolidation [SOCI with one subsidiary] - Class practice [Questions]
53- Basic consolidation [SOCI with one subsidiary] - Class practice [Solutions]
54- Master question [Consolidation SOFP] SOLUTION
55- Master question [Consolidation SOCI SOCIE]
56- Master question [Consolidation SOCI] SOLUTION
57- Master question [Consolidation SOCIE] SOLUTION
58- Master question [Consolidation SOCIE] SOLUTION (Workings)
59- Associate [SOFP SOCI] - Class notes
60- Associate [SOFP SOCI] - Class practice [Questions]
61- Associate [SOFP SOCI] - Class practice [Solutions]
62- IFRS 11 - Class notes
63-Q-1 Jun-10 SOLUTION
64-Q-1 Dec-16 SOLUTION
65-Complex groups - Class notes
66-Q-1 Jun-14 SOLUTION
67-Q-1 Jun-19 SOLUTION
68- Master question Complex groups
69- Step acquisition - Class notes
70- SOFP Master question (Step acquisition)
71- SOCI Master question (Step acquisition)
72-Q-1 Jun-11 SOLUTION
73-Q-1 Jun-16 SOLUTION
74-Q-2 Jun-18 SOLUTION
75-Q-4 Dec-19 SOLUTION
76- Replacement awards
77- Disposal - Class notes
78- Master question DISPOSAL [SOFP]
79-Q-1 Jun-12 SOLUTION
80-Q-1 Dec-09 SOLUTION
81- Master question DISPOSAL [SOCI]
2
82- SOCIE format (final)
400
401
404
411
417
422
424
427
430
433
437
440
442
444
446
448
451
459
462
469
475
477
487
489
493
495
502
504
511
517
530
551
565
566
567
569
576
579
582
585
588
590
83-Q-1 Dec-12 SOLUTION
84- Cashflow (revision) - Class notes
85- Cashflow (revision) - Practice QA
86- Cashflow [consolidated] - Class notes
87-Q-3 Dec-11 SOLUTION
88-Q-4 Dec-10 SOLUTION
89- IAS 24 - Class notes
90- IAS 24 - Class practice [Questions]
91- IAS 24 - Class practice [Solutions]
92- Foreign operations - Class notes
93- Master question (Foreign) SOFP SOCI
94-Q-1 Dec-14 SOLUTION
95-Q-1 Jun-17 SOLUTION
96-Q-1 Dec-10 SOLUTION
98-Q-5 Dec-18 SOLUTION
99- IFRS 16 (Lessor) - Class notes
100- IFRS 16 (Lessor) - Class practice (Questions)
101- IFRS 16 (Lessor) - Class practice (Solutions)
102- IFRS 16 (Lessee) - Class notes
103- IFRS 16 (Lessee) - Class practice [Questions]
104- IFRS 16 (Lessee) - Class practice [Solutions]
105-Q-4 Dec-18 SOLUTION
106- IFRS 16 (Sale and leaseback) - Class notes
107- IFRS 16 (Sale and leaseback) - Class practice [Questions]
108- IFRS 16 (Sale and leaseback) - Class practice [Solutions]
109-Q-6(a) Dec-17 SOLUTION
110- IFRS 15 - Class notes
111- IFRS 15 - Class practice [Questions]
112- IFRS 15 - Class practice [Solutions]
113- IFRS 15 - Illustrative examples [1 - 40]
114- IFRS 15 - Illustrative examples [44 - 63]
115-Q-4 Jun-17 SOLUTION
116-Q-3 Dec-14 SOLUTION
117- IAS 33 [Diluted EPS] - Class practice [Questions]
118- IAS 33 [Basic EPS] - Class practice [Solutions]
119- IAS 33 [Basic EPS] - Class notes
120- IAS 33 [Diluted EPS] - Class practice [Solutions]
121- IAS 33 [Diluted EPS] - Class notes
122- IAS 33 [Basic EPS] - Class practice [Questions]
123-Q-7 Jun-18 SOLUTION
124-Q-6 Jun-15 SOLUTION
3
125- IAS 12 - Class notes
592
605
611
626
628
630
631
633
635
663
667
669
674
678
680
682
688
691
694
710
714
716
717
718
723
726
730
732
126- IAS 12 - Class practice [Questions]
127- IAS 12 - Class practice [Solutions]
128-Q-1 Jun-18 SOLUTION
129-Q-5 Jun-16 SOLUTION
130-Q-3 Jun-17 SOLUTION
131-Q-3 Dec-16 SOLUTION
132-Q-4 Jun-19 SOLUTION
133- IFRIC 16 - Hedges of a Net Investment in a Foreign Operation
134- IFRS 9 (Hedging) - Class notes
135- IFRS 9 (Hedging) - Class practice [Questions]
136- IFRS 9 (Hedging) - Class practice [Solutions]
137- NBP Fund
138- SOCIE (IAS 1)
139- SOCI (IAS 1)
140- EFU Life (Notes to SOCI)
141- EFU Life (SOFP SOCI)
142- EFU General (Notes to SOCI)
143- BAL (Notes to SOFP)
144- Meezan Fund
145- EFU General (SOFP SOCI)
146- EOBI (Net assets available for benefits)
147- EOBI (Changes in net assets)
148- IFRIC 7 illustrative example
149- BAL (SOFP SOCI)
150- IFRS 13 - ACCA notes
151- ACCA practice question (Question)
152- ACCA practice question (Answer)
4
IAS 36 – Class notes
SCOPE
This standard shall not apply to:
(a) inventories (IAS 2);
(b) contract assets and assets arising from costs to obtain or fulfil a contract (IFRS 15);
(c) deferred tax assets (IAS 12);
(d) assets arising from employee benefits (IAS 19);
(e) financial assets (IFRS 9);
(f) investment property measured at fair value (IAS 40);
(g) biological assets measured at fair value less costs to sell (IAS 41);
(h) contracts within the scope of IFRS 17; and
(i) non‑current assets classified as held for sale (IFRS 5).
Exam notes:
For assets carried at revaluation model, following should be considered:
1. The only difference between “fair value” and “fair value less cost of disposal” is the direct
incremental costs attributable to the disposal of asset.
2. If cost of disposal is negligible then recoverable amount of asset must be equal to or greater than
fair value. Therefore, when both fair value and value in use are known, then asset is only revalued
to “fair value” and there is no need for impairment.
3. If cost of disposal is not negligible then “fair value less cost of disposal” is necessarily less than “fair
value”. Therefore, such asset is first revalued to “fair value” an3d then it is tested for impairment.
4. If fair value is not known and only value in use is known then asset is impaired if value in use is less
than carrying amount.
5. Although charging of impairment loss as per IAS 36 and revaluation loss as IAS 16/38 are same, but
accumulated depreciation is eliminated only at the time of revaluation as per IAS 16/38 and not at
the time of impairment as per IAS 36.
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED
1. Impairment test is the comparison of “carrying amount determined as per relevant IAS” with
“recoverable amount”
2. Carrying amount is the amount at which an asset is recognised after deducting any accumulated
epreciation (amortisation) and accumulated impairment losses thereon.
3. The recoverable amount of an asset or a cash‑generating unit is the higher of:
its fair value less costs of disposal
its value in use.
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IAS 36 – Class notes
Timing of impairment testing:
- For intangible assets not yet available for use
- For intangible assets with indefinite life
- For Goodwill acquired in business combination
- For all other assets
Impairment is tested annually
An entity shall assess at the end of each reporting
period whether there is any indication that an
asset may be impaired. If any such indication
exists, the entity shall estimate the recoverable
amount of the asset.
Indications of impairment
External sources of information
(a) the asset’s value has declined during the period significantly.
(b) significant changes with an adverse effect on the entity, in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have increased and those
increases are likely to affect the discount rate used in calculating an asset’s value in use.
(d) the carrying amount of the net assets of the entity is more than its market capitalisation.
Internal sources of information
(e) Obsolescence or physical damage of an asset.
(f) significant changes with an adverse effect on the entity, in the extent to which, or manner in which,
an asset is used
(g) economic performance of an asset is, or will be, worse than expected.
Dividend from a subsidiary, joint venture or associate
(h) for an investment in a subsidiary, joint venture or associate, the investor recognises a dividend from
the investment and evidence is available that:
(i) the carrying amount of the investment in the separate financial statements exceeds the carrying
amounts in the consolidated financial statements of the investee’s net assets, including associated
goodwill; or
(ii) the dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate
in the period the dividend is declared.
MEASURING RECOVERABLE AMOUNT
1. It is not always necessary to determine both an asset’s fair value less costs of disposal and its value in
use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it
is not necessary to estimate the other amount.
2. Sometimes it will not be possible to measure fair value less costs of disposal, In this case, the entity
may use the asset’s value in use as its recoverable amount.
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IAS 36 – Class notes
3. If an asset’s value in use is not expected to exceed its fair value less costs of disposal, the asset’s fair
value less costs of disposal may be used as its recoverable amount. This will often be the case for an
asset that is held for disposal.
4. If recoverable amount cannot be determined for an individual asset because it does not generate cash
inflows that are largely independent of those from other assets or groups of assets, then recoverable
amount is determined for the cash‑generating unit to which the asset belongs unless either:
(a) the asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair
value less costs of disposal can be measured.
Fair value less cost to sell
1. Fair value is 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. (See IFRS 13 Fair Value
Measurement.)
2. Costs of disposal are incremental costs directly attributable to the disposal of an asset or
cash‑generating unit, excluding finance costs and income tax expense.
3. Costs of disposal, other than those that have been recognised as liabilities, are deducted in
measuring fair value less costs of disposal.
Examples
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 (as defined in 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.
Value in use
1. Value in use is the present value of the future cash flows expected to be derived from an asset or
cash‑generating unit.
2. Estimating the value in use of an asset involves the following steps:
(a) estimating the future cash inflows and outflows to be derived from continuing use of the asset
and from its ultimate disposal; and
(b) applying the appropriate discount rate to those future cash flows.
Future cash flows
1. cash flows should reflect all possible variations in the amount or timing of future cash flows, the result
shall be to reflect the expected present value of the future cash flows, i.e. the weighted average of all
possible outcomes [Ʃpx].
2. Base cash flow projections on budgets/forecasts which shall cover a maximum period of five years,
unless a longer period can be justified. Extrapolate the projections based on the budgets/forecasts
using a steady or declining growth rate for subsequent years, unless an increasing rate can be justified.
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IAS 36 – Class notes
3. Estimates of future cash flows shall include:
(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from
continuing use of the asset and can be directly attributed, or allocated on a reasonable and
consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful
life.
Net disposal value at the end of its useful life is determined in a similar way to fair value less
costs of disposal, except that, it now also includes adjustments for future price increases.
4. To avoid double‑counting, estimates of future cash flows do not include:
(a) cash inflows from other recognized assets (for example, financial assets such as receivables); and
(b) cash outflows for recognized liabilities (for example, payables, pensions or provisions).
5. Future cash flows shall be estimated for the asset in its current condition. Therefore, future cash flows
shall not include estimated future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an entity is not yet committed; or
Once the entity is committed to the restructuring:
its estimates of future cashflows reflect the cost savings and other benefits from the
restructuring; and
its estimates of future cash outflows for the restructuring are included in a restructuring
provision in accordance with IAS 37.
(b) improving or enhancing the asset’s performance.
Projections of cash outflows include those for the day‑to‑day servicing of the asset as well
as future cash outflows (e.g. future part replacements to be accounted for as capital
expenditure) necessary to maintain the level of economic benefits expected to arise from
the asset in its current condition.
In case of capital work-in-progress, the future cash flows shall also include necessary capital
expenditure to get the asset ready for use or sale.
6. Estimates of future cash flows shall not include:
(a) cash inflows or outflows from financing activities; or
(b) income tax receipts or payments.
7. Future cash flows are estimated in the currency in which they will be generated and then discounted
using a discount rate appropriate for that currency. An entity translates the present value using the
spot exchange rate at the date of the value in use calculation.
Discount rate
The discount rate (rates) shall be a pre‑tax rate (rates) that reflect(s) current market assessments of:
(a) the time value of money; and
(b) the risks specific to the asset for which the future cash flow estimates have not been adjusted.
RECOGNITION AND MEASUREMENT OF IMPAIRMENT LOSS
Impairment loss = Carrying amount – Recoverable amount
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IAS 36 – Class notes
Accounting for impairment loss:
If asset is carried at cost model
If asset is carried at revaluation model
Impairment loss shall be recognized in profit and Impairment loss shall be treated as a revaluation
loss immediately.
decrease in accordance with relevant IAS (e.g. IAS
16, 38)
Dr. Impairment loss (P&L)
Cr. Accumulated impairment loss
Dr. Revaluation surplus
Dr. P&L
Cr. Accumulated impairment loss
After charging impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
When impairment loss is greater than carrying amount (i.e. when recoverable amount is negative),
then entity shall recognize a liability if and only if required by another IAS.
CASH GENERATING UNITS [CGU]
A cash‑generating unit is the smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.
Identifying the CGU to which asset belongs
Example
A mining entity owns a private railway to support its mining activities. The private railway could be sold
only for scrap value and it does not generate cash inflows that are largely independent of the cash
inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because its value in use
cannot be determined and is probably different from scrap value. Therefore, the entity estimates the
recoverable amount of the cash‑generating unit to which the private railway belongs, ie the mine as a
whole.
1. Identification of an asset’s cash‑generating unit involves judgement. If recoverable amount cannot be
determined for an individual asset, an entity identifies the lowest aggregation of assets that generate
largely independent cash inflows.
Example
A bus company provides services under contract with a municipality that requires minimum service on
each of five separate routes. Assets devoted to each route and the cash flows from each route can be
identified separately. One of the routes operates at a significant loss.
Because the entity does not have the option to curtail any one bus route, the lowest level of identifiable
cash inflows that are largely independent of the cash inflows from other assets or groups of assets is
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IAS 36 – Class notes
the cash inflows generated by the five routes together. The cash‑generating unit for each route is the
bus company as a whole.
2 In identifying whether cash inflows from an asset (or group of assets) are largely independent, an
entity considers various factors including how management monitors the entity’s operations (such as
by product lines, businesses, individual locations, districts or regional areas) or how management
makes decisions about continuing or disposing of the entity’s assets and operations. Illustrative
Example 1 gives examples of identification of a cash‑generating unit.
3. If an active market exists for the output produced by an asset or group of assets, that asset or group
of assets shall be identified as a cash‑generating unit, even if some or all of the output is used
internally. If such cash inflows are affected by internal transfer pricing, an entity shall use
management’s best estimate of future price(s) that could be achieved in arm’s length transactions in
estimating:
(a) the future cash inflows of giving asset or CGU; and
(b) the future cash outflows of receiving asset or CGU.
Recoverable amount and carrying amount of CGU
1. Recoverable amount of a CGU is determined using the same guidance as studied earlier for a single
asset.
2. Carrying amount of a CGU shall be determined on a basis consistent with the way recoverable amount
is determined.
3. The carrying amount of CGU should include carrying amounts of only those assets that can be
attributed directly or allocated on a reasonable basis to that CGU and does not include the carrying
amount of any recognized liability unless recoverable amount of the CGU cannot be determined
without consideration of this liability (for example inclusion of provision for dismantling will reduce
the carrying amount CGU for fair comparison with recoverable amount).
4. For practical reasons, the recoverable amount of a CGU is sometimes determined after consideration
of assets that are not part of the CGU (for example, receivables or other financial assets) or liabilities
that have been recognised (for example, payables, pensions and other provisions). In such cases, the
carrying amount of the CGU shall also include such assets and liabilities only for calculating
impairment loss.
Goodwill
Allocating goodwill to cash‑generating units
1. For the purpose of impairment testing, goodwill acquired in a business combination shall, from the
acquisition date, be allocated to each of the acquirer’s cash‑generating units, or groups of
cash‑generating units, that is expected to benefit from the synergies of the combination, irrespective
of whether other assets or liabilities of the acquiree are assigned to those units or groups of units.
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IAS 36 – Class notes
2. Goodwill sometimes cannot be allocated on a non-arbitrary basis to individual CGU, but only to groups
of CGUs.
Testing cash‑generating units with goodwill for impairment
1. When goodwill relates to a cash‑generating unit but has not been allocated to that unit, the unit shall
be tested for impairment, whenever there is an indication that the unit may be impaired, by
comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.
2. A cash‑generating unit to which goodwill has been allocated shall be tested for impairment annually,
and whenever there is an indication that the unit may be impaired, by comparing the carrying amount
of the unit, including the goodwill, with the recoverable amount of the unit. If the recoverable amount
of the unit exceeds the carrying amount of the unit, the unit and the goodwill allocated to that unit
shall be regarded as not impaired.
Timing of impairment tests
1. If the assets constituting the cash‑generating unit to which goodwill has been allocated are tested for
impairment at the same time as the unit containing the goodwill, they shall be tested for impairment
before the unit containing the goodwill.
2. Similarly, if the cash‑generating units constituting a group of cash‑generating units to which goodwill
has been allocated are tested for impairment at the same time as the group of units containing the
goodwill, the individual units shall be tested for impairment before the group of units containing the
goodwill.
3. At the time of impairment testing a cash‑generating unit to which goodwill has been allocated, there
may be an indication of an impairment of an asset within the unit containing the goodwill. In such
circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for
that asset before testing for impairment the cash‑generating unit containing the goodwill.
4. Similarly, there may be an indication of an impairment of a cash‑generating unit within a group of
units containing the goodwill. In such circumstances, the entity tests the cash‑generating unit for
impairment first, and recognises any impairment loss for that unit, before testing for impairment the
group of units to which the goodwill is allocated.
Corporate assets
1. Corporate assets are assets other than goodwill that contribute to the future cash flows of both the
cash‑generating unit under review and other cash‑generating units.
2. Corporate assets include group or divisional assets such as the building of a headquarters or a division
of the entity, EDP equipment or a research centre. The distinctive characteristics of corporate assets
are that they do not generate cash inflows independently of other assets or groups of assets and their
carrying amount cannot be fully attributed to the cash‑generating unit under review.
3. In testing a cash‑generating unit for impairment, an entity shall identify all the corporate assets that
relate to the cash‑generating unit under review. If a portion of the carrying amount of a corporate
asset:
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IAS 36 – Class notes
(a) can be allocated on a reasonable and consistent basis to that unit, the entity shall compare the
carrying amount of the unit, including the portion of the carrying amount of the corporate asset
allocated to the unit, with its recoverable amount and recognize any impairment loss.
(b) cannot be allocated on a reasonable and consistent basis to that unit, the entity shall:
(i) compare the carrying amount of the unit, excluding the corporate asset, with its recoverable
amount and recognize any impairment loss;
(ii) identify the smallest group of cash‑generating units that includes the cash‑generating unit
under review and to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis; and
(iii) compare the carrying amount of that group of cash‑generating units, including the portion of
the carrying amount of the corporate asset allocated to that group of units, with the
recoverable amount of the group of units and recognize any impairment loss.
Exam note
Recoverable amount of the group of CGUs should be given separately, however, if not given
separately then recoverable amounts of individual CGUs are added.
Impairment loss for a CGU
1. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group
of units) in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash‑generating unit (group
of units); and
(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount
of each asset in the unit (group of units).
2. These reductions in carrying amounts shall be treated as impairment losses on individual assets.
3. In allocating an impairment loss as above, an entity shall not reduce the carrying amount of an asset
below the highest of:
(a) its fair value less costs of disposal (if measurable);
(b) its value in use (if determinable); and
(c) zero.
The amount of the impairment loss that would otherwise have been allocated to the asset shall be
allocated pro rata to the other assets of the unit (group of units).
4. After allocating impairment loss as above, a liability shall be recognised for any remaining amount of
an impairment loss for a cash‑generating unit if, and only if, that is required by another IFRS.
REVERSING AN IMPAIRMENT LOSS
An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that
asset.
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IAS 36 – Class notes
Indications of impairment loss reversal
External sources of information
(a) there are observable indications that the asset’s value has increased significantly during the period.
(b) significant changes with a favourable effect on the entity in the technological, market, economic or
legal environment.
(c) market interest rates or other market rates of return on investments have decreased during the
period to affect the discount rate used in calculating the asset’s value in use.
Internal sources of information
(d) significant changes with a favourable effect on the entity in the extent to which, or manner in which,
the asset is used or is expected to be used.
(e) evidence is available from internal reporting that indicates that the economic performance of the
asset is, or will be, better than expected.
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.
Reversal an impairment loss for an individual asset
Upper limit for reversal for individual asset
The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment
loss shall not exceed the carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior years.
Accounting for impairment loss reversal:
If asset is carried at cost model
If asset is carried at revaluation model
Impairment loss reversal shall be recognized in Impairment loss shall be treated as a revaluation
profit and loss immediately.
increase in accordance with relevant IAS (e.g. IAS
16, 38)
Dr. Acc. depreciation & impairment loss
Cr. P&L
Dr. Acc. depreciation & impairment loss
Cr. P&L
Cr. Revaluation surplus
After reversing impairment loss, depreciation shall be charged on revised carrying amount over
remaining life.
Reversing an impairment loss for a CGU
1. A reversal of impairment loss for a CGU shall be allocated the assets of the unit, except for goodwill,
pro rate with the carrying amounts of the assets
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13
IAS 36 – Class notes
2. These increases in carrying amounts shall be treated as reversals of impairment losses for individual
assets.
3. In allocating a reversal of impairment loss as above, an entity shall not increase the carrying amount
of an asset above the lowest of:
(a) its recoverable amount (if measurable); and
(b) the carrying amount that would have been determined (net of amortization or depreciation) had
no impairment loss been recognized for the asset in prior periods.
The amount of the reversal of impairment loss that would otherwise have been allocated to the asset
shall be allocated pro rata to the other assets of the unit (group of units), except for goodwill.
4. An impairment loss recognized for goodwill shall not be reversed in a subsequent period.
Nasir Abbas FCA
14
IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
PRACTICE QUESTIONS
Question 1
Property, plant and equipment as disclosed in the draft financial statements of Apricot Pakistan Limited (APL)
for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The performance of
the plant has been deteriorating since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:
Inflows from sale of product under existing condition of the plant
Operational cost other than depreciation
Depreciation
Expenses to be paid in respect of 30 June 2018 accruals
Cost of increasing the plant’s capacity
Additional inflows (net) expected from the upgrade
Interest on loan
Maintenance cost
Tax payment on profits
Rs. in million
250
25
170
8
60
40
30
15
18
Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The plant’s
residual value after its remaining useful life of 3 years is estimated at Rs. 100 million.
An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the following
costs.
Cost of delivery to the customer
Legal cost
Costs to re-organize the production process after disposal of plant
Rs. in million
45
10
50
Applicable discount rate is 9%.
Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018.
(07)
{FAR II Autumn 2018, Q # 6(b)}
Question No. 2
Engro Limited (EL) has various factory units, each of which is categorized as cash generating unit. Following
information relates one factory in respect of impairment test:
(i)
EL follows cost model for all property, plant and equipment.
(ii)
Carrying amount of assets in CGU as at June 30, 2017 are as follows:
Land
Building
Plant and machinery
Equipment
Furniture and fixtures
(iii)
Rs. in million
150
200
700
180
120
Goodwill allocated to this CGU amounts to Rs. 50 million.
NASIR ABBAS FCA
15
IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
(iv)
(v)
Fair value less cost to sell of entire CGU amounts to Rs. 1,200 million. Fair value less cost to sell of land
amounts to Rs. 170 million.
Remaining life of this CGU is 8 years over which following cash flows are expected:
Rs. in million
Net pre-tax cash flows:
Annual (for 5 years)
Year 6
Year 7
Year 8
250
180
140
110
Net disposal proceeds at end of year
210
(vi)
Pre-tax discount rate of EL is 10% and post-tax discount rate is 7%. Tax rate applicable to EL is 30%.
Required:
Determine the carrying amount of each asset to be included in EL’s financial statements for the year ended
June 30, 2017.
Question 3
Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
Land
Building
Plant and machinery
Software
Goodwill
Furniture and fixtures
Rs. in million
1,000
1,200
1,800
300
100
500
Other information:
(i) Fair value less cost to sell of land is Rs. 950 million.
(ii) Recoverable amount of CGU is Rs. 4,100 million.
(iii) Software is outdated and management has decided to replace shortly. In this respect a party has offered
to purchase existing software for Rs. 100 million.
Required:
Calculate revised carrying amounts of assets after charging impairment loss.
Question 4
Carrying amounts of assets in a CGU as on June 30, 2020 are as follows:
Land
Building
Plant and machinery
Equipment
Goodwill
Inventory
Rs. in million
900
1,000
1,500
400
100
100
Other information:
NASIR ABBAS FCA
16
IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
(i)
(ii)
(iii)
(iv)
Fair value less cost to sell of land is Rs. 950 million.
Recoverable amount of CGU is Rs. 3,200 million.
An item of plant & machinery having book value of Rs. 120 million was severely damaged as result of
recent short circuit. It has been assessed as beyond repairs. It will be disposed off shortly.
Fair value less cost to sell of inventory (i.e. NRV) is Rs. 95 million.
Required:
Calculate revised carrying amounts of assets after charging impairment loss.
Question No. 5
BB Limited (BBL) produces a single product in two factories A and B. Factory A produces the required
components which are assembled in factory B. The finished product is then sent to distributors for sale.
Following information is available for the purpose of impairment testing:
(i)
(ii)
BBL uses cost model for subsequent measurement of property, plant and equipment.
The book value and fair value less cost to sell of BBL’s tangible assets as on 31 December 2016 were as
follows:
Building
Plant
Equipment
Other assets
(iii)
(iv)
Goodwill appearing in the books is Rs. 100 million.
Expected cash flows of BBL in next three years are as follows:
Net operating cash inflows
Estimated sale proceeds of all assets
Costs of disposing the above assets
(v)
Book value
Fair value less cost to sell
Factory A
Factory B
Factory A
Factory B
------------------------- Rs. in million ----------------------1,850
3,600
1,800
4,200
1,125
2,700
1,300
1,600
690
1,350
460
1,480
240
510
130
280
2017
2018
2019
------------ Rs. in million --------1,650
2,450
2,900
8,200
283
Pre-tax discount rate of BBL is 9%.
Required:
(a) Identify the cash generating unit for BB Limited.
(02)
(b) Determine the carrying amount of each asset to be included in BBL’s financial statements for the year
ended 31 December 2016 in accordance with International Financial Reporting Standards. (Ignore tax
implications)
10)
{Spring 2017, Q#3}
NASIR ABBAS FCA
17
IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
Question No. 6
Dream Limited (DL) is a manufacturing concern engaged in export sales. Following information relating to its
assets as on June 30, 2020:
Carrying
Fair value
amounts
----------- Rs. million ----------1,200
800
2,500
2,300
300
150
CGUs:
CGU 1
CGU 2
CGU 3
Corporate assets:
Vehicles
Head office building
Equipment
100
300
150
-
Remaining
useful life
(years)
5
10
4
10
20
15
Other details:
Following cashflows are estimated to determine value in use as on June 30, 2020:
CGU 1
CGU 2
CGU 3
-------------------------- USD in million -------------------2.20
2.80
0.80
Net annual cashflows
Appropriate discount rate is 12%.
Cost to sell is negligible.
Exchange rates for year 2020:
01-07-19
150
Rs. per USD
Average
155
30-06-20
160
Required:
Carrying amounts of assets after charging impairment loss, if corporate assets can be allocated to each CGU on a
reasonable basis.
Question No. 7
A plant was purchased and installed on July 1, 2015 at a total cost of Rs. 40 million. Initial estimate of useful
life was made at 8 years. It was tested for impairment as follows:
Date
Value in use
June 30, 2017
June 30, 2019
Rs. 24 million
Rs. 19.5 million
Fair value less cost
to sell
Rs. 22 million
Rs. 18 million
During 2018, estimate of useful life was reduced by 2 years. Accounting year ends on June 30th.
Required:
Journal entries to record both impairment tests. (depreciation entries are not required)
NASIR ABBAS FCA
18
IMPAIRMENT OF ASSETS (IAS-36) - QUESTIONS
Question No. 8
Decent Limited (DL) acquired a machine on July 1, 2016 at a cost of Rs. 24 million. Useful life of machine was
estimated at 10 years. Management of DL decided to follow revaluation model for this machine. Following
values were determined for impairment testing in respect of this machine:
Date
June 30, 2018
June 30, 2020
Value in use
Rs. 15 million
Rs. 18 million
Fair value
Rs. 17.5 million
Not available
Cost to sell
Rs. 1.1 million
Not available
It is DL’s policy to transfer required amount from revaluation surplus to retained earnings.
Required:
Journalize all the transactions upto June 30, 2020.
Question 9
Carrying amounts of assets in a CGU as on June 30, 2018 were as follows:
Rs. in million
Land
Building
Plant and machinery
Software
Goodwill
Equipment
1,000
1,200
1,800
300
100
500
Remaining
useful lives
15
10
4
5
Recoverable amount of CGU was Rs. 4,100 million on June 30, 2018. On June 30, 2020, Recoverable amount of
CGU moved to Rs. 3,850 million whereas recoverable amount of Software was Rs. 130 million.
Required:
Calculate revised carrying amounts of assets after each impairment testing.
NASIR ABBAS FCA
19
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
SOLUTIONS
Solution No. 1
Value in use
Net operating cash flow (W-1) [LY x 0.85]
RV
factor @ 9%
Value in use
2019
2020
----------- Rs. million --------210.00
178.50
210.00
178.50
0.917
0.841
192.57
150.12
2021
151.73
100.00
251.73
0.772
194.33
537.02 [A]
Fair value less cost to sell
Fair value
Cost to sell:
delivery cost
legal cost
Carrying value
Recoverable amount [higher of A and B]
Impairment loss
W-1 Net operating cash flow
Inflows
Operational cost
Maint. Cost
Rs. million
570.00
(45.00)
(10.00)
515.00 [B]
610.00
537.02
72.98
250.00
(25.00)
(15.00)
210.00
Solution No. 2
Existing carrying amount of each asset:
Land
Building
Plant & machinery
Equipment
Furniture and fixtures
Goodwill
Rs. in million
150
200
700
180
120
50
1,400
[A]
Rs. in million
1,200
[B]
Total fair value less cost to sell of CGU:
Fair value less cost to sell
NASIR ABBAS FCA
20
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
Total value in use of CGU
Net operating for Year 1
Net operating for Year 2
Net operating for Year 3
Net operating for Year 4
Net operating for Year 5
Net operating for Year 6
Net operating for Year 7
Net operating for Year 8
Net disposal proceeds
Cash flow
Rs. million
250.00
250.00
250.00
250.00
250.00
180.00
140.00
110.00
210.00
Factor
0.909
0.826
0.751
0.683
0.621
0.565
0.514
0.467
0.467
Present value
Rs. million
227
207
188
171
155
102
72
51
98
1,271
Recoverable amount [higher of B or C]
Total carrying amount [A]
Impairment loss
Revised carrying amount
Assets
Land
Building
Plant & machinery
Equipment
Furniture and fixtures
Goodwill
[C]
1,271
1,400
129
NBV
150.00
200.00
700.00
180.00
120.00
50.00
1,400.00
Loss
13.17
46.08
11.85
7.90
50.00
129.00
Revised NBV
150.00
186.83
653.92
168.15
112.10
1,271.00
W-1
Since fair value less cost to sell of land exceeds carrying amount therefore impairment loss is not
allocated to land
Loss in excess of Rs. 50 million (i.e. relating to goodwill) is allocated as follows:
Assets
NBV
Loss
Building
200.00
13.17
Plant & machinery
700.00
46.08
Equipment
180.00
11.85
Furniture and fixtures
120.00
7.90
1,200.00
79.00
Solution No. 3
Assets
Land
Building
NASIR ABBAS FCA
Revised
carrying
amount
---------- Rs. million -------1,000
50
950
1,200
154
1,046
Carrying
amount
Impairment
loss (W-1)
21
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
P&M
Software
Goodwill
Furniture & fittings
Recoverable amount
Impairment loss
1,800
300
100
500
4,900
4,100
800
231
200
100
64
800
1,569
100
436
4,100
W-1 Loss allocation
Since software is clearly impaired therefore it will be impaired first, then loss will be charged to GW
Limit check for assets other than GW and software:
[800 - GW(100) - Software(200) = 500]
Carrying
Impairment
Assets
loss
amount
------ Rs. million ----Land
1,000
111 Exceeding limit
Building
1,200
133
P&M
1,800
200
Furniture & fittings
500
56
4,500
500
Revised allocation of remaining loss
[800 - GW(100) - Software(200) - 50(building) = 450]
Carrying
Impairment
Assets
loss
amount
------ Rs. million ----Building
1,200
154
P&M
1,800
231
Furniture & fittings
500
64
3,500
450
Solution No. 4
Assets
Land
Building
P&M
Equipment
Goodwill
Inventory
Recoverable amount
Impairment loss
NASIR ABBAS FCA
Revised
carrying
Adjustments
amount
----------------------------- Rs. million ------------------------900
900
900
1,000
1,000
198
802
1,500
(120)
1,380
297
1,083
400
400
79
321
100
100
100
100
(5)
95
95
4,000
3,875
675
3,200
3,200
675
Carrying
amount
Adjusted
NBV
Impairment
loss (W-1)
22
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
W-1 Loss allocation
Fair value less cost to sell of land is already higher than carrying amount
[675 - GW(100) = 575]
Carrying
Impairment
Assets
loss
amount
--- Rs. million --Building
1,000
198
P&M
1,500
297
Equipment
400
79
2,900
575
Solution No. 5
(a)
Financial statements for year ending June 30, 2015
A cash generating unit is the smallest identifiable group of assets that generates cash flows that are largely
independent of other assets or groups. Since both factories are engaged in production of single product,
therefore, both factories of BBL is a cash generating unit.
(b)
Carrying amount of each asset:
A
B
Total
--------------- Rs. million -------------1,850
3,600
5,450
1,125
2,700
3,825
690
1,350
2,040
240
510
750
100
12,165 [A]
Building
Plant
Equipment
Other assets
Goodwill
Total fair value less cost to sell of CGU:
A
B
Total
--------------- Rs. million -------------1,800
4,200
6,000
1,300
1,600
2,900
460
1,480
1,940
130
280
410
11,250 [B]
Building
Plant
Equipment
Other assets
Total value in use of CGU
Net operating cash flows
Sale proceeds [8,200 - 283]
Factor @ 9%
[C]
NASIR ABBAS FCA
1
2
3
--------------- Rs. million -------------1,650
2,450
2,900
7,917
1,650
2,450
10,817
0.917
0.842
0.772
1,514
2,062
8,353
11,929
23
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
Recoverable amount [higher of B or C]
Total carrying amount [A]
Impairment loss
11,929
12,165
236
Revised carrying amount
Assets
Building A
Plant A
Equipment A
Other assets A
Building B
Plant B
Equipment B
Other assets B
Goodwill
NBV
1,850.00
1,125.00
690.00
240.00
3,600.00
2,700.00
1,350.00
510.00
100.00
12,165.00
L oss
42.00
15.67
5.45
61.30
11.58
100.00
236.00
Revised NBV
1,808.00
1,125.00
674.33
234.55
3,600.00
2,638.70
1,350.00
498.42
11,929.00
W-1
Since fair values less cost to sell of following assets exceed carrying amounts therefore impairment
loss is not allocated to them:
NBV
Fair value
Plant A
1,125
1,300
Building B
3,600
4,200
Equipment B
1,350
1,480
Loss in excess of Rs. 100 million (i.e. relating to goodwill) is allocated as
follows:
Assets
NBV
Loss
Building A
1,850.00
42.00
Equipment A
690.00
15.67
Other assets A
240.00
5.45
Plant B
2,700.00
61.30
Other assets B
510.00
11.58
5,990.00
136.00
Solution No. 6
Assets
CGU assets
Vehicles
Building
Equipment
NASIR ABBAS FCA
Carrying
----------- Loss --------Revised
amount
NBV
CGU1
CGU2
----------------------- Rs. million --------------------4,000.00
30.89
338.07
3,631.04
100.00
0.48
10.50
89.02
300.00
1.44
31.50
267.06
150.00
0.72
15.75
133.33
4,550.00
33.52
395.82
4,120.66
24
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
WORKINGS
W-1 Impairment loss allocation
CGU1
CGU assets
Vehicles
Building
Equipment
Loss
allocation
-------- Rs. million ------1,200.00
30.89
18.63
0.48
55.90
1.44
27.95
0.72
1,302.48
33.52
(W-2)
NBV
CGU2
CGU assets
Vehicles
Building
Equipment
Loss
allocation
------ Rs. million ------2,500.00
338.07
77.64
10.50
232.92
31.50
116.46
15.75
2,927.02
395.82
(W-2)
NBV
W-2 Impairment loss of CGU
CGU1
Carrying amounts
Vehicles
Building
Equipment
(W-2.1)
(W-2.1)
(W-2.1)
Recoverable amount (W-3)
Impairment loss
CGU2
CGU3
Total
--------------- Rs. million ------------1,200.00
2,500.00
300.00
4,000.00
18.63
77.64
3.73
100.00
55.90
232.92
11.18
300.00
27.95
116.46
5.59
150.00
1,302.48
2,927.02
320.50
1,268.96
2,531.20
388.80
33.52
395.82
-
W-2.1 Ratio for allocation of corporate assets
NBV of CGU
Weights of lives
Weighted average NBV
1,200.00
5.00
6,000.00
2,500.00
10.00
25,000.00
300.00
4.00
1,200.00
32,200.00
Corporate assets are allocated to CGUs in this ratio
W-3 Recoverable amount
Net annual cash flows
Annuity factor at 12%
Value in use
CGU1
CGU2
CGU3
--------------- USD million ------------2.20
2.80
0.80
3.605
5.650
3.037
7.93
15.82
2.43
--------------- PKR million -------------
Value in use [USD x 160]
1,268.96
2,531.20
388.80
Fair value less cost to sell
800.00
2,300.00
150.00
1,268.96
2,531.20
388.80
Recoverable amount [higher]
NASIR ABBAS FCA
25
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
Solution No. 7
30-06-17
Impairment loss [P&L]
Acc. Depreciation & impairment loss
[Impairment loss charged]
30-06-19
Acc. Depreciation & impairment loss
Impairment loss reversal [P&L]
[Impairment loss reversed]
------- Rs. million -----6.00
6.00
3.00
3.00
Workings
01-07-15
30-06-16
Cost
Dep. [40/8]
30-06-17
Dep.
30-06-17
Impairment loss
30-06-18
Dep. [24/4] [6/4]
30-06-19
Dep.
30-06-19
Impairment loss reversal*
NBV
40.00
(5.00)
35.00
(5.00)
30.00
(6.00)
24.00
(6.00)
18.00
(6.00)
12.00
3.00
15.00
Loss
(6.00)
(6.00)
1.50
(4.50)
1.50
(3.00)
3.00
-
* Although recoverable amount is much higher but only Rs. 3 million loss can be reversed
Solution No. 8
------- Rs. million -----01-07-16
Plant
24.000
Cash
[Plant purchased and installed]
30-06-17
Depreciation
24.000
2.400
Acc. Depreciation & impairment loss
[Depreciation for 2017]
30-06-18
Depreciation
2.400
2.400
Acc. Depreciation & impairment loss
[Depreciation for 2018]
30-06-18
Acc. Depreciation & impairment loss
Plant
[Elimination of accumulated depreciation]
NASIR ABBAS FCA
2.400
4.800
4.800
26
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
30-06-18
30-06-18
30-06-19
Revaluation loss [P&L]
Plant
[Revaluation of plant]
1.700
Impairment loss
Acc. Depreciation & impairment loss
[Impairment loss charged]
1.100
Depreciation
2.050
1.700
1.100
Acc. Depreciation & impairment loss
[Depreciation for 2019]
30-06-20
Depreciation
2.050
2.050
Acc. Depreciation & impairment loss
[Depreciation for 2020]
30-06-20
Acc. Depreciation & impairment loss
Impairment loss reversal [P&L]
[Reversal of impairment loss]
2.050
0.825
0.825
Workings
01-07-16
30-06-17
Cost
Dep. [20/10]
30-06-18
Dep.
30-06-18
Revaluation
30-06-18
Impairment loss *
30-06-19
Dep. [16.50/8] [2.80/8]
30-06-20
Dep.
30-06-20
Impairment loss reversal**
* Impairment loss:
Value in use
FV less cost to sell [17.50 - 1.1]
Recoverable amount (higher)
NASIR ABBAS FCA
Impairment
NBV
Surplus
loss
-------------- Rs. million -----------24.000
(2.400)
21.600
(2.400)
19.200
(1.700)
(1.700)
17.500
(1.700)
(1.100)
(1.100)
16.400
(2.800)
(2.050)
0.350
14.350
(2.450)
(2.050)
0.350
12.300
(2.100)
0.825
0.825
13.125
(1.275)
15.00
16.40
16.40
27
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
** Only impairment loss upto Rs. [i.e. Rs. 1.1m - Rs. 1.1 x 2/8] can be reversed
Solution No. 9
Impairment testing on June 30, 2018
Assets
NBV
Land
Building
P&M
Software
Goodwill
Equipment
Recoverable amount
Impairment loss
Impairment
Revised NBV
loss (W-1)
---------- Rs. million -------1,000.00
145.83
854.17
1,200.00
175.00
1,025.00
1,800.00
262.50
1,537.50
300.00
43.75
256.25
100.00
100.00
500.00
72.92
427.08
4,900.00
800.00
4,100.00
4,100.00
800.00
W-1 Loss allocation
On all assets except goodwill
Impairment
loss
------ Rs. million ----1,000
145.83
1,200
175.00
1,800
262.50
300
43.75
500
72.92
4,800
700.00
Assets
Carrying amount
Land
Building
P&M
Software
Equipment
Impairment testing on June 30, 2020
----------------- Maximum upper limit for ---------------
Assets
NBV
------ Actual ----------Loss
reversal (W2)
Loss
reversal
Revised NBV
Revised
NBV
----------------------------------------------- Rs. million -----------------------------------------Land
854.17
1,000.00
Building [1,025 x 13/15]
888.33
1,040.00
P&M [1,537.50 x 8/10]
1,230.00
1,440.00
Software [256.25 x 2/4]
128.13
130.00
Goodwill
Equipment [427.08 x 3/5]
Recoverable amount
Loss reversal
NASIR ABBAS FCA
-
-
256.25
300.00
3,356.88
3,910.00
145.83
129.96
984.13
[1,200 x 13/15]
151.67
135.16
1,023.49
[1,800 x 8/10]
210.00
187.14
1,417.14
Recoverable amount
1.88
1.88
130.00
-
-
-
[500 x 3/5]
43.75
38.99
295.24
553.13
493.13
3,850.00
3,850.00
493.13
28
IMPAIRMENT OF ASSETS (IAS-36) - SOLUTIONS
W-2 Reversal of loss allocation
On all assets except goodwill
Assets
Land
Building
P&M
Software
Equipment
Loss
reversal
------ Rs. million ----854.17
125.48
888.33
130.50
1,230.00
180.69
128.13
18.82
256.25
37.64
3,356.88
493.13
Carrying amount
Exceeding limit
Allocation of remaining reversal after limit of software [i.e. 18.82 - 1.88 = 16.95]
Loss
Assets
Carrying amount
reversal
------ Rs. million ----Land
854.17
4.48
Building
888.33
4.66
P&M
1,230.00
6.46
Equipment
256.25
1.34
3,228.75
16.95
NASIR ABBAS FCA
29
Solution [Q-1 Dec-07]
1st impairment test [CGUs excluding computer network]
Plant 1
Plant 2
Plant 3
---------------- Rs. -----------CGU assets
2,500,000
5,000,000 10,000,000
Building [2:3:5]
560,000
840,000
1,400,000
PABX [2:3:5]
280,000
420,000
700,000
3,340,000
6,260,000 12,100,000
Recoverable amount
1,200,000
7,000,000
6,400,000
Impairment loss
2,140,000
5,700,000
Loss allocation in proportion of carrying amounts:
CGU assets
1,601,796
Building
358,802
PABX
179,401
2,140,000
-
4,710,744
659,504
329,752
5,700,000
2nd impairment test [Group of CGUs including computer network]
Carrying amounts:
Rs.
Plant 1 [2,500,000 - 1,601,796]
898,204
Plant 2
5,000,000
Plant 3 [10,000,000 - 4,701,744]
5,289,256
Building [2,800,000 - 358,802 - 659,504]
1,781,693
PABX system [1,400,000 - 179,401 - 329,752]
890,847
Computer network
2,100,000
15,960,000
Recoverable amount [1,200 + 7,000 + 6,400]
14,600,000
Impairment loss
1,360,000
Loss allocation in proportion of carrying amounts:
Plant 1
Plant 2
Plant 3
Building
PABX system
Computer network
76,539
426,065
450,714
151,824
75,912
178,947
1,360,000
Revised carrying amounts as at 30-06-07:
Plant 1 [898,204 - 76,539]
Plant 2 [5,000,000 - 426,065]
Plant 3 [5,289,256 - 450,714]
Building [1,781,693 - 151,824]
PABX system [890,847 - 75,912]
Computer network [2,100,000 - 178,947]
Rs.
821,665
4,573,935
4,838,543
1,629,870
814,935
1,921,053
14,600,000
30
Solution [Q-2 Winter 2016]
Carrying
-- Impairment loss (W-1) -Revised NBV
amount
Green
Yellow
----------------------- Rs. million --------------------470.00
27.40
26.50
416.10
850.00
160.60
80.87
608.53
10.00
5.69
3.42
0.89
100.00
22.87
7.89
69.24
55.00
5.13
3.08
46.80
45.00
45.00
1,530.00
221.69
121.75
1,186.56
Assets
Buses [225 + 150 + 95]
Other assets [400 + 350 + 100]
Goodwill
Building
Computer
Equipment
WORKINGS
W-1 Impairment loss allocation
NBV
Limit (W-1.1)
loss
Green
Buses
Other assets
Goodwill
Building
Computer
Equipment
Buses
Other assets
Goodwill
Building
Computer
Equipment
Loss allocation
(W-1.2)
----------------------- Rs. million ---------------------225.00
197.60
27.40
27.40
400.00
400.00
160.60
5.69
5.69
5.69
56.95
56.95
22.87
31.32
26.20
5.13
5.13
25.63
34.17
744.59
221.69
NBV
Yellow
Maximum
Limit (W-1.3)
Maximum
loss
Loss allocation
(W-1.4)
----------------------- Rs. million ---------------------150.00
123.50
26.50
26.50
350.00
350.00
80.87
3.42
3.42
3.42
34.17
34.17
7.89
18.79
15.72
3.08
3.08
15.38
20.50
571.75
121.75
31
W-1.1
Buses [(2.52 - 0.05) x 80] = 197.60
Computers [31.32 x 46/55] = 26.20
Equipment [25.63 x 60/45] = 34.17
W-1.3
Buses [(2.52 - 0.05) x 50] = 123.50
Computers [18.79 x 46/55] = 15.72
Equipment [15.38 x 60/45] = 20.50
W-1.2 Loss allocation
Limit check for assets other than GW and Equipment:
[221.69 - 5.69 (GW) - 0 (Equipment) = 216.00]
W-1.4 Loss allocation
Limit check for assets other than GW and Equipment:
[121.75 - 3.42 (GW) - 0 (Equipment) = 118.34]
Buses
Other assets
Building
Computer
Buses
Other assets
Building
Computer
225.00
400.00
56.95
31.32
713.27
68.14 Exceeding limit
121.13
17.25
9.48 Exceeding limit
216.00
150.00
350.00
34.17
18.79
552.96
32.10 Exceeding limit
74.90
7.31
4.02 Exceeding limit
118.34
Revised allocation of remaining loss
[221.69 - 5.69 (GW) - 0 (Equipment) - 27.40 (Buses) - 5.13 (Computer) = 183.47]
Revised allocation of remaining loss
[121.75 - 3.42 (GW) - 0 (Equipment) - 26.50 (Buses) - 3.08 (Computer) = 88.76]
Other assets
Building
Other assets
Building
W-2
400.00
56.95
456.95
160.60
22.87
183.47
350.00
34.17
384.17
80.87
7.89
88.76
Impairment loss of CGU
Green
Buses
Other assets
Goodwill
Building
Computer
Equipment
(W-2.1)
(W-2.1)
(W-2.1)
(W-2.1)
Recoverable amount (W-3)
Impairment loss
Yellow
Orange
--------------- Rs. million ------------225.00
150.00
95.00
400.00
350.00
100.00
5.69
3.42
0.89
56.95
34.17
8.88
31.32
18.79
4.89
25.63
15.38
4.00
744.59
571.75
213.66
522.90
450.00
282.50
221.69
121.75
-
Total
470.00
850.00
10.00
100.00
55.00
45.00
-
-
32
W-2.1 Ratio for allocation of GW and corporate assets
NBV of CGU
Weights of lives
Weighted average NBV
625.00
2.00
1,250.00
500.00
1.50
750.00
195.00
1.00
195.00
2,195.00
Goodwill and corporate assets are allocated to CGUs in this ratio
W-3
Recoverable amount
Net cash flows
Annuity factor at 12%
Value in use
Green
Yellow
Orange
--------------- Rs. million ------------70.00
60.00
50.00
7.47
6.81
5.65
522.90
408.60
282.50
Fair value less cost to sell
500.00
450.00
250.00
Recoverable amount [higher]
522.90
450.00
282.50
33
IFRIC 1 – Class notes
Changes in the measurement of an existing decommissioning, restoration and similar liability that results
from changes in estimates shall be accounted for as follows:
At the date of estimate change:
Change in the amount of obligation = PV of obligation (using new estimates) – PV of obligation (using old
estimates)
If the related asset is measured using the cost model
Increase in obligation
Change in obligation is Added to the cost of
asset.
Decrease in obligation
Change in obligation is Deducted from the
cost of asset.
Dr. Asset
Cr. Provision for dismantling
Dr. Provision for dismantling
Cr. Asset
The entity shall consider whether there is a
need for impairment testing as per IAS 36.
The amount of change shall not exceed its
carrying amount. If the amount of change is
higher than carrying amount, then the excess
shall be recognized immediately in P&L.
If the related asset is measured using the revaluation model
Increase in obligation
Change in obligation is treated as revaluation
decrease
Dr. Revaluation surplus
Dr. P&L
Cr. Provision for dismantling
-
Decrease in obligation
Change in obligation is treated as revaluation
increase.
Dr. Provision for dismantling
Cr. P&L (reversal of previous loss)
Cr. Revaluation surplus
If the amount of change is higher than carrying
amount that would have been determined as
per cost model, then the excess shall be
recognized immediately in P&L.
A change in obligation is an indication that asset may have to be revalued. If so, then revaluation
and estimate change are handled in compound entry.
If revalued amount (i.e. fair value) is provided by valuer as net of dismantling cost, then for
revaluation accounting, revalued amount will be the sum of (i) net value determined by valuer and
(ii) present value of new dismantling obligation amount.
Nasir Abbas FCA
34
IFRIC 1 – QUESTIONS
PRACTICE QUESTIONS
Question 1
On July 1, 2015 a plant was purchased and installed at a cost of Rs. 80 million. As per contract, plant would be
dismantled after 8 years. Initial estimates of dismantling cost discount rate were Rs. 8 million and 9%. Financial
statements are prepared to every June 30th. Estimates were revised as follows:
Date
July 1, 2017
January 1, 2020
New estimates
Dismantling cost
Discount rate
Rs. 9 million
No change
Rs. 11 million
11%
Required:
Prepare Journal entries for the years ending June 30, 2019 and 2020.
Question 2
On January 1, 2014 a plant was purchased and installed at a cost of Rs. 120 million. As per agreement, plant will have to
be dismantled after a stipulated period of 10 years. The dismantling cost was initially estimated at Rs. 20 million to be
discounted at 8%. The management decided to follow revaluation model. In this regard, revalued amounts, including
dismantling costs, were determined as follows:
Date of valuation
31-12-14
31-12-16
Fair value (Rs. million)
126.00
91.00
On January 1, 2016 due to a change in technology, management decided to change the estimate of dismantling cost to
Rs. 18 million. On July 1, 2018 prevailing market based discount rate was revised to 5%.
Required:
Prepare all journal entries for the year ending December 31, 2018.
Question 3
On January 1, 2015 a plant was purchased and installed at a cost of Rs. 50 million. As per agreement, plant will have to be
dismantled after a stipulated period of 6 years. The dismantling cost was initially estimated at Rs. 30 million to be
discounted at 7%. The management decided to follow revaluation model. In this regard, revalued amounts, were
determined as follows:
Date of valuation
31-12-15
31-12-17
Fair value net of
dismantling obligation
(Rs. million)
49.61
16.58
On January 1, 2017 due to a change in technology, management decided to change the estimate of dismantling cost to
Rs. 38 million. On July 1, 2019 technology changed significantly and dismantling estimate was reduced to Rs. 10 million.
Moreover, prevailing market based discount rate was revised to 5%.
Required:
(a) Prepare a schedule showing movements in relevant items for all five years till December 31, 2019
(b) Prepare all journal entries for the year ending December 31, 2019.
Question 4
On July 1, 2018 a plant was purchased and installed at a cost of Rs. 4,500 million. As per agreement, plant will have to be
dismantled after a stipulated period of 4 years. The dismantling cost was initially estimated at Rs. 600 million to be
NASIR ABBAS FCA
35
IFRIC 1 – QUESTIONS
discounted at 10%. The management decided to follow revaluation model. In this regard, revalued amounts, were
determined as follows:
Date of valuation
30-06-19
30-06-20
Fair value net of
dismantling obligation
(Rs. million)
3,375
1,800
On June 30, 2019 due to a change in technology, management decided to change the estimate of dismantling cost to Rs.
825 million. It was further revised to Rs. 450 million on June 30, 2020.
Required:
Prepare all journal entries for the years ending June 30, 2019 and 2020.
NASIR ABBAS FCA
36
IFRIC 1 – SOLUTIONS
SOLUTIONS
Solution No. 1
30-06-19
Finance cost
Provision for dismantling
[Finance cost for 2019]
30-06-19
---- Rs. million ---0.53
0.53
Depreciation
10.60
Accumulated depreciation
[Depreciation for 2019]
31-12-19
10.60
Finance cost
0.29
0.29
Provision for dismantling
[Finance cost for 6-months 2020]
31-12-19
Depreciation
5.30
Accumulated depreciation
[Depreciation for 6-months 2020]
01-01-20
5.30
Plant
0.97
Provision for dismantling
[Change in estimate of obligation]
30-06-20
0.97
Finance cost
0.42
Provision for dismantling
[Finance cost for 6-months 2020]
30-06-20
0.42
Depreciation
5.44
Accumulated depreciation
[Depreciation for 6-months 2020]
W-1
01-07-15
30-06-16
Initial
Dep / Finance cost
30-06-17
Dep / Finance cost
01-07-17
Estimate change
30-06-18
Dep / Finance cost
30-06-19
Dep / Finance cost
31-12-19
Dep / Finance cost [6 months]
01-01-20
Estimate change
NASIR ABBAS FCA
5.44
NBV
Provision
---- Rs. million ---84.01
4.01
(10.50)
0.36
73.51
4.38
(10.50)
0.39
63.01
4.77
0.60
0.60
63.61
(10.60)
53.01
(10.60)
42.40
(5.30)
37.10
0.97
5.37
0.48
5.85
0.53
6.38
0.29
6.66
0.97
[8 x 1.09-8]
[9 x 1.09-6]
37
IFRIC 1 – SOLUTIONS
30-06-20
Dep / Finance cost [6 months]
38.08
(5.44)
32.64
7.63
0.42
8.05
[11 x 1.11-3.5]
Solution No. 2
Dr.
Cr.
--- Rs. million --6.50
6.50
30-06-18
Depreciation
Accumulated depreciation
[Depreciation for 6-months]
30-06-18
Revaluation surplus
Retained earnings
[Incremental depreciation for 6-months]
0.10
Finance cost
Provision for dismantling
[Finance cost for 6-months]
0.45
Revaluation surplus
P&L
Provision for dismantling
[Change in provision due to discount rate change]
1.15
0.82
Depreciation
Accumulated depreciation
[Depreciation for 6-months]
6.50
Finance cost
Provision for dismantling
[Finance cost for 6-months]
0.34
30-06-18
01-07-18
31-12-18
31-12-18
0.10
0.45
1.97
6.50
0.34
NBV
Surplus
P&L
Provision
---------------------- Rs. million --------------------01-01-14
31-12-14
Cost
Dep / Interest
31-12-14
Revaluation
31-12-15
Dep / Interest
01-01-16
Estimate change
31-12-16
Dep / Interest
31-12-16
Revaluation
31-12-17
Dep / Interest
01-07-18
Dep / Interest
01-07-18
Estimate change
NASIR ABBAS FCA
129.26
(12.93)
116.33
9.67
126.00
(14.00)
112.00
-
9.67
9.67
(1.07)
8.60
1.08
-
112.00
(14.00)
98.00
(7.00)
91.00
(13.00)
78.00
(6.50)
71.50
-
9.68
(1.21)
8.47
(7.00)
1.47
(0.21)
1.26
(0.10)
1.15
(1.15)
-
-
(0.82)
9.26
0.74
10.00
10.00
0.80
10.80
(1.08)
[20 x 1.08-10]
9.72
0.78
10.50
10.50
0.84
11.34
0.45
11.79
1.97
[18 x 1.08-8]
38
IFRIC 1 – SOLUTIONS
31-12-18
Dep / Interest
71.50
(6.50)
65.00
-
[18 x 1.05-5.5]
(0.82)
0.07
(0.74)
13.76
0.34
14.10
P&L
Provision
Solution No. 3
(a)
NBV
Surplus
Cost
Dep / Interest
---------------------- Rs. million --------------------69.99
(11.67)
19.99
1.40
31-12-15
Revaluation
58.33
12.67
12.67
-
21.39
-
31-12-16
[21.39 + 49.61]
Dep / Interest
71.00
(14.20)
12.67
(2.53)
-
21.39
1.50
Estimate change
56.80
-
10.14
(6.10)
-
22.89
6.10
31-12-17
Dep / Interest
56.80
(14.20)
4.03
(1.01)
-
28.99
2.03
31-12-17
Revaluation
42.60
5.00
3.02
5.00
-
31.02
-
31-12-18
[31.02 + 16.58]
Dep / Interest
47.60
(15.87)
8.02
(2.67)
-
31.02
2.17
01-07-19
Dep / Interest
31.73
(7.93)
5.35
(1.34)
-
33.19
1.16
01-07-19
Estimate change
23.80
-
4.01
19.79
5.28
34.35
(25.06)
31-12-19
Dep / Interest
23.80
(7.93)
23.80
(7.93)
5.28
-
9.29
0.23
(b)
30-06-19
Depreciation
01-01-15
31-12-15
01-01-17
[30 x 1.07-6]
[38 x 1.07-4]
[10 x 1.05-1.5]
7.93
Accumulated depreciation
[Depreciation for 6-months 2019]
30-06-19
30-06-19
7.93
Revaluation surplus
Retained earnings
[Transfer to RE for 6 months 2019]
1.34
Finance cost
1.16
1.34
Provision for dismantling
[Finance cost for 6-months 2019]
30-06-19
Provision for dismantling
P&L [25.06 - (23.80 - 4.01)]
Revaluation surplus
[Change in dismantling obligation]
NASIR ABBAS FCA
1.16
25.06
5.28
19.79
39
IFRIC 1 – SOLUTIONS
31-12-19
Depreciation
7.93
Accumulated depreciation
[Depreciation for 6-months 2019]
31-12-19
31-12-19
7.93
Revaluation surplus
Retained earnings
[Transfer to RE for 6 months 2019]
7.93
Finance cost
0.23
7.93
Provision for dismantling
[Finance cost for 6-months 2019]
0.23
Solution No. 4
01-07-18
Plant
Cash
Provision for dismantling (W-1)
[Initial recognition]
30-06-19
30-06-19
Depreciation [4,909.81 / 4]
Accumulated depreciation
[Depreciation for 2019]
Finance cost
---- Rs. million ---4,909.81
4,500.00
409.81
1,227.45
1,227.45
40.98
Provision for dismantling
[Finance cost for 2019]
30-06-19
30-06-19
Accumulated depreciation
Plant
[Elimination of accumulated depreciation]
Plant
40.98
1,227.45
1,227.45
313.23
Revaluation surplus
Provision for dismantling
[Revaluation of plant & estimate change]
30-06-20
30-06-20
30-06-20
Depreciation [3,995.59 / 3]
Accumulated depreciation
[Depreciation for 2020]
143.43
169.80
1,331.86
1,331.86
Revaluation surplus [143.43 / 3]
Retained earnings
[Incremental depreciation for 2020]
47.81
Finance cost
62.06
Provision for dismantling
[Finance cost for 2020]
NASIR ABBAS FCA
47.81
62.06
40
IFRIC 1 – SOLUTIONS
30-06-20
30-06-20
Accumulated depreciation
Plant
[Elimination of accumulated depreciation]
1,331.86
Provision for dismantling
Revaluation surplus
P&L
Plant
[Revaluation of plant & estimate change]
310.75
95.62
85.46
W-1
NBV
1,331.86
491.83
Surplus
P&L
Provision
---------------------- Rs. million --------------------01-07-18
30-06-19
Cost
Dep / Interest
4,909.81
(1,227.45)
409.81
40.98
3,682.36
-
-
Reval./Estimate
313.23
143.43
-
169.80
[3,375 + 620.59]
3,995.59
143.43
-
620.59
30-06-20
Dep / Interest
(1,331.86)
(47.81)
-
62.06
2,663.73
95.62
-
682.65
30-06-20
Reval./Estimate
(491.83)
(95.62)
(85.46)
(310.75)
[1,800 + 371.90]
2,171.90
-
(85.46)
371.90
30-06-19
NASIR ABBAS FCA
[600 x 1.1-4]
450.79
[826 x 1.1-3]
[450 x 1.1-2]
41
IFRS 5 – Class notes
SCOPE
The measurement provisions of this standard shall not apply to the assets, covered in following IFRS,
either as individual assets or as a part of a disposal group:
(a) deferred tax assets (IAS 12);
(b) assets arising from employee benefits (IAS 19);
(c) financial assets (IFRS 9);
(d) investment property measured at fair value (IAS 40);
(e) biological assets measured at fair value less costs to sell (IAS 41);
(f) groups of contracts within the scope of IFRS 17; and
However, classification and presentation requirements of this IFRS apply to above assets as well if these
are part of a disposal group.
Disposal group:
- It is a group of assets 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
cash‑generating unit to which goodwill has been allocated.
-
If a non-current asset, which falls within the scope of measurement requirements of this IFRS (e.g.
PPE), is a part of a disposal group, the measurement requirements of this IFRS apply to the disposal
group as a whole (i.e. not applied to that individual non-current asset).
CLASSIFICATION OF NON-CURRENT ASSETS (OR DISPOSAL GROUPS)
Classification as held for sale
1. An entity shall classify a non-current asset (or disposal group) as held for sale if following criteria is
met:
Its carrying amount will be recovered principally through a sale transaction rather than through
continuing use.
It must be available for immediate sale in its present condition subject only to terms that are
usual and customary for sales of such assets (or disposal groups).
Its sale must be highly probable. For a sale to be highly probable:
* The appropriate level of management must be committed to a plan to sell the asset (or
disposal group).
* An active programme to locate a buyer and complete the plan must have been initiated.
* The asset (or disposal group) must be actively marketed for sale at a price that is reasonable
in relation to its current fair value.
* The sale should be expected to be completed within in one year from the date of
classification.
* It is unlikely that the plan will be significantly changed or withdrawn.
Non adjusting event
If above criteria is met after the reporting period, then entity shall not classify the asset (or
disposal group) as held for sale, rather it shall be disclosed.
Nasir Abbas FCA
42
IFRS 5 – Class notes
2. Exception for “sale within one year” condition
An extension of the period, beyond one year, required to complete the sale does not preclude the
asset (or disposal group) from being classified as held for sale if the delay is caused by events or
circumstances beyond the entity’s control and there is sufficient evidence that the entity remains
committed to its plan.
Classification as held for distribution to owners
An entity shall classify a non-current asset (or disposal group) as held for distribution to owners if following
criteria is met:
The entity is committed to distribute the asset (or disposal group) to the owners.
It must be available for immediate distribution in its present condition.
Its distribution must be highly probable. For a distribution to be highly probable:
* The actions to complete the distribution must have been initiated.
* The distribution should be expected to be completed within in one year from the date of
classification.
* It is unlikely that the plan will be significantly changed or withdrawn.
Non-current assets that are to be abandoned
An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be abandoned.
This is because its carrying amount will be recovered principally through continuing use. It includes the
asset (or disposal group) that is to be used to the end of its economic life and the asset (or disposal group)
that is to be closed rather than sold.
MEASUREMENT
Measurement of a non-current asset (or disposal group) [Initial and subsequent]
1. A non-current asset (or disposal group) classified as held for sale shall be measured at the lower of:
- Its carrying amount; and
- Fair value less cost to sell
2. A non-current asset (or disposal group) classified as held for distribution to owners shall be measured
at the lower of:
- Its carrying amount; and
- Fair value less cost to distribute
Important:
When the sale is expected to occur beyond one year, the entity shall measure the costs to sell at
their present value. Any increase in the present value of the costs to sell that arises from the passage
of time shall be presented in profit or loss as a financing cost.
Immediately before the initial classification of the asset (or disposal group) as held for sale, the
carrying amounts of the asset (or all the assets and liabilities in the group) shall be measured in
accordance with applicable IFRSs.
Nasir Abbas FCA
43
IFRS 5 – Class notes
Recognition of impairment losses and reversals [Initial as well as subsequent]
Impairment loss = Carrying amount – Fair value less cost to sell
Impairment loss reversal (i.e. gain) = Fair value less cost to sell – Carrying amount
For individual asset:
1. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
cost to sell.
2. If subsequently fair value less cost to sell increases, a gain shall be recognized in P&L only to the extent
to reverse the cumulative impairment loss previously recognized either as per this IFRS or as per IAS
36.
For disposal group:
1. On subsequent remeasurement of a disposal group, the carrying amounts of any assets and liabilities
that are not within the scope of the measurement requirements of this IFRS, but are included in a
disposal group classified as held for sale, shall be remeasured in accordance with applicable IFRSs
before the fair value less costs to sell of the disposal group is remeasured.
2. An impairment loss shall be recognized in P&L for initial or subsequent write-down to fair value less
cost to sell.
3. If subsequently fair value less cost to sell increases, a gain shall be recognized only to the extent to
reverse the cumulative impairment loss previously recognized on the assets that are within the scope
of measurement requirements of this IFRS, either as per this IFRS or as per IAS 36.
4. The impairment loss recognized for the group shall be allocated to all non-current assets in the group
that are within the scope of the measurement requirements of this IFRS, in following order:
first, to reduce the carrying amount of any goodwill allocated to the group; and
then, to the other assets of the group pro rata on the basis of the carrying amount of each asset
in the group.
Any subsequent gain (i.e. loss reversal) shall be allocated to other assets of the group, except for
goodwill, pro rata on the basis of the carrying amount of each asset in the group.
Exam note:
This loss allocation is same as studied in IAS 36 for loss allocation in CGU except here “maximum
limit for loss allocation as per IAS 36” is not applicable.
Depreciation and finance cost:
- A non-current asset shall not be depreciated/amortized while it is classified as held for sale or held
for distribution to owners or while it is a part of disposal group classified as held for sale or held for
distribution to owners.
-
Interest and other expenses attributable to the liabilities of a disposal group classified as held for
sale or held for distribution to owners shall however continue to be recognized.
Nasir Abbas FCA
44
IFRS 5 – Class notes
Changes in plan of sale or distribution to owners
1. If the criteria for “held for sale” or “held for distribution to owners” classification are no longer met,
then entity shall cease to classify the asset (or disposal group) as “held for sale” or “held for
distribution to owners”.
Change between classes:
If an entity reclassifies an asset (or disposal group) directly from “held for sale” to “held for
distribution to owners” or vice verse, then this change is not considered as a change in plan,
therefore, it will be measured as per respective guidance studied earlier.
2. If an asset (or disposal group) ceases to be classified as “held for sale” or “held for distribution to
owners”, then it shall be measured at lower of:
-
Its carrying amount before classification, adjusted for any depreciation, amortization or
revaluations that would have been recognized had the asset (or disposal group) not been
classified as “held for sale” or “held for distribution to owners”; and
-
Its recoverable amount at the date of subsequent decision not to sell or distribute.
3. The required adjustment in carrying amount shall be immediately recognized in profit and loss from
continuing operations in the same caption as used to present earlier gain or loss.
4. If an entity removes an individual asset or liability an individual asset or liability from a disposal group
classified as “held for sale” or “held for distribution to owners”:
If the group still meets the classification criteria:
The remaining assets and liabilities of the disposal group to be sold shall continue to be measured as
a group.
If the group no longer meets the classification criteria:
- The remaining non‑current assets of the group that individually meet the criteria to be classified
as “held for sale” or “held for distribution to owners” shall be measured individually at the lower
of their carrying amounts and fair values less costs to sell (or costs to distribute) at that date.
- Any non‑current assets that do not meet the criteria for “held for sale” and “held for distribution
to owners” shall cease to be classified and be measured as per point 2 above.
PRESENTATION AND DISCLOSURES
Discontinued operations
A discontinued operation is a component (e.g. a cash generating unit or group of cash generating units)
of an entity that either has been disposed of, or is classified as held for sale, and
(a) represents a separate major line of business or geographical area of operations,
(b) is part of a single co‑ordinated plan to dispose of a separate major line of business or geographical
area of operations or
(c) is a subsidiary acquired exclusively with a view to resale.
Nasir Abbas FCA
45
IFRS 5 – Class notes
Disclosures:
An entity shall disclose:
(a) a single amount in the statement of comprehensive income comprising the total of:
(i) the post‑tax profit or loss of discontinued operations and
(ii) the post‑tax gain or loss recognised on the measurement to fair value less costs to sell or on the
disposal of the assets or disposal group(s) constituting the discontinued operation.
(b) an analysis of the single amount in (a) into:
(i) the revenue, expenses and pre‑tax profit or loss of discontinued operations and the related
income tax expense.
(ii) the gain or loss recognised on the measurement to fair value less costs to sell or on the disposal
of the assets or disposal group(s) constituting the discontinued operation and the related income
tax expense.
The analysis may be presented in the notes or in the statement of comprehensive income. If it is
presented in the statement of comprehensive income it shall be presented in a section identified as
relating to discontinued operations, i.e. separately from continuing operations.
(c) the net cash flows attributable to the operating, investing and financing activities of discontinued
operations. These disclosures may be presented either in the notes or in the financial statements.
Comparative figures:
- An entity shall re-present above disclosures for prior period presented in the financial statements
so that the disclosures relate to all operations that have been discontinued by the end of current
period.
- If an entity ceases to classify a component as held for sale, the results of operations of the
component previously presented in discontinued operations shall be reclassified and included in
income from continuing operations for all periods presented.
This restatement/reclassification of comparative figures is relevant for SOCI only. Disclosure of
disposal group held for sale under current assets (SOFP) shall not be represented/reclassified.
Non-current asset (or disposal group) classified as held of sale
1. Any gain or loss on the remeasurement of a non‑current asset (or disposal group) classified as held
for sale that does not meet the definition of a discontinued operation shall be included in profit or
loss from continuing operations.
2. An entity shall present a non‑current asset classified as held for sale and the assets of a disposal group
classified as held for sale separately from other assets in the statement of financial position. The
liabilities of a disposal group classified as held for sale shall be presented separately from other
liabilities in the statement of financial position. Those assets and liabilities shall not be offset and
presented as a single amount.
3. An entity shall present separately any cumulative income or expense recognised in other
comprehensive income relating to a non‑current asset (or disposal group) classified as held for sale.
Nasir Abbas FCA
46
IFRS 5 – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 December 2020, a company became committed to a plan to sell a manufacturing facility and has already
found a potential buyer. The company does not intend to discontinue the operations currently carried out in
the facility. At 31 December 2020 there is a backlog of uncompleted customer orders. The company will not
be able to transfer the facility to the buyer until after it ceases to operate the facility and has eliminated the
backlog of uncompleted customer orders. This is not expected to occur until spring 2021.
Required
Can the manufacturing facility be classified as 'held for sale' at 31 December 2020?
Question No. 2
On 20 October 2019 the directors of a company made a public announcement of plans to close a steel works.
The closure means that the company will no longer carry out this type of operation, which until recently has
represented about 10% of its total turnover. The works will be gradually shut down over a period of several
months, with complete closure expected in July 2020. At 31 December output had been significantly reduced
and some redundancies had already taken place. The cash flows, revenues and expenses relating to the steel
works can be clearly distinguished from those of the subsidiary's other operations.
Required
How should the closure be treated in the financial statements for the year ended 31 December 2019?
Question No. 3
An entity is committed to a plan to sell its headquarters building and has initiated actions to locate a buyer.
The entity will continue to use the building until construction of a new headquarters building is completed. The
entity does not intend to transfer the existing building to a buyer until after construction of the new building
is completed (and it vacates the existing building).
Required:
Can the building be classified as ‘held for sale’?
Question No. 4
An entity is committed to a plan to sell a manufacturing facility in its present condition and classifies the facility
as held for sale at that date. After a firm purchase commitment is obtained, the buyer’s inspection of the
property identifies environmental damage not previously existed. The entity is required by the buyer to make
good the damage, which will extend the period required to complete the sale beyond one year. However, the
entity has initiated actions to make good the damage, and satisfactory rectification of the damage is highly
probable.
Required:
Can the facility be classified as ‘held for sale’?
Question No. 5
An entity is committed to a plan to sell a non-current asset and classifies the asset as held for sale at that date.
(a) During the initial one-year period, the market conditions that existed at the date the asset was classified
initially as held for sale deteriorate and, as a result, the asset is not sold by the end of that period. During
that period, the entity actively solicited but did not receive any reasonable offers to purchase the asset
and, in response, reduced the price. The asset continues to be actively marketed at a price that is
reasonable given the change in market conditions.
(b) During the following one-year period, market conditions deteriorate further, and the asset is not sold by
the end of that period. The entity believes that the market conditions will improve and has not further
reduced the price of the asset. The asset continues to be held for sale, but at a price in excess of its current
fair value.
NASIR ABBAS FCA
47
IFRS 5 – QUESTIONS
Required:
Discuss whether the non-current asset meets the criteria for classification as held for sale in each year.
Question No. 6
On 1 January 2017, AB acquires a building for Rs. 2,000,000 with an expected life of 50 years. On 31 December
2020 AB puts the building up for immediate sale. Costs to sell the building are estimated at Rs. 100,000.
Required
Outline the accounting treatment of the above if the building had a fair value at 31 December 2020 of:
(a) Rs. 2,200,000
(b) Rs. 1,100,000
Question No. 7
Nash purchased a building for its own use on 1 January 2017 for Rs. 10 million and attributed it a 50 year useful
economic life. Nash uses the revaluation model to account for buildings.
On 31 December 2018, this building was revalued to Rs. 12 million.
On 31 December 2019, the building met the criteria to be classified as held for sale. Its fair value was deemed
to be Rs. 11 million and the costs necessary to sell the building were estimated to be Rs. 500,000.
Required:
Journalize above transactions/adjustments till 31 December 2019.
Question No. 8
An entity plans to dispose of a group of its assets. The information regarding the assets forming the disposal
group as on June 30, 2020 is as follows:
Carrying amount
(Rs. million)
Goodwill
Property, plant & equipment
(carried at revaluation model)
Property, plant & equipment
(carried at cost model)
Inventory
Financial assets
150
460
Fair values immediately before
classification as held for sale
(Rs. million)
400
570
-
240
180
220
150
On June 30, 2020 the entity measured the fair value less cost to sell of the group at Rs. 1,300 million.
Required:
Calculate revised carrying amounts as on June 30, 2020.
Question No. 9
A building was purchased on July 1, 2015 at a cost of Rs. 40 million. Initial estimate of useful life was made at
8 years. On June 30, 2017 the building was classified as held for sale. Its fair value less cost to sell was
determined as follows:
Date
June 30, 2017
June 30, 2018
Fair value less cost
to sell
Rs. 27 million
Rs. 29 million
On June 30, 2019 the plan to sell the building was changed. Recoverable amount on that date was determined
at Rs. 24 million.
Required:
All journal entries till June 30, 2019.
NASIR ABBAS FCA
48
IFRS – 5 - SOLUTIONS
SOLUTIONS
Solution No. 1
The facility will not be transferred until the backlog of orders is completed; this demonstrates that the facility is not
available for immediate sale in its present condition. The facility cannot be classified as 'held for sale' at 31 December
2020. It must be treated in the same way as other items of property, plant and equipment: it should continue to be
depreciated and should not be separately disclosed.
Solution No. 2
Because the steel works is being closed, rather than sold, it cannot be classified as 'held for sale'. In addition,
the steel works is not a discontinued operation. Although at 31 December 2019 the group was firmly
committed to the closure, this has not yet taken place and therefore the steel works must be included in
continuing operations. Information about the planned closure could be disclosed in the notes to the financial
statements.
Solution No. 3
The delay in the timing of the transfer of the existing building imposed by the entity (seller) demonstrates that
the building is not available for immediate sale. The criteria can not be met until the construction of the new
building in completed. Therefore, the building is not classified as held for sale.
Solution No. 4
Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception to
one-year condition. Hence the facility shall be classified as held for sale.
Solution No. 5
(a) Since the delay is due to circumstances beyond entity’s control therefore this delay qualifies for exception
to one-year condition. Hence the facility shall be classified as held for sale. At the end of the initial oneyear period, the asset would continue to be classified as held for sale.
(b) In that situation, the absence of a price reduction demonstrates that the asset is not available for
immediate sale. Moreover, an asset must be marketed at a price that is reasonable in relation to its current
fair value. Therefore, the conditions for an exception to the one-year requirement would not be met. The
asset would be reclassified.
Solution No. 6
Until 31 December 2020 the building is a normal non-current asset and its accounting treatment is prescribed
by IAS 16. The annual depreciation charge was Rs. 40,000 (Rs. 2,000,000/50). As such, the carrying amount at
31 December 2020, prior to reclassification, was Rs. 1,840,000 [i.e. Rs. 2,000,000 – (4 × Rs. 40,000)].
(a) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 2,200,000 – Rs. 100,000
= Rs. 2,100,000). This means that the building will continue to be measured at Rs. 1,840,000.
(b) On 31 December 2020 the building is classified as a non-current asset held for sale. It is measured at the
lower of carrying amount (i.e. Rs. 1,840,000) and fair value less costs to sell (i.e. Rs. 1,100,000 – Rs. 100,000
= Rs. 1,000,000). The building will therefore be measured at Rs. 1,000,000 as at 31 December 2020. An
impairment loss of Rs. 840,000 will be charged to the statement of profit or loss.
NASIR ABBAS FCA
49
IFRS – 5 - SOLUTIONS
Solution No. 7
01-01-17
---- Rs. million ---10.00
10.00
Building
Cash
[Purchase of building]
31-12-17
31-12-18
31-12-18
31-12-18
Depreciation
Accumulated depreciation
[Depreciation for 2017]
0.20
Depreciation
Accumulated depreciation
[Depreciation for 2018]
0.20
Accumulated depreciation
Building
[Elimination of accumulated depreciation]
0.40
Building
2.40
0.20
0.20
0.40
Revaluation surplus
[Revaluation of building]
31-12-19
31-12-19
31-12-19
31-12-19
2.40
Depreciation
Accumulated depreciation
[Depreciation for 2019]
0.25
Accumulated depreciation
Building
[Elimination of accumulated depreciation]
0.25
Revaluation surplus
Building
[Revaluation of building]
0.75
P&L
NCA held for sale
Building
[Loss on classification as held for sale]
0.50
10.50
W-1
01-01-17
31-12-17
Initial
Dep. [10/50]
31-12-18
Dep.
31-12-18
Revaluation
NASIR ABBAS FCA
0.25
0.25
0.75
11.00
NBV
Surplus
------ Rs. million ---10.00
(0.20)
9.80
(0.20)
9.60
2.40
2.40
50
IFRS – 5 - SOLUTIONS
31-12-19
Dep. [12/48] [2.40/48]
31-12-19
Revaluation
12.00
(0.25)
11.75
(0.75)
11.00
2.40
(0.05)
2.35
(0.75)
1.60
Solution No. 8
Goodwill
PPE (revaluation model)
PPE (cost model)
Inventory
Financial assets
Remeasurement
NBV just
adjustment
Impairment
NBV after
NBV
before initial
before initial
loss (W-1)
classification
classification
classification
-------------------------------------- Rs. million ------------------------------------150.00
150.00
(150.00)
460.00
(60.00)
400.00
(16.49)
383.51
570.00
570.00
(23.51)
546.49
240.00
(20.00)
220.00
220.00
180.00
(30.00)
150.00
150.00
1,600.00
1,490.00
(190.00)
1,300.00
W-1 Loss allocation
Goodwill
150.00 [First allocated to GW]
PPE (revaluation model)
16.49 [40 x 400/970]
PPE (cost model)
23.51 [40 x 570/970]
Inventory
- Scoped out
Financial assets -------------------------------------------------------- Scoped out
190.00 [1,490 - 1,300]
Solution No. 9
01-07-15
Building
Cash
[Purchase of building]
30-06-16
30-06-17
---- Rs. million ---40.00
40.00
Depreciation [40/8]
Building
[Depreciation for 2016]
5.00
Depreciation
5.00
5.00
Building
[Depreciation for 2017]
30-06-17
P&L [30 - 27]
NCA held for sale
Building
[Initial classification as held for sale]
NASIR ABBAS FCA
5.00
3.00
27.00
30.00
51
IFRS – 5 - SOLUTIONS
30-06-18
30-06-19
NCA held for sale [29 - 27]
P&L
[Reversal of impairment loss]
2.00
P&L (W-1)
Building (W-1)
NCA held for sale
[Adjustment when classification is ceased]
9.00
20.00
W-1
Carrying amount (had asset not been classified)
[40 - 5 x 4]
Recoverable amount
Lower of both
Carrying amount as per books
Immediate charge to P&L
NASIR ABBAS FCA
2.00
29.00
Rs. million
20.00
24.00
20.00
29.00
9.00
52
Basic data
Following information relates to a Alpha Limited:
Statement of financial position - Extracts
2020
2019
------- Rs. million -------
Property, plant & equipment:
Division A
Other divisions
170
920
1,090
180
840
1,020
Statement of comprehensive income - Extracts
-------- 2020 --------------- 2019 -------Other
Other
Division A
Division A
divisions
divisions
---------------------- Rs. million ---------------------Sales
Cost of sales
Gross profit
Operating expenses
PBT
Tax [20%]
PAT
560
(400)
160
(40)
120
(24)
96
1,520
(1,100)
420
(130)
290
(58)
232
430
(320)
110
(30)
80
(16)
64
1,330
(980)
350
(100)
250
(50)
200
53
Scenario I - Normal ongoing business
SOFP - Extracts
Non current assets
PPE
SOCI - Extracts
Sales
Cost of sales
Gross profit
Operating expenses
PBT
Tax [20%]
PAT
2020
2019
------- Rs. million ------
1,090
1,020
2020
2019
------- Rs. million -----2,080
(1,500)
580
(170)
410
(82)
328
1,760
(1,300)
460
(130)
330
(66)
264
54
Scenario II - Division A was classified as held for sale in 2019 and still not sold in 2020
Fair value less cost to sell was:
31-12-2019
31-12-2020
Rs. million
165
155
SOFP - Extracts
2020
2019
------- Rs. million ------
Non current assets
PPE
920
840
Current assets
Disposal group held for sale
155
165
SOCI - Extracts
2020
2019
------- Rs. million ------
Sales
Cost of sales
Gross profit
Operating expenses*
PBT
Tax [20%]
Profit from continuing operations
Profit from discontinued operations (W-1)
Profit after tax
W-1
PBT
Loss as per IFRS 5 [165 - 155] [180 - 165]
Tax [20%]
1,520
(1,100)
420
(130)
290
(58)
232
88
320
1,330
(980)
350
(100)
250
(50)
200
52
252
120
(10)
110
(22)
88
80
(15)
65
(13)
52
* Ignore depreciation adjustment as information is not given
55
Scenario III - Division A was classified as held for sale in 2020
Fair value less cost to sell was:
Rs. million
31-12-2020
155
SOFP - Extracts
2020
2019
------- Rs. million ------
Non current assets
PPE
920
1,020
Current assets
Disposal group held for sale
155
-
2020
SOCI - Extracts
Sales
Cost of sales
Gross profit
Operating expenses
PBT
Tax [20%]
Profit from continuing operations
Profit from discontinued operations (W-1)
Profit after tax
W-1
PBT
Loss as per IFRS 5 [170 - 155]
Tax [20%]
2019
(reclassified)
------- Rs. million -----1,520
(1,100)
420
(130)
290
(58)
232
84
316
1,330
(980)
350
(100)
250
(50)
200
64
264
120
(15)
105
(21)
84
80
80
(16)
64
56
Scenario IV - Division A was classified as held for sale in 2019 but ceased in 2020
Fair value less cost to sell was:
Rs. million
31-12-2019
165
Value in use
[as on 31-12-2020]
173
SOFP - Extracts
Non current assets
PPE
2020
2019
------- Rs. million ------
1,090
840
-
165
Current assets
Disposal group held for sale
2020
SOCI - Extracts
Sales
Cost of sales
Gross profit
Operating expenses (W-1)
PBT
Tax [20%]
PAT
W-1
Operating expenses
Loss as per IFRS 5 [180 - 165]
Loss reversal as per IFRS 5 [170 - 165]
2019
(reclassified)
------- Rs. million -----2,080
(1,500)
580
(165)
415
(83)
332
1,760
(1,300)
460
(145)
315
(63)
252
170
(5)
165
130
15
145
57
IAS 40 – Class notes
SCOPE
This standard does not apply to:
(a) biological assets related to agricultural activity (IAS 41); and
(b) mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources
IMPORTANT DEFINITIONS
Investment property is property (land or a building or part of a building or both) held (by the owner or by
the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both, rather than for:
(a) use in the production or supply of goods or services or for administrative purposes; or
(b) sale in the ordinary course of business.
Owner‑occupied property is property held (by the owner or by the lessee as a right-of-use asset) for use
in the production or supply of goods or services or for administrative purposes.
Important difference:
Investment property is held to earn rentals or for capital appreciation or both. Therefore, an investment
property generates cash flows largely independently of the other assets held by an entity. This
distinguishes investment property from owner‑occupied property. The production or supply of goods
or services (or the use of property for administrative purposes) generates cash flows that are
attributable not only to property, but also to other assets used in the production or supply process.
CLASSIFICATION OF PROPERTY
Examples of investment property
(a) land held for long‑term capital appreciation rather than for short‑term sale in the ordinary course of
business.
(b) land held for a currently undetermined future use. (If an entity has not determined that it will use the
land as owner‑occupied property or for short‑term sale in the ordinary course of business, the land is
regarded as held for capital appreciation.)
(c) a building owned by the entity (or a right-of-use asset relating to a building held by the entity) and
leased out under one or more operating leases.
(d) a building that is vacant but is held to be leased out under one or more operating leases.
(e) property that is being constructed or developed for future use as investment property.
Example of items that are not investment property
(a) property intended for sale in the ordinary course of business or in the process of construction or
development for such sale (see IAS 2 Inventories), for example, property acquired exclusively with a
view to subsequent disposal in the near future or for development and resale.
Nasir Abbas FCA
58
IAS 40 – Class notes
(b) owner‑occupied property (see IAS 16 and IFRS 16)
(c) property held for future use as owner‑occupied property
(d) property held for future development and subsequent use as owner‑occupied property
(e) property occupied by employees (whether or not the employees pay rent at market rates)
(f) owner‑occupied property awaiting disposal.
(g) property that is leased to another entity under a finance lease.
Intra-group property transfers:
In some cases, an entity owns property that is leased to, and occupied by, its parent or another
subsidiary. The property does not qualify as investment property in the consolidated financial
statements, because the property is owner‑occupied from the perspective of the group. However,
from the perspective of the entity that owns it, the property is investment property if it meets the
definition. Therefore, the lessor treats the property as investment property in its individual financial
statements.
Composite properties
1. If a property comprises of two portions; one is held to earn rentals or for capital appreciation and
other is held as owner occupied:
Portions can be sold or leased under a finance Portions cannot be sold or leased under a
lease separately:
finance lease:
Portions are accounted for as “investment
property” and “owner-occupied property”
accordingly.
Property is accounted for as “investment
property”, if only an insignificant portion is
owner-occupied.
2. If an entity provides services to the occupants of a property it holds:
If services are insignificant to the arrangement
as a whole:
If services are significant to the arrangement as
a whole:
Property is accounted for as “investment
property”.
[For example when owner of the building
provides security and maintenance services to
the lessees]
Property is accounted for as “owner-occupied
property”.
[For example if entity owns and manages a
hotel, services provided to guests are significant
to the arrangement as a whole]
Nasir Abbas FCA
59
IAS 40 – Class notes
Subjectivity involved:
It may be difficult to determine whether ancillary services are so significant that a property does
not qualify as investment property. For example, the owner of a hotel sometimes transfers some
responsibilities to third parties under a management contract. The terms of such contracts vary
widely. At one end of the spectrum, the owner’s position may, in substance, be that of a passive
investor (i.e. investment property). At the other end of the spectrum, the owner may simply have
outsourced day‑to‑day functions while retaining significant exposure to variation in the cash flows
generated by the operations of the hotel (i.e. owner-occupied property).
RECOGNITION
An owned investment property shall be recognised as an asset when, and only when:
(a) it is probable that the future economic benefits that are associated with the investment property will
flow to the entity; and
(b) the cost of the investment property can be measured reliably.
MEASUREMENT – Initial
An owned investment property shall be measured initially at its cost. Transaction costs shall be included
in the initial measurement.
[Components of cost are same as earlier studied for property, plant and equipment IAS 16]
MEASUREMENT – Subsequent
An entity shall choose as its accounting policy either the fair value model or cost model and shall apply
that policy to all of its investment properties.
Fair value model
1. An entity shall measure all of its investment property at end of every year at fair value, except in the
case discussed below as “exception”.
2. Any gain or loss from change in fair value shall be recognized in profit or loss for the period.
Exception:
If an entity determines that the fair value of an investment property is not reliably measurable on
a continuing basis, the entity shall measure that investment property using cost model and continue
to apply cost model until disposal of the property and assume residual value to be zero.
If any entity determines that the fair value of an investment property under construction is not
reliably measurable but expects the fair value to be reliably measurable when construction is
complete, it shall measure that property under construction at cost untill the earlier of:
* When its fair value becomes reliably measurable; or
* When its construction is completed.
Cost model
It is same as studied in IAS 16.
Nasir Abbas FCA
60
IAS 40 – Class notes
TRANSFERS
An entity shall transfer a property to, or from, investment property when, and only when, there is a change
in use. A change in use occurs when the property meets, or ceases to meet, the definition of investment
property and there is evidence of the change in use.
In isolation, a change in management’s intentions for the use of a property does not provide evidence of
a change in use.
Examples of evidence of a change in use include:
(a) commencement of owner‑occupation, or of development with a view to owner-occupation [transfer
from investment property to owner‑occupied property];
(b) commencement of development with a view to sale [transfer from investment property to
inventories];
(c) end of owner‑occupation [transfer from owner‑occupied property to investment property]; and
(d) inception of an operating lease to another party [transfer from inventories to investment property].
Transfer out
Property was carried at:
Cost model
--------------------- Property is now transferred to ----------------------Inventory
Owner-occupied property
Carrying amount of property as Carrying amount of property as
per IAS 40 is now considered as per IAS 40 is now considered as
cost of inventory
carrying amount of owneroccupied property.
Property is remeasured at fair Property is remeasured at fair
value at the date of transfer as value at the date of transfer as
per IAS 40.
per IAS 40.
Fair value model
This fair value at the date of This fair value at the date of
transfer is deemed as cost of transfer is deemed as cost of
inventory.
owner-occupied property.
Nasir Abbas FCA
61
IAS 40 – Class notes
Transfer in
Property will be carried at:
Cost model
Fair value model
--------------------- Property is transferred from ----------------------Inventory
Owner-occupied property
Carrying amount of inventory as Carrying amount of ownerper IAS 2 is now considered as occupied property is now
cost of investment property
considered as carrying amount
of investment property
Property is remeasured at fair Owner-occupied property is
value at the date of transfer and revalued to fair value in
resulting gain/loss is recognized accordance with revaluation
in P&L.
model of IAS 16.
(If revaluation surplus arises, it
This fair value at the date of stays there in equity till property
transfer is now the value of is subsequently disposed)
investment property.
This fair value at the date of
transfer is now the value of
investment property.
DERECOGNITION
It is same as studied in IAS 16.
Nasir Abbas FCA
62
IAS 40 – QUESTIONS
PRACTICE QUESTIONS
QUESTION NO. 1
Bilal Developers (BD) wishes to create a credible investment property portfolio with a view to determining if any property
may be considered surplus to the functional objectives. The following portfolio of property is owned by BD:
(a)
BD owns several plots of land. Some of the land is owned by BD for capital appreciation and this may be sold at
any time in the future. Other plots of land have no current purpose as BD has not determined whether it will use
the land to provide services such as those provided by national parks or for short-term sale in the ordinary course
of operations.
(b)
BD supplements it income by buying and selling properties. The housing department regularly sells part of its
housing inventory in the ordinary course of its operations as a result of changing demographics. Part of the
inventory, which is not held for sale, is to provide housing to low-income employees at below market rental. The
rent paid by employees covers the cost of maintenance of the property.
Required:
Discuss how above properties should be accounted for in financial statements of BD.
QUESTION NO. 2
Briefly discuss, with reasons, whether following properties may be classified as investment properties or not:
(a)
(b)
(c)
(d)
(e)
An entity rents out a building it owns to independent third parties under operating leases.
An entity owns a building it rents out to an independent third party (the lessee) under an operating lease. The
lessee operates a hotel from the building and provides a range of services commonly provided by such hotels.
The entity does not provide any services to the hotel guests and its rental income is unaffected by the number
of guests that occupy the hotel.
An entity acquired a tract of land to divide it into smaller plots to be sold in the ordinary course of business at an
expected 40% profit margin. No rentals are expected to be generated from the land.
An entity owns a building that it rents out to independent third parties under operating leases. The entity
provides cleaning, security and maintenance services for the lessees of the building. To do this, the entity’s
building administration and maintenance staff occupies a part of the building that measures less than 1% of the
floor area of the building.
An entity owns a two-storey building. Floor 1 is rented out to independent third parties under operating leases.
Floor 2 is occupied by the entity’s administration and maintenance staff. The entity can measure reliably the fair
value of each floor of the building without undue cost or effort.
QUESTION NO. 3
Briefly discuss, with reasons, whether following properties may be classified as investment properties or not:
(i)
An entity rents out a building it owns to independent third parties under operating leases. The entity provides
cleaning, security and maintenance services for the lessees of the building.
(ii)
An entity acquired a tract of land as a long-term investment because it expects its value to increase over
time. No rentals are expected to be generated from the land in the foreseeable future.
(iii)
An entity owns a building which it operates as a hotel (i.e. it rents out rooms to independent third parties in
return for payments). The entity provides hotel guests with a range of services commonly provided by hotels.
Some of the services are included in the room daily rate (e.g. breakfast and television); other services are charged
for separately (e.g. other meals, minibars, and guided tours of the surrounding area).
An entity owns a building it rents out to independent third parties under operating leases. The entity’s building
administration and maintenance staff occupies 25% of the building’s floor area.
(iv)
QUESTION NO. 4
Alpha Limited (AL) owns following two properties:
NASIR ABBAS FCA
63
IAS 40 – QUESTIONS
Property X
An office building owned by AL was purchased on January 01, 2011 for Rs. 12 million. This building is mainly used for
administrative activities of AL. Total estimated useful life of building was 20 years. This building had a fair value of Rs. 8.8
million on January 1, 2015. On January 1, 2018 its fair value as determined at Rs. 8.32 million. There has been no change
in estimate of useful life.
Property Y
Another building owned by AL was purchased on July 1, 2017 for Rs. 8 million. This building was purchased for the
objective of earning rentals. However it could be rented out on July 1, 2018. It had a fair value of Rs. 8.5 million on
December 31, 2017 which was increased to Rs. 9.4 million on December 31, 2018. Estimated useful life of this building
was 15 years.
AL follows revaluation model for property, plant and equipment and fair value model for investment properties.
Required:
Prepare journal entries for the year ending December 31, 2018.
QUESTION NO. 5
Quality Limited (QL) owns following two properties:
Property A
An office building used by QL for administrative purposes has a depreciated historical cost of Rs.2 million. At July 1, 2018
it had a remaining life of 20 years. After a reorganisation on January 1, 2019, the property was let to a third party and
reclassified as an investment property applying QL’s policy of the fair value model. An independent valuer assessed the
property to have a fair value of Rs. 2.3 million at January 1, 2019, which had risen to Rs. 2.5 million at June 30, 2019.
Property B
Another office building has been rented out to a tenant. At June 30, 2018, it had a fair value of Rs. 1.5 million which had
risen to Rs. 1.65 million at June 30, 2019.
Required:
Prepare extracts of statement of comprehensive income and statement of financial position for the year ended June 30,
2019.
QUESTION NO. 6
Beta Limited (BL) is engaged in buying and selling of properties as well as renting out of properties. BL had many properties
classified as investment properties. It follows fair value model for its investment properties. On July 1, 2018 BL changed
use of following two properties:
Property M
Property M was purchased some years ago for Rs. 5 million with the intention of letting it out. It was given on rent for
many years. On December 31, 2017 it was updated to a fair value of Rs. 6.2 million. On July 1, 2018, the tenant vacated
the building and BL decided to sell it in ordinary course of business. The fair value of building on July 1, 2018 was Rs. 6.5
million.
Property N
Property N was purchased 5 years ago for Rs. 7 million. It was given on operating lease to a lessee since then. On July 1,
2018 it was vacated by the tenant and BL decided to use it as administration office. This building was updated to a fair
value of Rs. 5.5 million on December 31, 2017. On July 1, 2018 its fair value was Rs. 5.3 million.
Required:
Prepare journal entries for the transfers on July 1, 2018.
NASIR ABBAS FCA
64
IAS – 40 - SOLUTIONS
SOLUTIONS
SOLUTION TO QUESTION NO.1
(a)
(b)
The land that is owned by BD for capital appreciation which may be sold at any time in the future and
the land that has no current purpose are both considered to be investment property under IAS 40. If
the land has no current purpose, it is considered to be held for capital appreciation.
BD supplements its income by buying and selling property, and the housing department regularly sells
part of its housing inventory. As these sales are in the ordinary course of its operations and are
routinely occurring, then the housing stock held for sale will be classified as inventory.
The part of the inventory held to provide housing to low-income employees at below market rental
will not be treated as investment property as the property is not held for capital appreciation and the
income just covers the cost of maintaining the properties and thus is not for profit. The property is
held to provide housing services rather than rentals. The rental revenue is incidental to the purposes
for which the property is held. This property will be accounted for under IAS 16 Property, Plant and
Equipment. The property is treated as owner occupied as set out above.
SOLUTION TO QUESTION NO.2
(a)
(b)
(c)
(d)
(e)
The building is classified as an item of investment property by the entity (lessor). It is a property held
to earn rentals.
The building is an investment property of the entity. The entity is a passive investor and is not engaged
in the business of operating a hotel.
The land is not classified as investment property. It is classified as inventory. It is held for sale in the
ordinary course of business.
The entire building is classified as an investment property by the entity (lessor). It is a property held to
earn rentals. The portion of the building occupied by the owner (owner-occupation) is insignificant and
so the building does not need to be accounted for as a mixed use property.
Floor 1 of the building is classified as an item of investment property by the entity (lessor) because it
is held to earn rentals.
Floor 2 of the building is classified as property, plant and equipment because it is held for use in the
production or supply of goods or services or for administrative purposes.
SOLUTION TO QUESTION NO.3
(i)
If the services provided by the entity are insignificant to the arrangement as a whole, the property is
investment property. In most cases, cleaning, security and maintenance services will be insignificant,
and hence, the building would be classified as investment property.
(ii)
The land is classified as investment property. It is property held for capital appreciation. The land is not
held for sale in the ordinary course of business; nor is it used in the production or supply of goods or
services or for administrative purposes.
(iii)
Because the entity is actively engaged in operating a hotel business in the building, it should be
classified as property, plant and equipment. Its cash inflows (income from letting out the rooms and
income from the other services provided) are dependent on the way it operates the hotel business.
Therefore, the building is not an investment property.
(iv)
The entity (owner) occupies 25% of the floor area of the building. The mixed use building should be
separated between investment property and property, plant and equipment. However, if the fair value
of the investment property component cannot be measured reliably without undue cost or effort, the
entire property should be accounted for as property, plant and equipment.
NASIR ABBAS FCA
65
IAS – 40 - SOLUTIONS
SOLUTION TO QUESTION NO.4
Property X
Date
01-01-18
01-01-18
31-12-18
31-12-18
Particulars
Accumulated depreciation (W-1)
Building
[Elimination of accumulated depreciation]
Building (W-1)
P&L
Revaluation surplus
[Revaluation of property X]
Depreciation (W-1)
Accumulated depreciation
[Depreciation for 2018]
Revaluation surplus (W-1)
Retained earnings
[Incremental depreciation for 2018]
Dr. (Rs.)
1,650,000
Cr. (Rs.)
1,650,000
1,170,000
650,000
520,000
640,000
640,000
40,000
40,000
W-1
NBV
01-01-11
31-12-11/14
Cost
Dep. [12m x 4/20]
01-01-15
Reval.
31-12-15/17
Dep. [8.8m x 3/16]
01-01-18
Reval.
31-12-18
Dep. [8.32m / 13]
Property Y
Date
31-12-18
12,000
(2,400)
9,600
(800)
8,800
(1,650)
7,150
1,170
8,320
(640)
7,680
Particulars
Investment property [9.4m – 8.5m]
P&L
[FV gain on investment property for 2018]
Surplus
520
520
(40)
480
Dr. (Rs.)
900,000
P&L
(800)
(800)
150
(650)
650
-
Cr. (Rs.)
900,000
SOLUTION TO QUESTION NO.5
Extracts - SOCI
Depreciation [2m/20 x 6/12]
Fair value gain on investment property (W-1)
Other comprehensive income
Revaluation gain [2.3m – (2m – 0.05m)]
Rs.’000’
50.00
350.00
350.00
Extracts - SOFP
Rs.’000’
Non-current assets
Investment property [2.5m + 1.65m]
Equity
Revaluation surplus
NASIR ABBAS FCA
4,150.00
350.00
66
IAS – 40 - SOLUTIONS
W-1
FV gain on Property A [2.5m – 2.3m]
FV gain on Property B [1.65m – 1.5m]
Rs.’000’
200.00
150.00
350.00
SOLUTION TO QUESTION NO.6
Property M
Date
01-07-18
01-07-18
Property N
Date
01-07-18
01-07-18
NASIR ABBAS FCA
Particulars
Investment property (M) [6.5m – 6.2m]
P&L
[Fair value gain at the date of transfer]
Inventory
Investment property (M)
[Investment property reclassified as inventory]
Particulars
P&L
Investment property (N) [5.5m – 5.3m]
[Fair value loss at the date of transfer]
Admin Building (PPE)
Investment property (N)
[Investment property reclassified as PPE]
Dr. (Rs.)
300,000
Cr. (Rs.)
300,000
6,500,000
6,500,000
Dr. (Rs.)
200,000
Cr. (Rs.)
200,000
5,300,000
5,300,000
67
Q-6 Jun-12
(a)
5 - Investment property
5.1 Investment property carried at cost model
Rs. million
Cost
Balance as at 01-01-11
Addition
Disposal
Balance as at 31-12-11
Accumulated depreciation
Balance as at 01-01-11
Charge for the year
Disposal
Balance as at 31-12-11
10.00
10.00
(W-1)
(W-1)
2.25
0.90
3.15
Net book value as at 31-12-11
6.85
Useful life
10 years
Property D is carried at cost because it is situated outside the main city and its fair
value cannot be determined.
5.2 Investment property carried at fair value model
Rs. million
Fair value
Balance as at 01-01-11
Addition
Transfer in
Fair value gain
Balance as at 31-12-11
WORKINGS
W-1
Annual depreciation [(10 - 1)/10]
(Property C)
(W-2)
(Property A)
(W-3)
120.00
30.00
120.00
14.00
284.00
Rs. million
0.90
Accumulated depreciation on 01-01-11 [0.9 x 2.5 years]
2.25
W-2
Property E
Total purchase cost
Allocated administrative costs
Cost of property
48.00
(3.00)
45.00
Cost of investment property portion [45 x 2/3]
30.00
W-3
Property A [120 - 100]
Property C [150 - 120]
Property E [51 x 2/3 - 30]
(20.00)
30.00
4.00
14.00
Since Property B was transferred out of IAS 40, it is not included in investment property
68
IAS 19 – Class notes
SCOPE
This standard shall be applied in accounting for all employee benefits, except those to which IFRS 2
applies.
EMPLOYEE BENEFITS
Employee benefits are all forms of consideration given by an entity in exchange for service rendered by
employees or for the termination of employment. Employee benefits include:
(a) Short‑term employee benefits
Employee benefits (other than termination benefits) that are expected to be settled wholly before
twelve months after the end of the annual reporting period in which the employees render the related
service.
Examples:
(i) wages, salaries and social security contributions;
(ii) paid annual leave and paid sick leave;
(iii) profit‑sharing and bonuses; and
(iv) non‑monetary benefits (such as medical care, housing, cars and free or subsidised goods or
services) for current employees;
(b) Post‑employment benefits
Employee benefits (other than termination benefits and short‑term employee benefits) that are
payable after the completion of employment.
Examples:
(i) retirement benefits (e.g. pensions and lump sum payments on retirement); and
(ii) other post‑employment benefits, such as post‑employment life insurance and post‑employment
medical care;
(c) Other long‑term employee benefits
All employee benefits other than short‑term employee benefits, post‑employment benefits and
termination benefits.
Examples:
(i) long‑term paid absences such as long‑service leave or sabbatical leave;
(ii) jubilee or other long‑service benefits; and
(iii) long‑term disability benefits;
(d) Termination benefits
Employee benefits provided in exchange for the termination of an employee’s employment as a result
of either:
(i) an entity’s decision to terminate an employee’s employment before the normal retirement date;
or
(ii) an employee’s decision to accept an offer of benefits in exchange for the termination of
employment.
Nasir Abbas FCA
69
IAS 19 – Class notes
SHORT TERM BENEFITS – Recognition and measurement
All short-term employee benefits
When an employee has rendered service to entity during an accounting year, the entity shall recognize
the undiscounted amount of short-term benefit expected to be paid for that service as an expense, unless
any other IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of benefits, an entity shall recognize the difference as an
accrued expense (if amount of benefits exceeds payment) or prepayment (if payment exceeds the
amount of benefits).
Short-term paid absences
An entity may pay employees for absence for various reasons including holidays, sickness and short‑term
disability, maternity or paternity, jury service and military service. Entitlement to paid absences falls into
two categories:
(a) accumulating; and
(b) non‑accumulating.
Accumulating paid absences
1. Accumulating paid absences are those that are carried forward and can be used in future periods if
the current period’s entitlement is not used in full.
2. Accumulating paid absences may be either:
Vesting (i.e. employees are entitled to a cash payment for unused entitlement); or
Non‑vesting (i.e. employees are not entitled to a cash payment for unused entitlement).
3. An obligation arises as employees render service that increases their entitlement to future paid
absences. An entity shall measure the obligation at the expected cost of accumulating paid absences
as the additional amount that the entity expects to pay as a result of the unused entitlement that has
accumulated at the end of the reporting period.
Non-vesting:
The obligation exists, and is recognised, even if the paid absences are non‑vesting, although the
possibility that employees may leave before they use an accumulated non‑vesting entitlement
affects the measurement of that obligation.
Non-accumulating paid absences
Non‑accumulating paid absences do not carry forward: they lapse if the current period’s entitlement is
not used in full and do not entitle employees to a cash payment for unused entitlement on leaving the
entity. This is commonly the case for sick pay (to the extent that unused past entitlement does not
increase future entitlement), maternity or paternity leave and paid absences for jury service or military
service. An entity recognises no liability or expense until the time of the absence, because employee
service does not increase the amount of the benefit.
Nasir Abbas FCA
70
IAS 19 – Class notes
Profit-sharing and bonus plans
1. An entity shall recognise the expected cost of profit‑sharing and bonus payments when, and only
when:
(a) the entity has a present legal or constructive obligation to make such payments as a result of past
events; and
(b) a reliable estimate of the obligation can be made.
A present obligation exists when, and only when, the entity has no realistic alternative but to make
the payments.
2. Under some profit‑sharing plans, employees receive a share of the profit only if they remain with the
entity for a specified period. Such plans create a constructive obligation as employees render service
that increases the amount to be paid if they remain in service until the end of the specified period.
The measurement of such constructive obligations reflects the possibility that some employees may
leave without receiving profit‑sharing payments.
3. An entity can make a reliable estimate of its legal or constructive obligation under a profit‑sharing or
bonus plan when, and only when:
(a) the formal terms of the plan contain a formula for determining the amount of the benefit;
(b) the entity determines the amounts to be paid before the financial statements are authorised for
issue; or
(c) past practice gives clear evidence of the amount of the entity’s constructive obligation.
Difference between bonus plan and dividend
An obligation under profit‑sharing and bonus plans results from employee service and not from a
transaction with the entity’s owners. Therefore, an entity recognises the cost of profit‑sharing and
bonus plans not as a distribution of profit but as an expense.
POST-EMPLOYMENT BENEFITS
Defined contribution plan
- A post-employment benefit plan under which
an entity pays fixed contribution into a
separate entity (fund) and will have no legal or
constructive obligation to pay further
contributions if the fund does not hold
sufficient assets to pay all employee benefits
relating to employee service in the current and
past periods.
- Entity’s legal or constructive obligation is
limited to the amount that it agrees to
contribute to the fund or an insurance
company.
- The amount of the post-employment benefit
received by the employee is the amount of
contributions (employer and employee) plus
investment returns.
Nasir Abbas FCA
Defined benefit plan
- A post-employment benefit plan other than
defined contribution plan. It may be unfunded
or it may fully or partially funded.
- Entity’s legal or constructive obligation is to
provide the agreed benefits to current and
former employees.
- The amount of the post-employment benefit
received by the employee is determined by
defined formula for the benefit.
- The actuarial risk and investment risk fall on
the entity.
71
IAS 19 – Class notes
-
The actuarial risk and investment risk fall on
the employee.
Defined contribution plan
Recognition and measurement
When an employee has rendered service to entity during an accounting year, the entity shall recognize
the contribution payable to a defined contribution plan for that service as an expense, unless any other
IFRS requires the inclusion in the cost of an assets (e.g. IAS 2 and IAS 16)
Prepayment or accrual
If payment is different from the amount of contribution payable, an entity shall recognize the difference
as an accrued expense (if amount of contribution payable exceeds payment) or prepayment (if payment
exceeds the amount of contribution payable).
When contributions are not expected to be paid before twelve months after the end of year in which
employees render the related service, these shall be discounted.
Disclosures
The entity shall disclose the amount recognized as expense for defined contribution plans.
Defined benefit plan
Note for students:
Whole process for recognition and measurement under defined benefit plan is better understood by
first showing the presentation in SOFP, SOCI and notes. Afterwards, all terms will be explained one by
one.
Statement of financial position
Net defined benefit liability / (asset)
XXX
(Working)
PV of defined benefit obligation
Fair value of plan assets
Net defined benefit liability / (asset)*
XXX
(XXX)
XXX
* Asset ceiling test:
In case of net defined benefit asset, it shall be measured at the lower of:
(a) surplus in defined benefit plan (as calculated above)
(b) Present value of future economic benefits available to the entity in the form of a reduction in future
contribution or a cash refund. (same discount rate is used as used for defined benefit obligation)
Nasir Abbas FCA
72
IAS 19 – Class notes
Statement of comprehensive income
Current service cost
Past service cost
Net interest
Gain / loss on settlement
Other comprehensive income:
Actuarial gain/loss
Return on plan assets
Asset ceiling adjustment
X
X
X
X
X
X
X
Notes – Reconciliation of PV of defined benefit obligation
Opening balance
X
Interest cost
X
Current service cost
X
Past service cost
X
Benefits paid
(X)
Settlement
(X)
Actuarial (gain) / loss [balancing figure]
X
Closing balance
X
Notes – Reconciliation of fair value of plan assets
Opening fair value
Interest income
Contributions to the plan
Benefits paid
Settlement
Return on plan assets (+/-) [balancing figure]
Closing fair value
X
X
X
(X)
(X)
X
X
1) Present value of defined benefit obligation and current service cost
1. Present value of defined benefit obligation is the present value without deducting any plan
assets, of expected future payments required to settle the obligation resulting from employee
service in the current and prior periods. Current service cost is the increase in the present value
of defined benefit obligation resulting from employee service in the current period.
Dr. Current service cost
Cr. PV of Defined benefit obligation
X
X
2. An entity shall use projected unit credit method to determine the present value of defined
obligation and related service cost. This method sees each period of service as giving rise to an
additional unit of benefit entitlement.
Example:
A lumpsum benefit equal to 1% of final salary multiplied by number of years of service will be paid
on retirement. Annual salary in year 1 is expected to be Rs. 25,000 and it is assumed to increase
Nasir Abbas FCA
73
IAS 19 – Class notes
8% per year. Appropriate discount rate is 10%. Assuming that employee will remain employed for
5 years, following is the calculation of defined benefit obligation and its related costs:
Lumpsum benefit = Rs. 25,000 x 1.084 x 1% x 5 = Rs. 1,700
Benefit unit for each year service = Rs. 1,700 / 5 = Rs. 340
Opening balance
Interest cost [Opening x 10%]
Current service cost
[PV of single unit i.e. Rs. 340]
Closing balance
[PV of cumulative units]
Yr-1
Yr-2
Yr-3
Yr-4
Yr-5
------------------------- Rs. -------------------------232
511
843
1,236
23
51
84
124
232
256
281
309
340
232
511
843
1,236
1,700
Post-employment benefit in form of annuity:
If benefit is not a lumpsum amount rather a series of payments (e.g. pension, medical facility)
then for calculation of a single unit of benefit per year of service, first convert the series of
benefits into a single value as at retirement date.
3. An entity shall attribute benefits to periods of service under the plan’s benefit formula. However,
if an employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity shall attribute benefit on a straight‑line basis from:
(a) the date when service by the employee first leads to benefits under the plan (whether or not
the benefits are conditional on further service) until
(b) the date when further service by the employee will lead to no material amount of further
benefits under the plan, other than from further salary increases.
4. Employee service gives rise to an obligation under a defined benefit plan even if the benefits:
- are conditional on future employment (in other words they are not vested); or
- become payable only if a specified event occurs when an employee is no longer employed
(e.g. medical support).
In measuring its defined benefit obligation, an entity considers the probability that some
employees may not satisfy any vesting requirements or the specified event will not occur.
Examples:
1. A plan pays a benefit of Rs. 100 for each year of service. The benefits vest after ten years
of service.
A benefit of Rs. 100 is attributed to each year. In each of the first ten years, the current
service cost and the present value of the obligation reflect the probability that the employee
may not complete ten years of service.
2. A plan pays a benefit of Rs. 100 for each year of service, excluding service before the age
of 25. The benefits vest immediately.
No benefit is attributed to service before the age of 25 because service before that date does
not lead to benefits (conditional or unconditional). A benefit of Rs. 100 is attributed to each
subsequent year.
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IAS 19 – Class notes
5. If further service of an employee will lead to no material amount of further benefits, then all
benefit is attributed to the service periods ending on or before that date.
Examples:
1. A plan pays a lumpsum retirement benefit of Rs. 2,000 to all employees who are still
employed at the age of 55 after twenty years of service, or who are still employed at the
age of 65, regardless of their length of service.
For employees who join before the age of 35, service first leads to benefits under the plan
at the age of 35 (an employee could leave at the age of 30 and return at the age of 33, with
no effect on the amount or timing of benefits). Those benefits are conditional on further
service. Also, service beyond the age of 55 will lead to no material amount of further
benefits. For these employees, the entity attributes benefit of Rs. 100 (Rs. 2,000 divided by
twenty) to each year from the age of 35 to the age of 55.
For employees who join between the ages of 35 and 45, service beyond twenty years will
lead to no material amount of further benefits. For these employees, the entity attributes
benefit of Rs. 100 (Rs. 2,000 divided by twenty) to each of the first twenty years.
For an employee who joins at the age of 55, service beyond ten years will lead to no material
amount of further benefits. For this employee, the entity attributes benefit of Rs. 200 (Rs.
2,000 divided by ten) to each of the first ten years.
For all employees, the current service cost and the present value of the obligation reflect the
probability that the employee may not complete the necessary period of service.
2. A post-employment medical plan reimburses 40 per cent of an employee’s postemployment medical costs if the employee leaves after more than ten and less than
twenty years of service and 50 per cent of those costs if the employee leaves after twenty
or more years of service.
Under the plan’s benefit formula, the entity attributes 4 per cent of the present value of the
expected medical costs (40 per cent divided by ten) to each of the first ten years and 1 per
cent (10 per cent divided by ten) to each of the second ten years. The current service cost in
each year reflects the probability that the employee may not complete the necessary period
of service to earn part or all of the benefits. For employees expected to leave within ten
years, no benefit is attributed.
6. If employee’s service in later years will lead to a materially higher level of benefit than in earlier
years, an entity attributes benefit on a straight-line basis until the date when further service by
the employee will lead to no material amount of further benefits. That is because the employee’s
service throughout the entire period will ultimately lead to a benefit at that higher level.
Example:
A post-employment medical plan reimburses 10 per cent of an employee’s post-employment
medical costs if the employee leaves after more than ten and less than twenty years of service
and 50 per cent of those costs if the employee leaves after twenty or more years of service.
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IAS 19 – Class notes
Service in later years will lead to a materially higher level of benefit than in earlier years.
Therefore, for employees expected to leave after twenty or more years, the entity attributes
benefit on a straight-line basis. Service beyond twenty years will lead to no material amount of
further benefits. Therefore, the benefit attributed to each of the first twenty years is 2.5 per cent
of the present value of the expected medical costs (50 per cent divided by twenty).
For employees expected to leave between ten and twenty years, the benefit attributed to each
of the first ten years is 1 per cent of the present value of the expected medical costs. For these
employees, no benefit is attributed to service between the end of the tenth year and the
estimated date of leaving.
For employees expected to leave within ten years, no benefit is attributed.
7. Estimates for defined benefit obligation and related service cost are based on actuarial
assumptions. Such assumptions shall be unbiased and mutually compatible. These assumptions
shall be based on market expectations at the end of the reporting period, for the period over
which the obligations are to be settled. Actuarial assumptions comprise of:
(a) Demographic assumptions that deal with matters such as:
- Mortality
- Rate of employee turnover, disability and early retirement
- The proportion of plan members with dependents who will be eligible for benefits
- The proportion of plan members who will select each form of payment option available
under the plan terms
- Claim rates under medical plans
(b) Financial assumptions that deal with items such as:
- The discount rate
- Benefits levels and future salary
- In case of medical benefits, future medical costs, claim handling costs
- Tax payable by the plan on contributions relating to service
2) Past service cost
1. Past service cost is the change in the present value of the defined benefit obligation for employee
service in prior periods, resulting from a plan amendment (i.e. the introduction or withdrawal of
or a change to defined benefit plan) or a curtailment (i.e. significant reduction by the entity in the
number of employees covered by a plan e.g. pant closure, discontinued operations or termination
of a plan).
2. Past service cost may be either positive or negative. An entity shall recognize past service cost as
an expense at the earliest of:
(a) When the plan amendment or curtailment occurs; and
(b) When the entity recognises related restructuring costs or termination benefits
Dr. Past service cost
Cr. PV of Defined benefit obligation
In case of negative past service cost, above entry shall be reversed.
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X
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IAS 19 – Class notes
3) Settlement
1. Settlement is a transaction that eliminates all further legal or constructive obligations for part or
all of the benefits provided under a defined benefits plan, other than a payment of benefits to
employees that set out in the terms of plan and included in the actuarial assumptions. For
example one off transfer of significant employer obligations under the plan to an insurance
company.
2. An entity shall recognize a gain or loss on settlement of a defined benefit plan when the
settlement occurs. The gain or loss on settlement is calculated as the difference between:
(a) The present value of the defined benefit obligation being settled, as determined on the date
of settlement; and
(b) The settlement price, including any plan assets transferred and any payments made directly
by the entity in connection with the settlement.
Dr. PV of defined benefit obligation
Cr. Plan assets / Cash
Dr/Cr. Gain on settlement (balancing)
X
X
X
4) Interest cost
1. Interest cost is the change during the period in the present value of defined benefit obligation
that arises from the passage of time.
2. It is calculated by applying discount rate (determined at start of year) to year start present value
of defined benefit obligation.
Interest cost = Opening PV of defined benefit obligation x discount rate %
Exam note:
Generally other movements in PV of defined benefit obligation are assumed to occur at year
end. However, interest calculation will be made on time proportionate basis to accommodate
the effect of changes (e.g. benefits paid) made during the year.
Dr. Interest cost
Cr. PV of defined benefit obligation
X
X
5) Fair value of plan assets
1. Plan assets comprise assets held by a long-term employee benefit fund and qualifying insurance
policies.
2. Fair value of plan assets is determined at end of every year and it is deducted from present value
of defined benefit obligation in determining net defined benefit obligation/(asset).
3. For disclosures in notes, fair value of plan assets is disaggregated into classes such as cash & cash
equivalents, equity instruments, debt instruments, real estate etc.
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IAS 19 – Class notes
4. Plan assets:
(a) Exclude unpaid contributions due from the reporting entity to the fund.
(b) Are reduced by accrued liabilities of the fund that do not relate to employee benefits.
6) Interest income
Interest income is calculated by applying discount rate (determined at start of year) to year start fair
value of plan assets.
Interest income = Opening fair value of plan assets x discount rate %
Exam note:
Generally other movements in fair value of plan assets are assumed to occur at year end. However,
interest calculation will be made on time proportionate basis to accommodate the effect of changes
(e.g. benefits paid, contributions) made during the year.
Dr. Plan assets
X
Cr. Interest cost
X
7) Contributions to fund
Necessary and timely contributions are made to fund.
Dr. Plan assets
X
Cr. Cash
X
8) Benefits paid
Post-employment benefits are paid to retiring employees out of plan assets.
Dr. PV of defined benefit obligation
Cr. Plan assets
X
X
9) Remeasurement
1. Actuarial gain/loss is the change during the period in the present value of defined benefit
obligation because of changes in actuarial assumptions and experience adjustments. Such
gain/loss is recognized in other comprehensive income.
Dr. Actuarial loss [OCI]
Cr. PV of defined benefit obligation
X
X
OR
Dr. PV of defined benefit obligation
Cr. Actuarial gain [OCI]
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X
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IAS 19 – Class notes
2. Return on plan assets is interest, dividend and other income derived from the plan assets net of
the costs of managing the plan assets. It is determined as a balancing figure in movement in fair
value of plan assets. This return is recognized in other comprehensive income.
Dr. Plan assets
Cr. Return on plan assets [OCI]
X
X
OR
Dr. Return on plan assets [OCI]
Cr. Plan assets
X
X
3. Any adjustment for asset ceiling test shall be recognized in other comprehensive income.
Reclassification to P&L:
All above remeasurements recognized in other comprehensive income shall not be reclassified to
P&L in a subsequent period. However, an entity may transfer those amounts within equity.
Multi-employer plans
1. Multi-employer plans are defined contribution plans or defined benefit plans that pool the assets
contributed by various entities that are not under common control and use those assets to provide
benefits to employees of more than one entity on the basis that contribution and benefit levels are
determined without regard to the identity of the entity that employs the employees.
2. An entity shall classify a multi-employer plan as a defined contribution plan or a defined benefit plan
under the terms of the plan.
3. If multi-employer plan is a defined benefit plan then entity shall account for its proportionate share
of the defined benefit obligation, plan assets and related costs as studied earlier. When sufficient
information is not available for defined benefit plan accounting, then entity shall account for the plan
as defined contribution plan.
Group plans
Defined benefit plans that share risks between group entities e.g. parent and subsidiary, are not multiemployer plans.
State plans
An entity shall account for state plan in the same way as for a multi-employer plan.
OTHER LONG-TERM EMPLOYEE BENEFITS
Examples:
- Long-term paid absences
- Jubilee
Nasir Abbas FCA
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IAS 19 – Class notes
-
Long-term disability benefits
Profit sharing and bonuses
Deferred remuneration
Recognition and measurement
It is accounted for same as learnt for defined benefit plan except remeasurement changes are also
recognized in P&L.
TERMINATION BENEFITS
Termination benefits result from either an entity’s decision to terminate the employment or an
employee’s decision to accept an entity’s offer of benefits in exchange for termination of employment.
Recognition
An entity shall recognize a liability and expense for termination benefits at the earlier of the following
dates:
(a) When the entity can no longer withdraw the offer of those benefits; and
(b) When the entity recognizes cost for a restructuring that is within the scope of IAS 37 and involves the
payment of termination benefits.
Measurement
If termination benefits are expected to be settled wholly before twelve months after the end of the year
in which the termination benefit is recognized, then entity shall account for these benefits same as shortterm benefits.
If termination benefits are not expected to be settled wholly before twelve months after the end of the
year in which the termination benefit is recognized, then entity shall account for these benefits same as
other long-term benefits.
Example
Background
As a result of a recent acquisition, an entity plans to close a factory in ten months and, at that time,
terminate the employment of all of the remaining employees at the factory. Because the entity needs
the expertise of the employees at the factory to complete some contracts, it announces a plan of
termination as follows.
Each employee who stays and renders service until the closure of the factory will receive on the
termination date a cash payment of RS. 30,000. Employees leaving before closure of the factory will
receive RS. 10,000.
There are 120 employees at the factory. At the time of announcing the plan, the entity expects 20 of
them to leave before closure. Therefore, the total expected cash outflows under the plan are RS.
3,200,000 (ie 20 × RS. 10,000 + 100 × RS. 30,000). The entity accounts for benefits provided in exchange
for termination of employment as termination benefits and accounts for benefits provided in exchange
for services as short-term employee benefits.
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IAS 19 – Class notes
Termination benefits
The benefit provided in exchange for termination of employment is RS. 10,000. This is the amount that
an entity would have to pay for terminating the employment regardless of whether the employees stay
and render service until closure of the factory or they leave before closure. Even though the employees
can leave before closure, the termination of all employees’ employment is a result of the entity’s
decision to close the factory and terminate their employment (ie all employees will leave employment
when the factory closes). Therefore the entity recognises a liability of RS. 1,200,000 (ie 120 × RS. 10,000)
for the termination benefits provided in accordance with the employee benefit plan at the earlier of
when the plan of termination is announced and when the entity recognizes the restructuring costs
associated with the closure of the factory.
Benefits provided in exchange for service
The incremental benefits that employees will receive if they provide services for the full ten-month
period are in exchange for services provided over that period. The entity accounts for them as shortterm employee benefits because the entity expects to settle them before twelve months after the end
of the annual reporting period. In this example, discounting is not required, so an expense of RS.
200,000 (ie RS. 2,000,000 ÷ 10) is recognised in each month during the service period of ten months,
with a corresponding increase in the carrying amount of the liability.
Nasir Abbas FCA
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EMPLOYEE BENEFITS (IAS-19) - QUESTIONS
PRACTICE QUESTIONS
Question 1
Employees of Alpha Limited (AL) are entitled to 10 paid leaves for each year. Unused leaves are entitled to cash
payment on leaving the entity. Average salary of employees for the year 2020 is Rs. 30,000 per month (2019:
Rs. 25,000 per month). As on June 30, 2019 there were 115 employees and their cumulative unused
compensated absences were 540 days.
During 2020, 15 employees resigned who cashed their unused leaves of 75 days. Of remaining employees 40%
employees availed 6 leaves each and 60% employees availed 9 leaves each.
Required:
Assuming 300 working days in a year, calculate the amount of compensated absence obligation at June 30,
2020 and related expense for the year 2020.
Question 2
Employees of Beta Limited (BL) are entitled to 5 paid leaves for each year. Unused leaves may be carried
forward for one calendar year (i.e. non-vesting). Leaves are allowed on LIFO basis therefore leave is taken first
out of the current year’s entitlement and then out any balance brought forward from the previous year.
Average salary of employees for the year 2020 is Rs. 1,000 per day (2019: Rs. 800 per day). As on June 30, 2019
there were 100 employees and their carried forward unused compensated absences were 240 days.
During 2020, on an average each employee availed 3 leaves. It is expected that during 2021, 70 employees will
avail 5 leaves or less, whereas 30 employees will avail 7 leaves.
Required:
Calculate the amount of compensated absence obligation at June 30, 2020 and related expense for the year
2020.
Question 3
Gamma Limited (GL) has offered its employees (including 5 directors) following profit share for their service
for the year:
o 10% of the profit in excess of target profit will be distributed to 5 directors, but each director can get a
maximum share equal to 20% of that profit share.
o 25% of the remaining excess profit (i.e. after deducting 10% share dedicated to directors) will be
distributed to all employees other than directors.
However, this profit share will be distributed to only those employees (including directors) who remain
employed till June 30th next year. Target profit for the year ending December 31, 2019 was set at Rs. 8,000,000.
However actual profit for the year 2019 was Rs. 10,500,000. Financial statements for the year ended December
31, 2019 are being finalized. It is estimated that one director will leave before June 30, 2020. Moreover, other
employees are also expected to leave as a result of which distribution of remaining excess profit to other
employees will reduce to 21%.
Required:
Journal entry to record profit share distribution for the year ending December 31, 2019.
Question 4
An annual pension equal to 2.5% of final salary multiplied by number of years of service will be paid from
retirement till death. Annual salary in year 1 is expected to be Rs. 40,000 and it is assumed to increase 6% per
year. Appropriate discount rate is 10%.
Required:
Assuming that employee will remain employed for 5 years and will live for 4 years after retirement, show yearly
calculations for service period of 5 years relating to defined benefit obligation and related costs.
NASIR ABBAS FCA
82
EMPLOYEE BENEFITS (IAS-19) - QUESTIONS
Question 5
A company is operating two post-employment benefits plans (funded), the details of which are as follows:
Plan A
The terms of the plan are as follows.
(i) Employees contribute 6% of their salaries to the plan.
(ii) Employer contributes, currently, the same amount to the plan for the benefit of the employees.
(iii) On retirement, employees are guaranteed a pension which is based upon the number of years service with
the company and their final salary.
The following details relate to the plan in the year to December 31, 2019:
Present value of obligation at January 1, 2019
Present value of obligation at December 31, 2019
Fair value of plan assets at January 1, 2019
Fair value of plan assets at December 31, 2019
Current service cost
Pension benefits paid
Total contributions paid to the scheme for year to December 31, 2019
Rs. million
200
240
190
225
20
19
17
The interest rate on high quality corporate bonds for the two plans are:
January 1, 2019
5%
December 31, 2019
6%
Plan B
Under the terms of the plan, the company does not guarantee any return on the contributions paid into the
fund. The company's legal and constructive obligation is limited to the amount that is contributed to the fund.
The following details relate to this scheme:
Rs. million
Fair value of plan assets at December 31, 2019
21
Contributions paid by company for year to December 31, 2019
10
Contributions paid by employees for year to December 31, 2019
10
Required:
(a) Discuss the nature of and differences between above two plans.
(b) Prepare extracts of SOFP, SOCI and notes for the year 2019 in respect of Plan A only.
Question 6
Savage, a public limited company, operates a funded defined benefit plan for its employees. The plan provides
a pension of 1% of the final salary for each year of service. The cost for the year is determined using the
projected unit credit method. This reflects service rendered to the dates of valuation of the plan and
incorporates actuarial assumptions primarily regarding discount rates, which are based on the market yields
of high quality corporate bonds.
The directors have provided the following information about the defined benefit plan for the current year (year
ended June 30, 2020).
(a) The actuarial cost of providing benefits in respect of employees' service for the year to June 30, 2020 was
Rs. 40 million. This is the present value of the pension benefits earned by the employees in the year.
(b) The pension benefits paid to former employees in the year were Rs. 42 million.
(c) Savage should have paid contributions to the fund of Rs. 28 million. Because of cash flow problems Rs. 8
million of this amount had not been paid at the financial year end of June 30, 2020.
NASIR ABBAS FCA
83
EMPLOYEE BENEFITS (IAS-19) - QUESTIONS
(d) The present value of the obligation to provide benefits to current and former employees was Rs. 3,000
million at June 30, 2019 and Rs. 3,375 million at June 30, 2020.
(e) The fair value of the plan assets was Rs. 2,900 million at June 30, 2019 and Rs. 3,170 million (including the
contributions owed by Savage) at June 30, 2020.
With effect from July 1, 2019, the company had amended the plan so that the employees were now provided
with an increased pension entitlement. The actuaries computed that the present value of the cost of these
benefits at July 1, 2019 was Rs. 125 million. The interest rate on high quality corporate bonds was as follows
from the following dates:
June 30,2019
6%
June 30, 2020
7%
Required:
Prepare extracts of SOFP, SOCI and notes for the year 2020.
NASIR ABBAS FCA
84
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
SOLUTIONS
Solution No. 1
Days
Balance as on 01-07-19
Leave encashment
Expense for the year (balancing)
Balance as on 30-06-20
540
(75)
Rate*
(Rs.)
1,000
1,000
**685
1,200
Amount
(Rs.)
540,000
(75,000)
357,000
822,000
* Monthly salary x 12/300
** Year end balance = 540 - 75 + 100 x 10 - 40 x 6 - 60 x 9 = 685 days
Solution No. 2
Since brought forward leaves balance could not be availed in 2020 and hence expired, therefore, opening
obligation must be reversed.
Dr. Obligation for compensated absence [240 x Rs. 800]
Cr. P&L
192,000
192,000
At 30-06-20 average unused leaves balance is 2 days for 100 employees but only 30 employees are expected
to utilize this balance in 2021 and unused leaves of 70 employees will lapse. Therefore, obligation will be
recorded for 60 days (30 x 2 days) as follows:
Dr. P&L [60 x Rs. 1,000]
60,000
Cr. Obligation for compensated absence
60,000
Solution No. 3
Rs.
2,500,000
Excess profit [10,500,000 - 8,000,000]
Profit distribution to directors [2,500,000 x 10% x 4/5]
Profit distribution to other employees [2,500,000 x 90% x 21%]
Journal
entry
Dr. Employee cost
Cr. Bonus payable
Rs.
672,500
200,000
472,500
672,500
Rs.
672,500
Solution No. 4
Annual pension = Rs. 40,000 x 1.064 x 2.5% x 5 = Rs. 6,312
Lumpsum amount of pension (assuming 4 years remaining life) = Rs. 6,312 x annuity factor = Rs. 20,010
Benefit unit for each year service = Rs. 20,010 / 5 = Rs. 4,002
NASIR ABBAS FCA
85
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
Opening balance
Interest cost [Opening x 10%]
Current service cost
[PV of single unit i.e. Rs. 4,002]
Closing balance
[PV of cumulative units]
Yr-1
Yr-2
Yr-3
Yr-4
Yr-5
------------------------- Rs. -------------------------2,733
6,013
9,922
14,553
273
601
992
1,455
2,733
3,007
3,308
3,639
4,002
2,733
6,013
9,922
14,553
20,010
Solution No. 5
(a)
With defined contribution plans, the employer (and possibly, as here, current employees too) pay regular
contributions into the plan of a given or 'defined' amount each year. The contributions are invested, and the
size of the post-employment benefits paid to former employees depends on how well or how badly the plan's
investments perform. If the investments perform well, the plan will be able to afford higher benefits than if
the investments performed less well. The B scheme is a defined contribution plan. The employer's liability is
limited to the contributions paid.
With defined benefit plans, the size of the post-employment benefits is determined in advance, i.e. the
benefits are 'defined'. The employer (and possibly, as here, current employees too) pay contributions into the
plan, and the contributions are invested. The size of the contributions is set at an amount that is expected to
earn enough investment returns to meet the obligation to pay the post-employment benefits. If, however, it
becomes apparent that the assets in the fund are insufficient, the employer will be required to make additional
contributions into the plan to make up the expected shortfall. On the other hand, if the fund's assets appear
to be larger than they need to be, and in excess of what is required to pay the post-employment benefits, the
employer may be allowed to take a 'contribution holiday' (ie stop paying in contributions for a while).
The main difference between the two types of plans lies in who bears the risk: if the employer bears the risk,
even in a small way by guaranteeing or specifying the return, the plan is a defined benefit plan. A defined
contribution scheme must give a benefit formula based solely on the amount of the contributions.
A defined benefit scheme may be created even if there is no legal obligation, if an employer has a practice of
guaranteeing the benefits payable. The A scheme is a defined benefit scheme. The employer, guarantees a
pension based on the service lives of the employees in the scheme. The company's liability is not limited to the
amount of the contributions. This means that the employer bears the investment risk: if the return on the
investment is not sufficient to meet the liabilities, the company will need to make good the difference.
(b)
Plan A
Extracts – SOFP
PV of defined benefit obligation
Fair value of plan assets
Net defined benefit liability
Rs. million
240
(225)
15
Extracts – SOCI
Current service cost
Net interest [10 – 9.50]
NASIR ABBAS FCA
Rs. million
(20)
(0.5)
86
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
Other comprehensive income:
Actuarial loss
Return on plan assets
(29.00)
27.50
Extracts – Notes
Reconciliation of PV of defined benefit obligation
Opening balance
Interest cost [200 x 5%]
Current service cost
Benefits paid
Actuarial loss (balancing figure)
Closing balance
Rs. million
200.00
10.00
20.00
(19.00)
29.00
240.00
Reconciliation of Fair value of plan assets
Opening balance
Interest income [190 x 5%]
Contributions
Benefits paid
Return on plan assets (balancing figure)
Closing balance
Rs. million
190.00
9.50
17.00
(19.00)
27.50
225.00
Solution No. 6
Extracts – SOFP
PV of defined benefit obligation
Fair value of plan assets [3,170 – 8]
Net defined benefit liability
Rs. million
3,375
(3,162)
213
Extracts – SOCI
Current service cost
Net interest [188 – 174]
Past service cost
Other comprehensive income:
Actuarial loss
Return on plan assets
Rs. million
(40)
(14)
(125)
(64)
110
Extracts – Notes
Reconciliation of PV of defined benefit obligation
Opening balance
Past service cost
Interest cost [3,125 x 6%]
Current service cost
Benefits paid
Actuarial loss (balancing figure)
Closing balance
NASIR ABBAS FCA
Rs. million
3,000
125
188
40
(42)
64
3,375
87
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
Reconciliation of Fair value of plan assets
Opening balance
Interest income [2,900 x 6%]
Contributions
Benefits paid
Return on plan assets (balancing figure)
Closing balance
NASIR ABBAS FCA
Rs. million
2,900
174
20
(42)
110
3,162
88
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
Question 3(a) [Jun-15]
Tanzeem Limited (TL) operates a defined benefit pension plan for its employees. The following details relate
to the plan:
Discount rate
Present value of obligation at year end
Fair value of plan assets at year end
Current service cost
Benefits paid during the year
Contributions made during the year
2014
2013
9%
8%
-------- Rs. million -----2,040
2,300
1,784
2,150
125
143
99
110
105
118
Additional information:
Present value of pension obligation and fair value of plan assets as on 1 January 2013 were Rs. 2,050 million
and Rs. 1,995 million respectively.
During the year 2013, TL amended the scheme whereby the benefits available under the plan had been
increased. It resulted in an increase in the present value of the defined benefit pension obligation by Rs.
13 million.
On 31 December 2014, TL sold a business segment to Sachai Limited (SL). Accordingly, TL transferred the
relevant component of its pension fund to SL. The present value of the defined benefit pension obligation
transferred was Rs. 280 million and the fair value of plan assets transferred was Rs. 240 million. TL also
made a cash payment of Rs. 20 million to SL in respect of the plan.
Required:
(a) Prepare relevant extracts to be reflected in the statement of financial position, statement of
comprehensive income and notes to the financial statements for the year ended 31 December 2014 in
accordance with International Financial Reporting Standards. (Show comparative figures)
(11)
(b) Prepare entries to record the pension obligation:
- on sale of business segment to SL
- at the year-end.
NASIR ABBAS FCA
(03)
89
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
Solution
(i)
Extracts – SOFP
2014
PV of defined benefit obligation
Fair value of plan assets
Net defined benefit liability (Note – 5)
Rs. million
2,040
1,784
256
2013
2,300
2,150
150
Extracts – SOCI
2014
Current service cost
Net interest cost [207 – 94] [164 – 160]
Past service cost
Gain on settlement [280 – 240 – 20]
Other comprehensive income:
Remeasurement gain [213 – 326] [40 + 13]
2013
Rs. million
(125)
(13)
20
(143)
(4)
(13)
-
(113)
(13)
Extracts – Notes
5 – Defined benefit liability
5.1 Reconciliation of PV of defined benefit obligation
2014
Opening balance
Past service cost
Interest cost [2,300 x 9%] [2,050 x 8%]
Current service cost
Settlement
Benefits paid
Actuarial (gain)/loss (balancing figure)
Closing balance
Rs. million
2,300
207
125
(280)
(99)
(213)
2,040
2013
2,050
13
164
143
(110)
40
2,300
5.2 Reconciliation of Fair value of plan assets
2014
Opening balance
Interest income [2,150 x 9%][1,995 x 8%]
Contributions
Settlement
Benefits paid
Return on plan assets (balancing figure)
Closing balance
NASIR ABBAS FCA
Rs. million
2,150
194
105
(240)
(99)
(326)
1,784
2013
1,995
160
118
(110)
(13)
2,150
90
EMPLOYEE BENEFITS (IAS-19) - SOLUTIONS
5.3 Settlement
During 2014, the company sells one of its business segments and transfers the relevant part of the pension
plan to the purchaser. This is a settlement. The overall gain on settlement is calculated as follows:
Rs. million
PV of benefit obligation
280
FV of plan assets
(240)
Cash
(20)
Gain on settlement
20
(ii)
PV of DBO
----- Rs. million -----280
Plan assets
Cash
Gain on settlement
[Gain on settlement]
Employee cost [125 + 13]
OCI
Plan assets [194 - 326]
PV of DBO [207+ 125 - 213]
[Year end adjustments]
NASIR ABBAS FCA
240
20
20
138
113
132
119
91
IFRIC 14 – Class notes
BACKGROUND
IAS 19 limits the measurement of a net defined benefit asset to the lower of the surplus in the defined
benefit plan and the asset ceiling. Asset ceiling is defined as ‘the present value of any economic benefits
available in the form of refunds from the plan or reductions in future contributions to the plan’.
Questions have arisen about when refunds or reductions in future contributions should be regarded as
available, particularly when a Minimum Funding Requirement (MFR) exists. MFRs exist in many countries
to improve the security of the post-employment benefit promise made to members of an employee
benefit plan. Such requirements normally stipulate a minimum amount or level of contributions that must
be made to a plan over a given period. Therefore, an MFR may limit the ability of the entity to reduce
future contributions.
ISSUES
Following issues have been addressed in this IFRIC:
1. when refunds or reductions in future contributions should be regarded as available.
2. how an MFR might affect the availability of reductions in future contributions.
3. when an MFR might give rise to a liability.
1) AVAILABILITY OF A REFFUND OR REDUCTION IN FUTURE CONTRIBUTIONS
An entity shall determine the availability of a refund or a reduction in future contributions in accordance
with the terms and conditions of the plan and any statutory requirements in the jurisdiction of the plan.
An economic benefit, in the form of a refund or a reduction in future contributions, is available if the entity
can realize it at some point during the life of the plan or when the plan liabilities are settled. An entity
shall determine the maximum economic benefit that is available from refunds, reduction in future
contributions or a combination of both.
Economic benefit available as refund
The right to refund
A refund is available to an entity only if the entity has an unconditional right to a refund. It can exist
whatever the funding level of a plan at the end of the reporting period. However, if the entity’s right to a
refund of a surplus depends on the occurrence or non-occurrence of one or more uncertain future events
not wholly within its control, the entity does not have an unconditional right and shall not recognize an
asset.
Measurement of the economic benefit
1. An entity shall measure the economic benefit available as a refund as the amount of the surplus at
the end of the reporting period (being the fair value of the plan assets less the present value of the
defined benefit obligation) that the entity has a right to receive as a refund, less any associated costs.
For instance, if a refund would be subject to a tax other than income tax, an entity shall measure the
amount of the refund net of the tax.
2. In measuring the amount of a refund available when the plan is wound up, an entity shall include the
costs to the plan of settling the plan liabilities and making the refund. For example, an entity shall
deduct professional fees if these are paid by the plan rather than the entity, and the costs of any
insurance premiums that may be required to secure the liability on wind-up.
Nasir Abbas FCA
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IFRIC 14 – Class notes
3. If the amount of a refund is determined as the full amount or a proportion of the surplus, rather than
a fixed amount, an entity shall make no adjustment for the time value of money, even if the refund is
realizable only at a future date.
Economic benefit available as a contribution reduction
If there is no MFR for contributions relating to future service, the economic benefit available as a reduction
in future contributions is the future service cost to the entity for each period over the shorter of the
expected life of the plan and the expected life of the entity. The future service cost to the entity excludes
amounts that will be borne by employees.
2) EFFECT OF MINIMUM FUNDING REQUIREMENT ON REDUCTION IN FUTURE CONTRIBUTIONS
If there is an MFR relating to future service, the economic benefit available as a reduction in future
contributions is the sum of:
(a) Prepayment in respect of contributions relating to future service; and
(b) Estimated future service cost for each period over the shorter of the expected life of the plan and the
expected life of the entity less MFR contributions required for future service ignoring prepayment in
(a) above.
Limit for (b)
While discounting the amounts in (b), if the MFR contributions required for future service exceed
the future service cost in any year, then it will be taken as a negative for discounting purpose.
However, the total present value of (b) can never be less than zero.
3) WHEN A MINIMUM FUNDING REQUIREMENT MAY GIVE RISE TO A LIABILITY
If an entity has an obligation under an MFR to pay contributions to cover an existing shortfall on the
minimum funding basis in respect of past service, then:
(a) If MFR contributions payable will be available as a refund or reduction in future contributions after
payment
No liability shall be recognized. (in simple words no accounting needed for this obligation)
(b) If MFR contributions payable will NOT be available as a refund or reduction in future contributions
after payment
To the extent that the contributions payable will not be available after they are paid into the plan, the
entity shall recognize a liability when the obligation arises.
Exam note:
- If there is existing plan surplus
Find asset ceiling adjustment for existing surplus separately and determine liability for MFR
contribution separately. Then combine both adjustments to determine final net adjustment.
- If there is existing plan deficit
First find updated plan balance after making MFR contribution (only for the purpose of
working), then determine liability adjustment on that updated balance.
Nasir Abbas FCA
93
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – QUESTIONS
PRACTICE QUESTIONS
Question 1
ABC Limited operates a funded defined benefit plan for its employees. The plan provides a pension of 1% of
the final salary for each year of service. The cost for the year is determined using the projected unit credit
method. This reflects service rendered to the dates of valuation of the plan and incorporates actuarial
assumptions primarily regarding discount rates, which are based on the market yields of high quality corporate
bonds.
Following information is available in respect of the benefit plan:
2020
2019
2018
------------ Rs. million -----------Fair value of plan assets
1,970
1,700
1,500
PV of defined benefit obligation
1,766
1,510
1,300
PV of economic benefits available (Asset ceiling)
220
180
170
Current service cost
280
250
210
Contributions
160
120
100
Benefits paid
190
150
140
Discount rate
10%
10%
10%
Required:
Prepare extracts of SOFP and SOCI for the year 2020 (also show comparative figures for 2019).
Question 2
XYZ Limited operates a funded defined benefit plan for its employees. As per the terms and conditions of the
plan, any surplus in plan can be refunded only after following deductions:
5% for professional costs.
3% local govt. tax
10% income tax
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,500 million and Rs. 1,700 million respectively.
Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
Question 3
MNO Limited has a defined benefit plan. The MFR requires it to pay contributions to cover the future service
cost. The future service cost and related MFR contribution required as follows:
Year
2021
2022
2023
2024 onwards
(till perpetuity)
Future service
MFR
cost
contribution
---------- Rs. million ----------15
17
15
15
15
12
15
11
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,520 million and Rs. 1,600 million (including prepayment of Rs. 20 million in respect of above MFR
NASIR ABBAS FCA
94
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – QUESTIONS
contributions) respectively. Any surplus in plan cannot be refunded to the entity under any circumstances but
can be used for reductions of future contributions.
Appropriate discount rate is 7%.
Required:
Determine the amount of net defined liability/asset to be included in statement of financial position as at June
30, 2020.
Question 4
AB Limited has a funding level on the MFR basis of 80% in a benefit plan. Under the MFR, it is required to
increase the funding level to 95% immediately. As a result, it has an obligation to contribute Rs. 50 million to
the plan to cover shortfall in respect of past service. The plan rules permit a full refund of any surplus to the
entity at the end of the life of the plan.
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,500 million and Rs. 1,600 million respectively.
Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
included in statement of financial position as at June 30, 2020.
Question 5
XY Limited has a funding level on the MFR basis of 75% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 70% of any
surplus to the entity at the end of the life of the plan.
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,500 million and Rs. 1,600 million respectively.
Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
included in statement of financial position as at June 30, 2020.
Question 6
MNO Limited has a funding level on the MFR basis of 77% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% immediately. As a result, it has an obligation to contribute Rs. 300 million
to the plan to cover shortfall in respect of past service. The plan rules permit a maximum refund of 60% of any
surplus to the entity at the end of the life of the plan.
The present value of defined benefit plan and fair value of plan assets as determined at June 30, 2020 were Rs.
1,600 million and Rs. 1,500 million respectively.
Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
included in statement of financial position as at June 30, 2020.
NASIR ABBAS FCA
95
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – QUESTIONS
Question 7
PQR Limited has a funding level on the MFR basis of 95% in a benefit plan. Under the MFR, it is required to
increase the funding level to 100% over the next 3 years. The contributions are required to cover past service
as well as future service. The plan rules do not permit any refund of any surplus to the entity at the end of the
life of the plan however can be used for reductions of future contributions.
On June 30, 2020:
- The present value of MFR contributions required for past service is approximately Rs. 300 million.
- The present value of economic benefits available as a future contribution reduction (i.e. future service cost
net of MFR contributions required) is approximately Rs. 80 million.
- The present value of defined benefit plan is Rs. 1,200 million
- Fair value of plan assets is Rs. 1,300 million.
Required:
Discussing the effect of MFR contribution required, determine the amount of net defined liability/asset to be
included in statement of financial position as at June 30, 2020.
NASIR ABBAS FCA
96
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS
SOLUTIONS
Solution No. 1
Extracts - SOFP
Net defined benefit (liability) / asset (W-1)
Extracts – SOCI
Current service cost (W-2)
Interest income [(W-2) (W-3) (W-4)]
Other comprehensive income:
Remeasurement of benefit plan (W-5)
Workings
W-1
Fair value of plan assets
PV of DBO
Net benefit asset
Asset ceiling adjustment
Net benefit asset
W-2 Reconciliation of PV of DBO
Opening balance
Interest
Current service cost
Benefits paid
Actuarial (gain)/loss
Closing balance
2020
2019
------ Rs. million -----204
180
(280)
18
(250)
17
156
83
2020
2019
2018
-------------- Rs. million -----------1,970
1,700
1,500
(1,766)
(1,510)
(1,300)
204
190
200
(10)
(30)
204
180
170
2020
2019
------ Rs. million -----1,510
1,300
151
130
280
250
(190)
(150)
15
(20)
1,766
1,510
W-3 Reconciliation of FV of Plan assets
Opening balance
Interest
Contributions
Benefits paid
Return on plan assets
Closing balance
1,700
170
160
(190)
130
1,970
1,500
150
120
(150)
80
1,700
W-4 Asset ceiling adjustment
Opening balance
Interest
Remeasurement
Closing balance
10
1
(11)
-
30
3
(23)
10
NASIR ABBAS FCA
97
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS
W-5 Remeasurement
Actuarial gain /(loss)
Asset ceiling adjustment
Return on plan assets
(15)
11
130
126
20
23
80
123
Solution No. 2
Fair value of plan assets
PV of DBO
Surplus in plan
Rs. million
1,700
1,500
200
Asset ceiling [200 x 92%]
184
Net defined benefit asset to be recognized
184
Solution No. 3
Rs. million
1,600.00
1,520.00
80.00
Fair value of plan assets
PV of defined benefit obligation
Surplus
Asset ceiling (W-1)
67.23
Net defined benefit asset
67.23
W-1
Year
2021
2022
2023
2024
onwards
Future
MFR
Contribution
service cost contributions
reduction
----------- Rs. million ----------15.00
17.00
(2.00)
15.00
15.00
15.00
12.00
3.00
15.00
11.00
4.00
PV of future service cost less MFR
[-2 x 1.07-1 + 0 x 1.07-2 + 3 x 1.07-3 + 4 x 0.07-1 x 1.07-3]
Rs. million
47.23
Prepayment of MFR
20.00
Asset ceiling
67.23
NASIR ABBAS FCA
98
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS
Solution No. 4
IFRIC 14 requires the entity to recognize a liability to the extent that the contributions payable are not fully
available. Payment of the contributions of Rs. 50 million will increase the IAS 19 surplus from Rs. 100 million
to Rs. 150 million. Under the rules of the plan this amount will be fully refundable to the entity with no
associated costs. Therefore, no liability is recognized for the obligation to pay the contributions and the net
defined benefit asset will be presented in SOFP at Rs. 100 million.
Solution No. 5
The payment of Rs. 300 million would increase the IAS 19 surplus of Rs. 100 million to Rs. 400 million. Of this
Rs. 400, 70% (Rs. 280 million) is refundable. The remaining Rs. 120 million (30% of Rs. 400 million) of the
contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the extent
that the additional contributions payable are not available to it. Therefore, existing surplus of Rs. 100 million
will be reduced to its asset ceiling of Rs. 70 million and additional liability will be recorded for Rs. 90 million
(30% of Rs. 300 million). As a result the net defined benefit liability recognized in SOFP is Rs. 20 million. On
payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs. 280
million.
Summary:
Fair value of plan assets
PV of defined benefit obligation
Surplus
Asset ceiling adjustment(W-1)
Net defined benefit liability
W-1
Reduction of existing surplus [Rs. 100m x 30%]
Additional liability for additional contributions
Rs. million
1,600.00
1,500.00
100.00
(120.00)
(20.00)
(30)
(90)
(120)
Solution No. 6
The payment of Rs. 300 million would change the IAS 19 deficit of Rs. 100 to a surplus of Rs. 200 million. Of
this Rs. 200 million, 60% (Rs. 120 million) is refundable. The remaining Rs. 80 million (40% of Rs. 200 million)
of the contributions paid is not available to the entity. IFRIC 14 requires the entity to recognize a liability to the
extent that the additional contributions payable are not available to it. Therefore, the net defined benefit
liability is Rs. 180 million, comprising the deficit of Rs. 100 million plus the additional liability of Rs. 80 million.
On payment of MFR contribution of Rs. 300 million, it will be converted into net defined benefit asset of Rs.
120 million.
Summary:
Fair value of plan assets
PV of defined benefit obligation
Deficit
Additional liability [200 x 40%]
Net defined benefit liability
NASIR ABBAS FCA
Rs. million
1,500.00
1,600.00
(100.00)
(80.00)
(180.00)
99
LIMIT ON DEFINED BENEFIT ASSET AND MFR (IFRIC-14) – SOLUTIONS
Solution No. 7
Current surplus of Rs. 100 million can not be refunded however it can be used for future reduction in future
contributions. Only Rs. 80 million is available as economic benefit in form of reduction in future contributions,
thus it will be reduced by Rs. 20 million. Moreover, additional liability of Rs. 300 million will be recognized for
MFR in respect of past service as no refund is available.
Summary:
Fair value of plan assets
PV of defined benefit obligation
Surplus
Rs. million
1,300.00
1,200.00
100.00
Asset ceiling adjustment (W-1)
(320.00)
Net defined benefit liability
(220.00)
W-1
Reduction of existing surplus [Rs. 100m - Rs. 80m]
Additional liability for additional contributions
NASIR ABBAS FCA
(20)
(300)
(320)
100
IFRS 2 – Class notes
SCOPE
1. This standard shall be applied in accounting for all share-based payment transactions, including:
(i) Equity-settled share-based payment transactions.
(ii) Cash-settled share-based payment transactions.
(iii) Transactions with options for settlement in cash or equity instruments.
Group entities:
This IFRS applies when goods and services are received by one entity and another entity in the
same groups has an obligation to settle a share-based payment transaction.
2. This standard shall not apply to:
(i) Issue of shares to existing holders of equity instruments in their capacity as a holder of equity
instruments. (e.g right issue)
(ii) Issue of shares in business combination.
SHARE-BASED PAYMENT TRANSACTIONS
Share-based payment arrangement
An agreement between the entity (or another group entity or any shareholder of any group entity) and
another party (including an employee) that entitles the other party to receive:
(a) cash or other assets of the entity for amounts that are based on the price (or value) of equity
instruments (including shares or share options) of the entity or another group entity, or
(b) equity instruments (including shares or share options) of the entity or another group entity,
provided the specified vesting conditions, if any, are met.
Share-based payment transaction
A transaction in which the entity:
(a) receives goods or services from the supplier of those goods or services (including an employee) in a
share-based payment arrangement, or
(b) incurs an obligation to settle the transaction with the supplier in a share-based payment arrangement
when another group entity receives those goods or services.
Equity-settled share-based payment transaction
A share-based payment transaction which is settled in entity’s own equity instruments (including shares
or share options).
Cash-settled share-based payment transaction
A share-based payment transaction in which the entity acquires goods or services by incurring a liability
to transfer cash or other assets to the supplier of those goods or services for amounts that are based on
the price (or value) of equity instruments (including shares or share options) of the entity or another
group entity.
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101
IFRS 2 – Class notes
RECOGNITION – General
When an entity obtains the goods or receive the services, it shall recognize the transaction:
Dr. Expense / Asset
Cr. Relevant equity account [in case of equity-settled share-based payment transaction]
Cr. Liability [in case of cash-settled share-based payment transaction]
Exam note:
IFRS 2 does not specifically mention which equity account is credited. It is better to use a separate
account e.g. “equity instruments granted” unless shares are eventually issued.
Equity instrument granted
The right (conditional or unconditional) to an equity instrument of the entity conferred by the entity on
another party, under a share-based payment transaction.
EQUITY-SETTLED SHARE-BASED PAYMENT TRANSACTION
Overview of measurement
An entity shall measure the goods or services received:
If fair value of goods or services received can be
measured reliably:
If fair value of goods or services cannot be
measured reliably (e.g. employee service)
at the fair value of the goods or services received
at the fair value of equity instrument granted,
measured at grant date.
Fair value
The amount for which an asset could be exchanged, a liability settled, or an equity instrument granted
could be exchanged, between knowledgeable, willing parties in an arm’s length transaction.
(It is different from IFRS 13)
Grant date
The date at which the entity and another party (including an employee) agree to a share-based
payment arrangement. If that agreement is subject to an approval process (for example, by
shareholders), grant date is the date when that approval is obtained.
Example where fair value of goods or services cannot be measured reliably:
Background
An entity granted shares with a total fair value of Rs. 100,000 to parties other than employees who are
from a particular section of the community (historically disadvantaged individuals), as a means of
enhancing its image as a good corporate citizen. The economic benefits derived from enhancing its
corporate image could take a variety of forms, such as increasing its customer base, attracting or
retaining employees, or improving or maintaining its ability to tender successfully for business
contracts. The entity cannot identify the specific consideration received. For example, no cash was
Nasir Abbas FCA
102
IFRS 2 – Class notes
received and no service conditions were imposed. Therefore, the identifiable consideration (nil) is less
than the fair value of the equity instruments granted (Rs. 100,000).
Application of requirements
Although the entity cannot identify the specific goods or services received, the circumstances indicate
that goods or services have been (or will be) received, and therefore IFRS 2 applies. In this situation,
because the entity cannot identify the specific goods or services received, the rebuttable presumption
in paragraph 13 of IFRS 2, that the fair value of the goods or services received can be estimated reliably,
does not apply. The entity should instead measure the goods or services received by reference to the
fair value of the equity instruments granted.
Transactions in which services are received
[A detailed discussion on recognition]
Case I – If the equity instruments granted vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty as consideration for the equity instruments have been received. In this case, on grant date
the entity shall recognize the services received in full, with a corresponding increase in equity.
Case II – If the equity instruments granted requires some vesting conditions
Vesting conditions
A condition that determines whether the entity receives the services that entitle the counterparty to
receive cash, other assets or equity instruments of the entity, under a share-based payment
arrangement. A vesting condition is either a service condition or a performance condition.
Service condition:
A vesting condition that requires the counterparty to complete a specified period of service during
which services are provided to the entity. If the counterparty, regardless of the reason, ceases to
provide service during the vesting period, it has failed to satisfy the condition. A service condition does
not require a performance target to be met.
Performance condition
A vesting condition that requires:
(a) the counterparty to complete a specified period of service (ie a service condition); the service
requirement can be explicit or implicit; and
(b) specified performance target(s) to be met while the counterparty is rendering the service required
in (a) [for example share price growth, profits growth].
Nasir Abbas FCA
103
IFRS 2 – Class notes
The entity shall presume that the services to be rendered by the counterparty as consideration for those
equity instruments will be received in the future, during the vesting period.
(a) Service condition
If equity instruments granted do not vest until the counterparty completes a service period, the entity
shall account for those services as they are rendered by the counterparty over the vesting period,
with a corresponding increase in equity. For example, if an employee is granted share options
conditional upon completing three years’ service, then the entity shall presume that the services to
be rendered by the employee as consideration for the share options will be received in the future,
over that three-year vesting period.
(b) Performance condition
1. If equity instrument granted is conditional upon the achievement of a performance condition and
remaining in the entity’s employ/service until that performance condition is satisfied, the entity
shall account for the service expense with a corresponding increase in equity over the expected
vesting period.
2. An entity shall estimate the length of the expected vesting period at the grant date, based on
most likely outcome of the performance condition. If performance condition is:
a market condition:
the estimate of the length of the vesting
period shall be consistent with the
assumptions used in estimating the fair value
of the options granted, and shall not be
subsequently revised.
Nasir Abbas FCA
not a market condition:
the entity shall revise its estimate of the
length of the vesting period, if necessary, if
subsequent information indicates that the
length of the vesting period differs from
previous estimates.
104
IFRS 2 – Class notes
Market condition
A performance condition, upon which the exercise price, vesting or exercisability of an equity
instrument depends, that is related to market price of the entity’s equity instruments for
example attaining a specified share price or a specified amount of intrinsic value of share option
or a specified % of total shareholders return.
Exam note:
Discussion about vesting period above can be summarized as follows:
In case of service condition:
Vesting period is the conditional period specifically agreed.
In case of performance condition (other than market condition):
Vesting period is the period estimated by the management for completion of conditions. This
estimate is subsequently reviewed and revised if needed.
In case of market condition:
Vesting period is the period estimated by the management initially while estimating the fair
value of the instrument granted. This estimate is not revised subsequently.
Transactions measured at fair value of equity instrument granted
[A detailed discussion on measurement]
Case I – Fair value of equity instrument granted can be measured reliably
Determining the fair value of equity instrument granted:
An entity shall measure the fair value of equity instrument granted at measurement date based on:
- Market prices [if market prices are available]
- Other generally accepted valuation techniques [if market prices are not available]
Measurement date:
It is the date at which fair value of the equity instrument granted is measured. Measurement date:
For transactions with employees – is the grant date
For transactions with other parties – is the date when goods or services are received
Exam note:
Fair value of “equity instrument granted (i.e. right to get shares)” is by default equal to the fair value of
the related “equity instrument (i.e. share itself)”.
Treatment of vesting conditions:
-
-
Market condition:
Market condition (e.g. target share price) shall be taken into account when estimating the fair
value of the equity instrument granted.
Any other condition:
Vesting conditions shall not be taken into
account when estimating the fair value of
equity instruments
The entity shall recognize the goods or services when other vesting conditions are met,
Instead these conditions shall be taken into
account by adjusting the number of equity
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IFRS 2 – Class notes
irrespective of whether that market condition
is satisfied.
instruments included in the measurement of
the transaction amount.
-
The entity shall recognize the amount of goods
or services over the vesting period on the best
available estimate of the number of equity
instruments expected to vest and shall revise
that estimate subsequently, if necessary, so
that ultimately the amount recognized for
goods and services shall be based on the
number of equity instruments that eventually
vest.
-
Hence on a cumulative basis, no amount is
recognized for goods or services received if
the equity instruments granted do no vest
because of failure to satisfy a vesting
condition.
Exam note:
Amount is calculated at end of every year (till vesting date) on cumulative basis as follows:
= Best estimate of no. of equity instruments expected to eventually vest x fair value of instrument
granted at measurement date x reporting year*/ Vesting period
Here, in case of employees, best estimate of no. of equity instruments can be further split into:
= Number of persons x number of instruments per person
It is considered as closing balance of equity and any change in equity balance is:
Dr. Employee cost
Cr. Equity instrument granted
* Do not forget to pro-rate it in months if transaction occurs during the year.
After vesting date:
The entity shall not subsequently reverse the amount recognized for goods or services received if the
vested equity instruments are later forfeited or expired without exercise. However, entity may transfer
the amount within equity (e.g. transferred to retained earnings).
Case II – Fair value of equity instrument granted cannot be measured reliably
1. The entity shall measure the equity instruments (generally share options) initially at measurement
date at intrinsic value. This intrinsic value is remeasured subsequently on every year end and finally
on the date of settlement (e.g. exercise, forfeiture, lapse). Any changes on this remeasurement are
recognized in P&L.
Intrinsic value of share option
= Fair value of shares – exercise price
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2. The entity shall recognize the goods or services received based on the number of instruments that are
expected to ultimately vest or ultimately be exercised. The entity shall revise that estimate, if
necessary, if subsequent information indicates that the number of instruments expected to vest
differs from previous estimates. [as studied earlier in “treatment of other vesting conditions”]
3. After vesting date, the entity shall reverse the amount recognized for goods or services received if
the share options are later forfeited, or lapse at the end of the share option’s life.
4. If an entity settles a grant, it shall account for it as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period. Moreover, any payment made to counterparty on settlement of the grant
shall be accounted for:
Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)
Any payment in excess of the fair value:
as an expense immediately in P&L
Modification to the terms and conditions of grant (including cancellations and settlements)
[For example, a downturn in the equity market may mean that the original option exercise price set is no
longer attractive, therefore, the exercise price is reduced]
This guidance is relevant for share-based payment transactions with employees as well as transactions
with other parties that are measured by at the fair value of the equity instruments granted. This guidance
is technically not necessary when equity instrument granted is measured at intrinsic value.
Case I – Modification is beneficial for counterparties (e.g. employees)
Examples – reduction in exercise price, increase in equity instruments granted, reduction in vesting
period, reduction in performance condition (other than market condition)
Steps for application of modification:
1. Continue to recognize the original fair value of measurement date of the original equity instruments
granted over the original vesting period. (i.e. same as was done before modification)
2. Any increase in total fair value at the date of modification (either due to increase in fair value or due
to increase in number of equity instruments granted) shall be recognized:
If modification occurs before vesting date
Over the remaining period from the
modification date until the date when the
modified equity instruments vest.
Nasir Abbas FCA
If modification occurs after vesting period
Immediately OR
Over the remaining vesting period if employee
is required to complete an additional vesting
period.
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IFRS 2 – Class notes
Increase in total fair value of equity instruments
If fair value of equity instrument is increased (e.g. by reducing the exercise price)
Fair value of instruments measured immediately after modification
Less Fair value of instruments measured immediately before modification
Total increase in fair value
Rs.
XXX
(XXX)
XXX
If number of equity instruments is increased
Total increase in fair value
= Total fair value of additional equity instruments granted measured at the date of modification
3. If the entity modifies the vesting conditions in a manner that is beneficial to the counterparty, the
entity shall consider the modified vesting conditions for “treatment of vesting conditions” as studied
earlier.
Case II – Modification is not beneficial for counterparties (e.g. employees)
Examples – increase in exercise price, decrease in equity instruments granted, increase in vesting period,
addition in performance condition (other than market condition)
Steps for application of modification:
1. If the modification decreases the fair value of equity instruments granted (e.g. due to increase in
exercise price), the entity shall not account for this decrease in fair value rather it shall continue to
recognize the original fair value of measurement date of the original equity instruments granted over
the original vesting period. (i.e. same as was done before modification)
2. If modification reduces the number of equity instruments granted, that reduction shall be accounted
for as a cancellation in accordance with Case III below.
3. If the entity modifies the vesting conditions in a manner that is not beneficial to the counterparty, the
entity shall not consider the modified vesting conditions for “treatment of vesting conditions” as
studied earlier.
Case III – Cancellation (other than cancellation by failure of vesting conditions)
(a) Cancellation and settlement
1. The entity shall account for the cancellation as an acceleration of vesting and shall therefore
recognize immediately the amount that would otherwise would have been recognized over the
remaining vesting period.
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IFRS 2 – Class notes
2. Any payment made to counterparty on settlement of the grant shall be accounted for:
Upto the amount of fair value of equity instruments granted measured at cancellation date:
as the repurchase of equity (i.e. deduction from equity)
Any payment in excess of the fair value:
as an expense immediately in P&L
3. If share-based payment arrangement included liability components, the entity shall remeasure
the fair value of the liability at the date of cancellation. Any payment made to settle the liability
component shall be accounted for as a repayment of the liability.
(b) Cancellation and replacement with new equity instruments
The entity shall account for the grant of new equity instruments as replacement for the cancelled
equity instruments in the same way as a modification of original grant as studied in Case I and II above.
Except here the increase in total fair value is determined as follows:
Rs.
Fair value replacement equity instruments at replacement date
Less:
Fair value of cancelled equity instruments immediately before cancellation
Less: Payment made to counterparty [i.e. debited to equity as studied in (a)]
Increase in total fair value to be accounted for
X
(X)
Rs.
X
(X)
X
If new grant cannot be identified as a replacement reward
Then original grant shall be accounted for as “cancelled” and new grant shall be accounted in a
normal way as a new grant of equity instruments.
CASH-SETTLED SHARE-BASED PAYMENT TRANSACTION
Examples – share appreciation rights, granting shares that are redeemable
Measurement
The entity shall measure the goods and services received and the related liability at the fair value of the
liability. This fair value of liability is remeasured subsequently on every year end and finally on the date
of settlement. Any changes on this remeasurement are recognized in P&L.
Recognition
Case I – If the counterparty’s right to receive cash vests immediately [i.e. no vesting conditions]
In the absence of evidence to the contrary, the entity shall presume that services rendered by the
counterparty have been received. In this case, the entity shall recognize the services received in full, with
a corresponding increase in liability.
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IFRS 2 – Class notes
Case II – If the transaction requires some vesting conditions
The entity shall presume that the services to be rendered by the counterparty will be received in the
future, during the expected vesting period.
Treatment of vesting conditions:
-
Market condition:
Any other condition:
Market condition (e.g. target share price) shall - Vesting conditions shall not be taken into
be taken into account when estimating the fair
account when estimating the fair value of the
value of the liability.
liability.
-
Instead these conditions shall be taken into
account by adjusting the number of awards
included in the measurement of the
transaction amount.
-
The entity shall recognize the amount of goods
or services over the vesting period on the best
available estimate of the number of awards
expected to vest and shall revise that estimate
subsequently, if necessary, so that ultimately
the amount recognized for goods and services
shall be based on the number of awards that
eventually vest.
-
Hence on a cumulative basis, the amount
recognized for goods or services received is
equal to the cash that is paid.
SHARE-BASED PAYMENT TRANSACTIONS WITH CASH ALTERNATIVE
Counterparty has a choice of settlement
If entity has granted the counterparty the right to choose whether to settle a share-based payment
transaction in cash or issuance of equity instruments, the entity has granted compound financial
instruments thus it includes a debt component and an equity component.
Case I – If the fair value of goods or services can be measured reliably
When an entity obtains the goods or receive the services, it shall recognize the transaction:
Dr. Expense / Asset [at the fair value of goods or services]
Cr. Liability [at the fair value of debt component i.e. fair value of liability for a cash-settled transaction]
Cr. Equity [balancing figure]
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IFRS 2 – Class notes
Case II – If the fair value of goods or services cannot be measured [e.g. services of employees]
When an entity obtains the goods or receive the services, it shall recognize the transaction:
Dr. Expense/Asset [at the fair value of share alternative]
Cr. Liability [at the fair value of cash alternative]
Cr. Equity [balancing figure]
Subsequent treatment
1. After initial recognition, “liability component” and “equity component” are accounted for as studied
earlier for “cash-settled share-based payment transactions” and “equity-settled share-based payment
transaction” respectively and corresponding increase/decrease is charged to the related expense for
goods or services received.
2. At the settlement date, liability component shall be remeasured to its fair value with corresponding
increase/decrease in P&L.
3. If at settlement:
(a) Entity pays in cash rather than issuing equity instruments then:
- Payment is applied to settle the liability in full
- Equity component is transferred to any other reserve (e.g. retained earnings)
(b) Entity issues equity instruments rather than paying cash then:
- Liability shall be transferred to equity as the consideration of the equity instruments issued
Entity has a choice of settlement
If entity has a choice of whether to settle in cash or by issuing equity instruments, the entity shall
determine whether it has a present obligation to settle in cash or not.
Case I – If the entity has a present obligation to settle in cash
1. It may happen if:
- Entity is legally prohibited from issuing shares
- Entity has a past practice or stated policy to settle in cash
- Entity generally settles in cash whenever counterparty asks for cash settlement
2. It shall account for the transaction as “cash-settled share-based payment transaction”
Case II – If the entity has no such obligation to settle in cash
1. It shall account for the transaction as “equity-settled share-based payment transaction”
2. Upon settlement if:
(i) Entity selects to settle in cash, the payment shall be accounted for as the repurchase of equity
(i.e. deduction from equity.)
(ii) Entity elects to settle by issuing equity instruments, it is normally accounted for as studied earlier
for equity-settled share-based payment transaction
(iii) Entity selects out of (i) or (ii) which have higher fair value (as settlement date) then the difference
between (i) and (ii) shall be recognized as expense.
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SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
SOLUTIONS
Solution [Q-1(a) Dec-18]
Corolla Limited
Extracts – SOFP
2014
2015
2016
2017
------------------------ Rs. million --------------------31.20
170.79
187.56
Equity
2014
[(47 – 8) x 4,000(W-1) x Rs. 600 x 1/3]
2015
[(44 – 4) x 0(W-1) x Rs. 600 x 2/3]
2016
[43 x 6,000(W-1) x Rs. 600 x 3/3 + (43 – 2) x 6,000(W-1) x Rs. 130* x 1/2]
2017
[43 x 6,000(W-1) x Rs. 600 x 3/3 + 42 x 6,000(W-1) x Rs. 130* x 2/2]
* Increase in fair value at modification date = Rs. 710 – Rs. 580 = Rs. 130
Extracts – SOCI
Employee cost
2014
2015
2016
2017
------------------ Rs. million -----------------31.20
(31.20)
170.79
16.77
[i.e. change in equity instrument valuation]
Explanations
Service conditions/Number of executives
Initially service condition was 3 years. During 2016, as a result of modification one more year was added to
vesting service condition. This condition shall be taken into account while estimating the number of employees
who will eventually receive the share options granted.
Performance condition (other than market condition)
Performance condition (i.e. target amount of average gross profit) shall be taken into account while estimating
the number of share options that will eventually vest.
W-1 Number of equity instruments granted
Year
Average GP estimate (i.e. performance condition)
No. of
(Rs. million)
options
2014
(940 + 940 + 940) ÷ 3 = 940
4,000
2015
(940 + 820 + 820) ÷ 3 = 860
2016
(940 + 820 + 1,270) ÷ 3 = 1,010
6,000
2017
(940 + 820 + 1,270 + 1,200) ÷ 4 = 1,058
6,000
Market condition
Market condition (i.e. target share price) shall be taken into account while estimating the fair value of equity
instrument granted. It is assumed that fair values of share options given are estimated using market condition.
Modification
On January 1, 2016 exercise price of share option was reduced as a result of which fair value of share option
was increased. Since this change is beneficial for employees, therefore, it was treated as follows:
- Continue to the original fair value of measurement date of the original equity instruments granted over
original vesting period.
- Any increase in total fair value (i.e. Rs. 130) shall be recognized over remaining vesting period including the
additional one year.
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SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Solution [Q-3(b) Jun-15]
Mehran Bank Limited
31-12-15
Dr. Employee cost
Cr. Equity component [1,900,000 (W-1) x 1/3]
Cr. Liability component (W-2)
[Year end expenses and remeasurement]
31-12-16
Dr. Employee cost
Cr. Equity component
Cr. Liability component (W-2)
[Year end expenses and remeasurement]
31-12-17
Dr. Employee cost
Cr. Equity component
Cr. Liability component (W-2)
[Year end expenses and remeasurement]
Settlement
01-07-18
Dr. Employee cost
Cr. Liability component (W-2)
[Remeasurement on settlement]
Dr. Equity component (W-1)
Dr. Liability component (W-2)
Cr. Share capital [100,000 x Rs. 10]
Cr. Share premium
[Issue of 100,000 shares]
Rs.
4,633,333
Rs.
633,333
4,000,000
4,953,334
633,333
4,320,000
5,513,333
633,333
4,880,000
800,000
800,000
1,900,000
14,000,000
1,000,000
14,900,000
W-1 Initial measurement
Total amount
Employee cost [100,000 x Rs. 135]
Liability component [80,000 x Rs. 145]
Equity component
Rs.
13,500,000
11,600,000
1,900,000
W-2 Liability component
Balance
Year 1
Expense (balancing)
Balance [80,000 x Rs. 150 x 1/3]
Year 2
Expense (balancing)
Balance [80,000 x Rs. 156 x 2/3]
Year 3
Expense (balancing)
4,000,000
4,000,000
4,320,000
8,320,000
4,880,000
Balance [80,000 x Rs. 165 x 3/3]
Expense (balancing)
Settlement [80,000 x Rs. 175]
13,200,000
800,000
14,000,000
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SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Solution [Q-6 Dec-10]
Engineering Works Limited
It is estimated that EWL expected all employees to take share options, therefore, equity instruments granted
were recognized for total employees at intrinsic value (because fair value of share options is not given)
30-06-10
Dr. Employee cost
Cr. Equity instruments granted [600 x 1,000 x Rs. 22]
[Recognition on vesting date at intrinsic value]
Rs.
13,200,000
Dr. Equity instruments granted
Cr. Share options [13,200,000 x 60%]
[Issued share options to 60% employees]
7,920,000
31-07-10
Dr. Equity instruments granted
Cr. Share options [13,200,000 x 20%]
[Issued share options to 20% employees]
Dr. Equity instruments granted [13,200,000 x 20%]*
Cr. Employee cost (balancing)
Cr. Bonus payable [600 x 20% x Rs. 10,000]
[Equity instrument granted lapse for 20% employees]
Rs.
13,200,000
7,920,000
2,640,000
2,640,000
2,640,000
1,440,000
1,200,000
* Since balancing figure of this entry is “employee cost” so no need to remeasure equity instruments granted
to intrinsic value at settlement date (i.e. lapse)
01-09-10
Dr. Employee cost
Cr. Share options [600 x 80% x 1,000 x Rs. 10]
[Remeasurement of intrinsic value on settlement]
4,800,000
4,800,000
Dr. Bonus payable
Cr. Cash
[Payment of bonus]
1,200,000
Dr. Cash [600 x 80% x 1,000 x Rs. 8]
Dr. Share options [600 x 80% x 1,000 x Rs. 32]
Cr. Share capital [600 x 80% x 1,000 x Rs. 10]
Cr. Share premium
[Issue of shares on exercise of share options]
3,840,000
15,360,000
NASIR ABBAS FCA
1,200,000
4,800,000
14,400,000
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SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
PRACTICE QUESTIONS
Question 1
An entity grants 100 share options to each of its 500 employees. Each grant is conditional upon the employee
working for the entity over the next three years. The entity estimates that the fair value of each share option
is Rs. 15.
On the basis of a weighted average probability, the entity estimates that 20 % of employees will leave during
the three-year period and therefore forfeit their rights to the share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issuing share options at end of 3rd year
if:
(a) If everything turns out exactly as expected.
(b) During year 1, 20 employees leave. The entity revises its estimate of total employee departures over the
three-year period from 20 % (100 employees) to 15 % (75 employees). During year 2, a further 22
employees leave. The entity revises its estimate of total employee departures over the three-year period
from 15 % to 12 % (60 employees). During year 3, a further 15 employees leave. Hence, a total of 57
employees forfeited their rights to the share options during the three-year period, and a total of 44,300
share options (443 employees × 100 options per employee) vested at the end of year 3.
Question 2
At the beginning of year 1, the entity grants 100 shares each to 500 employees, conditional upon the
employees’ remaining in the entity’s employ during the vesting period. The shares will vest at the end of year
1 if the entity’s earnings increase by more than 18 %; at the end of year 2 if the entity’s earnings increase by
more than an average of 13 % per year over the two-year period; and at the end of year 3 if the entity’s earnings
increase by more than an average of 10 % per year over the three-year period. The shares have a fair value of
Rs. 30 per share at the start of year 1, which equals the share price at grant date. No dividends are expected
to be paid over the three-year period.
By the end of year 1, the entity’s earnings have increased by 14 %, and 30 employees have left. The entity
expects that earnings will continue to increase at a similar rate in year 2, and therefore expects that the shares
will vest at the end of year 2. The entity expects, on the basis of a weighted average probability, that a further
30 employees will leave during year 2, and therefore expects that 440 employees will vest in 100 shares each
at the end of year 2.
By the end of year 2, the entity’s earnings have increased by only 10 % and therefore the shares do not vest at
the end of year 2. 28 employees have left during the year. The entity expects that a further 25 employees will
leave during year 3, and that the entity’s earnings will increase by at least 6 %, thereby achieving the average
of 10 % per year.
By the end of year 3, 23 employees have left and the entity’s earnings had increased by 8 %, resulting in an
average increase of 10.67 % per year. Therefore, 419 employees received 100 shares at the end of year 3.
Required:
Prepare extracts of SOFP and SOCI for all 3 years and journal entry of issue of shares at end of 3rd year (assuming
face value of each share Rs. 10).
Question 3
At the beginning of year 1, Entity A grants share options to each of its 100 employees working in the sales
department. The share options will vest at the end of year 3, provided that the employees remain in the entity’s
employ, and provided that the volume of sales of a particular product increases by at least an average of 5 %
per year. If the volume of sales of the product increases by an average of between 5 % and 10 % per year, each
employee will receive 100 share options. If the volume of sales increases by an average of between 10 % and
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SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
15 % each year, each employee will receive 200 share options. If the volume of sales increases by an average
of 15 % or more, each employee will receive 300 share options.
On grant date, Entity A estimates that the share options have a fair value of Rs. 20 per option. Entity A also
estimates that the volume of sales of the product will increase by an average of between 10 % and 15 % per
year, and therefore expects that, for each employee who remains in service until the end of year 3, 200 share
options will vest. The entity also estimates, on the basis of a weighted average probability, that 20 % of
employees will leave before the end of year 3.
By the end of year 1, seven employees have left and the entity still expects that a total of 20 employees will
leave by the end of year 3. Hence, the entity expects that 80 employees will remain in service for the threeyear period. Product sales have increased by 12 % and the entity expects this rate of increase to continue over
the next 2 years.
By the end of year 2, a further five employees have left, bringing the total to 12 to date. The entity now expects
only three more employees will leave during year 3, and therefore expects a total of 15 employees will have
left during the three-year period, and hence 85 employees are expected to remain. Product sales have
increased by 18 %, resulting in an average of 15 % over the two years to date. The entity now expects that sales
will average 15 % or more over the three-year period, and hence expects each sales employee to receive 300
share options at the end of year 3.
By the end of year 3, a further two employees have left. Hence, 14 employees have left during the three-year
period, and 86 employees remain. The entity’s sales have increased by an average of 16 % over the three years.
Therefore, each of the 86 employees receives 300 share options.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
Question 4
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
executive remaining in the entity’s employ until the end of year 3. The exercise price is Rs. 40. However, the
exercise price drops to Rs. 30 if the entity’s earnings increase by at least an average of 10 % per year over the
three-year period. On grant date, the entity estimates that the fair value of the share options, with an exercise
price of Rs. 30, is Rs. 16 per option. If the exercise price is Rs. 40, the entity estimates that the share options
have a fair value of Rs. 12 per option.
During year 1, the entity’s earnings increased by 12 %, and the entity expects that earnings will continue to
increase at this rate over the next two years. The entity therefore expects that the earnings target will be
achieved, and hence the share options will have an exercise price of Rs. 30.
During year 2, the entity’s earnings increased by 13 %, and the entity continues to expect that the earnings
target will be achieved.
During year 3, the entity’s earnings increased by only 3 %, and therefore the earnings target was not achieved.
The executive completes three years’ service, and therefore satisfies the service condition. Because the
earnings target was not achieved, the 10,000 vested share options have an exercise price of Rs. 40.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
Question 5
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
executive remaining in the entity’s employ until the end of year 3. However, the share options cannot be
exercised unless the share price has increased from Rs. 50 at the beginning of year 1 to above Rs. 65 at the end
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SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
of year 3. If the share price is above Rs. 65 at the end of year 3, the share options can be exercised at any time
during the next seven years, i.e. by the end of year 10.
The entity applies a binomial option pricing model, which takes into account the possibility that the share price
will exceed Rs. 65 at the end of year 3 (and hence the share options become exercisable) and the possibility
that the share price will not exceed Rs. 65 at the end of year 3 (and hence the options will be forfeited). It
estimates the fair value of the share options with this market condition to be Rs. 24 per option.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
Question 6
At the beginning of year 1, an entity grants 10,000 share options with a ten-year life to each of ten senior
executives. The share options will vest and become exercisable immediately if and when the entity’s share
price increases from Rs. 50 to Rs. 70, provided that the executive remains in service until the share price target
is achieved. The entity applies a binomial option pricing model, which takes into account the possibility that
the share price target will be achieved during the ten-year life of the options, and the possibility that the target
will not be achieved. The entity estimates that the fair value of the share options at grant date is Rs. 25 per
option. From the option pricing model, the entity determines that the mode of the distribution of possible
vesting dates is five years. In other words, of all the possible outcomes, the most likely outcome of the market
condition is that the share price target will be achieved at the end of year 5. Therefore, the entity estimates
that the expected vesting period is five years. The entity also estimates that two executives will have left by
the end of year 5, and therefore expects that 80,000 share options (10,000 share options × 8 executives) will
vest at the end of year 5.
Throughout years 1–4, the entity continues to estimate that a total of two executives will leave by the end of
year 5. However, in total three executives leave, one in each of years 3, 4 and 5. The share price target is
achieved at the end of year 6. Another executive leaves during year 6, before the share price target is achieved.
Required:
Prepare extracts of SOFP and SOCI for 5 years.
Question 7
At the beginning of year 1, an entity grants 1,000 share options to 50 employees. The share options will vest
at the end of year 3, provided the employees remain in service until then. The share options have a life of 10
years. The exercise price is Rs. 60 and the entity’s share price is also Rs. 60 at the date of grant.
At the date of grant, the entity concludes that it cannot estimate reliably the fair value of the share options
granted.
At the end of year 1, three employees have ceased employment and the entity estimates that a further seven
employees will leave during years 2 and 3. Hence, the entity estimates that 80 per cent of the share options
will vest.
Two employees leave during year 2, and the entity revises its estimate of the number of share options that it
expects will vest to 86 per cent.
Two employees leave during year 3. Hence, 43,000 share options vested at the end of year 3.
The entity’s share price during years 1–10, and the number of share options exercised during years 4–10, are
set out below. (Share options that were exercised during a particular year were all exercised at the end of that
year)
Share price at
Options
Year
year end
exercised at year
end
1
63
2
65
3
75
4
88
6,000
5
100
8,000
NASIR ABBAS FCA
117
SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
6
7
8
9
10
90
96
105
108
115
5,000
9,000
8,000
5,000
2,000
Required:
(a) Journal entries for 1st four years
(b) Also compute following figures to be shown in SOFP (separately under following heads) and SOCI for all 10
years:
o Equity instruments granted
o Share options
o Share capital (assuming Face value of each share is Rs. 10 each)
o Share premium
Question 8
At the beginning of year 1, an entity grants 100 share options to each of its 500 employees. Each grant is
conditional upon the employee remaining in service over the next three years. The entity estimates that the
fair value of each option is Rs. 15. On the basis of a weighted average probability, the entity estimates that 100
employees will leave during the three-year period and therefore forfeit their rights to the share options.
Suppose that 40 employees leave during year 1. Also suppose that by the end of year 1, the entity’s share price
has dropped, and the entity reprices its share options, and that the repriced share options vest at the end of
year 3. The entity estimates that a further 70 employees will leave during years 2 and 3, and hence the total
expected employee departures over the three-year vesting period is 110 employees.
During year 2, a further 35 employees leave, and the entity estimates that a further 30 employees will leave
during year 3, to bring the total expected employee departures over the three-year vesting period to 105
employees.
During year 3, a total of 28 employees leave, and hence a total of 103 employees ceased employment during
the vesting period. For the remaining 397 employees, the share options vested at the end of year 3. The entity
estimates that, at the date of repricing, the fair value of each of the original share options granted (i.e. before
taking into account the repricing) is Rs. 5 and that the fair value of each repriced share option is Rs. 8.
Required:
Prepare extracts of SOFP and SOCI for all 3 years.
Question 9
On January 1, 2019, an entity granted 100 share options to each of its 200 employees. Each grant was
conditional upon the employee remaining in service over the next four years. The entity estimated that the fair
value of each option was Rs. 20 on grant date. On the basis of a weighted average probability, the entity
estimated that 20 employees would leave during the 4-year period and therefore forfeit their rights to the
share options.
During 2019, 10 employees left and by the end of year, the entity still estimated that only 20 employees would
leave during the 4-year vesting period. During 2020, no employee left and the entity revised its estimate to a
total 15 employees leaving during 4-year vesting period. Financial year ends on every December 31st.
Required:
Prepare extracts of SOFP and SOCI for the years ending December 31, 2019 and 2020 in respect of each of the
following independent situations:
NASIR ABBAS FCA
118
SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
(a) On July 1, 2020 after share price collapsed, the entity reduced the exercise price to accommodate
employees. On the date of modification, fair value of each original share option granted was Rs. 10 and
fair value of each repriced share option granted was Rs. 14.
(b) On July 1, 2020 to further motivate, the entity granted additional 30 share options each without any change
in remaining vesting period. On the date of modification, fair value of each additional share option was Rs.
24.
(c) On July 1, 2020 the entity reduced to vesting period from 4 years to 3 years.
Question 10
At the beginning of year 1, the entity grants 1,000 share options to each member of its sales team, conditional
upon the employee remaining in the entity’s employ for three years, and the team selling more than 50,000
units of a particular product over the three-year period.
The fair value of the share options is Rs. 15 per option at the date of grant.
During year 2, the entity increases the sales target to 100,000 units. By the end of year 3, the entity has sold
55,000 units, and the share options are forfeited. Twelve members of the sales team have remained in service
for the three-year period.
Required:
Discuss the accounting treatment of above transactions.
Question 11
At the beginning of year 1, an entity grants to a senior executive 10,000 share options, conditional upon the
executive remaining in the entity’s employ until the end of year 3. At grant date, the fair value of each share
option is estimated at Rs. 12. At the beginning of year 2, the entity cancels the original grant and replaces it
with new 10,000 share options, without any change in vesting period, and also pays Rs. 2 per option as a
compensation. Immediately before cancellation, fair value of original instrument reduces to Rs. 8 whereas fair
value of new replacement instruments is estimated at Rs. 17 each.
Required:
Journalize transactions for year 2 only.
Question 12
An entity grants 100 cash share appreciation rights (SARs) to each of its 500 employees, on condition that the
employees remain in its employ for the next three years.
During year 1, 35 employees leave. The entity estimates that a further 60 will leave during years 2 and 3.
During year 2, 40 employees leave and the entity estimates that a further 25 will leave during year 3.
During year 3, 22 employees leave. At the end of year 3, 150 employees exercise their SARs, another 140
employees exercise their SARs at the end of year 4 and the remaining 113 employees exercise their SARs at
the end of year 5.
The entity estimates the fair value of the SARs at the end of each year in which a liability exists as shown below.
At the end of year 3, all SARs held by the remaining employees vest. The intrinsic values of the SARs at the date
of exercise (which equal the cash paid out) at the end of years 3, 4 and 5 are also shown below.
NASIR ABBAS FCA
Year
Fair value (Rs.)
1
2
3
4
5
14.40
15.50
18.20
21.40
-
Intrinsic value
(Rs.)
15.00
20.00
25.00
119
SHARE BASED PAYMENTS (IFRS-2) - QUESTIONS
Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
Question 13
An entity grants 100 cash-settled share appreciation rights (SARs) to each of its 500 employees on the condition
that the employees remain in its employ for the next three years and the entity reaches a revenue target (Rs.
1 billion in sales) by the end of Year 3. The entity expects all employees to remain in its employ.
For simplicity, this example assumes that none of the employees’ compensation qualifies for capitalization as
part of the cost of an asset.
At the end of Year 1, the entity expects that the revenue target will not be achieved by the end of Year 3.
During Year 2, the entity’s revenue increased significantly and it expects that it will continue to grow.
Consequently, at the end of Year 2, the entity expects that the revenue target will be achieved by the end of
Year 3.
At the end of Year 3, the revenue target is achieved and 150 employees exercise their SARs. Another 150
employees exercise their SARs at the end of Year 4 and the remaining 200 employees exercise their SARs at
the end of Year 5.
Using an option pricing model, the entity estimates the fair value of the SARs, ignoring the revenue target
performance condition and the employment-service condition, at the end of each year until all of the cashsettled share-based payments are settled. At the end of Year 3, all of the SARs vest. The following table shows
the estimated fair value of the SARs at the end of each year and the intrinsic values of the SARs at the date of
exercise (which equals the cash paid out).
Year
Fair value (Rs.)
1
2
3
4
5
14.40
15.50
18.20
21.40
25.00
Intrinsic value
(Rs.)
15.00
20.00
25.00
Required:
Show movement in liability for cash-settled share-based payment transaction for all 5 years.
Question 14
An entity grants to an employee the right to choose either 1,000 phantom shares, i.e. a right to a cash payment
equal to the value of 1,000 shares, or 1,200 shares. The grant is conditional upon the completion of three years’
service. If the employee chooses the share alternative, the shares must be held for three years after vesting
date.
At grant date, the entity’s share price is Rs. 50 per share. At the end of years 1, 2 and 3, the share price is Rs.
52, Rs. 55 and Rs. 60 respectively. The entity does not expect to pay dividends in the next three years. After
taking into account the effects of the post-vesting transfer restrictions, the entity estimates that the grant date
fair value of the share alternative is Rs. 48 per share.
At the start of year 4, the employee chooses:
Scenario 1: The cash alternative
Scenario 2: The equity alternative
Required:
Journalize all transactions over 3 years. (assuming face value of each share Rs. 10).
NASIR ABBAS FCA
120
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
SOLUTIONS
Solution No. 1
(a)
Extracts – SOFP
Equity
[50,000 x 80% x Rs. 15 x 1/3]
[50,000 x 80% x Rs. 15 x 2/3]
[50,000 x 80% x Rs. 15 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
Dr. Equity instrument granted
Cr. Share options
(b)
Extracts – SOFP
Equity
[50,000 x 85% x Rs. 15 x 1/3]
[50,000 x 88%x Rs. 15 x 2/3]
[44,300 x Rs. 15 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
Dr. Equity instrument granted
Cr. Share options
Solution No. 2
Extracts – SOFP
Equity
[44,000 x Rs. 30 x 1/2]
[41,700 x Rs. 30 x 2/3]
[41,900 x Rs. 30 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
NASIR ABBAS FCA
Year 1
Year 2
Year 3
------------------ Rs. -----------------200,000
400,000
600,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------200,000
200,000
200,000
Rs.
600,000
Rs.
600,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------212,500
440,000
664,500
Year 1
Year 2
Year 3
------------------ Rs. -----------------212,500
227,500
224,500
Rs.
664,500
Rs.
664,500
Year 1
Year 2
Year 3
------------------ Rs. -----------------660,000
834,000
1,257,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------660,000
174,000
423,000
121
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Dr. Equity instrument granted
Cr. Share capital
Cr. Share premium
Solution No. 3
Extracts – SOFP
Equity
[80 x 200 x Rs. 20 x 1/3]
[85 x 300 x Rs. 20 x 2/3]
[86 x 300 x Rs. 20 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
Solution No. 4
Extracts – SOFP
Equity
[10,000 x Rs. 16 x 1/3]
[10,000 x Rs. 16 x 2/3]
[10,000 x Rs. 12 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
Solution No. 5
Extracts – SOFP
Equity
[10,000 x Rs. 24 x 1/3]
[10,000 x Rs. 24 x 2/3]
[10,000 x Rs. 24 x 3/3]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
NASIR ABBAS FCA
Rs.
1,257,000
Rs.
419,000
838,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------106,667
340,000
516,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------106,667
233,333
176,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------53,333
106,667
120,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------53,333
53,334
13,333
Year 1
Year 2
Year 3
------------------ Rs. -----------------80,000
160,000
240,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------80,000
80,000
80,000
122
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Solution No. 6
Extracts – SOFP
Equity
[80,000 x Rs. 25 x 1/5]
[80,000 x Rs. 25 x 2/5]
[80,000 x Rs. 25 x 3/5]
[80,000 x Rs. 25 x 4/5]
[70,000 x Rs. 25 x 5/5]
Extracts – SOCI
Employee cost
[i.e. change in equity
instrument valuation]
Year 1
Year 2
Year 3
Year 4
Year 5
----------------------------------- Rs. ------------------------------400,000
800,000 1,200,000 1,600,000 1,750,000
Year 1
Year 2
Year 3
Year 4
Year 5
----------------------------------- Rs. ------------------------------400,000
400,000
400,000
400,000
150,000
Solution No. 7
(a)
Year - 1
Dr. Employee cost (W-1)
Cr. Equity instruments granted
[Year 1 expense recorded]
Year - 2
Dr. Employee cost (W-1)
Cr. Equity instruments granted
[Year 2 expense recorded]
Year - 3
Dr. Employee cost (W-1)
Cr. Equity instruments granted
[Year 3 expense recorded]
Rs.
40,000
40,000
103,333
103,333
501,667
501,667
Dr. Equity instruments granted
Cr. Share options
[Share options actually vested]
Year - 4
Dr. Employee cost [6,000 x (88 - 75)]
Cr. Share options
[Intrinsic value updated on settlement]
645,000
Dr. Cash [6,000 x Rs. 60]
Dr. Share options (W-1)
Cr. Share capital
Cr. Share premium (W-2)
[6,000 options exercised]
360,000
168,000
Dr. Employee cost [37,000 x (88 - 75)]
Cr. Share options
[Intrinsic value updated on Year 4 end]
481,000
NASIR ABBAS FCA
Rs.
645,000
78,000
78,000
60,000
468,000
481,000
123
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
(b)
Year – 1
Year – 2
Year – 3
Year – 4 [6,000 shares issued]
Year – 5 [8,000 shares issued]
Year – 6 [5,000 shares issued]
Year – 7 [9,000 shares issued]
Year – 8 [8,000 shares issued]
Year – 9 [5,000 shares issued]
Year – 10 [2,000 shares issued]
------------------------ SOFP ------------------------SOCI
Equity
Share
Share
Share
Expense/
instrument
options
capital
premium
(income)
granted
(W-1)
(W-2)
(W-2)
----------------------------------- Rs. ------------------------------40,000
40,000
143,333
103,333
645,000
501,667
1,036,000
60,000
468,000
559,000
1,160,000
140,000 1,188,000
444,000
720,000
190,000 1,588,000 (290,000)
540,000
280,000 2,362,000
144,000
315,000
360,000 3,122,000
135,000
96,000
410,000 3,612,000
21,000
430,000 3,822,000
14,000
W-1 Equity instruments granted/Share options
Balance
Year 1
Settlement
Expense (balancing)
Balance [50,000 x 80% x (63 - 60) x 1/3]
Year 2
Settlement
Expense (balancing)
Balance [50,000 x 86% x (65 - 60) x 2/3]
Year 3
Settlement
Expense (balancing)
Balance [43,000 x (75 - 60) x 3/3]
Year 4
Settlement [6,000 x (88 - 60)]
Expense (balancing)
Balance [37,000 x (88 - 60)]
Year 5
Settlement [8,000 x (100 - 60)]
Expense (balancing)
Balance [29,000 x (100 - 60)]
Year 6
Settlement [5,000 x (90 - 60)]
Expense (balancing)
Balance [24,000 x (90 - 60)]
Year 7
Settlement [9,000 x (96 - 60)]
Expense (balancing)
Balance [15,000 x (96 - 60)]
Year 8
Settlement [8,000 x (105 - 60)]
Expense (balancing)
Balance [7,000 x (105 - 60)]
Year 9
Settlement [5,000 x (108 - 60)]
Expense (balancing)
NASIR ABBAS FCA
Rs.
40,000
40,000
103,333
143,333
501,667
645,000
(168,000)
559,000
1,036,000
(320,000)
444,000
1,160,000
(150,000)
(290,000)
720,000
(324,000)
144,000
540,000
(360,000)
135,000
315,000
(240,000)
21,000
124
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Year 10
Balance [2,000 x (108 - 60)]
Settlement [2,000 x (115 - 60)]
Expense (balancing)
Balance
W-2 Share capital and Share premium
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Issue [6,000 x 60 + 168,000 - 60,000]
Balance
Issue [8,000 x 60 + 320,000 - 80,000]
Balance
Issue [5,000 x 60 + 150,000 - 50,000]
Balance
Issue [9,000 x 60 + 324,000 - 90,000]
Balance
Issue [8,000 x 60 + 360,000 - 80,000]
Balance
Issue [5,000 x 60 + 240,000 - 50,000]
Balance
Issue [2,000 x 60 + 110,000 - 20,000]
Balance
Solution No. 8
Extracts – SOFP
Equity
[(500 – 110) x 100 x Rs. 15 x 1/3]
[(500 – 105) x 100 x (Rs. 15 x 2/3 + Rs. 3 x 1/2)]
[397 x 100 x (Rs. 15 + Rs. 3)]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
96,000
(110,000)
14,000
Share
Share
capital
premium
--------- Rs. ------60,000
468,000
60,000
468,000
80,000
720,000
140,000
1,188,000
50,000
400,000
190,000
1,588,000
90,000
774,000
280,000
2,362,000
80,000
760,000
360,000
3,122,000
50,000
490,000
410,000
3,612,000
20,000
210,000
430,000
3,822,000
Year 1
Year 2
Year 3
------------------ Rs. -----------------195,000
454,250
714,600
Year 1
Year 2
Year 3
------------------ Rs. -----------------195,000
259,250
260,350
Solution No. 9
(a)
Extracts – SOFP
Equity
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x (Rs. 20 x 2/4 + Rs. 4 x 0.5/2.5)]
NASIR ABBAS FCA
2019
2020
-------- Rs. ------90,000
199,800
125
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
2019
2020
-------- Rs. ------90,000
109,800
(b)
Extracts – SOFP
Equity
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x (100 x Rs. 20 x 2/4 + 30 x Rs. 24 x 0.5/2.5)]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
2019
2020
-------- Rs. ------90,000
211,640
2019
2020
-------- Rs. ------90,000
121,640
(c)
Extracts – SOFP
Equity
[(200 – 20) x 100 x Rs. 20 x 1/4]
[(200 – 15) x 100 x Rs. 20 x 2/3)]
Extracts – SOCI
Employee cost
[i.e. change in equity instrument valuation]
2019
2020
-------- Rs. ------90,000
246,667
2019
2020
-------- Rs. ------90,000
156,667
Solution No. 10
IFRS requires, for a performance condition that is not a market condition, the entity to recognize the services
received during the vesting period based on the best available estimate of the number of equity instruments
expected to vest and to revise that estimate, if necessary, if subsequent information indicates that the number
of equity instruments expected to vest differs from previous estimates. On vesting date, the entity revises the
estimate to equal the number of equity instruments that ultimately vested.
If the entity modifies the vesting conditions in a manner that is not beneficial to the employee, the entity does
not take the modified vesting conditions into account when applying the requirements of the IFRS regarding
treatment of vesting conditions.
Therefore, because the modification to the performance condition made it less likely that the share options
will vest, which was not beneficial to the employee, the entity takes no account of the modified performance
condition when recognizing the services received. Instead, it continues to recognize the services received over
NASIR ABBAS FCA
126
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
the three-year period based on the original vesting conditions. Hence, the entity ultimately recognizes
cumulative remuneration expense of Rs. 180,000 over the three-year period (12 employees × 1,000 options ×
Rs. 15).
Solution No. 11
Year - 2
Dr. Equity instrument granted
Cr. Cash [10,000 x Rs. 2]
Rs.
20,000
Dr. P&L
115,000
Rs.
20,000
Cr. Equity instrument granted
115,000
Balance
Expense (balancing)
Balance [10,000 x Rs. 12 x 1/3]
Repurchase of equity [Rs. 2 x 10,000]
Expense (balancing)
Balance [10,000 x Rs. 12 x 2/3 + 10,000 x Rs. 11* x 1/2]
40,000
40,000
(20,000)
115,000
135,000
Workings
Year 1
Year 2
* Rs. 17 - [Rs. 8 - Rs. 2] = Rs. 11
Solution No. 12
Movement in liability
Balance
Year 1
Settlement
Expense (balancing)
Balance [(500 - 95) x 100 x Rs. 14.40 x 1/3]
Year 2
Settlement
Expense (balancing)
Balance [(500 - 100) x 100 Rs. 15.50 x 2/3]
Year 3
Settlement [150 x 100 x Rs. 15]
Expense (balancing)
Balance [(403 - 150) x 100 x Rs. 18.20]
Year 4
Settlement [140 x 100 x Rs. 20]
Expense (balancing)
Balance [(403 - 290) x 100 x Rs. 21.40]
Year 5
Settlement [113 x 100 x Rs. 25]
Expense (balancing)
Balance
Solution No. 13
Movement in liability
Balance
Year 1
Settlement
Expense (balancing)
NASIR ABBAS FCA
Rs.
194,400
194,400
218,933
413,333
(225,000)
272,127
460,460
(280,000)
61,360
241,820
(282,500)
40,680
-
Rs.
127
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Year 2
Year 3
Year 4
Year 5
Balance [0 x Rs. 14.40 x 1/3]
Settlement
Expense (balancing)
Balance [500 x 100 Rs. 15.50 x 2/3]
Settlement [150 x 100 x Rs. 15]
Expense (balancing)
Balance [(500 - 150) x 100 x Rs. 18.20]
Settlement [150 x 100 x Rs. 20]
Expense (balancing)
Balance [(500 - 300) x 100 x Rs. 21.40]
Settlement [200 x 100 x Rs. 25]
Expense (balancing)
Balance
Solution No. 14
Year - 1
Dr. Employee cost [57,600(W-1) x 1/3]
Cr. Equity component [7,600(W-1) x 1/3]
Cr. Liability component [50,000(W-1) x 1/3]
[Initial recognition of transaction]
Dr. Employee cost
Cr. Liability component (W-2)
[Year end remeasurement]
Year - 2
Dr. Employee cost
Cr. Equity component [7,600 x 2/3 - 2,533]
Cr. Liability component (W-2)
[Year end expenses and remeasurement]
Year - 3
Dr. Employee cost
Cr. Equity component [7,600 x 3/3 - 2,533 - 2,533]
Cr. Liability component (W-2)
[Year end expenses and remeasurement]
Settlement
Scenario I
Dr. Liability component (W-2)
Cr. Cash
[Cash settlement]
Dr. Equity component (W-1)
Cr. Retained earnings
[Transfer of equity component to retained earnings]
NASIR ABBAS FCA
516,667
516,667
(225,000)
345,333
637,000
(300,000)
91,000
428,000
(500,000)
72,000
-
Rs.
19,200
Rs.
2,533
16,667
666
666
21,867
2,533
19,334
25,867
2,533
23,333
60,000
60,000
7,600
7,600
128
SHARE BASED PAYMENTS (IFRS-2) - SOLUTIONS
Scenario II
Dr. Equity component (W-1)
Dr. Liability component (W-2)
Cr. Share capital [1,200 x Rs. 10]
Cr. Share premium
[Issue of 1,200 shares]
W-1 Initial measurement
Total amount
Employee cost [1,200 x Rs. 48]
Liability component [1,000 x Rs. 50]
Equity component
W-2 Liability component
Balance
Year 1
Initial recognition [1,000 x Rs. 50 x 1/3]
Expense (balancing)
Balance [1,000 x Rs. 52 x 1/3]
Year 2
Expense (balancing)
Balance [1,000 x Rs. 55 x 2/3]
Year 3
Expense (balancing)
Settlement [1,000 x Rs. 60]
NASIR ABBAS FCA
7,600
60,000
12,000
55,600
Rs.
57,600
50,000
7,600
16,667
666
17,333
19,334
36,667
23,333
60,000
129
IAS 21 [Separate financial statements] – Class notes
IMPORTANT CONCEPTS
Currencies
Foreign currency
It is a currency other than functional currency of the entity.
Presentation currency
It is the currency in which the financial statements are presented.
Functional currency
1. It is the currency of the primary economic environment in which the entity operates.
2. The primary economic environment in which an entity operates is normally the one in which it
primarily generates and expends cash. An entity considers the following factors in determining its
functional currency:
(a) the currency:
(i) that mainly influences sales prices for goods and services (this will often be the currency in
which sales prices for its goods and services are denominated and settled); and
(ii) of the country whose competitive forces and regulations mainly determine the sales prices of
its goods and services.
(b) the currency that mainly influences labour, material and other costs of providing goods or services
(this will often be the currency in which such costs are denominated and settled).
3. The following factors may also provide evidence of an entity’s functional currency:
(a) the currency in which funds from financing activities (i.e. issuing debt and equity instruments) are
generated.
(b) the currency in which receipts from operating activities are usually retained.
4. An entity’s functional currency reflects the underlying transactions, events and conditions that are
relevant to it. Accordingly, once determined, the functional currency is not changed unless there is a
change in those underlying transactions, events and conditions.
Monetary items
1. Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed
or determinable number of units of currency.
2. The essential feature of a monetary item is a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency.
Examples
- pensions and other employee benefits to be paid in cash
- provisions that are to be settled in cash
- lease liabilities
- cash dividends that are recognised as a liability
- a contract to receive (or deliver) a variable number of the entity’s own equity instruments or a
variable amount of assets in which the fair value to be received (or delivered) equals a fixed or
determinable number of units of currency is a monetary item.
Nasir Abbas FCA
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IAS 21 [Separate financial statements] – Class notes
3. Conversely, the essential feature of a non‑monetary item is the absence of a right to receive (or an
obligation to deliver) a fixed or determinable number of units of currency.
Examples
- amounts prepaid for goods and services
- goodwill
- intangible assets
- inventories
- property, plant and equipment
- right‑of‑use assets
- provisions that are to be settled by the delivery of a non‑monetary asset.
INITIAL RECOGNITION OF FOREIGN CURRENCY TRANSACTIONS
1. A foreign currency transaction is a transaction that is denominated or requires settlement in a foreign
currency, including transactions arising when an entity:
(a) buys or sells goods or services whose price is denominated in a foreign currency;
(b) borrows or lends funds when the amounts payable or receivable are denominated in a foreign
currency; or
(c) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign
currency.
2. A foreign currency transaction shall be recorded, on initial recognition in the functional currency, by
applying to the foreign currency amount the spot exchange rate between the functional currency and
the foreign currency at the date of the transaction.
Date of the transaction
- The date of a transaction is the date on which the transaction first qualifies for recognition in
accordance with IFRSs. (Preferable for exam questions)
-
For practical reasons, a rate that approximates the actual rate at the date of the transaction is
often used, for example, an average rate for a week or a month might be used for all
transactions in each foreign currency occurring during that period. (Only use if asked in
question)
-
However, if exchange rates fluctuate significantly, the use of the average rate for a period is
inappropriate.
REPORTING AT THE ENDS OF SUBSEQUENT REPORTING PERIODS
At end of each reporting period:
Items
Translation
Using closing rate (i.e. spot exchange rate at year end).
Foreign currency monetary
items
Non-monetary items that
Using the exchange rate at the date of transaction.
are measured in terms of
historical cost in a foreign
currency
Nasir Abbas FCA
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IAS 21 [Separate financial statements] – Class notes
Non-monetary items that
are measured at fair value in
a foreign currency
Using the exchange rate at the date when fair value was measured.
Items where carrying amount is determined as a comparison of two or more amounts
The carrying amount of some items is determined by comparing two or more amounts. For example, the
carrying amount of inventories is the lower of cost and net realizable value in accordance with IAS 2
Inventories. Similarly, in accordance with IAS 36 Impairment of Assets, the carrying amount of an asset for
which there is an indication of impairment is the lower of its carrying amount before considering possible
impairment losses and its recoverable amount. When such an asset is non-monetary and is measured in
a foreign currency, the carrying amount is determined by comparing:
(a) the cost or carrying amount, as appropriate, translated at the exchange rate at the date when that
amount was determined (i.e. the rate at the date of the transaction for an item measured in terms of
historical cost); and
(b) the net realizable value or recoverable amount, as appropriate, translated at the exchange rate at the
date when that value was determined (e.g. the closing rate at the end of the reporting period).
The effect of this comparison may be that an impairment loss is recognized in the functional currency but
would not be recognized in the foreign currency, or vice versa.
RECOGNITION OF EXCHANGE DIFFERENCES
Monetary items
Exchange differences arising on:
-
the year-end remeasurement; and
the settlement
shall be recognized in P&L
Non-monetary items
Exchange differences arising on valuation (as per
relevant standards):
For assets whose valuation gains/losses are
recognized in P&L (e.g. Inventory, impairment)
Shall be recognized in P&L
For assets whose valuation gains/losses are
recognized in OCI (e.g. revaluation model)
Shall be recognized in OCI
Exam note:
It is automatically done when valuation gain/loss
as per relevant IAS is calculated by comparing
values translated in functional currency at
valuation date.
Nasir Abbas FCA
132
IAS 21 – QUESTIONS
PRACTICE QUESTIONS
Question No. 1
Determine the functional currency in each of the following cases:
(a) Company A manufactures a product for the domestic market in Pakistan. Its sales are denominated in Pak
rupee. The sale of its product in Pakistan is affected mainly by local supply and demand and regulations.
Its inputs are sources in Pakistan and the prices of inputs are denominated in Pak rupee and mainly
influenced by economic forces and regulations of Pakistan.
(b) Company B mines a product in Pakistan. Sales of the product in denominated in US dollars. The sale price
in USD is affected by global demand for the product. About 90% of company’s costs are for expatriate staff
salaries and for chemicals and specialized machinery imported from USA. These costs are denominated
and settled in US dollars. However its other costs are incurred and settled in Pak rupee.
Question No. 2
On December 21, 2018 40,000 units of a raw material were imported at $ 2 per unit on credit. Financial year
ends on December 31st. 60% of the payment was made on January 22, 2019 and 40% of the payment was made
on February 10, 2019. The spot exchange rates are as follows:
Date
21-12-18
31-12-18
22-01-19
10-02-19
Exchange rate ($ 1)
Rs. 110
Rs. 114
Rs. 120
Rs. 125
Required:
Journalize above transactions.
Question No. 3
On July 1, 2018 Alpha Limited (AL) purchased a building in UAE for Dhs. 500,000. After initial recognition,
management decided to measure this property using fair value model in accordance with IAS 40. AL’s financial
year ends on December 31st. The fair values and spot exchange rates are as follows:
Date
01-07-18
31-12-18
31-12-19
Fair value
(Dhs)
500,000
515,000
505,000
Exchange rate
(Dh 1)
Rs. 32
Rs. 30
Rs. 40
Required:
Journalize above transactions.
Question No. 4
On January 1, 2017 Beta Limited (BL) purchased a building for administrative purposes for a liaison office in UK
for £ 100,000. Its useful life was initially estimated at 10 years. After initial recognition, management decided
to measure this property using revaluation model in accordance with IAS 16. BL’s financial year ends on
December 31st. The fair values and spot exchange rates are as follows:
Date
01-01-17
01-01-18
01-01-19
NASIR ABBAS FCA
Fair value
(£)
100,000
90,000
102,000
Exchange rate
(£ 1)
Rs. 140
Rs. 134
Rs. 136
133
IAS 21 – QUESTIONS
Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the years
ending December 31, 2017, 2018 and 2019.
Question No. 5
On September 1, 2018 purchase order was issued for import of a plant at an invoice price of $ 120,000. 20%
advance was paid alongwith purchase order. Plant was received on October 1, 2018 and installed accordingly.
30% of the invoice amount was paid at the time of delivery and remaining 50% was paid on February 28, 2019.
Plant has a useful life of 10 years. Financial year ends on every 31st December. The spot exchange rates are as
follows:
Date
01-09-18
01-10-18
31-12-18
28-02-19
Exchange rate ($ 1)
Rs. 110
Rs. 120
Rs. 130
Rs. 140
Required:
Journalize above transactions.
Question No. 6
Following transactions took place during the year ending June 30, 2019:
(a) On August 15, 2018 5,000 units of product “MN” were purchased for Dinars 5 per unit on credit. The
account was fully settled on September 30, 2018.
(b) On October 1, 2018 following equity investments were made:
Company
A
B
Number of
shares
5000
8000
Purchase
Price
$5
$9
Measurement policy
Fair value through OCI
Fair value through P&L
On May 1, 2019 2000 shares of company A were sold at a price of $ 5.8 per share and 1000 shares of
company B were sold at a price of $ 10 per share. Market prices at June 30, 2019 of shares of company A
and B were $ 6 and $ 9.3 per share respectively.
(c) On January 1, 2019 3,000 units of product “MN were sold locally at a price of Rs. 750 per unit and remaining
2,000 units were exported at a price of € 6 per unit on credit. Sale proceeds from foreign customer were
realized on July 31, 2019.
(d) On April 1, 2019 a machine was imported from Japan for ¥ 2 million. 30% advance had been piad on March
1, 2019 and remaining balance was settled on July 31, 2019. Useful life of machine has been estimated at
10 years.
Following spot exchange rates in rupees are available:
Date
Dinar 1
$1
15-08-18
100
30-09-18
102
01-10-18
110
01-01-19
01-03-19
01-04-19
01-05-19
118
30-06-19
120
31-07-19
NASIR ABBAS FCA
€1
140
137
132
¥1
2.50
3.00
3.20
3.50
134
IAS 21 – QUESTIONS
Required:
Calculate “total profit or loss” and “other comprehensive income” for the year ending June 30, 2019.
Question No. 7
Copper Limited (CL) entered into following transactions during the year ended 30 June 2019:
(i)
(ii)
On 1 October 2018, CL imported a machine from China for USD 250,000 against 60% advance payment
which was made on 1 July 2018. The remaining payment was made on 1 April 2019.
On 1 January 2019, CL sold goods to a Dubai based company for USD 40,000 on credit. CL received 25%
amount on 1 April 2019, however, the remaining amount is still outstanding.
Following exchange rates are available:
Date
1 USD
01-Jul-18
Rs. 121
01-Oct-18
Rs. 124
01-Jan-19
Rs. 137
01-Apr-19
Rs. 140
30-Jun-19
Rs. 163
Average
Rs. 135
Required:
Prepare journal entries in CL’s books to record the above transactions for the year ended 30 June 2019.
NASIR ABBAS FCA
135
IAS – 21 - SOLUTIONS
SOLUTIONS
Solution No. 1
(a) Since market forces and regulations in Pakistan’s economy largely determines the selling price and costs
of entity’s inputs, therefore its functional currency is Pak rupee.
(b) Since market forces and regulations in USA’s economy largely determines the selling price and costs of
entity’s inputs, therefore its functional currency is US dollar.
Solution No. 2
21-12-18
Inventory
Creditors [40,000 x $ 2 x Rs. 110]
[Purchase of raw material]
31-12-18
22-01-19
10-02-19
Dr.
Cr.
--------- Rs. ---------8,800,000
8,800,000
P&L (exchange loss)
Creditors [$ 80,000 x Rs. 4]
[Reporting at year end]
320,000
P&L (exchange loss)
Creditors [$ 80,000 x Rs. 114 x 60%]
Cash [$80,000 x 60% x Rs. 120]
[Partial settlement of creditors]
288,000
5,472,000
P&L (exchange loss)
Creditors [$ 80,000 x Rs. 114 x 40%]
Cash [$80,000 x 40% x Rs. 125]
[Final settlement of creditors]
352,000
3,648,000
320,000
5,760,000
4,000,000
Solution No. 3
01-07-18
Investment property
Bank
[Purchase of property]
31-12-18
P&L (FV loss)
Dr.
Cr.
--------- Rs. ---------16,000,000
16,000,000
550,000
Investment property
[Fair value adjustment at year end]
31-12-19
Investment property
P&L (FV gain)
[Fair value adjustment at year end]
NASIR ABBAS FCA
550,000
4,750,000
4,750,000
136
IAS – 21 - SOLUTIONS
W-1
Fair value
(Dhs)
500,000
515,000
505,000
01-07-18
31-12-18
31-12-19
Rate
(Rs/Dhs)
32.00
30.00
40.00
Converted
value
(Rs.)
16,000,000
15,450,000
20,200,000
Gain/(loss)
(Rs.)
(550,000)
4,750,000
Solution No. 4
2019
2018
2017
-------------------- Rs.'000 -------------------Extracts – SOFP
Non-current assets
Building (W-1)
Equity
Revaluation surplus
Extracts – SOCI
Depreciation
Revaluation loss
Revaluation loss reversal
Other comprehensive income:
Revaluation gain / (loss)
W-1
01-01-17
31-12-17
Cost [£ 100,000 x Rs. 140]
Dep [14,000 / 10]
01-01-18
Revaluation
[£ 90,000 x Rs. 134]
Dep [12,060 / 9]
31-12-18
01-01-19
Revaluation
[£ 102,000 x Rs. 136]
Dep [13,872 / 8]
31-12-19
12,138
10,720
12,600
2,338
-
-
(1,734)
480
(1,340)
(540)
-
(1,400)
-
2,672
-
-
NBV
Surplus
P&L
-------------------- Rs.'000 -------------------14,000
(1,400)
12,600
(540)
(540)
12,060
(540)
(1,340)
60
10,720
(480)
3,152
2,672
480
13,872
2,672
(1,734)
(334)
12,138
2,338
-
Solution No. 5
01-01-18
Advance to supplier
Bank [$120,000 x 20% x Rs. 110]
[20% advance paid to supplier]
01-10-18
Plant
Advance to supplier
Bank [$ 120,000 x 30% x Rs. 120]
Creditors [$ 120,000 x 50% x Rs. 120]
[Plant is received and installed]
NASIR ABBAS FCA
Dr.
Cr.
--------- Rs. ---------2,640,000
2,640,000
14,160,000
2,640,000
4,320,000
7,200,000
137
IAS – 21 - SOLUTIONS
31-12-18
Depreciation
354,000
Accumulated depreciation
[Depreciation for 2018]
31-12-18
10-02-19
354,000
P&L [exchange loss]
Creditors [$ 120,000 x 50% x Rs. 10]
[Exchange loss on creditors at year end]
600,000
P&L (exchange loss)
Creditors [$ 60,000 x Rs. 140]
Bank [$60,000 x Rs. 10]
[Final settlement of creditors]
600,000
7,800,000
600,000
8,400,000
Solution No. 6
For the year ending June 30, 2019
(a)
Purchases [5,000 x Dinar 5 x Rs. 100]
Exchange loss on settlement [Dinar 25,000 x Rs. 2]
P&L
OCI
-------- Rs. ------(2,500,000)
(50,000)
-
190,000
268,800
-
882,000
510,000
-
3,930,000
(36,000)
-
(142,500)
(280,000)
1,986,000
778,800
(b)
Profit on sale of shares:
A [2000 x ($5.8 x Rs. 118 - $5 x Rs. 110)]
B [1000 x ($10 x Rs. 118 - $9 x Rs. 110)]
Fair value gain at year end:
A [3000 x ($6 x Rs. 120 - $5 x Rs. 110)]
B [7000 x ($9.3 x Rs. 120 - $9 x Rs. 110)]
(c)
Sales [3,000 x Rs. 750 + 2,000 x € 6 x Rs. 140]
Exchange loss on debtors [2,000 x € 6 x Rs. 3]
(d)
Depreciation [(¥ 2m x 30% x Rs. 2.50 + ¥ 2m x 70% x Rs. 3) / 10 x 3/12]
Exchange loss on creditors [¥ 2m x 70% x Rs. 0.2]
Solution No. 7
(i)
Date
1-Jul-18 Advance for PPE
Bank [250,000 x 60% x 121]
1-Oct-18
PPE
Debit
18,150
Credit
18,150
30,550
Advance for PPE
Payable for PPE (250,000 x 40% x 124)
NASIR ABBAS FCA
Rs '000'
18,150
12,400
138
IAS – 21 - SOLUTIONS
1-Apr-19
(ii)
1-Jan-19
Payable for PPE
Exchange Loss (P&L)(bal.)
Bank (250,000 x 40% x 140)
12,400
1,600
Debtor
5,480
14,000
Sales [40,000 x 137]
1-Apr-19
30-Jun-19
5,480
Bank (40,000 x 25% x 140)
Debtor (5,480 x 25%)
Exchange gain(P&L)(bal.)
1,400
Debtor [(30,000 x 163) - (5,480 x 75%)]
Exchange gain (P&L)(Bal.)
780
NASIR ABBAS FCA
1,370
30
780
139
IFRS 9 (Recognition, Classification and Measurement) – Class notes
RECOGNITION
An entity shall recognize a financial asset or a financial liability in its statement of financial position when
and only when the entity becomes party to the contractual provisions of the instrument. On initial
recognition the entity shall also classify financial asset or financial liability as per guidance discussed later
in this chapter.
Examples:
- Entity B transfers cash to Entity A as a collateral for a borrowing transaction. The cash is not legally
segregated from Entity A’s assets. Therefore, Entity A recognizes the cash as an asset and a payable
to Entity B, while Entity B derecognizes the cash and recognizes a receivable from Entity A.
- Assets to be acquired and liabilities to be incurred as a result of a firm commitment to purchase or
sell goods or services are generally not recognized until at least one of the parties has performed
under the agreement. For example, an entity that receives a firm order does not generally recognize
an asset (and the entity that places the order does not recognize a liability) at the time of the
commitment but, instead, delays recognition until the ordered goods or services have been shipped,
delivered or rendered.
- Planned future transactions, no matter how likely, are not assets and liabilities because the entity has
not become a party to a contract.
CLASSIFICATION OF FINANCIAL ASSETS
Financial assets which are debt instruments of other entity
An entity shall classify financial assets as subsequently measured at:
1) Amortized cost
2) Fair value through other comprehensive income
3) Fair value through profit or loss
1) Amortized cost
A financial asset shall be measured, except for 3(ii) below, at amortized cost if both of the following
conditions are met:
(i) the financial asset is held within a business model whose objective is to hold financial assets in order
to collect contractual cash flows and
(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Amortized cost
The amount at which the financial asset or financial liability is measured at initial recognition minus
the principal repayments, plus or minus the cumulative amortization using the effective interest
method of any difference between that initial amount and the maturity amount and, for financial
assets, adjusted for any loss allowance.
2) Fair value through OCI
A financial asset shall be measured, except for 3(ii) below, at fair value through other comprehensive
income if both of the following conditions are met:
(i) the financial asset is held within a business model whose objective is achieved by both collecting
contractual cash flows and selling financial assets and
Nasir Abbas FCA
140
IFRS 9 (Recognition, Classification and Measurement) – Class notes
(ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely
payments of principal and interest on the principal amount outstanding.
Business model
Any entity’s business model is determined at a level that reflects how groups of financial assets are
managed together to achieve a particular business objective. It does not depend on management’s
intentions for an individual instrument. However, an entity may have more than one business models
for managing its financial instruments. For example, an entity may hold a portfolio of investments that
it manages to collect contractual cash flows and another portfolio of investments that it manages in
order to trade to realize fair value changes.
Contractual cashflows comprise of:
Principal
Interest
It is the fair value of the financial
It consists of consideration for the time value of money, for the
asset at initial recognition.
credit risk associated with the principal amount outstanding
during a particular period of time and for other basic lending
risks and costs, as well as a profit margin.
3) Fair value through P&L
A financial asset shall be measured at fair value through profit or loss if either:
(i) it cannot be classified as measured at amortized cost or fair value through OCI; or
(ii) an entity has, at initial recognition, irrevocably designated the financial asset as measured at fair value
through P&L if doing so eliminates or significantly reduces an accounting mismatch.
Financial assets which are equity instruments of other entity
An entity shall classify financial assets as subsequently measured at:
1) Fair value through other comprehensive income
2) Fair value through profit or loss
A financial asset shall be measured at fair value through P&L (default method) unless an entity has made
an irrevocable election, at initial recognition, for particular investments in equity instruments if these are
not held for trading to present subsequent changes in fair value in OCI.
CLASSIFICATION OF FINANCIAL LIABILITIES
An entity shall classify all financial liabilities as subsequently measured at amortized cost except for:
(a) Financial liabilities, including derivatives that are liabilities, measured at fair value through P&L
An entity may, at initial recognition, irrevocably designate a financial liability as measured at fair
value through P&L if either:
- It eliminates or significantly reduces an accounting mismatch; or
- A group of financial liabilities is managed and its performance is evaluated on a fair value basis
in accordance with a documented risk management or investment strategy.
(b) Financial liabilities that arise when a transfer of a financial asset does not qualify for derecognition or
when the continuing involvement approach applies.
(c) Financial guarantee contracts.
Nasir Abbas FCA
141
IFRS 9 (Recognition, Classification and Measurement) – Class notes
(d) Commitments to provide a loan at a below-market interest rate.
(e) Contingent consideration recognized by an acquirer in a business combination.
INITIAL MEASUREMENT
Financial assets
Financial assets subsequently measured at Financial assets subsequently measured at fair
amortized cost or fair value through OCI:
value at P&L:
Fair value of asset + transaction cost
Fair value of asset
Financial liabilities
Financial liabilities subsequently measured at Financial liabilities subsequently measured at fair
amortized cost:
value at P&L:
Fair value of liability – transaction cost
Fair value of liability
Transaction costs
Incremental costs that are directly attributable to the acquisition or issue of a financial asset or financial
liability. An incremental cost is one that would not have been incurred if the entity had not acquired or
issued of the financial instrument.
Examples of transactions costs:
Include
Do not include
Fees and commission paid to agent, advisers, brokers Debt premium and discounts
and dealers
Financing costs
Levies by regulatory agencies and security exchanges
Internal administrative or holding costs
Transfer taxes and duties
Important for initial measurement:
Transaction costs for financial asset or financial liability subsequently measured at fair value
through P&L are recognized as expense when incurred.
Transaction costs expected to be incurred on transfer or disposal of a financial instrument are not
included in the measurement of the financial instrument.
Generally transaction price (i.e. fair value of consideration given or received) is equal to the fair
value of financial asset or financial liability at initial recognition, however, if transaction price is
different then, the difference on initial measurement shall be charged to P&L. [Fair value of an
interest free long term loan is measured as the present value of all future cash receipts discounted
using the prevailing market interest rate for a similar instrument.]
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IFRS 9 (Recognition, Classification and Measurement) – Class notes
SUBSEQUENT MEASUREMENT [IGNORING IMPAIRMENT]
Financial assets
A financial asset which is an equity instrument of another entity
Types
Treatment
(i) Equity investments which - At each reporting date, the asset shall be measured at fair value.
are not held for trading and, - Fair value gain or loss shall be recognized in other comprehensive
at initial recognition, entity
income.
has made irrevocable
- It is a non-monetary item, therefore, as per IAS 21, its related foreign
exchange gain or loss shall also be recognized in OCI.
election for this treatment
- Cumulative gain or loss recognized in OCI, shall not be reclassified to
[Fair value through OCI]
profit or loss on de-recognition of the asset. However, it may be
transferred within equity e.g. retained earnings.
- Any dividend shall be recognized in P&L.
(ii) All other equity
- At each reporting date, the asset shall be measured at fair value.
investments
- Fair value gain or loss shall be recognized in P&L.
[Fair value through P&L]
- It is non-monetary item, therefore, as per IAS 21, its related foreign
(default measurement)
exchange gain or loss shall also be recognized in P&L.
- Any dividend shall be recognized in P&L.
A financial asset which is a financial liability of another entity (e.g. loans)
Types
Treatment
(i) If asset is classified as
- The asset shall be measured at amortized cost using effective
measured at amortized cost
interest rate method.
- Interest income using effective interest rate shall be recognized in
P&L.
- It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
- Any gain or loss on derecognition shall be recognized in P&L.
(ii) If asset is classified as
- At each reporting date, the asset shall be measured at fair value with
measured at fair value
any gain or loss recognized in other comprehensive income.
through OCI
- Interest income using effective interest rate shall be recognized in
profit or loss (i.e. same as calculated in amortized cost).
- Any foreign exchange gain/loss on amortized cost measured in
foreign currency shall be recognized in P&L.
- Cumulative fair value gain or loss, previously recognized in OCI, shall
be reclassified to profit or loss on de-recognition of the asset.
(All amounts recognized in P&L would be the same which would have
been recognized had the asset been measured at amortized cost)
Nasir Abbas FCA
143
IFRS 9 (Recognition, Classification and Measurement) – Class notes
(iii) If asset is classified as
measured at fair value
through profit or loss
-
At each reporting date, the asset shall be measured at fair value with
any gain or loss recognized in profit or loss.
It is a monetary item, therefore, as per IAS 21 its exchange gain or
loss shall be recognized in P&L.
Actual interest received is recognized in profit or loss.
Financial liabilities
Types
(i) If liability is classified as
measured at amortized cost
(default measurement)
(ii) If liability is classified as
measured at fair value
through profit or loss
Treatment
- The liability shall be measured at amortized cost using effective
interest rate method.
- Interest expense using effective interest rate shall be recognized in
P&L.
- Any gain or loss on derecognition shall be recognized in P&L.
- At each reporting date, the liability shall be measured at fair value.
- Any change in fair value attributable to change in own credit risk is
recognized in OCI (Amount presented in OCI shall not be
subsequently transferred to P&L, however, the entity may transfer
the cumulative gain or loss within equity e.g. retained earnings). The
remaining amount of change in the fair value of the liability shall be
presented in P&L. However, if it creates or enlarges accounting
mismatch, then entire fair value gain or loss shall be recognized in
P&L.
- Actual interest paid is recognized in profit or loss.
Estimating change in fair value of liability attributable to change in own credit risk:
Multiple methods can be used to estimate the amount of change in fair value attributable to change in
own credit risk. If the only significant relevant changes in market conditions for a liability are changes
in an observed (benchmark) interest rate, the amount of change in fair value attributable to change in
own credit risk can be estimated in following steps:
1) First find “Instrument-specific component” of IRR of the liability as
= IRR of liability at start of period (i.e. a market rate of return which is calculated using fair value of
liability and the contractual cash flows at the start of the period) LESS observed benchmark interest
rate (e.g. KIBOR) at start of period
2) Calculate the amount of change to be presented in OCI as follows:
Fair value of liability at end of the period
Present value of contractual cash flows of liability at end of year discounted at “Year
end KIBOR + Instrument-specific component (as calculated in Step 1)”
(Gain)/Loss to be recognized in OCI
Nasir Abbas FCA
Rs.
XXX
(XXX)
XXX
144
IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS
PRACTICE QUESTIONS
Question 1
Following independent situations relate to financial assets:
(1) A Limited (AL) holds investments to collect their contractual cash flows. The funding needs of AL are predictable and
the maturity of investments matches to estimated funding needs. However AL would sell an investment in particular
circumstances, perhaps to fund unanticipated capital expenditure, or because the credit rating of the instrument falls
below that required by AL’s investment policy.
(2) B Limited (BL) expects to pay a cash outflow in ten years to fund capital expenditure and invests excess cash in shortterm financial assets. When the investments mature, BL reinvests the cash in new short-term financial assets. BL
maintains this strategy until the funds are needed, at which time BL uses the proceeds from the maturing financial
assets to fund the capital expenditure. Only sales that are insignificant in value occur before maturity (unless there is
an increase in credit risk).
(3) D Limited (DL) expects to incur capital expenditure in a few years’ time. DL invests its excess cash in short and longterm financial assets so that it can fund the expenditure when the need arises. Many of the financial assets have
contractual lives that exceed DL’s anticipated investment period. DL will hold financial assets to collect the contractual
cash flows and, when an opportunity arises, it will sell financial assets to re-invest the cash in financial assets with a
higher return.
(4) F Bank holds financial assets to meet its everyday liquidity needs. The bank actively manages the return on the
portfolio in order to minimize the costs of managing those liquidity needs. That return consists of collecting
contractual payments as well as gains and losses from the sale of financial assets. F Bank holds financial assets to
collect contractual cash flows and sells financial assets to reinvest in higher yielding financial assets or to better match
the duration of its liabilities. In the past, this strategy has resulted in frequent sales activity and such sales have been
significant in value. This activity is expected to continue in the future
Required:
Briefly discuss how each of the above assets should be classified?
Question 2
Following independent situations relate to financial assets (i.e. investments in bonds):
(1) Bond A has a stated maturity date. Payments of principal and interest on the principal amount outstanding are linked
to an inflation index.
(2) Bond B is a variable interest rate instrument with a stated maturity date that permits the borrower to choose the
market interest rate on an ongoing basis. For example, at each interest rate reset date, the borrower can choose to
pay three-month LIBOR for a three-month term or one-month LIBOR for a one-month term.
(3) Bond C has a stated maturity date and pays a variable market interest rate. That variable interest rate is capped.
(4) Bond D is a full recourse loan and is secured by collateral.
(5) Bond E is convertible into fixed number of equity instruments of the issuer.
(6) Bond F is a perpetual bond but the issuer may call the instrument at any point and pay the holder the par amount
plus accrued interest due. It pays a market interest rate but payment of interest cannot be made unless the issuer is
able to remain solvent immediately afterwards. Deferred interest does not accrue additional interest.
Required:
For each of the above assets, briefly discuss whether contractual cashflows solely comprise of principal and interest?
Question 3
On 1 January 2018 Abacus Co purchases a debt instrument for its fair value of Rs. 100,000. The debt instrument is due to
mature on 31 December 2022 at par. The instrument has a face value of Rs. 125,000 and the instrument carries fixed
interest at 4.72% that is paid annually. (The effective interest rate is 10%.)
NASIR ABBAS FCA
145
IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS
Required:
Show extracts of Income statement and Balance sheet for each of the five years till December 31, 2022.
Question 4
On May 14, 2018 Zain Limited (ZL) acquired 5,000 shares of a listed company for Rs. 27.50 per share (including Rs. 1.50
per share as broker’s commission). On that date the fair value of share was Rs. 25 per share. ZL had purchased these
shares with the intention of holding in long term. Moreover, it made an irrevocable election for designation as fair value
through other comprehensive income. On June 30, 2018 (i.e. year-end) fair value of shares moved to Rs. 28 per share.
This price further increased to Rs. 33 per share on June 30, 2019. On August 1, 2019 ZL sold 3,000 shares for Rs. 31 per
share.
Required:
Journalize all of the above transactions.
Question 5
In January 1, 2018 Wolf Limited (WL) purchased 10 million shares of a listed company at a price of Rs. 25 per share
(whereas fair value was Rs. 25.50 per share). WL also paid transaction costs of Rs. 15 million. On November 30, 2018 WL
received a dividend of Rs. 4 per share. WL’s year end is December 31. At December 31, 2018, the shares were trading at
Rs. 28.
Required:
Show the financial statements extracts of WL at December 31, 2018 relating to the investment in shares if:
(i) The shares were bought for trading.
(ii) The shares were bought as a source of dividend income and were the subject of an irrevocable election at initial
recognition to recognize them at fair value through other comprehensive income.
Question 6
On January 1, 2018, Tokyo Limited (TL) bought Rs. 100,000 (nominal value) 5% bonds for Rs. 95,000 (fair value), incurring
transactions costs of Rs. 2,000. Interest is received at end of every year. The bonds will be redeemed at a premium of Rs.
5,960 over nominal value on December 31, 2020. The effective rate of interest is 8%. The fair value of the bond was as
follows:
Date
December 31, 2018
December 31, 2019
Fair value (Rs.)
110,000
104,000
On January 1, 2020 TL sold this bond for Rs. 105,000.
Required:
Journalize all above transactions over all relevant years if:
(a) TL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) TL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
(c) TL's business model is to buy and sell bonds in the short term to gain from fair value changes.
Question 7
On January 1, 2018, Sialkot Limited (SL) bought 100 Euro-dollar bonds at a price of $ 50 each and incurred transaction
cost of $ 0.5 per bond. The bonds will be redeemed at a premium of 20% over face value of $ 40 each after four years.
Coupon rate is 10%. The effective rate of interest is 6.80%.
NASIR ABBAS FCA
146
IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS
The exchange rates and fair value of the bond were as follows:
Date
01-01-18
31-12-18
31-12-19
Exchange rate
(Rs. per $)
150
152
153
Fair value
($)
50
51
48
Required:
Journalize all transactions for the years ending December 31, 2018 and 2019 if:
(a) SL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) SL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
Question 8
Decent Limited (DL) issued following bonds on January 1, 2019:
1) Face value = Rs. 150,000
Issued at a discount of 5%
Coupon rate = 7%
Redemption after 4 years at a premium of 10%
Effective interest rate = 10.734%
2) Face value = Rs. 80,000
Issued at a premium of 10%
Issue costs = Rs. 2,000
Contractual cash flows:
31-12-19 – Rs. 9,500
31-12-20 – Rs. 41,500
31-12-21 – Rs. 52,700
Effective interest rate = 8.111%
3) Face value = Rs. 100,000
Coupon rate = zero
Issued at a discount of 25%
Redemption after 4 years at par
Effective interest rate = 7.457%
Required:
(a)
Prepare complete schedules for amortized cost calculation for each bond.
(b)
Journalize all the transactions for the year ending December 31, 2019.
(c)
Show extracts of SOFP and SOCI for the year ending December 31, 2019.
Question 9
On January 1, 2018 Engro Limited (EL) issued debentures (nominal value Rs. 50,000) at a premium of 10%. Coupon rate is
10% payable at end of every year. A broker commission of 4% of nominal value was paid on issuance. These debentures
will be redeemed at a premium of 5% after 3 years.
Required:
(a)
Calculate effective interest rate to be used for amortized cost calculation.
(b)
Journalize all transactions for all three years.
NASIR ABBAS FCA
147
IFRS 9 (Recognition, Classification and Measurement) – QUESTIONS
Question 10
On January 1, 2018 Alpha Limited (AL) issued 9% debentures at nominal value of Rs. 80,000 to finance a certain investment
in assets. The management has decided to classify these debentures to be measured at fair value through profit and loss.
AL’s credit rating was also changed in subsequent years due to some factors. These debentures were revalued to fair
values as follows:
Date of fair value
31-12-18
31-12-19
Fair value
Rs. 88,000 (Fair value loss of Rs. 3,000 is attributable to change in credit rating of AL)
Rs. 82,000 (Fair value gain of Rs. 7,000 is attributable to change in credit rating of AL)
Required:
(a) Show extracts of Statement of comprehensive income and Statement of financial position for the years ending
December 31, 2018 and 2019.
(b) Journalize above transactions for the years ending December 31, 2018 and 2019.
Question 11
Beta Limited (BL) issued 8% debentures some years ago. These debentures will be redeemed at par (i.e. Rs. 100,000) on
December 31, 2023. On January 1, 2019 the fair value of debentures was Rs. 100,000 showing a market rate of return of
8% (i.e. IRR of fair value and contractual cashflows over remaining life). On that date KIBOR was 5%.
On December 31, 2019 KIBOR moved to 5.75% and fair value of BL’s debentures moved to Rs. 95,972 showing a market
rate of return of 9.25%.
On December 31, 2020 KIBOR moved to 5.50% and fair value of BL’s debentures moved to Rs. 95,026 showing a market
rate of return of 10%.
It is BL’s policy to measure financial liabilities at fair value through P&L.
Required:
Calculate fair value gain/loss to be recognized in OCI and P&L for the years ending December 31, 2019 and 2020.
NASIR ABBAS FCA
148
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
SOLUTIONS
Solution No. 1
(1) Although AL may consider, among other information, the financial assets' fair values from a liquidity perspective (i.e.
the cash amount that would be realised if AL needs to sell assets), AL’s objective is to hold the financial assets and
collect the contractual cash flows. Therefore, these assets shall be classified as measured at amortized cost.
(2) The objective of BL’s business model is to hold financial assets to collect contractual cash flows. Selling financial
assets is only incidental to BL’s business model. Therefore, these assets shall be classified as measured at amortized
cost.
(3) The objective of the business model is achieved by both collecting contractual cash flows and selling financial assets.
DL decides on an ongoing basis whether collecting contractual cash flows or selling financial assets will maximise the
return on the portfolio until the need arises for the invested cash. Therefore, these assets shall be measured at fair
value through other comprehensive income.
(4) The objective of the business model is to maximise the return on the portfolio to meet everyday liquidity needs and
F Bank achieves that objective by both collecting contractual cash flows and selling financial assets. In other words,
both collecting contractual cash flows and selling financial assets are integral to achieving the business model’s
objective. Therefore, these assets shall be measured at fair value through other comprehensive income.
Solution No. 2
(1) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding. Linking
payments of principal and interest on the principal amount outstanding to an unleveraged inflation index resets the
time value of money to a current level. In other words, the interest rate on the instrument reflects ‘real’ interest.
Thus, the interest amounts are consideration for the time value of money on the principal amount outstanding.
However, if the interest payments were indexed to another variable such as the debtor’s performance (eg the
debtor’s net income) or an equity index, the contractual cash flows are not payments of principal and interest on the
principal amount outstanding.
(2) The contractual cash flows are solely payments of principal and interest on the principal amount outstanding as long
as the interest paid over the life of the instrument reflects consideration for the time value of money, for the credit
risk associated with the instrument and for other basic lending risks and costs, as well as a profit margin. The fact that
the LIBOR interest rate is reset during the life of the instrument does not in itself disqualify the instrument. However,
if the borrower is able to choose to pay a one-month interest rate that is reset every three months, the interest rate
is reset with a frequency that does not match the tenor of the interest rate. Consequently, the time value of money
element is modified. Similarly, if an instrument has a contractual interest rate that is based on a term that can exceed
the instrument’s remaining life (for example, if an instrument with a five-year maturity pays a variable rate that is
reset periodically but always reflects a five-year maturity), the time value of money element is modified. That is
because the interest payable in each period is disconnected from the interest period.
(3) The contractual cash flows of both:
(a) an instrument that has a fixed interest rate; and
(b) an instrument that has a variable interest rate
are payments of principal and interest on the principal amount outstanding as long as the interest reflects
consideration for the time value of money, for the credit risk associated with the instrument during the term of the
instrument and for other basic lending risks and costs, as well as a profit margin.
(4) The fact that a full recourse loan is collateralized does not in itself affect the analysis of whether the contractual cash
flows are solely payments of principal and interest on the principal amount outstanding.
NASIR ABBAS FCA
149
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
(5) The holder would analyze the convertible bond in its entirety. The contractual cash flows are not payments of
principal and interest on principal amount outstanding because they reflect a return that is inconsistent with a basic
lending arrangement i.e. the return is linked to the value of the equity of the issuer.
(6) The contractual cashflows are not payments of principal and interest on the principal amount outstanding because
the issuer may be required to defer interest payments and additional interest does not accrue on those deferred
interest amounts. As a result, interest amounts are not consideration for the time value of money on the principal
amount outstanding.
Solution 3
2018
2019
2020
2021
2022
-------------------------------------- Rs. -------------------------------------Income statement - extracts
Interest income
10,000
10,410
10,861
11,357
11,872
Balance sheet - extracts
Non-current assets
Investment
104,100
108,610
113,571
-
-
-
-
-
119,028
-
Current assets
Investment
W-1
Date
31-12-18
31-12-19
31-12-20
31-12-21
31-12-22
Opening
balance
Interest
Cashflow
Closing
balance
[A]
[B = A x 10%]
[C]
[A + B - C]
5,900
5,900
5,900
5,900
130,900
104,100
108,610
113,571
119,028
-
100,000
104,100
108,610
113,571
119,028
10,000
10,410
10,861
11,357
11,872
Solution 4
Dr.
Cr.
-------- Rs. ------14-05-18
Investment [5,000 x (25 + 1.50)]
132,500
P&L [5,000 x (27.50 – 25 – 1.50)]
5,000
Cash [5,000 x 27.50]
137,500
[Initial recognition]
30-06-18
Investment [5,000 x (Rs. 28 - Rs. 26.5)]
7,500
Fair value gain [OCI]
7,500
[Re-measurement at fair value]
30-06-19
Investment [5,000 x (Rs. 33 - Rs. 28)]
Fair value gain [OCI]
25,000
25,000
[Re-measurement at fair value]
NASIR ABBAS FCA
150
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
01-08-19
Cash [3,000 x Rs. 31]
93,000
Loss on sale of shares
6,000
Investment [3,000 x Rs. 33]
99,000
[Sale of 3,000 shares]
Solution 5
(i)
Rs. million
SOCI – extracts
Dividend income [10m x Rs. 4]
Gain on initial recognition [10m x Rs. 0.50]
Transaction cost
Fair value gain [(Rs. 28 – Rs. 25.50) x 10m]
40.00
5.00
(15.00)
25.00
SOFP – extracts
Non-current assets
Investment [10m x Rs. 28]
280.00
(ii)
SOCI – extracts
Dividend income [10m x Rs. 4]
Gain on initial recognition
Other comprehensive income:
Fair value gain [(Rs. 28 x 10m - (Rs. 25.50 x 10m + Rs. 15m)]
40.00
5.00
10.00
SOFP – extracts
Equity
Fair value reserve
10.00
Non-current assets
Investment [10m x Rs. 28]
280.00
Solution 6
(a)
Asset shall be measured at amortized cost
01-01-18
Investment [95,000 + 2,000]
Cash
[Initial recognition]
31-12-18
Investment
Investment income (W-1)
[Investment income for 2018]
NASIR ABBAS FCA
Dr.
Cr.
-------- Rs. ------97,000
97,000
7,760
7,760
151
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
31-12-18
31-12-19
31-12-19
Cash [100,000 x 5%]
Investment
[Interest received for 2018]
5,000
Investment
Investment income (W-1)
[Investment income for 2019]
7,981
Cash
5,000
5,000
7,981
Investment
[Interest received for 2019]
01-01-20
Cash
5,000
105,000
Investment (W-1)
Profit on disposal
[Sale of investment]
(b)
102,741
2,259
Asset shall be measured at fair value through OCI
01-01-18
31-12-18
31-12-18
Investment [95,000 + 2,000]
Cash
[Initial recognition]
97,000
Investment
Investment income (W-1)
[Investment income for 2018]
7,760
Cash
5,000
97,000
7,760
Investment
[Interest received for 2018]
31-12-18
31-12-19
31-12-19
5,000
Investment (W-1)
Fair value reserve [OCI]
[Fair value gain 2018]
10,240
Investment
Investment income (W-1)
[Investment income for 2019]
7,981
Cash
10,240
7,981
5,000
Investment
[Interest received for 2019]
31-12-19
01-01-20
Fair value reserve [OCI]
Investment (W-1)
[Fair value loss 2019]
Cash
Investment
Profit on disposal
[Sale of investment]
NASIR ABBAS FCA
5,000
8,981
8,981
105,000
104,000
1,000
152
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
01-01-20
(c)
Fair value reserve [OCI]
P&L (W-1)
[Cumulative gain reclassified to P&L]
1,259
1,259
Asset shall be measured at fair value through P&L
01-01-18
31-12-18
31-12-18
Investment
P&L (transaction costs)
Cash
[Initial recognition]
95,000
2,000
Investment [110,000 - 95,000]
P&L
[Fair value gain for 2018]
15,000
Cash
5,000
97,000
15,000
Investment income
[Interest received for 2018]
31-12-19
31-12-19
5,000
P&L [110,000 - 104,000]
Investment
[Fair value loss for 2019]
6,000
Cash
5,000
6,000
Investment income
[Interest received for 2019]
01-01-20
5,000
Cash
105,000
Investment
Profit on disposal
[Sale of investment]
104,000
1,000
W-1
Date
Opening
balance
Interest
Cashflow
Closing
balance
Fair
value
Fair value
reserve
OCI
[A]
[B = A x 8%]
[C]
[D = A + B - C]
[E]
[F = E - D]
[Change in F]
10,240
1,259
10,240
(8,981)
31-12-18
31-12-19
97,000
99,760
7,760
7,981
5,000
5,000
Solution 7
(a) Measured at amortized cost
01-01-18
Investment [(50 + 0.5) x 100 x Rs. 150]
Cash
[Initial recognition]
31-12-18
Investment [$343(W-1) x Rs. 152]
Investment income (W-1)
[Investment income for 2018]
NASIR ABBAS FCA
99,760
102,741
110,000
104,000
Dr.
Cr.
-------- Rs. ------757,500
757,500
52,136
52,136
153
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
31-12-18
31-12-19
31-12-19
Cash [$400 x Rs. 152]
Investment
[Interest received for 2018]
60,800
Investment [$340(W-1) x Rs. 153]
Investment income (W-1)
[Investment income for 2019]
52,020
Cash [$400 x Rs. 153]
Investment
[Interest received for 2019]
61,200
(b) Measured at fair value through OCI
60,800
52,020
61,200
Dr.
Cr.
-------- Rs. ------757,500
757,500
01-01-18
Investment [(50 + 0.5) x 100 x Rs. 150]
Cash
[Initial recognition]
31-12-18
Investment [$343(W-1) x Rs. 152]
Investment income (W-1)
[Investment income for 2018]
52,136
Cash [$400 x Rs. 152]
Investment
[Interest received for 2018]
60,800
Investment (W-1)
Exchange gain (P&L) (W-2)
Fair value reserve [OCI] (W-2)
[Fair value gain & exchange gain 2018]
26,364
Investment [$340(W-1) x Rs. 153]
Investment income (W-1)
[Investment income for 2019]
52,020
Cash [$400 x Rs. 153]
Investment
[Interest received for 2019]
61,200
Fair value reserve [OCI] (W-2)
Investment
Exchange gain (P&L) (W-2)
[Fair value loss & exchange gain 2019]
36,613
31-12-18
31-12-18
31-12-19
31-12-19
31-12-19
NASIR ABBAS FCA
52,136
60,800
10,100
16,264
52,020
61,200
31,620
4,993
154
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
W-1
------------------------ $ Amortized cost ------------------------Date
Opening
balance
Interest
Cashflow
Closing
balance
[A]
[B = A x 6.8%]
[C]
[D = A + B - C]
31-12-18
31-12-19
5,050
4,993
343
340
400
400
4,993
4,933
Rupees
amortized
cost
(translated)
[E]
758,936 [4,993 x 152]
754,749 [4,933 x 153]
W-2
------------------------ Book value (ignoring FV change) ------------------------Opening
Closing
Exchange
Interest
Cashflow
balance
gain/(loss)
balance
Date
[F]
[G]
[H]
[I = E - F - G + H]
[J = F + G - H + I]
--------------------------------------------- Rs. -----------------------------------------------31-12-18
31-12-19
757,500
758,936
52,136
52,020
60,800
61,200
10,100
4,993
758,936
754,749
W-3
Date
Opening
balance
Fair value
(translated)
Fair value
reserve
OCI
[J]
[K]
[L = K - J]
[Change in L]
--------------------------- Rs. ----------------------------------31-12-18
758,936
31-12-19
754,749
775,200
16,264
16,264
(20,349)
(36,613)
[5,100 x 152]
734,400
[4,800 x 153]
Exam note for students:
If average exchange rate for the period is given then interest income for the year can be required to be translated at
average exchange rate.
Solution 8
(a)
------------------------------- Rs. ----------------------------Bond - 1
Date
Opening
balance
Interest
[A]
[B = A x 10.734%]
Cashflow
Closing
balance
[A + B - C]
10,500
10,500
10,500
175,500
147,296
152,607
158,488
-
31-12-19
31-12-20
31-12-21
31-12-22
142,500
147,296
152,607
158,488
Bond - 2
------------------------------- Rs. ----------------------------Closing
Opening
Interest
Cashflow
balance
balance
Date
[A]
31-12-19
31-12-20
31-12-21
NASIR ABBAS FCA
86,000
83,475
48,746
15,296
15,811
16,381
17,012
[C]
[B = A x 8.111%]
6,975
6,771
3,954
[C]
[A + B - C]
9,500
41,500
52,700
83,475
48,746
155
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
Bond - 3
Date
31-12-19
31-12-20
31-12-21
31-12-22
Opening
balance
Interest
[A]
[B = A x
7.457%]
75,000
80,593
86,603
93,061
Cashflow
5,593
6,010
6,458
6,939
[C]
100,000
(b)
31-12-19
31-12-19
balance
[A + B C]
80,593
86,603
93,061
-
Dr.
Cr.
-------- Rs. -------
Bond - 1
01-01-19
Closing
Cash [150,000 x 95%]
Bonds
[Initial recognition]
142,500
Finance cost [142,500 x 10.734%]
Bonds
[Finance cost for the year]
15,296
Bonds [150,000 x 7%]
Cash
[Interest payment for the year]
10,500
Cash [80,000 x 1.1 - 2,000]
Bonds
[Initial recognition]
86,000
Finance cost [86,000 x 8.111%]
Bonds
[Finance cost for the year]
6,975
Bonds
9,500
142,500
15,296
10,500
Bond - 2
01-01-19
31-12-19
31-12-19
Cash
[Interest payment for the year]
NASIR ABBAS FCA
86,000
6,975
9,500
156
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
Bond - 3
01-01-19
Cash [100,000 x 75%]
Bonds
[Initial recognition]
31-12-19
Finance cost [75,000 x 7.457%]
Bonds
[Finance cost for the year]
Dr.
Cr.
-------- Rs. ------75,000
75,000
5,593
5,593
Solution No. 9
(a)
Initial recognition [50,000 x 1.1 - 50,000 x 4%]
Year 1 payment [50,000 x 10%]
Year 2 payment [50,000 x 10%]
Year 3 payment [50,000 x 10% + 50,000 x 1.05]
Effective interest rate = 5% + [5,975/(5,975 + 1,143)] x 5% =
(53,000)
5,000
5,000
57,500
------ 5% -----Factor
PV
1.000
(53,000)
0.952
4,760
0.907
4,535
0.864
49,680
5,975
-------- 10% ------Factor
PV
1.000
(53,000)
0.909
4,545
0.826
4,130
0.751
43,183
(1,143)
9.20%
(b)
01-01-18
Cash
Debentures
Dr.
Cr.
-------- Rs. ------53,000
53,000
[Initial recognition]
31-12-18
Finance cost
4,875
Debentures
[Finance cost for the 2018]
31-12-18
Debentures
4,875
5,000
Cash
[Interest payment for the 2018]
31-12-19
Finance cost
5,000
4,863
Debentures
[Finance cost for the 2019]
31-12-19
Debentures
4,863
5,000
Cash
[Interest payment for the 2019]
31-12-20
Finance cost
5,000
4,762
Debentures
[Finance cost for the 2019]
31-12-20
Debentures
Cash
[Interest and redemption payment]
NASIR ABBAS FCA
4,762
57,500
57,500
157
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
W-1
Date
Opening balance
Interest
[B = A x
9.2%]
4,875
4,863
4,762
[A]
31-12-18
31-12-19
31-12-20
53,000
52,875
52,738
Cashflow
Closing balance
[C]
[A + B - C]
5,000
5,000
57,500
52,875
52,738
0
Solution No. 10
(a)
2018
2019
-------------- Rs. ---------------SOCI – extracts
Interest expense [80,000 x 9%]
Fair value gain / (loss)
Other comprehensive income:
[W-1]
Fair value gain / (loss)
(7,200)
(7,200)
(5,000)
(1,000)
(3,000)
7,000
(3,000)
4,000
88,000
82,000
Dr.
Cr.
SOFP - extracts
Equity
Fair value reserve
Non-current liabilities
Debentures
(b)
-------- Rs. ------01-01-18
Cash
80,000
Debentures
80,000
[Initial recognition]
31-12-18
Finance cost [80,000 x 9%]
7,200
Cash
[Finance cost for the 2018]
31-12-18
P&L
Fair value reserve [OCI]
7,200
5,000
3,000
Debentures
8,000
[Fair value loss for 2018]
31-12-19
Finance cost
7,200
Cash
[Finance cost for the 2019]
31-12-19
P&L
7,200
1,000
Debentures
6,000
Fair value reserve [OCI]
7,000
[Fair value gain for 2019]
NASIR ABBAS FCA
158
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
W-1
2018
2019
---------- Rs. ----------
FV gain/(loss) to be recognized in:
OCI
P&L (balancing)
Total [88 - 80] [82 - 88]
(3,000)
(5,000)
(8,000)
7,000
(1,000)
6,000
Solution No. 11
Calculation for 2019
01-01-19
Market rate for valuation
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
8%
Cashflows
(Rs.)
8,000
8,000
8,000
8,000
108,000
Market value
PV
(Rs.)
7,407
6,859
6,351
5,880
73,503
[A]
IRR
KIBOR
Instrument-specific component for 2019
9.25%
Cashflows
(Rs.)
8,000
8,000
8,000
108,000
Market value
PV
(Rs.)
7,323
6,703
6,135
75,812
[B]
KIBOR
Instrument-specific component
Discount rate to find OCI portion
Cashflows
(Rs.)
8,000
8,000
8,000
108,000
[C]
NASIR ABBAS FCA
It is only shown for students
knowledge about calculation of
market value which is already
given in questions
95,972
5.75%
3.00%
8.75%
Present value:
Rate to find OCI portion
31-12-20
31-12-21
31-12-22
31-12-23
100,000
8.00%
5.00%
3.00%
31-12-19
Market rate for valuation
31-12-20
31-12-21
31-12-22
31-12-23
It is only shown for students
knowledge about calculation of
market value which is already
given in questions
8.75%
PV
(Rs.)
7,356
6,764
6,220
77,216
97,557
159
IFRS 9 (Recognition, Classification and Measurement) – SOLUTIONS
Fair value gain/(loss) for the year 2019
Total fair value gain/(loss)
Far value gain/(loss) in OCI
Far value gain/(loss) in P&L (balancing)
Rs.
4,028
1,584
2,443
[A - B]
[C - B]
Calculation for 2020
01-01-20
Market value
[A]
IRR
KIBOR
Instrument-specific component for 2020
95,972
9.25%
5.75%
3.50%
31-12-20
Market rate for valuation
Cashflows
(Rs.)
31-12-21
8,000
31-12-22
8,000
31-12-23
108,000
Market value
10.00%
PV
(Rs.)
7,273
6,612
81,142
[B]
KIBOR
Instrument-specific component
Discount rate to find OCI portion
Cashflows
(Rs.)
8,000
8,000
108,000
[C]
Fair value gain/(loss) for the year 2019
Total fair value gain/(loss)
Far value gain/(loss) in OCI
Far value gain/(loss) in P&L (balancing)
NASIR ABBAS FCA
95,026
5.50%
3.50%
9.00%
Present value:
Rate to find OCI portion
31-12-21
31-12-22
31-12-23
It is only shown for students
knowledge about calculation of
market value which is already
given in questions
[A - B]
[C - B]
9.00%
PV
(Rs.)
7,339
6,733
83,396
97,469
Rs.
946
2,442
(1,496)
160
IFRS 9 (Regular way transactions and Impairment) – Class notes
REGULAR WAY PURCHASE OR SALE
It is a purchase or sale of a financial asset under a contract whose terms require delivery of the asset
within the time frame established generally by regulation or convention in the marketplace concerned.
(e.g. Pakistan Stock Exchange)
Following two methods are allowed for accounting for regular way purchase or sale of financial assets:
1) Trade date accounting
2) Settlement date accounting
Trade date
The trade date is the date that an entity commits itself to purchase or sell an asset.
Settlement date
The settlement date is the date that an asset is delivered to or by an entity.
1) Trade date accounting
Purchase of financial asset
On trade date
Financial asset is recognized at the amount as already studied earlier
depending upon the class of asset (i.e. initial measurement) and a
corresponding payable is recognized as payment has not yet been
made.
Dr. Financial asset (i.e. purchased)
Cr. Payable
Fair value changes at year-end
(if it arrives between Trade
date and Settlement date)
Gain/loss on changes in fair value of the financial asset is accounted for
as studied earlier depending upon the class of asset (i.e. as follows):
– Not applicable (for amortized cost class)
– Recognized in OCI (for FV through OCI class)
– Recognized in P&L (for FV through P&L class)
On settlement date
(i) Payable is settled
Dr. Payable
Cr. Cash
(ii) Further gain/loss on changes in fair value of the financial asset is
accounted for as studied earlier depending upon the class of asset
(i.e. as follows):
– Not applicable (for amortized cost class)
– Recognized in OCI (for FV through OCI class)
– Recognized in P&L (for FV through P&L class)
Nasir Abbas FCA
161
IFRS 9 (Regular way transactions and Impairment) – Class notes
Sale of financial asset
On trade date
Financial asset is de-recognized and a gain or loss on disposal is
recognized in P&L and a corresponding receivable is recognized at sale
value (i.e. fair value at trade date).
Dr. Receivable
Cr. Financial asset
Dr./Cr. P&L (i.e. gain or loss on disposal)
Fair value changes at year-end
(if it arrives between Trade
date and Settlement date)
No entry as the financial asset is already derecognized.
On settlement date
Receivable is settled
Dr. Cash
Cr. Receivable
2) Settlement date accounting
Purchase of financial asset
On trade date
No accounting
Fair value changes at year-end
(if it arrives between Trade
date and Settlement date)
Although no financial asset has yet been recognized even then a
gain/loss on changes in fair value of the financial asset (except if it
would be classified as measured at amortized cost) is accounted as
follows (as studied earlier depending upon the class of asset to be used):
Dr. Receivable
Cr. OCI (if it would be classified as measured at FV through OCI)
Cr. P&L (if it would be classified as measured at FV through P&L
[Above entry is an example of fair value gain. In case of fair value
loss, it is reverse]
On settlement date
The financial asset is now recognized as follows:
If asset is classified as measured at amortized cost:
Dr. Financial asset [fair value of trade date]
Cr. Cash [fair value of trade date]
Nasir Abbas FCA
162
IFRS 9 (Regular way transactions and Impairment) – Class notes
If asset is classified as measured at fair value through OCI:
Dr. Financial asset [fair value of settlement date]
Cr. Cash [fair value of trade date]
Cr. Receivable
Dr./Cr. OCI [balancing figure]
If asset is classified as measured at fair value through P&L:
Dr. Financial asset [fair value of settlement date]
Cr. Cash [fair value of trade date]
Cr. Receivable
Dr./Cr. P&L [balancing figure]
Sale of financial asset
On trade date
Although the financial asset is not de-recognized but a gain or loss on
changes in fair value of the financial asset is accounted for as follows:
– Not applicable (for amortized cost class)
– Recognized in OCI (for FV through OCI class)
– Recognized in P&L (for FV through P&L class)
Fair value changes at yearend (if it arrives between
Trade date and Settlement
date)
No further gain/loss on fair value changes is recognized because the
entity’s right to changes in the fair value ceased on trade date.
On settlement date
The financial asset is now de-recognized as follows:
If asset was classified as measured at amortized cost:
Dr. Cash [fair value of trade date]
Cr. Financial asset [Carrying amount]
Dr./Cr. Profit or loss on disposal
If asset was classified as measured at fair value through OCI:
Dr. Cash [fair value of trade date]
Cr. Financial asset [fair value of trade date]
Dr. OCI
Cr. Profit on disposal
OR
Dr. Loss on disposal
Cr. OCI
If asset was classified as measured at fair value through P&L:
Dr. Cash [fair value of trade date]
Cr. Financial asset [fair value of trade date]
Nasir Abbas FCA
163
IFRS 9 (Regular way transactions and Impairment) – Class notes
IMPAIRMENT OF FINANCIAL ASSETS
Impairment does not apply to:
- Financial assets which are equity instruments of other entity
- Financial assets which are debt instruments of other entity and measured at FV through P&L
Following terms should be understood first to discuss the topic of impairment of financial assets:
Key terms
Credit loss
The difference between all contractual cash flows that are due to an entity in accordance with the
contract and all the cash flows that the entity expects to receive (i.e. all cash shortfalls), discounted at
the original effective interest rate (or credit-adjusted effective interest rate for purchased or
originated credit-impaired financial assets).
Expected credit losses
The weighted average of credit losses with the respective risks of a default occurring as the weights.
Lifetime expected credit losses
The expected credit losses that result from all possible default events over the expected life of a
financial instrument.
12-months expected credit losses
The portion of lifetime expected credit losses that represent the expected credit losses that result
from default events on a financial instrument that are possible within the 12 months after the reporting
date.
Credit-impaired financial asset
A financial asset is credit-impaired when one or more events that have a detrimental impact on the
estimated future cash flows of that financial asset have occurred.
Purchased or originated credit-impaired financial asset
Purchased or originated financial asset(s) that are credit-impaired on initial recognition.
Credit-adjusted effective interest rate
The rate that exactly discounts the estimated future cash payments or receipts through the expected
life of the financial asset to the amortized cost of a financial asset that is a purchased or originated
credit-impaired financial asset.
1) Expected credit losses
IAS 36 covers impairment of most of the non-current assets (except for financial assets) and it operates
an incurred loss model. This means that impairment is recognized only when an event has occurred which
has caused a fall in recoverable amount of asset. However, IFRS 9 operates an expected loss model. It is
no longer necessary for a credit event to have occurred before credit losses are recognized. Instead, an
entity always accounts for expected credit losses, and changes in those expected credit losses. The
amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since
initial recognition and, consequently, more timely information is provided about expected credit losses.
Nasir Abbas FCA
164
IFRS 9 (Regular way transactions and Impairment) – Class notes
1.1 – RECOGNITION OF EXPECTED CREDIT LOSSES
(a) General approach
1. An entity shall recognize an allowance for expected losses at an amount equal to 12-months expected
credit losses at initial recognition.
2. An entity shall measure the allowance for expected credit losses at each reporting date:
If the credit risk on that financial instrument If the credit risk on that financial instrument
has increased significantly since initial has NOT increased significantly since initial
recognition:
recognition:
At an amount equal to lifetime expected credit
losses
At an amount equal to 12-months expected
credit losses
Important
o Changes in credit risk can be assessed on an individual or collective basis considering all
reasonable and supportable information.
o When making the assessment of changes in credit risk, an entity shall use the change in the risk
of a default occurring over the expected life instead of the change in the amount of expected
credit losses.
o If reasonable and supportable forward-looking information is available without undue cost or
effort, an entity cannot rely solely on past due information when determining whether credit
risk has increased significantly since initial recognition.
o There is a rebuttable presumption that the credit risk on a financial asset has increased
significantly since initial recognition when contractual payments are more than 30 days past
due.
o If previously a loss allowance has been recognized at lifetime expected credit losses, the entity
shall measure the loss allowance at 12-months expected credit losses at current reporting date
if change in credit risk is not significant now.
3. Initial recognition of loss allowance as well as any change in the amount of allowance for expected
credit losses (or reversal) shall be recognized in profit or loss as an impairment gain or loss.
In case of financial asset measured at amortized cost:
Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss (it is a contra asset account)
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
In case of financial asset (which is a debt instrument of another entity) measured at FV through OCI
Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss [OCI]
Since loss is credited to OCI, hence no allowance is deducted from gross carrying amount of
financial asset.
Notes: Above entries are given for impairment loss. These should be reversed in case of impairment
gain.
Nasir Abbas FCA
165
IFRS 9 (Regular way transactions and Impairment) – Class notes
(b) Simplified approach for trade receivables, contract assets (IFRS 15) and lease receivables
In case of Trade receivable and contract assets In case of Trade receivable and contract assets
which do not contain a significant financing which contain a significant financing component
component:
and Lease receivables:
Simplified approach must be followed
Simplified approach may be followed if the entity
chooses this treatment as an accounting policy
[Otherwise general approach will be used]
1. An allowance for expected credit losses on initial recognition as well as at each reporting date at an
amount equal to lifetime expected credit loss shall be recognized.
2. Any change in the amount of allowance for expected credit losses (or reversal) shall be recognized in
profit or loss as an impairment gain or loss.
Dr. Impairment loss (P&L)
Cr. Allowance for expected credit loss
This “allowance for expected credit loss” is deducted from gross carrying amount of financial asset
so that a net position is presented in statement of financial position.
Notes: Above entry is given for impairment loss. This should be reversed in case of impairment gain.
1.2 – MEASUREMENT OF EXPECTED CREDIT LOSSES
An entity shall measure expected credit losses of a financial instrument in a way that reflects:
(a) an unbiased and probability-weighted amount that is determined by evaluating a range of possible
outcomes;
(b) the time value of money; and
(c) reasonable and supportable information that is available without undue cost or effort at the reporting
date about past events, current conditions and forecasts of future economic conditions.
2) Credit-impaired asset
Evidence that a financial asset is credit-impaired include observable data about the following events:
(a) significant financial difficulty of the issuer or the borrower;
(b) a breach of contract, such as a default or past due event;
(c) the lender(s) of the borrower, for economic or contractual reasons relating to the borrower’s financial
difficulty, having granted to the borrower a concession(s) that the lender(s) would not otherwise
consider;
(d) it is becoming probable that the borrower will enter bankruptcy or other financial reorganization;
Nasir Abbas FCA
166
IFRS 9 (Regular way transactions and Impairment) – Class notes
(e) the disappearance of an active market for that financial asset because of financial difficulties; or
(f) the purchase or origination of a financial asset at a deep discount that reflects the incurred credit
losses.
It may not be possible to identify a single discrete event—instead, the combined effect of several events
may have caused financial assets to become credit-impaired.
2.1 – FINANCIAL ASSET WHICH SUBSEUQUENTLY BECOMES CREDIT-IMPAIRED
1. Interest revenue shall be calculated by applying the normal effective interest rate to the amortized
cost of the financial asset
Interest income = (Gross carrying amount – Loss allowance) x normal effective interest rate
2. Measurement and accounting for subsequent allowance for impairment loss would be same as
studied earlier for general approach. However, an adjustment would be needed by applying effective
interest rate to opening balance of loss allowance as follows:
Dr. Financial asset
Cr. Loss allowance [Opening loss allowance x effective interest %]
Exam note:
1 and 2 above are easier to handle if accounted for in a compound entry.
3. If in subsequent reporting periods, the credit risk on the financial instrument improves so that the
financial asset is no longer credit-impaired (e.g. improvement in the borrower’s credit rating) then we
would revert to measuring the interest income by applying the effective interest rate to the gross
carrying amount as before.
2.2 – PURCHASED OR ORIGINATED CREDIT-IMPAIRED FINANCIAL ASSET
1. In some cases, a financial asset is considered credit-impaired at initial recognition because the credit
risk is very high and in a case of purchase it is acquired at a deep discount. Credit-adjusted effective
interest rate is calculated using all contractual cashflows adjusted for initial estimate of the lifetime
expected credit losses.
2. Interest revenue shall be calculated by applying credit-adjusted effective interest rate to the
amortized cost (i.e. net carrying amount) of the financial asset from initial recognition.
3. An entity shall only recognize the cumulative changes in lifetime expected credit losses since initial
recognition as a loss allowance for purchased or originated credit-impaired financial assets. At each
reporting date, an entity shall recognize in profit or loss the amount of the change in lifetime expected
credit losses as an impairment gain or loss. An entity shall recognize favourable changes in lifetime
expected credit losses as an impairment gain, even if the lifetime expected credit losses are less than
the amount of expected credit losses that were included in the estimated cash flows on initial
recognition.
Nasir Abbas FCA
167
IFRS 9 (Regular way transactions and Impairment) – Class notes
4. If expected credit losses are to be discounted then credit-adjusted effective interest rate determined
at initial recognition shall be used.
Helpful diagram for impairment
Nasir Abbas FCA
168
IFRS 9 (Regular way transactions and Impairment) – QUESTIONS
PRACTICE QUESTIONS
Question 1
On December 29, 2019 an entity commits itself to purchase a financial asset for Rs. 1,000, which its fair value on
commitment (trade) date. On December 31, 2019 (i.e. year-end) and on January 4, 2020 (settlement date) the fair value
of the asset is Rs. 1,025 and Rs. 1,038 respectively.
Required:
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset will be measured at amortized cost
Case – II Financial asset will be measured at fair value through OCI
Case – III Financial asset will be measured at fair value through P&L
Under following accounting policies:
(a) Trade date accounting
(b) Settlement date accounting
Question 2
On December 29, 2019 an entity commits itself to sell a financial asset for Rs. 1,010, which its fair value on commitment
(trade) date. Carrying amount of the asset is Rs. 1,000. On December 31, 2019 (i.e. year-end) and on January 4, 2020
(settlement date) the fair value of the asset is Rs. 1,025 and Rs. 1,030 respectively.
Required:
Journal entries for the above transactions for each of the following cases:
Case – I Financial asset will be measured at amortized cost
Case – II Financial asset will be measured at fair value through OCI
Case – III Financial asset will be measured at fair value through P&L
Under following accounting policies:
(c) Trade date accounting
(d) Settlement date accounting
Question 3
On January 1, 2018, Nobita Limited (NL) bought Rs. 200,000 (nominal value) 10% bonds, incurring transactions costs of
1% of purchase price. The bonds will be redeemed at a premium of Rs. 25% over nominal value on December 31, 2020.
The effective rate of interest is 16.6386%. The fair value of the bond was as follows:
Date
December 31, 2018
December 31, 2019
Fair value (Rs.)
260,000
280,000
The investment was not considered to be credit-impaired at any stage. The relevant expected credit losses, for use in
measuring the loss allowance were as follows:
Date
January 1, 2018
December 31, 2018
December 31, 2019
NASIR ABBAS FCA
Rs.
7,000
10,000
12,000
169
IFRS 9 (Regular way transactions and Impairment) – QUESTIONS
Required:
Journalize all above transactions over all relevant years if:
(a) NL's business model is to hold bonds until the redemption date and collect contractual cash flows.
(b) NL's business model is to hold bonds until redemption but also to sell them if investments with higher returns become
available.
Question 4
An entity purchased debentures of Rs. 450,000 on January 1, 2019, on which date they are not considered to be creditimpaired. The financial asset is classified at amortized cost and has an effective interest rate of 10%. Coupon payment of
Rs. 30,000 was duly received on December 31, 2019 and December 31, 2020. The following additional information is also
available on December 31, 2019:
2019
2020
Lifetime expected credit loss if there is a default (i.e. LGD)
30%
35%
[% of gross carrying amount]
Probability of default occurring within 12-months
10%
11%
Probability of default occurring within lifetime
12%
15%
Required:
Extracts of SOFP and SOCI for the year ending December 31, 2019 and 2020 if risk assessment on each year end shows:
(a) There is no significant increase in credit risk since initial recognition
(b) There is a significant increase in credit risk since initial recognition
(c) The asset has become credit-impaired
Question 5
On January 1, 2019 Happy Limited (HL) invested in 5,000 debentures issued by Sad Limited (SL). Each debenture is
redeemable at par (i.e. Rs. 100) after 4 years. Coupon rate was 9% payable annually. Issue price was Rs. 98 per debenture
(i.e. equal to the fair value). Transaction costs incurred amount to Rs. 2,500. Effective rate of interest was 9.4678%.
HL classified this investment at amortized cost. The investment was not credit-impaired on initial recognition. On initial
recognition HL estimated the lifetime expected credit losses to be Rs. 15,000 and the 12-month expected credit losses to
be Rs. 3,125.
On December 31, 2019, due to high debt ratio and declining profit margins, SL issued a warning to its creditors that it is
undergoing a business restructuring process aimed at saving the business from bankruptcy. As a result, the directors of
HL determined that there was a significant increase in credit risk since the initial recognition. On that date, revised
estimates were as follows:
-
The lifetime expected credit losses had increased to Rs. 17,500; and
The 12-months expected credit loss had increased to Rs. 5,000
On December 31, 2020, the credit risk for the investment remained significantly higher than at initial recognition. On that
date, revised estimates were as follows:
-
The lifetime expected credit losses had increased to Rs. 20,000; and
The 12-months expected credit loss had increased to Rs. 8,000
Required:
Journal entries for the year ending December 31, 2019 and 2020 if risk assessment shows:
(a) The asset was not credit-impaired at either December 31, 2019 or December 31, 2020.
(b) The asset became credit-impaired at December 31, 2019 and remained so at December 31, 2020.
NASIR ABBAS FCA
170
IFRS 9 (Regular way transactions and Impairment) – QUESTIONS
Question 6
On December 1, 2019 Good Limited (GL) entered into a contract with a customer for Rs. 500,000. All performance
obligations were satisfied on that date. There is no significant financing component in the contract.
At December 31, 2019 GL does not believe that the increase in credit risk since initial recognition is significant.
If default occurs, GL expects to lose 80% of the gross carrying amount of the receivable. The customer pays in full on
January 15, 2020.
01-12-19
4%
6%
Probability of default over the next 12-months
Probability of default over the lifetime
31-12-19
5%
7%
Required:
Journal entries of above transactions.
Question 7
On December 31, 2019 Mango Limited (ML) has a portfolio of receivables of Rs. 30 million. The trade receivables do not
have a significant financing component in accordance with IFRS 15.
ML has constructed following provision matrix to determine expected credit losses on the portfolio of receivables:
Current
Gross carrying amount (Rs. million)
Default rate
15.00
0.3%
1-30
7.50
1.6%
Number of days past due
31-60
61-90
4.00
2.50
3.6%
6.6%
More than 90
1.00
10.6%
The loss allowance measured at end of 2018 was Rs. 350,000
Required:
Journal entry to record impairment loss on December 31, 2019.
Question 8
On January 1, 2019 Almond Limited (AL) purchased 10% debentures (having nominal value of Rs. 60,000) at a price of Rs.
50,000. These bonds are redeemable at par on December 31, 2022. AL’s management had estimated at initial recognition
that only 85% of contractual cashflows would be recovered. As a result of which, the investment was considered as
purchased credit-impaired financial asset and credit-adjusted effective rate was estimated at 10.627%.
On December 31, 2019 Rs. 4,800 was received in respect of coupon payment of 2019 and AL’s revised its estimate of
expected default on contractual cashflows to 20%.
On December 31, 2020 Rs. 4,900 was received in respect of coupon payment of 2020 and AL’s revised its estimate of
expected default on contractual cashflows to 18%.
On December 31, 2021 Rs. 5,300 was received in respect of coupon payment of 2021 and AL’s revised its estimate of
expected default on contractual cashflows to 12%.
Finally on December 31, 2022 the debentures were redeemed at Rs. 58,000.
Required:
All journal entries till December 31, 2022.
NASIR ABBAS FCA
171
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
SOLUTIONS
Solution No. 1
(a) Trade date accounting
Case – I
29-12-19
Financial asset 1,000
Payable
Case – II
1,000
Financial asset 1,000
Payable
Case – III
1,000
Financial asset 1,000
Payable
Financial asset
P&L
25
25
Payable
1,000
1,000
31-12-19
No entry
Financial asset
OCI
25
Payable
1,000
25
04-01-20
Payable
1,000
Cash
1,000
Cash
1,000
Financial asset
OCI
(b) Settlement date accounting
Case – I
29-12-19
No entry
13
13
Cash
1,000
Financial asset
P&L
Case – II
13
13
Case – III
No entry
No entry
31-12-19
No entry
Receivable
OCI
25
25
Receivable
P&L
25
1,000
25
13
Financial asset 1,038
Cash
Receivable
P&L
25
04-01-20
Financial asset
Cash
1,000
1,000
Solution No. 2
(a) Trade date accounting
Case – I
29-12-19
Receivable
1,010
Financial asset 1,000
Profit on disposal 10
NASIR ABBAS FCA
Financial asset 1,038
Cash
Receivable
OCI
Case – II
Receivable
1,010
Financial asset 1,000
Profit on disposal 10
1,000
25
13
Case – III
Receivable
1,010
Financial asset 1,000
Profit on disposal 10
172
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
31-12-19
No entry
No entry
No entry
04-01-20
Cash
1,010
Receivable
Cash
1,010
1,010
Receivable
(b) Settlement date accounting
Case – I
29-12-19
No entry
Cash
1,010
Case – II
Financial asset
OCI
1,010
Receivable
1,010
Case – III
10
10
Financial asset
P&L
10
10
31-12-19
No entry
No entry
No entry
04-01-20
Cash
1,010
Financial asset 1,000
Profit on disposal
10
Cash
OCI
1,010
10
Financial asset 1,010
Profit on disposal
10
Cash
1,010
Financial asset
1,010
Solution 3
(a) Asset shall be measured at amortized cost
Dr.
Cr.
-------- Rs. ------202,000
202,000
01-01-18
Investment [200,000 x 1.01]
Cash
[Initial recognition]
01-01-18
Impairment loss [P&L]
Loss allowance
[Initial recognition of ECL]
7,000
Investment
Investment income (W-1)
[Investment income for 2018]
33,610
Cash [200,000 x 10%]
Investment
[Interest received for 2018]
20,000
Impairment loss [P&L] [10,000 - 7,000]
Loss allowance
[Subsequent remeasurement of ECL]
3,000
31-12-18
31-12-18
31-12-18
NASIR ABBAS FCA
7,000
33,610
20,000
3,000
173
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
31-12-19
31-12-19
Investment
Investment income (W-1)
[Investment income for 2019]
35,874
Cash
20,000
35,874
Investment
[Interest received for 2019]
31-12-19
Impairment loss [P&L] [12,000 - 10,000]
Loss allowance
[Subsequent remeasurement of ECL]
20,000
2,000
2,000
(b) Asset shall be measured at fair value through OCI
Dr.
Cr.
-------- Rs. ------202,000
202,000
01-01-18
Investment [200,000 x 1.01]
Cash
[Initial recognition]
01-01-18
Impairment loss [P&L]
Loss allowance [OCI]
[Initial recognition of ECL]
7,000
Investment
Investment income (W-1)
[Investment income for 2018]
33,610
Cash [200,000 x 10%]
Investment
[Interest received for 2018]
20,000
Impairment loss [P&L] [10,000 - 7,000]
Loss allowance [OCI]
[Subsequent remeasurement of ECL]
3,000
Investment (W-1)
Fair value reserve [OCI]
[Fair value gain 2018]
44,390
Investment
Investment income (W-1)
[Investment income for 2019]
35,874
Cash
20,000
31-12-18
31-12-18
31-12-18
31-12-18
31-12-19
31-12-19
Investment
[Interest received for 2019]
NASIR ABBAS FCA
7,000
33,610
20,000
3,000
44,390
35,874
20,000
174
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
31-12-19
31-12-19
Impairment loss [P&L] [12,000 - 10,000]
Loss allowance [OCI]
[Subsequent remeasurement of ECL]
2,000
Investment (W-1)
Fair value reserve [OCI]
[Fair value gain 2019]
4,126
2,000
4,126
W-1
Date
Opening
balance
Interest
Cashflow
Closing
balance
Fair
value
Fair value
reserve
OCI
[A]
[B = A x 6.6386%]
[C]
[D = A + B - C]
[E]
[F = E - D]
[Change in F]
31-12-18
31-12-19
202,000
215,610
33,610
35,874
20,000
20,000
215,610
231,484
Solution 4
(a)
260,000
280,000
44,390
48,516
44,390
4,126
2019
2020
----------- Rs. ----------
SOCI - extracts
Interest income (W-1)
Expected loss [Change in allowance(W-1)]
45,000
(13,950)
46,500
(4,588)
SOFP - extracts
Non-current assets
Investment (W-1)
451,050
462,962
(b)
SOCI - extracts
Interest income (W-1)
Expected loss [Change in allowance(W-1)]
45,000
(16,740)
46,500
(8,539)
SOFP - extracts
Non-current assets
Investment (W-1)
448,260
456,221
(c)
SOCI - extracts
Interest income (W-1)
Expected loss [Change in allowance(W-1)] [25,279 – 16,740 – 1,674]
45,000
(16,740)
44,826
(6,865)
SOFP - extracts
Non-current assets
Investment (W-1)
448,260
456,221
NASIR ABBAS FCA
175
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
W-1
Initial amount
Interest income
Cashflow
Gross balance 31-12-19
Loss allowance 31-12-19
[A]
[B]
[C]
Gross balance 01-01-20
Interest income
Interest adjustment for allowance [16,740 x 10%]
Cashflow
Gross balance 31-12-20
Loss allowance 31-12-20
[D]
Solution 5
(a)
(a)
(b)
(c)
---------------------- Rs. ------------------450,000
450,000
450,000
45,000
45,000
45,000
[A x 10%]
[A x 10%]
[A x 10%]
(30,000)
465,000
(13,950)
(30,000)
465,000
(16,740)
(30,000)
465,000
(16,740)
[B x 30% x 10%]
[B x 30% x 12%]
[B x 30% x 12%]
451,050
448,260
448,260
465,000
46,500
465,000
46,500
465,000
44,826
[B x 10%]
[B x 10%]
[C x 10%]
-
-
1,674
(30,000)
481,500
(18,538)
(30,000)
481,500
(25,279)
(30,000)
481,500
(25,279)
[D x 35% x 11%]
[D x 35% x 15%]
[D x 35% x 15%]
462,962
456,221
456,221
Dr.
Cr.
-------- Rs. ------492,500
492,500
01-01-19
Investment [5,000 x 98 + 2,500]
Cash
[Initial recognition]
01-01-19
Impairment loss [P&L]
Loss allowance
[Initial recognition of ECL]
3,125
Investment
46,629
31-12-19
3,125
Investment income (W-1)
[Investment income for 2019]
31-12-19
Cash
46,629
45,000
Investment
[Interest received for 2019]
31-12-19
31-12-20
45,000
Impairment loss [P&L] [17,500 - 3,125]
Loss allowance
[Subsequent remeasurement of ECL]
14,375
Investment
46,783
Investment income (W-1)
[Investment income for 2020]
NASIR ABBAS FCA
14,375
46,783
176
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
31-12-20
Cash
45,000
Investment
[Interest received for 2020]
31-12-20
Impairment loss [P&L] [20,000 - 17,500]
Loss allowance
[Subsequent remeasurement of ECL]
(b)
45,000
2,500
2,500
Dr.
Cr.
-------- Rs. ------492,500
492,500
01-01-19
Investment [5,000 x 98 + 2,500]
Cash
[Initial recognition]
01-01-19
Impairment loss [P&L]
Loss allowance
[Initial recognition of ECL]
3,125
Investment
46,629
31-12-19
3,125
Investment income (W-1)
[Investment income for 2019]
31-12-19
Cash
46,629
45,000
Investment
[Interest received for 2019]
31-12-19
31-12-20
45,000
Impairment loss [P&L] [17,500 - 3,125]
Loss allowance
[Subsequent remeasurement of ECL]
14,375
Investment
46,783
14,375
Loss allowance (W-1)
Investment income (W-1)
[Investment income for 2020]
31-12-20
Cash
1,657
45,126
45,000
Investment
[Interest received for 2020]
31-12-20
Impairment loss [P&L] [20,000 - 17,500 - 1,657]
Loss allowance
[Subsequent remeasurement of ECL]
NASIR ABBAS FCA
45,000
843
843
177
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
W-1
Initial amount [5,000 x 98 + 2,500]
Interest income
[A]
Cashflow [5,000 x 100 x 9%]
Gross balance 31-12-19
Loss allowance 31-12-19
[B]
[C]
Gross balance 01-01-20
Interest income
Interest adjustment for allowance [17,500 x 9.4678%]
Cashflow
Gross balance 31-12-20
Loss allowance 31-12-20
[D]
(a)
(b)
-------------- Rs. ------------492,500
492,500
46,629
46,629
[A x 9.4678%]
[A x 9.4678%]
(45,000)
494,129
(17,500)
476,629
(45,000)
494,129
(17,500)
476,629
494,129
46,783
494,129
45,126
[B x 9.4678%]
[C x 9.4678%]
(45,000)
495,912
(20,000)
475,912
1,657
(45,000)
495,912
(20,000)
475,912
Solution 6
Dr.
Cr.
-------- Rs. ------500,000
500,000
01-12-19
Trade receivables
Sales
[Initial recognition]
01-12-19
Impairment loss [P&L] [500,000 x 80% x 6%]
Loss allowance
[Initial recognition of ECL]
24,000
Impairment loss [P&L] [500,000 x 80% x 7% - 2 4,000]
Loss allowance
[Subsequent remeasurement of ECL]
4,000
31-12-19
15-01-20
Cash
24,000
4,000
500,000
Trade receivable
[Cash received from customer]
15-01-20
Loss allowance
Impairment loss [P&L]
[Loss allowance reversed on cash recovery]
500,000
28,000
28,000
Solution 7
31-12-19
Impairment loss [P&L]
Loss allowance
[Impairment loss for 2019]
NASIR ABBAS FCA
Dr.
Cr.
-------- Rs. million ------0.23
0.23
178
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
W-1
Gross
amount
Current
1-30 days
31-60 days
61-90 days
More than 90 days
(Rs. million)
15.00
7.50
4.00
2.50
1.00
Opening balance
Default rate
Allowance
0.30%
1.60%
3.60%
6.60%
10.60%
(Rs. million)
0.05
0.12
0.14
0.17
0.11
0.58
0.35
0.23
Solution 8
01-01-19
Investment
Cash
[Initial recognition]
31-12-19
Investment
Dr.
Cr.
-------- Rs. ------50,000
50,000
5,314
Investment income (W-1)
[Investment income for 2019]
31-12-19
Cash
P&L
5,314
4,800
300
Investment (W-1)
[Interest received for 2019]
31-12-19
31-12-20
5,100
Impairment loss [P&L] (W-1)
Loss allowance
[Measurement of ECL]
2,992
Investment
5,336
2,992
Loss allowance (W-1)
Investment income (W-1)
[Investment income for 2020]
31-12-20
Cash
P&L
318
5,018
4,900
200
Investment (W-1)
[Interest received for 2020]
31-12-20
Loss allowance [2,992 + 318 - 1,859]
Impairment gain [P&L]
[Measurement of ECL]
NASIR ABBAS FCA
5,100
1,451
1,451
179
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
31-12-21
Investment
5,361
Loss allowance
Investment income (W-1)
[Investment income for 2021]
31-12-21
Cash
198
5,164
5,300
P&L
Investment (W-1)
[Interest received for 2021]
31-12-21
31-12-22
31-12-22
200
5,100
Loss allowance [1,859 + 198 + 1,665]
Impairment gain [P&L]
[Measurement of ECL]
3,722
Investment
Loss allowance (W-1)
Investment income (W-1)
[Investment income for 2022]
5,389
177
Cash
58,000
3,722
5,566
P&L
Loss allowance (W-1)
Investment (W-1)
[Redemption amount received]
235
1,665
56,100
W-1
Initial
amount
Interest income [50,000 x 10.627%(W-2)]
Cashflow (W-2)
Gross balance 31-12-19
Loss allowance 31-12-19 (W-2.1)
Rs.
Gross balance 01-01-20
Interest income [47,221 x 10.627%]
Interest adjustment for allowance [2,992 x 10.627%]
Cashflow (W-2)
Gross balance 31-12-20
Loss allowance 31-12-20 (W-.2.2)
50,214
5,018
318
(5,100)
50,450
(1,859)
48,590
Gross balance 01-01-21
Interest income [48,590 x 10.627%]
Interest adjustment for allowance [1,859 x 10.627%]
Cashflow (W-2)
Gross balance 31-12-21
Loss allowance 31-12-21 (W-.2.2)
50,450
5,164
198
(5,100)
50,711
1,665
52,376
NASIR ABBAS FCA
50,000
5,314
(5,100)
50,214
(2,992)
47,221
180
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
Gross balance 01-01-22
Interest income [52,376 x 10.627%]
Interest adjustment for allowance [1,665 x 10.627%]
Cashflow (W-2)
Gross balance 31-12-22
Loss allowance 31-12-22 (W-.2.2)
50,711
5,566
(177)
(56,100)
-
W-2
Credit-adjusted effective rate
Transaction price
31-12-19
31-12-20
31-12-21
31-12-22
Credit-adjusted effective rate
Contractual
cashflows
(Rs.)
(50,000)
6,000
6,000
6,000
66,000
Recovery
expected
85%
85%
85%
85%
Initial estimate of expected credit loss
PV of contractual cash flows at credit-impaired effective rate
PV of expected cash flows at credit-impaired effective rate
Expected
cashflows
(Rs.)
(50,000)
5,100
5,100
5,100
56,100
10.627%
Rs.
58,824
50,000
8,824
W-2.1
31-12-19
Expected credit loss
31-12-20
31-12-21
31-12-22
Contractual
cash flows
Default
Expected
credit loss
6,000
6,000
66,000
20%
20%
20%
1,200
1,200
13,200
Contractual
cash flows
Default
Expected
credit loss
6,000
66,000
18%
18%
1,080
11,880
Initial estimate of credit loss
Change in expected credit loss
PV of loss
1,085
981
9,750
11,816
8,824
2,992
W-2.2
31-12-20
Expected credit loss
31-12-21
31-12-22
Initial estimate of credit loss
Change in expected credit loss
NASIR ABBAS FCA
PV of loss
976
9,707
10,683
8,824
1,859
181
IFRS 9 (Regular way transactions and Impairment) – SOLUTIONS
W-2.3
31-12-21
Expected credit loss
31-12-22
Initial estimate of credit loss
Change in expected credit loss
NASIR ABBAS FCA
Contractual
cash flows
Default
Expected
credit loss
66,000
12%
7,920
PV of loss
7,159
7,159
8,824
(1,665)
182
(a) Trade date accounting
Purchase transaction
28-09-11 Financial asset [20,000 x 24]
Payable
30-09-11
30-09-11
03-10-11
03-10-11
Financial asset [21,000 x 23.5 - 480,000]
P&L
13,500
Payable [480,000 - 20,000 x 23.50]
Exchange gain (P&L)
10,000
Financial asset [21,500 x 25 - 21,000 x 23.5]
P&L
44,000
Payable [20,000 x 23.50]
Exchange loss (P&L)
Cash [20,000 x 25]
470,000
30,000
Sale transaction
29-09-11 Receivable [35,000 x 23]
Loss on disposal
Financial asset
30-09-11
04-10-11
Dr.
Cr.
--------- Rs. ------480,000
480,000
13,500
10,000
44,000
500,000
805,000
4,200
809,200
Receivable [35,000 x (23.5 - 23)]
Exchange gain (P&L)
17,500
Cash [35,000 x 26]
Receivable [35,000 x 23.5]
Exchange gain (P&L)
910,000
17,500
822,500
87,500
(b) Settlement date accounting
Purchase transaction
30-09-11 Receivable [(21,000 - 20,000) x 23.5]
P&L
04-10-11
Financial asset [21,500 x 25]
Receivable
P&L
Cash [20,000 x 25]
Sale transaction
29-09-11 P&L
Dr.
Cr.
--------- Rs. ------23,500
23,500
537,500
23,500
14,000
500,000
4,200
Financial asset [809,200 - 35,000 x 23]
30-09-11
04-10-11
4,200
Financial asset [35,000 x (23.5 - 23)]
Exchange gain (P&L)
17,500
Cash [35,000 x 26]
Financial asset [809,200 - 4,200 + 17,500]
Exchange gain (P&L)
910,000
17,500
822,500
87,500
183
Q-5 Jun-19
Dr.
Cr.
-------- Rs. ------1,475,000
15,000
1,490,000
01-01-15
Investment [15,000 x 96 + 35,000]
Loss on initial recognition [15,000 x 1]
Cash
[Initial recognition]
01-01-15
Impairment loss [P&L]
Loss allowance
[Initial recognition of ECL]
11,200
Investment
185,850
31-12-15
11,200
185,850
Investment income (W-1)
[Investment income for 2015]
31-12-15
Cash
180,000
Investment
[Interest received for 2015]
31-12-15
No entry required as there is no change in loss allowance (i.e. 11,200)
31-12-16
Investment
180,000
186,587
186,587
Investment income (W-1)
[Investment income for 2016]
31-12-16
Cash
180,000
Investment
[Interest received for 2016]
31-12-16
31-12-17
180,000
Impairment loss [P&L] [62,600 - 11,200]
Loss allowance
[Subsequent remeasurement of ECL]
51,400
Investment
187,417
51,400
187,417
Investment income (W-1)
[Investment income for 2017]
31-12-17
Cash
180,000
180,000
Investment
[Interest received for 2017]
31-12-17
31-12-18
Impairment loss [P&L] [70,900 - 62,600]
Loss allowance
[Subsequent remeasurement of ECL]
Investment
Loss allowance (W-1)
Investment income (W-1)
[Investment income for 2018]
8,300
8,300
188,352
8,933
179,418
184
31-12-18
Cash
180,000
Investment
[Interest received for 2018]
31-12-18
Loss allowance
Impairment gain [P&L]
[Subsequent remeasurement of ECL]
180,000
8,933
8,933
W-1
Initial amount [15,000 x 96 + 35,000]
Interest income [1,475,000 x 12.60%]
Cashflow [1,500,000 x 12%]
Gross balance 31-12-15
Loss allowance 31-12-15
Rs.
1,475,000
185,850
(180,000)
1,480,850
(11,200)
1,469,650
Gross balance 01-01-16
Interest income [1,480,850 x 12.60%]
Cashflow [1,500,000 x 12%]
Gross balance 31-12-16
Loss allowance 31-12-16
1,480,850
186,587
(180,000)
1,487,437
(62,600)
1,424,837
Gross balance 01-01-17
Interest income [1,487,437 x 12.60%]
Cashflow [1,500,000 x 12%]
Gross balance 31-12-17
Loss allowance 31-12-17
1,487,437
187,417
(180,000)
1,494,854
(70,900)
1,423,954
Gross balance 01-01-18
Interest income [1,423,954 x 12.60%]
Interest adjustment for allowance [70,900 x 12.60%]
Cashflow [1,500,000 x 12%]
Gross balance 31-12-18
Loss allowance 31-12-18
1,494,854
179,418
8,933
(180,000)
1,503,206
(70,900)
1,432,306
185
IFRS 9 (Re-classification and De-recognition) – Class notes
RE-CLASSIFICATION
Financial assets
1. When and only when an entity changes it business model for managing financial assets, it shall
reclassify all affected financial assets. Such changes are expected to be very infrequent. A change in
entity’s business model will occur only when an entity either begins or ceases to perform an activity
that is significant to its operations.
2. The reclassification shall be applied prospectively from the reclassification date. The entity shall not
restate any previously recognized gains, losses (including impairment gains or losses) or interest.
Reclassification date
The first day of the first reporting period following the change in business model that results in an
entity reclassifying financial assets.
3. The following are not changes in business model:
- A change in intention related to particular financial asset
- The temporary disappear of a particular market for financial assets
- A transfer of financial assets between parts of the entity with different business models.
If a financial asset is reclassified out of AMORTIZED COST measurement:
Reclassified to:
Fair value through P&L
Treatment
- Loss allowance is derecognized and adjusted against financial asset.
- The asset shall be measured at fair value on reclassification date.
- Any resulting fair value gain or loss shall be recognized in P&L.
Fair value through OCI
-
The asset shall be measured at fair value on reclassification date.
Any resulting fair value gain or loss shall be recognized in OCI.
The effective interest rate and the measurement of expected credit
losses shall not be adjusted as a result of the reclassification.
The loss allowance, which is currently shown as a contra asset
account, would be de-recognized and recognized as a loss
allowance[OCI].
If a financial asset is reclassified out of FAIR VALUE through P&L measurement:
Reclassified to:
Fair value through OCI
Nasir Abbas FCA
Treatment
- The asset shall continue to be measured at fair value.
- The effective interest rate is calculated based on the fair value of the
asset at reclassification date.
- For the purpose of initial recognition of loss allowance,
reclassification date is treated as the date of initial recognition.
186
IFRS 9 (Re-classification and De-recognition) – Class notes
Amortized cost
-
The asset shall be measured at fair value on reclassification date.
Any resulting fair value gain or loss shall be recognized in P&L.
The fair value at reclassification date becomes its new gross carrying
amount.
The effective interest rate is calculated based on the fair value of the
asset at reclassification date.
For the purpose of initial recognition of loss allowance,
reclassification date is treated as the date of initial recognition.
If a financial asset is reclassified out of FAIR VALUE through OCI measurement:
Reclassified to:
Fair value through P&L
Treatment
- The asset shall continue to be measured at fair value.
- The cumulative gain or loss previously recognized in OCI shall be
reclassified to P&L.
Amortized cost
-
The asset shall be measured at fair value on reclassification date.
The cumulative gain or loss previously recognized in OCI shall be
removed from equity and adjusted against the asset.
Dr. Fair value reserve [it is shown in SOCE]
Cr. Financial asset
-
The effective interest rate and the measurement of expected credit
losses shall not be adjusted as a result of the reclassification.
A loss allowance would be recognized as a contra asset account from
the reclassification date.
Financial liabilities
An entity shall not reclassify any financial liability.
DE-RECOGNITION OF FINANCIAL ASSET
1. An entity shall derecognize a financial asset when, and only when:
(a) the contractual rights to the cash flows from the financial asset expire, or
(b) it transfers the financial asset and the transfer qualifies for derecognition.
2. An entity transfers a financial asset if, and only if, it either:
(a) transfers the contractual rights to receive the cash flows of the financial asset, or
Nasir Abbas FCA
187
IFRS 9 (Re-classification and De-recognition) – Class notes
(b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a
contractual obligation to pay the cash flows to one or more recipients in an arrangement that
meets the following conditions:
Conditions
(i) The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original asset. Short-term advances by the entity with the right
of full recovery of the amount lent plus accrued interest at market rates do not violate this
condition.
(ii) The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay them
cash flows.
(iii) The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay. In addition, the entity is not entitled to reinvest such cash
flows, except for investments in cash or cash equivalents during the short settlement period
from the collection date to the date of required remittance to the eventual recipients, and
interest earned on such investments is passed to the eventual recipients.
3. When an entity transfers a financial asset:
(a) if the entity transfers substantially all the risks and rewards of ownership
The entity shall derecognize the financial asset and recognize separately as assets or liabilities any
rights and obligations created or retained in the transfer.
Examples
(a) an unconditional sale of a financial asset;
(b) a sale of a financial asset together with an option to repurchase the financial asset at its fair
value at the time of repurchase; and
(c) a sale of a financial asset together with a put or call option that is deeply out of the money
(b) if the entity retains substantially all the risks and rewards of ownership
The entity shall continue to recognize the financial asset and recognize a financial liability for the
consideration received.
Examples
(a) a sale and repurchase transaction where the repurchase price is a fixed price or the sale
price plus a lender’s return;
(b) a securities lending agreement;
(c) a sale of a financial asset together with a total return swap that transfers the market risk
exposure back to the entity;
(d) a sale of a financial asset together with a deep in-the-money put or call option; and
(e) a sale of short-term receivables in which the entity guarantees to compensate the
transferee for credit losses that are likely to occur.
(c) if the entity neither transfers nor retains substantially all the risks and rewards of ownership
[for example sale and repurchase transactions (i.e. repo transactions)]
The entity shall determine whether it has retained control of the financial asset.
(i) if the entity has not retained control, it shall derecognize the financial asset and recognize
separately as assets or liabilities any rights and obligations created or retained in the transfer.
(ii) if the entity has retained control, it shall continue to recognize the financial asset to the extent
of its continuing involvement in the financial asset.
Nasir Abbas FCA
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IFRS 9 (Re-classification and De-recognition) – Class notes
4. On de-recognition of a financial asset in its entirety, the difference between:
(a) The carrying amount (measured at date of de-recognition); and
(b) The consideration received (including any new asset obtained less any new liability)
Shall be recognized in P&L.
Measurement at date of de-recognition
Before making above entry for de-recognition, the carrying amount is measured at the date of derecognition using the same rules as studied earlier for “subsequent measurement”.
5. If the transferred asset is part of a larger financial asset (e.g. when an entity enters into an interest
rate stirp whereby the counterparty obtains the right to the interest cash flows but not the principal
cash flows from a debt instrument), the previous carrying amount of the larger financial asset shall be
allocated between the part that continues to be recognized and the part that is de-recognized, on the
basis of the relative fair values of parts on the date of transfer. The difference between:
(a) The carrying amount (measured at date of de-recognition) allocated to the part derecognized;
and
(b) The consideration received for the part derecognized (including any new asset obtained less any
new liability)
Shall be recognized in P&L.
Re-classification of cumulative gain/loss on debt investment measured at FV through OCI
It has already been discussed earlier in subsequent measurement that cumulative value fair
gain/loss previously recognized in OCI shall be reclassified to P&L on de-recognition.
In the asset, which is being partially de-recognized has cumulative fain/loss in OCI, then the balance
in OCI will also be allocated based on the relative fair values of parts on the date of transfer.
Some important transactions for exams:
Repo transaction
Under repo transaction (i.e. sale and repurchase agreement) an entity sells an asset with a condition
that same asset will be repurchased after some agreed time.
Sale of asset – If terms of sale suggest that substantially all the risks and rewards are transferred then
asset is derecognized (e.g. when repurchase price is based on fair value on repurchase date)
Secured loan – If terms of sale suggest that substantially all the risks and rewards are not transferred
(e.g. when repurchase is either at a fixed price or sale price plus lender’s rate of return). This transaction
is a secured loan in substance. Entity shall not de-recognize the asset rather it shall recognize a loan
and account for accordingly.
Factoring
Factoring means sale of receivables to another party called “factor”. Factor provides debt collection
services and also provide a certain portion as advance. Factor service may be “with recourse” or
“without recourse”.
With recourse – Since bad debt risk is borne by the entity, therefore, any advance received is considered
as a loan and receivables are not derecognized.
Without recourse – Since bad debt risk is borne by the factor, therefore, receivables are derecognized.
Nasir Abbas FCA
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IFRS 9 (Re-classification and De-recognition) – Class notes
Write-off
An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no
reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off
constitutes a de-recognition event.
For example, an entity plans to enforce the collateral on a financial asset and expects to recover no
more than 30 per cent of the financial asset from the collateral. If the entity has no reasonable
prospects of recovering any further cash flows from the financial asset, it should write off the remaining
70 per cent of the financial asset.
DE-RECOGNITION OF FINANCIAL LIABILITIES
1. An entity shall remove a financial liability (or a part of a financial liability) from its statement of
financial position when, and only when, it is extinguished—i.e. when the obligation specified in the
contract is discharged (e.g. payment) or cancelled or expires.
2. An exchange between an existing borrower and lender of debt instruments with substantially
different terms shall be accounted for as an extinguishment of the original financial liability and the
recognition of a new financial liability. Similarly, a substantial modification of the terms of an existing
financial liability or a part of it (whether or not attributable to the financial difficulty of the debtor)
shall be accounted for as an extinguishment of the original financial liability and the recognition of a
new financial liability.
Substantial change
The terms are substantially different if the discounted present value of the cash flows under the
new terms, including any fees paid net of any fees received and discounted using the original
effective interest rate, is at least 10 per cent different from the discounted present value of the
remaining cash flows of the original financial liability.
3. The difference between:
(a) the carrying amount of a financial liability (or part of a financial liability) extinguished or
transferred to another party; and
(b) the consideration paid, including any non-cash assets transferred or liabilities assumed
shall be recognized in profit or loss.
4. If an exchange of debt instruments or modification of terms is accounted for as an extinguishment,
any costs or fees incurred are recognized as part of the gain or loss on the extinguishment. If the
exchange or modification is not accounted for as an extinguishment, any costs or fees incurred adjust
the carrying amount of the liability and are amortized over the remaining term of the modified liability
(i.e. using revised effective interest rate).
IFRIC 19 – Extinguishing financial liabilities with equity instruments
Background
A debtor and creditor might renegotiate the terms of a financial liability with the result that the debtor
extinguishes the liability fully or partially by issuing equity instruments to the creditor. These
transactions are sometimes referred to as ‘debt for equity swaps’.
Nasir Abbas FCA
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IFRS 9 (Re-classification and De-recognition) – Class notes
Scope
An entity shall not apply this Interpretation to transactions in situations where:
(a) the creditor is also a direct or indirect shareholder and is acting in its capacity as a direct or indirect
existing shareholder.
(b) the creditor and the entity are controlled by the same party or parties before and after the
transaction and the substance of the transaction includes an equity distribution by, or contribution
to, the entity.
(c) extinguishing the financial liability by issuing equity shares is in accordance with the original terms
of the financial liability. (e.g. convertibles)
Consensus
1. When equity instruments issued to a creditor as a consideration paid to extinguish all or part of a
financial liability are recognized initially, an entity shall measure them at:
(a) the fair value of the equity instruments issued, unless that fair value cannot be reliably
measured.
(b) If the fair value of the equity instruments issued cannot be reliably measured then the equity
instruments shall be measured to reflect the fair value of the financial liability extinguished.
2. The difference between:
(i) The carrying amount of the financial liability extinguished; and
(ii) The consideration paid (i.e. amount of equity instruments issued)
Shall be recognized in profit and loss.
3. If only a part of financial liability is extinguished and part of the consideration also relates to the
modification of the remaining portion, then the consideration paid shall be allocated between the
part extinguished and part retained.
MODIFICATION OF FINANCIAL ASSET (Measured at Amortized cost)
Case – I Modification does not result in de-recognition of financial asset:
1. An entity shall recalculate the gross carrying amount of the financial asset and shall recognize a
modification gain or loss in profit or loss.
2. The gross carrying amount of the financial asset shall be recalculated as the present value of the
renegotiated or modified contractual cash flows that are discounted at the financial asset’s original
effective interest rate (or credit-adjusted effective interest rate for purchased or originated creditimpaired financial assets).
3. Any costs or fees incurred adjust the carrying amount of the modified financial asset and are
amortized over the remaining term of the modified financial asset.
Nasir Abbas FCA
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IFRS 9 (Re-classification and De-recognition) – Class notes
4. An entity shall assess whether there has been a significant increase in the credit risk of the financial
instrument by comparing:
(a) the risk of a default occurring at the reporting date (based on the modified contractual terms);
and
(b) the risk of a default occurring at initial recognition (based on the original, unmodified contractual
terms).
5. If the contractual cash flows on a financial asset have been renegotiated or otherwise modified, but
the financial asset is not derecognized, that financial asset is not automatically considered to have
lower credit risk. An entity shall assess whether there has been a significant increase in credit risk
since initial recognition on the basis of all reasonable and supportable information that is available
without undue cost or effort.
Case – II Modification results in de-recognition of financial asset:
1. The modified asset is considered a ‘new’ financial asset. Accordingly, the date of the modification shall
be treated as the date of initial recognition of that financial asset when applying the impairment
requirements to the modified financial asset. This typically means measuring the loss allowance at an
amount equal to 12-month expected credit losses until the credit risk is significantly increased
afterwards.
2. However, in some unusual circumstances following a modification that results in derecognition of the
original financial asset, there may be evidence that the modified financial asset is credit-impaired at
initial recognition, and thus, the financial asset should be recognized as an originated credit-impaired
financial asset.
Nasir Abbas FCA
192
IFRS 9 (Re-classification and De-recognition) – QUESTIONS
PRACTICE QUESTIONS
Question 1
On January 1, 2017, Tokyo Limited (TL) invested Rs. 500,000 (i.e. equal to face value) in 8% debentures. These debentures
would be redeemed at a premium of 10%. The effective interest was 8.6687%.
Initially these debentures were classified as measured at amortized cost. However, on June 30, 2019 management of TL
changed its business model and decided to re-classify these bonds as measured at fair value through P&L.
The fair values of the debentures were as follows:
Date
June 30, 2019
January 1, 2020
December 31, 2020
Fair value (Rs.)
540,000
510,000
545,000
The debentures have never been credit-impaired and there have been no significant increase in credit risk since initial
recognition. The expected credit losses were determined as follows:
Date
January 1, 2017
December 31, 2017
December 31, 2018
December 31, 2019
12-month credit losses
(Rs.)
5,000
7,000
8,000
9,200
Lifetime credit losses
(Rs.)
12,500
15,000
16,700
17,000
Required:
Journal entries for the years ending December 31, 2019 and 2020.
Question 2
Sigma Limited (SL) purchased bonds in a company some years ago. The bonds were classified at fair value through profit
or loss since they were held for trading. The bonds have a face value of Rs. 500,000 and coupon rate of 10% per annum.
The bonds would be redeemed at a premium of 20% on December 31, 2025.
On August 1, 2019, SL decided to change the classification from fair value through P&L to amortized cost.
The fair values of the bonds were as follows:
Date
December 31, 2018
August 1, 2019
January 1, 2020
Fair value (Rs.)
545,000
570,000
590,000
The debentures have never been credit-impaired and there have been no significant increase in credit risk since initial
recognition. The expected credit losses were determined as follows:
Date
January 1, 2018
January 1, 2019
January 1, 2020
December 31, 2020
12-month credit losses
(Rs.)
5,000
7,000
8,000
9,200
Lifetime credit losses
(Rs.)
12,500
15,000
16,700
17,000
Required:
Journal entries for the years ending December 31, 2019 and 2020.
NASIR ABBAS FCA
193
IFRS 9 (Re-classification and De-recognition) – QUESTIONS
Question 3
Mango Limited (ML) purchased debentures of a company on January 1, 2018 for Rs. 147,408 (i.e. fair value). The face
value of debentures was Rs. 100,000 and coupon rate was 20% per annum. These would be redeemed at a premium of
23% on December 31, 2021. Effective interest rate was 10%.
On August 1, 2019, ML decided to change the classification from fair value through OCI to amortized cost.
The fair values of the debentures were as follows:
Date
December 31, 2018
August 1, 2019
December 31, 2019
December 31, 2020
Fair value (Rs.)
145,350
147,500
148,850
142,000
The debentures have never been credit-impaired and there have been no significant increase in credit risk since initial
recognition. The expected credit losses were determined as follows:
Date
January 1, 2018
December 31, 2018
December 31, 2019
December 31, 2020
12-month credit losses
(Rs.)
5,000
7,000
8,000
9,200
Lifetime credit losses
(Rs.)
12,500
15,000
16,700
17,000
Required:
Journal entries for the years ending December 31, 2019 and 2020.
Question 4
On April 30, 2020 Alpha Limited (AL) sold 3,000 shares of a company at a price of Rs. 65 per share (fair value of share on
that date was Rs. 68). AL also incurred a transaction cost of Rs. 0.70 per share in sale transaction.
These shares had been purchased last year and were re-measured on December 31, 2019 to Rs. 62 per share.
Required:
Journal entries to record sale of shares on April 30, 2020 if AL measures its investments in shares at:
(a) Fair value through P&L
(b) Fair value through OCI
Question 5
On April 30, 2020 Beta Limited (BL) sold 2,000 debentures of a company at a price of Rs. 115 per debenture (fair value of
debenture on that date was Rs. 118). BL also incurred a transaction cost of Rs. 2.50 per debenture.
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and also incurred transaction costs
of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
The fair values of the debentures were as follows:
Date
December 31, 2018
December 31, 2019
Fair value (Rs.)
220,000
226,000
Required:
Journal entries to record sale of debentures on April 30, 2020 if BL measures its investments in debentures at:
(a) Amortized cost
(b) Fair value through OCI
NASIR ABBAS FCA
194
IFRS 9 (Re-classification and De-recognition) – QUESTIONS
Question 6
On January 1, 2019 Zee Limited (ZL) sold 2,000 debentures of a company at a price of Rs. 120 per debenture (equal to fair
value of debenture on that date) to Hexa Finance (HF) in a sale and repurchase agreement. Following terms were agreed
in repo agreement:
- ZL will purchase the debentures on December 31, 2020 at a price of Rs. 132 per debenture (irrespective of fair value)
- Coupon payments for 2019 and 2020 will be received by HF being legal owner of debentures
[It gives an effective rate of return of HF equal to 17.106%]
These debentures had been purchased on January 1, 2018 for Rs. 105 per debenture and ZL also incurred transaction
costs of Rs. 6,000. The effective rate was 12% whereas annual coupon payment was Rs. 15 per debenture.
Required:
Journal entries for the years ending December 31, 2019 and 2020.
Question 7
On December 1, 2019 Wee Limited (WL) sold its receivable to factors as follows:
- Receivables amounting to Rs. 800,000 were sold to Factor Aay and receives an advance of 70% immediately at an
interest of 1% per month. The factor also charged a fee of Rs. 8,000 for the service. Factor Aay will pay the balance
amount, after deducting interest and service fees, on debt settlement by customer (i.e. on December 31, 2019). The
debts are factored with recourse.
Receivables amounting to Rs. 500,000 were sold to a Factor Bee for an immediate payment of Rs. 400,000 and
remaining Rs. 70,000 will be paid on December 31, 2019. The debts are factored without recourse.
Required:
Journal entries for above transactions assuming that debtors settled their accounts on December 31, 2019.
Question 8
Zalmi Limited (ZL) took a loan from Dolphin Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 12% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
o Fair value of new loan on that date was Rs. 637,755 and effective interest rate was 12%.
ZL paid Rs. 25,000 on January 1, 2019 relating to modification of the loan contract.
Required:
Journal entries for the year ending December 31, 2019.
Question 9
Kings Limited (KL) took a loan from Sultan Bank amounting to Rs. 800,000 on January 1, 2017 at 10% interest payable
annually. Final maturity of loan is on December 31, 2021. ZL also paid processing and legal charges of Rs. 30,000. As a
result its effective interest rate was 11.015%.
During 2018, ZL faced certain financial difficulties and the bank agreed to modify the existing loan. On January 1, 2019,
new terms were agreed as follows:
o ZL will not pay interest for the years 2019 and 2020
o From 2021 onwards annual interest rate will be charged at 13% (i.e. market interest rate)
o Final maturity date will be extended to December 31, 2023
ZL paid Rs. 40,000 on January 1, 2019 relating to modification of the loan contract.
NASIR ABBAS FCA
195
IFRS 9 (Re-classification and De-recognition) – QUESTIONS
Required:
Journal entries for the year ending December 31, 2019.
Question 10
On January 1, 2017, Sidney Limited (SL) purchased 1 million 5 years debentures issued by Oval Limited (OL) at a premium
of Rs. 5 per debenture. SL also incurred transaction costs of Rs. 1.50 per debenture. Coupon rate was 6% payable annually.
The debentures would be redeemed at par value of Rs. 100 each on December 31, 2021. The effective interest rate was
4.5186%.
Due to certain financial and liquidity issues, OL re-structured the payment plan with effect from January 1, 2020 after due
consultation with debenture holders. Under the revised plan the maturity date was extended by one year. further the
coupon rate was increased to 6.25% for 2020 and 2021 and 6.50% for 2022.
Required:
Journal entries for the year ending December 31, 2020.
Question 11
On January 1, 2018, Mosco Limited (ML) issued 1 million debentures at par (i.e. Rs. 100 each) against purchase of a
building. Coupon rate was 12% per annum whereas effective interest was 14.5%.
On January 1, 2020 it was agreed with the creditor to settle the entire remaining liability by issue of ordinary shares of
ML (having face value of Rs. 10 each) and a result 1.8 million shares were issued. The market price of ML’s shares on
that date was Rs. 65 per share.
Required:
Journal entry to record the issue of shares.
NASIR ABBAS FCA
196
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
SOLUTIONS
Solution No. 1
31-12-19
Investment (AC)
Interest income
[Investment income for 2019]
31-12-19
Cash
Dr.
Cr.
------------ Rs. ----------43,948
43,948
40,000
Investment (AC)
[Contractual cashflow for 2019]
31-12-19
01-01-20
31-12-20
40,000
Impairment loss [9,200 - 8,000]
Loss allowance
[Impairment loss for 2019]
1,200
Loss allowance
Investment (FVPL)
Investment (AC)
FV gain [P&L] (W-2)
[Reclassification adjustment]
9,200
510,000
Cash
40,000
1,200
510,925
8,275
Interest income
[Contractual cashflow for 2020]
31-12-20
40,000
Investment (FVPL) [545,000 - 510,000]
FV gain [P&L]
[Fair value gain for 2020]
35,000
35,000
W-1
Date
31-12-17
31-12-18
31-12-19
Opening
balance
Interest
Payment
Closing
balance
[A]
[B = A x 8.6687%]
[C]
[A + B - C]
500,000
503,344
506,977
43,344
43,633
43,948
40,000
40,000
40,000
503,344
506,977
510,925
W-2
Gross carrying amount
Loss allowance
Fair value
Fair value gain
NASIR ABBAS FCA
Rs.
510,925
(9,200)
501,725
510,000
8,275
197
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 2
Dr.
Cr.
------------ Rs. ----------45,000
45,000
31-12-19
Investment (FVPL) [590,000 - 545,000]
Fair value gain [P&L]
[Fair value gain for 2019]
31-12-19
Cash [500,000 x 10%]
Interest income
[Contractual cashflow for 2019]
50,000
Investment (AC)
Investment (FVPL)
[Reclassification adjustment]
590,000
01-01-20
01-01-20
31-12-20
31-12-20
50,000
590,000
Impairment loss
Loss allowance
[Initial recognition of loss allowance]
8,000
Investment (AC) [590,000 x 8.833%(W-1)]
Interest income
[Investment income for 2020]
52,115
Cash
50,000
8,000
52,115
Investment (AC)
[Contractual cashflow for 2020]
31-12-20
50,000
Impairment loss [9,200 - 8,000]
Loss allowance
[Measurement of loss allowance]
W-1
FV at reclassification
Year 1 payment
Year 2 payment
Year 3 payment
Year 4 payment
Year 5 payment
Year 6 payment
Cashflows
(590,000)
50,000
50,000
50,000
50,000
50,000
650,000
1,200
1,200
---------- 5% -------Factor
PV
1.000
(590,000)
0.952
47,600
0.907
45,350
0.864
43,200
0.823
41,150
0.784
39,200
0.746
484,900
111,400
Effective interest rate = 5% + [111,400/(111,400 + 33,900)] x 5% =
NASIR ABBAS FCA
--------- 10% ------Factor
PV
1.000
(590,000)
0.909
45,450
0.826
41,300
0.751
37,550
0.683
34,150
0.621
31,050
0.564
366,600
(33,900)
8.833%
198
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 3
31-12-19
Investment (FVOCI) (W-1)
Interest income
[Investment income for 2019]
31-12-19
Cash
Dr.
Cr.
------------ Rs. ----------14,215
14,215
20,000
Investment (FVOCI)
[Contractual cashflow for 2019]
31-12-19
31-12-19
01-01-20
01-01-20
01-01-20
31-12-20
20,000
Investment (FVOCI) (W-1)
FV reserve [OCI]
[Fair value gain for 2019]
9,285
Impairment loss [8,000 - 7,000]
Loss allowance [OCI]
[Impairment loss for 2019]
1,000
Loss allowance [OCI]
Loss allowance
[Reclassification adjustment]
8,000
Fair value reserve
Investment (FVOCI)
[Reclassification adjustment]
12,486
Investment (AC)
Investment (FVOCI)
[Reclassification adjustment]
148,850
Cash
20,000
9,285
1,000
8,000
12,486
148,850
Interest income
[Contractual cashflow for 2020]
31-12-20
31-12-20
20,000
Investment (AC) (W-1)
Interest income
[Investment income for 2020]
13,636
Impairment loss [9,200 - 8,000]
Loss allowance
[Impairment loss for 2020]
1,200
13,636
1,200
W-1
Date
Opening
balance
Interest
Payment
Closing
balance
Fair value
Fair value
reserve
OCI
[A]
[B = A x 10%]
[C]
[A + B - C]
[E]
[F = E - D]
[Change in F]
31-12-18
31-12-19
31-12-20
NASIR ABBAS FCA
147,408
142,149
136,364
14,741
14,215
13,636
20,000
20,000
20,000
142,149
136,364
130,000
145,350
148,850
-
3,201
12,486
-
3,201
9,285
199
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 4
Dr.
Cr.
------------ Rs. -----------
(a)
30-04-20
30-04-20
Investment [3,000 x (68 – 62)]
Fair value gain [P&L]
[Remeasurement on the date of de-recognition]
18,000
Cash [3,000 x (65 – 0.70)]
Loss on disposal (P&L)
Investment [3,000 x 68]
192,900
11,100
18,000
204,000
[Sale of investment]
Dr.
Cr.
------------ Rs. -----------
(b)
30-04-20
30-04-20
Investment [3,000 x (68 – 62)]
Fair value reserve [OCI]
[Remeasurement on the date of de-recognition]
18,000
Cash [3,000 x (65 – 0.70)]
Loss on disposal (P&L)
Investment [3,000 x 68]
[Sale of investment]
192,900
11,100
18,000
204,000
Solution 5
Dr.
Cr.
------------ Rs. -----------
(a)
30-04-20
30-04-20
(b)
30-04-20
30-04-20
30-04-20
Investment (W-1)
Interest income
[Investment income for 4 months]
8,294
Cash [2,000 x (115 - 2.50)]
Gain on disposal
Investment (W-1)
[Sale of investment]
225,000
Investment (W-1)
Interest income
[Investment income for 4 months]
Investment (W-1)
Fair value reserve [OCI]
[Remeasurement on the date of de-recognition]
Cash [2,000 x (115 - 2.50)]
Loss on disposal [P&L]
Investment (W-1)
[Sale of investment]
NASIR ABBAS FCA
8,294
9,356
215,644
Dr.
Cr.
------------ Rs. ----------8,294
8,294
1,706
1,706
225,000
11,000
236,000
200
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
30-04-20
Fair value reserve [OCI]
Gain on disposal [P&L]
[Reclassification of cumulative gain on de-recognition]
20,356
20,356
W-1
Date
Opening
balance
Interest
[A]
[B = A x 12%]
31-12-18
31-12-19
30-04-20
216,000
211,920
207,350
Payment
Closing
balance
[C]
[A + B - C]
25,920
25,430
8,294
30,000
30,000
-
211,920
207,350
215,644
Fair value
Fair value
reserve
OCI
[E]
[F = E - D]
[Change in F]
220,000
226,000
236,000
8,080
18,650
20,356
8,080
10,570
1,706
[207,350 x 12% x 4/12]
* Initial recognition = 105 x 2000 + 6,000 = Rs. 216,000
Solution 6
Dr.
Cr.
------------ Rs. ----------240,000
240,000
01-01-19
Cash [120 x 2,000]
Financial liability - repo
[sale of debentures]
31-12-19
Financial liability - repo [2,000 x 15]
Investment
[Contractual cashflow for 2019]
30,000
Interest expense [240,000 x 17.106%]
Financial liability - repo
[Interest expense for 2019]
41,055
Investment (W-1)
Interest income
[Interest income for 2019]
25,430
Financial liability - repo [2,000 x 15]
Investment
[Contractual cashflow for 2020]
30,000
Interest expense [(240,000 + 41,055 - 30,000) x 17.106%]
Financial liability - repo
[Interest expense for 2020]
42,945
Investment (W-1)
Interest income
[Interest income for 2020]
24,882
Financial liability - repo
Cash [132 x 2,000]
[Repurchase of debentures]
264,000
31-12-19
31-12-19
31-12-20
31-12-20
31-12-20
31-12-20
NASIR ABBAS FCA
30,000
41,055
25,430
30,000
42,945
24,882
264,000
201
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1
Date
Opening
balance
Interest
[A]
[B = A x 12%]
31-12-18
31-12-19
31-12-20
216,000
211,920
207,350
Payment
Closing
balance
25,920
25,430
24,882
[C]
30,000
30,000
30,000
[A + B - C]
211,920
207,350
202,232
Solution 7
(a) Factor with recourse
01-12-19
31-12-19
Dr.
Cr.
------------ Rs. -----------
Cash [800,000 x 70%]
Financial liability (Factor)
[70% advance received]
560,000
Cash
Financial liability (Factor)
Factor finance cost [560,000 x 1%]
Factor fees [P&L]
Receivables
[Cash settlement of receivables]
226,400
560,000
5,600
8,000
560,000
800,000
Dr.
(b) Factor without recourse
01-12-19
Cash
Financial asset (Factor)
Loss on sale of receivables
Receivables
[Receivables derecognized
31-12-19
Cash
Cr.
------------ Rs. ----------400,000
70,000
30,000
500,000
70,000
Financial asset (Factor)
[Final settlement from factor]
70,000
Solution 8
01-01-19
Bank loan (existing) (W-1)
Gain on extinguishment
Cash
Bank loan (New)
[Restructuring of loan]
31-12-19
Interest expense (W-3)
Bank loan (New)
[Interest expense for 2019]
NASIR ABBAS FCA
Dr.
Cr.
------------ Rs. ----------780,161
117,406
25,000
637,755
76,531
76,531
202
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1 Original loan schedule
Opening
Date
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
770,000
774,816
780,161
786,096
792,685
W-2 Testing of 10% rule
Cashflow
01-01-19
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
25,000
96,000
96,000
896,000
Interest
Cashflow
Closing
balance
[B = A x 11.015%]
[C]
[A + B - C]
84,816
85,346
85,935
86,588
87,315
Factor
[11.015%]
1.000
0.901
0.811
0.731
0.658
0.593
PV of new terms at original effective rate
PV of original terms
Difference
80,000
80,000
80,000
80,000
880,000
774,816
780,161
786,096
792,685
-
PV
25,000
70,176
63,168
531,328
689,672
780,161
90,489
11.60%
Since it is more than 10% therefore existing loan is derecognized
W-3 Revised loan schedule
Opening
Date
balance
[A]
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
637,755
714,286
800,000
800,000
800,000
Interest
Payment
Closing
balance
[B = A x 12%]
[C]
[A + B - C]
76,531
85,714
96,000
96,000
96,000
96,000
96,000
896,000
714,286
800,000
800,000
800,000
-
Solution 9
01-01-19
Bank loan (existing) (W-1)
Cash
[Restructuring cost of loan]
31-12-19
Interest expense (W-3)
Bank loan (Existing)
[Interest expense for 2019]
NASIR ABBAS FCA
Dr.
Cr.
------------ Rs. ----------40,000
40,000
66,931
66,931
203
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1 Original loan schedule
Opening
Date
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
Interest
Cashflow
Closing
balance
[B = A x 11.015%]
[C]
[A + B - C]
770,000
774,816
780,161
786,096
792,685
84,816
85,346
85,935
86,588
87,315
W-2 Testing of 10% rule
Cashflow
Factor
[11.015%]
01-01-19
40,000
1.000
31-12-19
0.901
31-12-20
0.811
31-12-21
104,000
0.731
31-12-22
104,000
0.658
31-12-23
904,000
0.593
PV of new terms at original effective rate
PV of original terms
Difference
80,000
80,000
80,000
80,000
880,000
774,816
780,161
786,096
792,685
-
PV
40,000
76,024
68,432
536,072
720,528
780,161
59,633
7.64%
Since it is less than 10% therefore existing loan is not derecognized
W-3 Revised loan schedule
Opening
Date
balance
[A]
01-01-19
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
Interest (W-4)
Payment
[B = A x 9.0427%]
[C]
Closing
balance
780,161
740,161
807,092
880,075
855,657
829,032
66,931
72,983
79,583
77,375
74,968
40,000
104,000
104,000
904,000
[A + B - C]
740,161
807,092
880,075
855,657
829,032
-
W-4 Calculation of revised effective rate
Cashflow
01-01-19
(740,161)
31-12-19
31-12-20
31-12-21
104,000
31-12-22
104,000
31-12-23
904,000
IRR =
NASIR ABBAS FCA
9.0427%
204
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 10
01-01-20
Investment (W-2)
Modification gain [P&L]
[Modification gain recognized]
31-12-20
Investment
Dr.
Cr.
--------- Rs. million -------2.22
2.22
4.74
Interest income (W-1)
[Interest income for 2020]
31-12-20
4.74
Cash
6.25
Investment
[Contractual cashflow for 2020]
W-1
Opening
Date
6.25
Modification
Interest
Cashflow
Closing
balance
[B]
[C = (A + B) x 4.5186%]
[D]
[A + B + C - D]
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
31-12-22
106.50
105.31
104.07
102.77
103.49
101.91
2.22
-
4.81
4.76
4.70
4.74
4.68
4.59
6.00
6.00
6.00
6.25
6.25
106.50
105.31
104.07
102.77
103.49
101.91
-
W-2 Modification gain/loss
Cashflow
31-12-20
6.25
31-12-21
6.25
31-12-22
106.50
PV of modified cashflows at original effective rate
PV of original cashflows
Modification gain
Factor
[4.5186%]
0.957
0.915
0.876
PV
5.98
5.72
93.29
104.99
102.77
2.22
Solution 11
Dr.
Cr.
------------ Rs. million ---------01-01-20
Debentures (W-1)
Loss on extinguishment
Share capital [1.8 x Rs. 10]
Share premium [1.8 x Rs. 55]
[Extinguishment of financial liability]
NASIR ABBAS FCA
105.36
11.64
18.00
99.00
205
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1
Date
31-12-18
31-12-19
NASIR ABBAS FCA
Opening
balance
Interest
Payment
[A]
[B = A x 14.5%]
[C]
100.00
102.50
Closing
balance
14.50
14.86
12.00
12.00
[A + B - C]
102.50
105.36
206
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
SOLUTIONS
Solution No. 1
31-12-19
Investment (AC)
Interest income
[Investment income for 2019]
31-12-19
Cash
Dr.
Cr.
------------ Rs. ----------43,948
43,948
40,000
Investment (AC)
[Contractual cashflow for 2019]
31-12-19
01-01-20
31-12-20
40,000
Impairment loss [9,200 - 8,000]
Loss allowance
[Impairment loss for 2019]
1,200
Loss allowance
Investment (FVPL)
Investment (AC)
FV gain [P&L] (W-2)
[Reclassification adjustment]
9,200
510,000
Cash
40,000
1,200
510,925
8,275
Interest income
[Contractual cashflow for 2020]
31-12-20
40,000
Investment (FVPL) [545,000 - 510,000]
FV gain [P&L]
[Fair value gain for 2020]
35,000
35,000
W-1
Date
31-12-17
31-12-18
31-12-19
Opening
balance
Interest
Payment
Closing
balance
[A]
[B = A x 8.6687%]
[C]
[A + B - C]
500,000
503,344
506,977
43,344
43,633
43,948
40,000
40,000
40,000
503,344
506,977
510,925
W-2
Gross carrying amount
Loss allowance
Fair value
Fair value gain
NASIR ABBAS FCA
Rs.
510,925
(9,200)
501,725
510,000
8,275
207
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 2
Dr.
Cr.
------------ Rs. ----------45,000
45,000
31-12-19
Investment (FVPL) [590,000 - 545,000]
Fair value gain [P&L]
[Fair value gain for 2019]
31-12-19
Cash [500,000 x 10%]
Interest income
[Contractual cashflow for 2019]
50,000
Investment (AC)
Investment (FVPL)
[Reclassification adjustment]
590,000
01-01-20
01-01-20
31-12-20
31-12-20
50,000
590,000
Impairment loss
Loss allowance
[Initial recognition of loss allowance]
8,000
Investment (AC) [590,000 x 8.833%(W-1)]
Interest income
[Investment income for 2020]
52,115
Cash
50,000
8,000
52,115
Investment (AC)
[Contractual cashflow for 2020]
31-12-20
50,000
Impairment loss [9,200 - 8,000]
Loss allowance
[Measurement of loss allowance]
W-1
FV at reclassification
Year 1 payment
Year 2 payment
Year 3 payment
Year 4 payment
Year 5 payment
Year 6 payment
Cashflows
(590,000)
50,000
50,000
50,000
50,000
50,000
650,000
1,200
1,200
---------- 5% -------Factor
PV
1.000
(590,000)
0.952
47,600
0.907
45,350
0.864
43,200
0.823
41,150
0.784
39,200
0.746
484,900
111,400
Effective interest rate = 5% + [111,400/(111,400 + 33,900)] x 5% =
NASIR ABBAS FCA
--------- 10% ------Factor
PV
1.000
(590,000)
0.909
45,450
0.826
41,300
0.751
37,550
0.683
34,150
0.621
31,050
0.564
366,600
(33,900)
8.833%
208
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 3
31-12-19
Investment (FVOCI) (W-1)
Interest income
[Investment income for 2019]
31-12-19
Cash
Dr.
Cr.
------------ Rs. ----------14,215
14,215
20,000
Investment (FVOCI)
[Contractual cashflow for 2019]
31-12-19
31-12-19
01-01-20
01-01-20
01-01-20
31-12-20
20,000
Investment (FVOCI) (W-1)
FV reserve [OCI]
[Fair value gain for 2019]
9,285
Impairment loss [8,000 - 7,000]
Loss allowance [OCI]
[Impairment loss for 2019]
1,000
Loss allowance [OCI]
Loss allowance
[Reclassification adjustment]
8,000
Fair value reserve
Investment (FVOCI)
[Reclassification adjustment]
12,486
Investment (AC)
Investment (FVOCI)
[Reclassification adjustment]
148,850
Cash
20,000
9,285
1,000
8,000
12,486
148,850
Interest income
[Contractual cashflow for 2020]
31-12-20
31-12-20
20,000
Investment (AC) (W-1)
Interest income
[Investment income for 2020]
13,636
Impairment loss [9,200 - 8,000]
Loss allowance
[Impairment loss for 2020]
1,200
13,636
1,200
W-1
Date
Opening
balance
Interest
Payment
Closing
balance
Fair value
Fair value
reserve
OCI
[A]
[B = A x 10%]
[C]
[A + B - C]
[E]
[F = E - D]
[Change in F]
31-12-18
31-12-19
31-12-20
NASIR ABBAS FCA
147,408
142,149
136,364
14,741
14,215
13,636
20,000
20,000
20,000
142,149
136,364
130,000
145,350
148,850
-
3,201
12,486
-
3,201
9,285
209
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 4
Dr.
Cr.
------------ Rs. -----------
(a)
30-04-20
30-04-20
Investment [3,000 x (68 – 62)]
Fair value gain [P&L]
[Remeasurement on the date of de-recognition]
18,000
Cash [3,000 x (65 – 0.70)]
Loss on disposal (P&L)
Investment [3,000 x 68]
192,900
11,100
18,000
204,000
[Sale of investment]
Dr.
Cr.
------------ Rs. -----------
(b)
30-04-20
30-04-20
Investment [3,000 x (68 – 62)]
Fair value reserve [OCI]
[Remeasurement on the date of de-recognition]
18,000
Cash [3,000 x (65 – 0.70)]
Loss on disposal (P&L)
Investment [3,000 x 68]
[Sale of investment]
192,900
11,100
18,000
204,000
Solution 5
Dr.
Cr.
------------ Rs. -----------
(a)
30-04-20
30-04-20
(b)
30-04-20
30-04-20
30-04-20
Investment (W-1)
Interest income
[Investment income for 4 months]
8,294
Cash [2,000 x (115 - 2.50)]
Gain on disposal
Investment (W-1)
[Sale of investment]
225,000
Investment (W-1)
Interest income
[Investment income for 4 months]
Investment (W-1)
Fair value reserve [OCI]
[Remeasurement on the date of de-recognition]
Cash [2,000 x (115 - 2.50)]
Loss on disposal [P&L]
Investment (W-1)
[Sale of investment]
NASIR ABBAS FCA
8,294
9,356
215,644
Dr.
Cr.
------------ Rs. ----------8,294
8,294
1,706
1,706
225,000
11,000
236,000
210
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
30-04-20
Fair value reserve [OCI]
Gain on disposal [P&L]
[Reclassification of cumulative gain on de-recognition]
20,356
20,356
W-1
Date
Opening
balance
Interest
[A]
[B = A x 12%]
31-12-18
31-12-19
30-04-20
216,000
211,920
207,350
Payment
Closing
balance
[C]
[A + B - C]
25,920
25,430
8,294
30,000
30,000
-
211,920
207,350
215,644
Fair value
Fair value
reserve
OCI
[E]
[F = E - D]
[Change in F]
220,000
226,000
236,000
8,080
18,650
20,356
8,080
10,570
1,706
[207,350 x 12% x 4/12]
* Initial recognition = 105 x 2000 + 6,000 = Rs. 216,000
Solution 6
Dr.
Cr.
------------ Rs. ----------240,000
240,000
01-01-19
Cash [120 x 2,000]
Financial liability - repo
[sale of debentures]
31-12-19
Financial liability - repo [2,000 x 15]
Investment
[Contractual cashflow for 2019]
30,000
Interest expense [240,000 x 17.106%]
Financial liability - repo
[Interest expense for 2019]
41,055
Investment (W-1)
Interest income
[Interest income for 2019]
25,430
Financial liability - repo [2,000 x 15]
Investment
[Contractual cashflow for 2020]
30,000
Interest expense [(240,000 + 41,055 - 30,000) x 17.106%]
Financial liability - repo
[Interest expense for 2020]
42,945
Investment (W-1)
Interest income
[Interest income for 2020]
24,882
Financial liability - repo
Cash [132 x 2,000]
[Repurchase of debentures]
264,000
31-12-19
31-12-19
31-12-20
31-12-20
31-12-20
31-12-20
NASIR ABBAS FCA
30,000
41,055
25,430
30,000
42,945
24,882
264,000
211
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1
Date
Opening
balance
Interest
[A]
[B = A x 12%]
31-12-18
31-12-19
31-12-20
216,000
211,920
207,350
Payment
Closing
balance
25,920
25,430
24,882
[C]
30,000
30,000
30,000
[A + B - C]
211,920
207,350
202,232
Solution 7
(a) Factor with recourse
01-12-19
31-12-19
Dr.
Cr.
------------ Rs. -----------
Cash [800,000 x 70%]
Financial liability (Factor)
[70% advance received]
560,000
Cash
Financial liability (Factor)
Factor finance cost [560,000 x 1%]
Factor fees [P&L]
Receivables
[Cash settlement of receivables]
226,400
560,000
5,600
8,000
560,000
800,000
Dr.
(b) Factor without recourse
01-12-19
Cash
Financial asset (Factor)
Loss on sale of receivables
Receivables
[Receivables derecognized
31-12-19
Cash
Cr.
------------ Rs. ----------400,000
70,000
30,000
500,000
70,000
Financial asset (Factor)
[Final settlement from factor]
70,000
Solution 8
01-01-19
Bank loan (existing) (W-1)
Gain on extinguishment
Cash
Bank loan (New)
[Restructuring of loan]
31-12-19
Interest expense (W-3)
Bank loan (New)
[Interest expense for 2019]
NASIR ABBAS FCA
Dr.
Cr.
------------ Rs. ----------780,161
117,406
25,000
637,755
76,531
76,531
212
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1 Original loan schedule
Opening
Date
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
770,000
774,816
780,161
786,096
792,685
W-2 Testing of 10% rule
Cashflow
01-01-19
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
25,000
96,000
96,000
896,000
Interest
Cashflow
Closing
balance
[B = A x 11.015%]
[C]
[A + B - C]
84,816
85,346
85,935
86,588
87,315
Factor
[11.015%]
1.000
0.901
0.811
0.731
0.658
0.593
PV of new terms at original effective rate
PV of original terms
Difference
80,000
80,000
80,000
80,000
880,000
774,816
780,161
786,096
792,685
-
PV
25,000
70,176
63,168
531,328
689,672
780,161
90,489
11.60%
Since it is more than 10% therefore existing loan is derecognized
W-3 Revised loan schedule
Opening
Date
balance
[A]
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
637,755
714,286
800,000
800,000
800,000
Interest
Payment
Closing
balance
[B = A x 12%]
[C]
[A + B - C]
76,531
85,714
96,000
96,000
96,000
96,000
96,000
896,000
714,286
800,000
800,000
800,000
-
Solution 9
01-01-19
Bank loan (existing) (W-1)
Cash
[Restructuring cost of loan]
31-12-19
Interest expense (W-3)
Bank loan (Existing)
[Interest expense for 2019]
NASIR ABBAS FCA
Dr.
Cr.
------------ Rs. ----------40,000
40,000
66,931
66,931
213
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1 Original loan schedule
Opening
Date
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
Interest
Cashflow
Closing
balance
[B = A x 11.015%]
[C]
[A + B - C]
770,000
774,816
780,161
786,096
792,685
84,816
85,346
85,935
86,588
87,315
W-2 Testing of 10% rule
Cashflow
Factor
[11.015%]
01-01-19
40,000
1.000
31-12-19
0.901
31-12-20
0.811
31-12-21
104,000
0.731
31-12-22
104,000
0.658
31-12-23
904,000
0.593
PV of new terms at original effective rate
PV of original terms
Difference
80,000
80,000
80,000
80,000
880,000
774,816
780,161
786,096
792,685
-
PV
40,000
76,024
68,432
536,072
720,528
780,161
59,633
7.64%
Since it is less than 10% therefore existing loan is not derecognized
W-3 Revised loan schedule
Opening
Date
balance
[A]
01-01-19
31-12-19
31-12-20
31-12-21
31-12-22
31-12-23
Interest (W-4)
Payment
[B = A x 9.0427%]
[C]
Closing
balance
780,161
740,161
807,092
880,075
855,657
829,032
66,931
72,983
79,583
77,375
74,968
40,000
104,000
104,000
904,000
[A + B - C]
740,161
807,092
880,075
855,657
829,032
-
W-4 Calculation of revised effective rate
Cashflow
01-01-19
(740,161)
31-12-19
31-12-20
31-12-21
104,000
31-12-22
104,000
31-12-23
904,000
IRR =
NASIR ABBAS FCA
9.0427%
214
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
Solution 10
01-01-20
Investment (W-2)
Modification gain [P&L]
[Modification gain recognized]
31-12-20
Investment
Dr.
Cr.
--------- Rs. million -------2.22
2.22
4.74
Interest income (W-1)
[Interest income for 2020]
31-12-20
4.74
Cash
6.25
Investment
[Contractual cashflow for 2020]
W-1
Opening
Date
6.25
Modification
Interest
Cashflow
Closing
balance
[B]
[C = (A + B) x 4.5186%]
[D]
[A + B + C - D]
balance
[A]
31-12-17
31-12-18
31-12-19
31-12-20
31-12-21
31-12-22
106.50
105.31
104.07
102.77
103.49
101.91
2.22
-
4.81
4.76
4.70
4.74
4.68
4.59
6.00
6.00
6.00
6.25
6.25
106.50
105.31
104.07
102.77
103.49
101.91
-
W-2 Modification gain/loss
Cashflow
31-12-20
6.25
31-12-21
6.25
31-12-22
106.50
PV of modified cashflows at original effective rate
PV of original cashflows
Modification gain
Factor
[4.5186%]
0.957
0.915
0.876
PV
5.98
5.72
93.29
104.99
102.77
2.22
Solution 11
Dr.
Cr.
------------ Rs. million ---------01-01-20
Debentures (W-1)
Loss on extinguishment
Share capital [1.8 x Rs. 10]
Share premium [1.8 x Rs. 55]
[Extinguishment of financial liability]
NASIR ABBAS FCA
105.36
11.64
18.00
99.00
215
IFRS 9 (Re-classification and De-recognition) – SOLUTIONS
W-1
Date
31-12-18
31-12-19
NASIR ABBAS FCA
Opening
balance
Interest
Payment
[A]
[B = A x 14.5%]
[C]
100.00
102.50
Closing
balance
14.50
14.86
12.00
12.00
[A + B - C]
102.50
105.36
216
IAS 32 – Class notes
DEFINITIONS
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial
liability or equity instrument of another entity.
A financial asset is any asset that is:
(a) cash;
(b) an equity instrument of another entity;
(c) a contractual right:
(i) to receive cash or another financial asset from another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
potentially favourable to the entity; or
(d) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to receive a variable number of the
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial asset for a fixed number of the entity’s own equity instruments.
A financial liability is any liability that is:
(a) a contractual obligation:
(i) to deliver cash or another financial asset to another entity; or
(ii) to exchange financial assets or financial liabilities with another entity under conditions that are
potentially unfavourable to the entity; or
(b) a contract that will or may be settled in the entity’s own equity instruments and is:
(i) a non‑derivative for which the entity is or may be obliged to deliver a variable number of the
entity’s own equity instruments; or
(ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or
another financial sset for a fixed number of the entity’s own equity instruments.
An equity instrument is any contract that evidences a residual interest in the assets of an entity after
deducting all of its liabilities.
PRESENTATION
Liability and Equity
1. The issuer of the financial instrument shall classify the instrument on initial recognition as a financial
liability or an equity instrument in accordance with the substance of the contractual agreement and
the definitions.
2. A critical feature in differentiating a financial liability from an equity instrument is the existence of a
contractual obligation of one party to the financial instrument (the issuer) either to deliver cash or
another financial asset to the other party (the holder) or to exchange financial assets or financial
liabilities with the holder under conditions that are potentially unfavourable to the issuer. Although
the holder of an equity instrument may be entitled to receive a pro rata share of any dividends or
Nasir Abbas FCA
217
IAS 32 – Class notes
other distributions of equity, the issuer does not have a contractual obligation to make such
distributions because it cannot be required to deliver cash or another financial asset to another party.
Compound financial instruments
[e.g. convertible preference shares]
1. An entity recognizes separately the components of a financial instrument that:
(a) creates a financial liability of the entity; and
(b) grants an option to the holder of the instrument to convert it into an equity instrument of the
entity.
For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary
shares of the entity is a compound financial instrument. From the perspective of the entity, such an
instrument comprises two components: a financial liability (a contractual arrangement to deliver
cash or another financial asset) and an equity instrument (a call option granting the holder the right,
for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The
economic effect of issuing such an instrument is substantially the same as issuing simultaneously a
debt instrument with an early settlement provision and warrants to purchase ordinary shares, or
issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the
entity presents the liability and equity components separately in its statement of financial position.
2. Classification of the liability and equity components of a convertible instrument is not revised as a
result of a change in the likelihood that a conversion option will be exercised, even when exercise of
the option may appear to have become economically advantageous to some holders.
3. The initial carrying amounts of both components are calculated as follows:
Fair value of the instrument as a whole
Less: Financial liability component [i.e. calculated as PV of contractual cashflows
(ignoring conversion option) discounted at the market rate of interest on similar
debt instruments without conversion options]
Equity component
X
(X)
X
Subsequent measurement:
- Financial liability component shall be subsequently measured as already studied earlier. If
amortized cost method is used, then effective interest rate is calculated. However, in absence
of any transaction cost, the market interest rate used in point (3) above will be used as effective
interest rate.
- Equity component shall not be remeasured.
4. Transaction costs that relate to the issue of compound financial instrument are allocated to the
liability and equity components of the instrument in proportion to the allocation of proceeds.
Nasir Abbas FCA
218
IAS 32 – Class notes
Transaction cost relating to:
Equity:
Shall be accounted for as deduction from
equity.
Dr. Equity component
Cr. Cash
Financial liability:
Shall be accounted for as already studied for initial
measurement of financial liability.
Dr. Financial liability (i.e. amortized cost)
OR
Dr. P&L (i.e. FV through P&L)
Cr. Cash
5. On redemption date of instrument:
If holder opts for redemption:
(i) Cash redemption:
Dr. Financial liability (carrying amount)
Cr. Cash (redemption amount)
If holder opts for conversion:
(i) Conversion of instrument:
Dr. Financial liability (carrying amount)
Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)
(ii) Transfer of equity component:
Dr. Equity component (carrying amount)
Cr. Retained earnings
(ii) Transfer of equity component:
Dr. Equity component (carrying amount)
Cr. Retained earnings
ALTERNATIVELY
Conversion of instrument
Dr. Financial liability (carrying amount)
Dr. Equity component (carrying amount)
Cr. Share capital (face value of shares issued)
Cr. Share premium (balancing)
6. When an entity extinguishes a convertible instrument before maturity through an early redemption
or repurchase in which the original conversion privileges are unchanged:
(a) the entity allocates the consideration paid for the repurchase or redemption to the liability and
equity components of the instrument at the date of the transaction and account for as follows:
Fair value of the liability component on repurchase date
[i.e. PV of remaining contractual cashflows (ignoring conversion option)
discounted at the market rate of interest on similar debt instruments
without conversion options on repurchase date]
Less: Carrying amount of liability component
(Gain)/Loss on repurchase of liability component (charged to P&L)
Total consideration paid
Less: Consideration for liability component
Consideration for equity component
Nasir Abbas FCA
[A]
X
(X)
X
[A]
[B]
X
(X)
X
219
IAS 32 – Class notes
Dr. Financial liability [Carrying amount]
Dr/Cr. Loss or gain on repurchase of liability component [P&L]
Dr. Equity component [Consideration for equity component i.e. B]
Cr. Cash [Total consideration paid]
(b) Any transaction cost paid is allocated to liability component and equity component in ratio of [A]
and [B] above mentioned in point [6(a)]. This allocated transaction cost is then accounted for as
follows:
Dr. P&L [Portion allocated to liability component]
Dr. Equity component [Portion allocated to equity component]
Cr. Cash [Total transaction cost paid]
(c) Any remaining balance in equity component may be transferred to another line item in equity e.g.
retained earnings.
Treasury shares
If an entity reacquires its own equity instruments, those instruments (‘treasury shares’) shall be deducted
from equity. No gain or loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation
of an entity’s own equity instruments. Such treasury shares may be acquired and held by the entity or by
other members of the consolidated group.
Interest, dividends, losses and gains
Interest, dividends, losses and gains relating to a financial instrument or a component that is a financial
liability shall be recognized as income or expense in profit or loss. Distributions to holders of an equity
instrument shall be recognized by the entity directly in equity. Transaction costs of an equity transaction
shall be accounted for as a deduction from equity.
Preference shares
Preference shares may be issued with various rights. In determining whether a preference share is a
financial liability or an equity instrument, an issuer assesses the particular rights attaching to the share to
determine whether it exhibits the fundamental characteristic of a financial liability.
Nasir Abbas FCA
220
IAS 32 – Class notes
A summary of various terms relating to preference shares and the resulting accounting treatment is
outlined in the table below:
Preference shares
Preference dividend
Preference dividend
(Mandatory)
(Discretionary)
Redeemable:
It is considered as financial
It is considered as compound
- Mandatory; OR
liability
instrument
- Optional for holder
Liability is initially measured at
Liability is initially measured at
fair value i.e. present value of
PV of the redemption amount
future contractual cashflows
only.
Equity is initially measured as
residual.
Redeemable:
- Optional for issuer
Non-redeemable
Nasir Abbas FCA
Unwinding of Preference
dividend as well as redemption
amount will be recognized as
Interest expense in P&L using
effective interest rate method.
Preference dividend will be
recognized as a distribution of
equity (in SOCIE).
Unwinding of redemption
amount will be recognized as
interest expense in P&L using
effective interest rate method.
It is considered as compound
instrument
It is considered as equity
Liability is initially measured at
PV of the dividends only.
Equity is initially measured as
residual.
Equity is initially measured at
the entire proceeds
Unwinding of Preference
dividend will be recognized as
Interest expense in P&L using
effective interest rate method.
It is considered as compound
instrument
Preference dividend will be
recognized as a distribution of
equity (in SOCIE).
Liability is initially measured at
PV of the dividends only.
Equity is initially measured as
residual.
Equity is initially measured at
the entire proceeds
Unwinding of preference
dividend will be recognized as
Interest expense in P&L using
effective interest rate method.
Preference dividend will be
recognized as a distribution of
equity (in SOCIE).
It is considered as equity
221
IAS 32 – Class notes
Offsetting a financial asset and a financial liability
1. A financial asset and a financial liability shall be offset and the net amount presented in the statement
of financial position when, and only when, an entity:
(a) currently has a legally enforceable right to set off the recognized amounts; and
(b) intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
2. An entity currently has a legally enforceable right of set‑off if the right of set‑off:
(a) is not contingent on a future event; and
(b) is legally enforceable in all of the following circumstances:
(i) the normal course of business;
(ii) the event of default; and
(iii) the event of insolvency or bankruptcy of the entity and all of the counterparties.
3. Offsetting a recognized financial asset and a recognized financial liability and presenting the net
amount differs from the derecognition of a financial asset or a financial liability. Although offsetting
does not give rise to recognition of a gain or loss, the derecognition of a financial instrument not only
results in the removal of the previously recognized item from the statement of financial position but
also may result in recognition of a gain or loss.
Nasir Abbas FCA
222
IAS 32 – QUESTIONS
PRACTICE QUESTIONS
Question 1
An entity issued 2,000 convertible bonds on January 1, 2020. The bonds have a three-year term, and are issued at par
with a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 2,000,000 but the fair value was Rs. 1,980,000. Interest
is payable annually in arrears at a nominal annual interest rate of 6 per cent. Each bond is convertible at any time up to
maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without
conversion options is 9 per cent.
Required:
Journal entry at initial recognition of bonds.
Question 2
An entity issued 1,000 convertible bonds on January 1, 2011. The bonds had a 10-year term, and were issued at par with
a face value of Rs. 1,000 per bond, giving total proceeds of Rs. 1,000,000. Interest is payable in arrears at a nominal annual
interest rate of 10% payable every 6-months. Each bond is convertible on maturity into ordinary shares at a conversion
price of Rs. 25 per share. When the bonds were issued, the prevailing market interest rate for similar debt without
conversion options was 11%.
On January 1, 2016 the entity repurchased the bonds at a price of Rs. 1,700 each. On that date market interest rate of
similar non-convertible bonds was 8%.
Required:
Journal entries to record repurchase of bonds.
Question 3
Following transactions relate to Aron Limited (AL):
(a) AL issued one million convertible bonds on January 1, 2018. The bonds had a term of three years and were issued
with a total fair value of Rs. 100 million which is also the par value. Interest is paid annually in arrears at a rate of 6%
per annum and bonds, without the conversion option, attracted an interest rate of 9% per annum on January 1, 2018.
The company incurred issue costs of Rs. 1 million. If the investor did not convert to shares they would have been
redeemed at par. At maturity all of the bonds were converted into 2.5 million ordinary shares of Rs. 10 each of AL.
No bonds could be converted before that date. The directors have been told that the impact of the issue costs is to
increase the effective interest rate to 9.38%.
(b) AL held a 3% holding of the shares in Smart, a public limited company, The investment was classified as an investment
in equity instruments and at December 31, 2020 had a carrying value of Rs. 5 million (brought forward from the
previous period). As permitted by IFRS 9 Financial instruments, AL had made an irrevocable election to recognize all
changes in fair value in other comprehensive income. The cumulative gain to December 31, 2019 recognized in other
comprehensive income relating to the investment was Rs. 400,000. On December 31, 2020, the whole of the share
capital of Smart was acquired by Given, a public limited company, and as a result, AL received shares in Given with a
fair value of Rs. 5.5 million in exchange for its holding in Smart.
(c) AL granted interest free loans to its employees on January 1, 2020 of Rs. 10 million. The loans will be paid back on
December 31, 2021 as a single payment by the employees. The market rate of interest for a two year loan on both of
the above dates is 6% per annum.
Required:
Journal entries for the year ending December 31, 2020.
NASIR ABBAS FCA
223
IAS 32 – SOLUTIONS
SOLUTIONS
Solution No. 1
Dr.
Cr.
------------ Rs. ----------01-01-20
Cash
2,000,000
Gain on initial recognition [P&L]
Financial liability (W-1)
Equity component (W-1)
[Initial recognition of bonds]
20,000
1,848,122
131,878
W-1
Total fair value of financial instrument
Liability component
[120,000 x annuity factor at 9% + 2,000,000 x discount factor at 9%]
Equity component
Rs.
1,980,000
1,848,122
131,878
Solution No. 2
01-01-16
Financial liability (W-2)
Loss on redemption of liability [P&L] (W-2)
Equity component (W-2)
Cash
[Repurchase of convertible bonds]
01-01-16
Retained earnings
Equity component (W-2)
[Transfer of remaining balance in equity component]
W-1
Initial measurement
Total value of financial instrument
Liability component
[50,000 x annuity factor at 11% + 1,000,000 x discount factor at 11%]
Equity component
W-2
Loss on repurchase of liability
PV of remaining contractual cashflows at 8%
[50,000 x annuity factor at 8% + 1,000,000 x discount factor at 8%]
Dr.
Cr.
------------ Rs. ----------962,312
118,797
618,891
1,700,000
559,139
559,139
Rs.
1,000,000
940,248
59,752
1,081,109
Carrying amount of liability component
[50,000 x annuity factor at 11% + 1,000,000 x discount factor at 11%]
962,312
Loss on repurchase of liability component
118,797
Loss allocated to equity
Consideration paid allocated to equity [1,700,000 - 1,081,109]
Carrying amount of equity component
Loss on repurchase of equity component
618,891
59,752
559,139
NASIR ABBAS FCA
224
IAS 32 – SOLUTIONS
Solution No. 3
(a)
31-12-20
31-12-20
31-12-20
Interest expense (W-2)
Financial liability
[Interest expense for 2020]
Financial liability
Cash
[Coupon payment for 2020]
Dr.
Cr.
------------ Rs. million ---------9.11
9.11
6.00
6.00
Financial liability (W-2)
Equity component [7.59 - 0.08](W-1)
Share capital [2.5m x 10]
Share premium (balancing)
[Conversion of bonds into shares]
100.00
7.52
Investment (Smart) [5.50 - 5]
FV reserve [OCI]
[Remeasurement gain on de-recognition]
0.50
Investment (Given)
Investment (Smart)
[Exchange of shares]
5.50
Financial asset (Loan) [10m x 1.06-2]
Employee cost (balancing)
Cash
[Initial recognition of loan]
8.90
1.10
Financial asset (Loan) [8.90 x 6%]
Interest income
[Interest income for 2020]
0.53
25.00
82.52
(b)
31-12-20
31-12-20
0.50
5.50
(c)
01-01-20
31-12-20
W-1
Initial measurement
Total value of financial instrument
Liability component
[6m x 3-year annuity factor at 9% + 100m x discount factor at 9%]
Equity component
Allocation of transaction cost:
Financial liability component [1m x 92.41/100]
Equity component [1m x 7.59/100]
NASIR ABBAS FCA
10.00
0.53
Rs. million
100.00
92.41
7.59
0.92
0.08
1.00
225
IAS 32 – SOLUTIONS
W-2
Date
31-12-18
31-12-19
31-12-20
NASIR ABBAS FCA
Opening
balance
Interest
Payment
[A]
[B = A x 9.38%]
[C]
91.48
94.06
96.89
Closing
balance
8.58
8.82
9.11
[A + B - C]
6.00
6.00
6.00
94.06
96.89
100.00
226
Q-4 Dec-17
Dr.
Cr.
------------ Rs. million ----------9.63
1.23
0.36
10.50
01-01-16
Financial liability (W-1)
Equity component (W-3)
Gain on liability repurchase [P&L] (W-3)
Cash [105 x 0.1m]
[Repurchase of convertible bonds]
01-01-16
P&L (W-4)
Equity component (W-4)
Cash [2 x 0.1m]
[Transaction costs paid]
0.18
0.02
Interest expense (W-1)
Financial liability
[Interest expense for 2016]
6.06
Financial liability
Cash
[Coupon payment for 2016]
5.40
31-12-16
31-12-16
W-1
Initial amount (W-2)
Interest expense [95.57m x 7%]
Cashflow [100m x 6%]
Balance 31-12-15
Repurchase [96.26 x 10%]
Interest expense [86.63m x 7%]
Cashflow [90m x 6%]
Balance 31-12-16
W-2
Initial measurement of liability component:
PV of interest cashflows:
2015 - 2019 [6m x 5-year annuity factor at 7% (i.e. KIBOR + 2%)]
2020 [3m x 1.07-6]
PV of principal payments:
2019 [50m x 1.07-5]
2020 [50m x 1.07-6]
0.20
6.06
5.40
Rs. million
95.57
6.69
(6.00)
96.26
(9.63)
86.63
6.06
(5.40)
87.29
24.60
2.00
35.65
33.32
95.57
227
W-3
Loss on repurchase of liability
PV of interest cashflows:
2016 - 2019 [6m x 4-year annuity factor at 8% (i.e. KIBOR + 2%)]
2020 [3m x 1.08-5]
PV of principal payments:
2019 [50m x 1.08-4]
Rs. million
19.87
2.04
2020 [50m x 1.08 ]
Fair value of liability component on 01-01-16
36.75
34.03
92.70
Fair value of liability component repurchased [92.70 x 10%]
Carrying amount of liability component repurchased (W-1)
Gain on repurchase of liability component
9.27
(9.63)
(0.36)
-5
Consideration allocated to equity:
Total consideration [105 x 0.1m]
Consideration for liability component
W-4
Allocation of transaction cost:
Financial liability component [0.2m x 9.27/10.50]
Equity component [0.2m x 1.23/10.50]
10.50
(9.27)
1.23
0.18
0.02
0.20
228
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOFP WITH ONE SUBSIDIARY
Consolidated SOFP (or Group SOFP) is line by line addition of all values in SOFPs of Parent (P) and Subsidiary (S), subject
to certain adjustments. Following are basic eliminations / calculations / workings which are essential for a consolidation
question:
(a)
GOODWILL / NEGATIVE GOODWILL
Consideration transferred for acquisition of controlling interest is mostly different from value of S’s
identifiable net assets at acquisition date. This difference is called “goodwill” (if +ve) and “negative goodwill
or bargain purchase gain” (if –ve).
IFRS 3 allows to carry NCI in Group SOFP at:
Proportionate share of fair values of net assets of “S” OR
- Fair value of NCI (i.e. Full goodwill method)
(i) NCI valued at proportionate share
(ii) NCI valued at Fair value
Consideration transferred
Less: P’s share in S’s identifiable net assets at acquisition
Consideration transferred
Fair value of NCI
Less: S’s identifiable net assets at acquisition
Goodwill / (negative goodwill)
Goodwill / (negative goodwill)
Irrespective of valuation method of NCI:
Goodwill is shown as a non-current asset in group SOFP
Negative goodwill is added to P’RE
(b)
POST ACQUISITION PROFITS AND OTHER RESERVES OF “S”
(i)
(ii)
P’s share in S’s post acquisition profits are ADDED to P’s RE to make it Group RE
P’s share in S’s post acquisition other reserves (e.g. revaluation reserve) are ADDED to P’s other
reserves in Group reserves
Acquisition related costs:
Acquisition related transactions costs (except for the issue costs relating to debt or equity securities issued as
consideration, in which case such costs are accounted for as IAS 32 and IFRS 9) incurred by P are considered as expense
for the purpose of consolidation.
If in question, such costs are included in cost of investment appearing in P’s SOFP, then:
DEDUCT from Investment in “Goodwill” working
DEDUCT from P’s RE as an expense in “Group RE” working
(c)
NON CONTROLLING INTEREST [NCI]
It is shown as a part of equity in Group SOFP and represents portion of S’s net assets that are not owned by P
(a) NCI valued at proportionate share
(b) NCI valued at Fair value
NCI is valued at:
(i)
Proportionate share of S’s net assets at
acquisition date PLUS
(ii)
NCI share in S’s post acquisition reserves
NCI is valued as:
(i)
Fair value of NCI at acquisition date PLUS
(ii)
NCI share in S’s post acquisition reserves
“S’s reserves” include revaluation reserve raised for group revaluation policy application
Nasir Abbas FCA
229
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Following adjustments are made for consolidation of statement of financial positions:
1.
IMPAIRMENT LOSS
Goodwill on acquisition is tested for impairment annually as a part of CGU. Generally whole “S” is a CGU and
therefore when it is tested for impairment, the impairment loss is allocated to goodwill and other assets of S as
per IAS 36. In questions, impairment loss of goodwill may be:
Given OR
Determined by impairment testing of CGU (i.e. S) as follows:
Recoverable amount of whole S
Less: Carrying amounts of:
Identifiable net assets of S (i.e. after making all fair value adjustments as well)
Full goodwill on acquisition (Note)
Total impairment loss
[This loss is now allocated as per IAS 36 i.e. first to full goodwill and then other assets]
X
X
X
(X)
X
Note:
If NCI is valued at fair value method, then Goodwill calculated at acquisition already reflects “Full
goodwill”.
If NCI is valued at proportionate share method, then goodwill on acquisition represents only the portion of
goodwill attributable to P whereas recoverable amount reflects contribution of total goodwill towards
cashflows of S. Therefore, only for the purpose of calculation of impairment loss, Goodwill is grossed up by
P’s% share to find “Full goodwill”.
Consolidation adjustment:
(1) Impairment loss on CGU allocated to other assets is:
(i) DEDUCTED from relevant assets in Group SOFP
(ii) DEDUCTED from S’s RE in “Group RE working”
(2) Impairment loss on CGU allocated to goodwill is charged as follows:
(a) NCI valued at proportionate share method
(b) NCI valued at Fair value method
“Total allocated loss x P% share” is:
(i) DEDUCTED from goodwill in “Goodwill
Working”
(ii) DEDUCTED from P’s RE in “Group RE
Working”
Total allocated loss is:
(i) DEDUCTED from goodwill in “Goodwill
Working”
(ii) DEDUCTED from S’s RE “Group RE working”
[Note: If impairment loss of goodwill is given, then use
that given figure and no need to apply P% share]
Memorandum entry:
Dr. Group RE
Cr. Goodwill
Nasir Abbas FCA
Dr. Group RE (P’s share)
Dr. NCI (NCI share)
Cr. Goodwill (Total)
230
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
2.
INTER COMPANY BALANCES
Examples:
Debtor and creditor [due to inter-company trading]
Loan (asset) and loan (liability) [due to inter-company loan]
Inter-company current account
P’s investment (asset) in S’s debentures (liability)
Reconciliation of inter-company balances:
If balances (receivable / payable) do not agree then following may be the reasons alongwith relative
adjustment:
Reason
(1.) Error
(2.) Cash in transit
(3.) Goods in transit
Adjustment
Correct error accordingly in relevant books
Dr. Cash (i.e. ADD in cash)
Cr. Receivables (i.e. DEDUCT from receivables)
Dr. Inventory (i.e ADD in inventory)
Cr. Payables (i.e. ADD to payables)
Elimination of inter-company balance:
Since balances have now agreed, these are ELIMINATED
Memorandum entry:
Dr. Payable (Agreed / adjusted balance)
Cr. Receivable
3.
UNREALIZED PROFIT IN INVENTORY [URP]
URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP =
Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP =
Total profit earned in the inter-company sale x % goods held in stock
Consolidation adjustment:
P to S sale
S to P sale
URP is DEDUCTED from:
(i)
Inventory in Group SOFP
(ii)
P’ RE in Group RE working
URP is DEDUCTED from:
(i)
Inventory in Group SOFP
(ii)
S' RE in Group RE working
Memorandum entry:
Dr. Group RE
Cr. Inventory
Nasir Abbas FCA
Dr. Group RE
Dr. NCI
Cr. Inventory
231
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
4.
(a) FAIR VALUE ADJUSTMENT FOR S’s NET ASSETS
IFRS 3 requires recognition of identifiable net assets of S at fair values on acquisition date (except for items
covered in IFRS 2, IFRS 5, IFRS 16, IAS 12 and IAS 19). Therefore, certain fair value adjustments are needed.
Information about fair value adjustments at acquisition date may be available as:
Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
Both Fair values and book values of S assets and liabilities are given (i.e. net assets)
Consolidation adjustment:
Asset/Liability still exists in books of S
For asset:
FV adjustment (increase) is ADDED to:
(i)
S’ net assets in “Goodwill working”
(ii)
Relevant asset’s NBV in Group SOFP
Asset/Liability was sold / settled after acquisition
For asset:
FV adjustment (increase) is:
(i)
ADDED to S’s net assets in “Goodwill working”
(ii)
DEDUCTED from S' RE in Group RE working
For liability:
FV adjustment (increase) is:
(i)
DEDUCTED from S’ net assets in “Goodwill
working”
(ii)
ADDED to Relevant liability’s NBV in Group
SOFP
For liability:
FV adjustment (increase) is:
(i)
DEDUCTED from S’s net assets in “Goodwill
working”
(ii)
ADDED to S' RE in Group RE working
Memorandum entry:
Dr. Relevant Asset
Cr. Goodwill
Cr. NCI
Cr. Relevant liability
Dr. Group RE
Dr. NCI
Cr. Goodwill
Cr. NCI
In case of FV adjustment (decrease) to S’s net assets, above adjustments will be reversed
Note – If subsequently S has accounted for any such fair value adjustment in its books, then it must be reversed.
4.
(b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books. This adjustment is not applicable if related
asset has been sold / realized after acquisition date.
Calculation of Extra accumulated depreciation:
= FV adjustment ÷ remaining useful life x years since acquisition
(above formula is for straight line method)
Consolidation adjustment:
Extra Accumulated depreciation is DEDUCTED from:
(i)
Relevant asset in Group SOFP
(ii)
S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. PPE
In case of negative adjustment to S’s net assets, above adjustments will be reversed
Nasir Abbas FCA
232
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
5.
(a) PROFIT ON INTER-COMPANY SALE OF NON-CURRENT ASSET
Profit in inter-company sale of non-current asset is unrealized unless the asset is fully depreciated by buyer.
Calculation of Profit:
Profit =
Sale value of Asset x margin %
OR
Sale value of Asset x markup / (100 + markup)
Consolidation adjustment:
P to S sale
S to P sale
Profit is DEDUCTED from:
(i)
Relevant Asset in Group SOFP
(ii)
P’ RE in Group RE working (i.e. seller)
Memorandum entry:
Dr. Group RE
Cr. Relevant asset
5.
Profit is DEDUCTED from:
(i)
Relevant Asset in Group SOFP
(ii)
S' RE in Group RE working (i.e. seller)
Dr. Group RE
Dr. NCI
Cr. Relevant asset
(b) EXCESS DEPRECIATION ON INTER-COMPANY SALE OF NON-CURRENT ASSET
As asset is depreciated, a portion of seller’s profit is realized. Therefore excess depreciation on profit is
deducted from seller’s profit on this sale OR added back to seller’s RE.
Calculation of Accumulated excess depreciation:
= Profit x depreciation % x years since sale of asset
[It is calculated using same depreciation basis as of buyer company in its books]
Consolidation adjustment:
P to S sale
Excess accumulated depreciation is ADDED to:
(i)
Relevant Asset in Group SOFP
(ii)
P’ RE in Group RE working (i.e. seller)
Memorandum entry:
Dr. Relevant asset
Cr. Group RE
S to P sale
Excess accumulated depreciation is ADDED to:
(i)
Relevant Asset in Group SOFP
(ii)
S' RE in Group RE working (i.e. seller)
Dr. Relevant asset
Cr. Group RE
Cr. NCI
ALTERNATIVELY [5 (a) and (b) can be combined as follows]
5.
UNREALIZED PROFIT ON INTER-COMPANY SALE OF NON CURRENT ASSET
Unrealized profit is the profit included in carrying amount of a non current asset transferred in inter-company
sale.
Calculation of Unrealized profit:
URP =
NBV of Asset x margin %
OR
NBV of Asset x markup / (100 + markup)
OR
URP =
Profit on sale – excess depreciation charged by buyer to date
OR
URP =
Nasir Abbas FCA
NBV appearing in books of buyer – NBV (ignoring profit)
233
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Consolidation adjustment:
P to S sale
S to P sale
URP is DEDUCTED from:
(i)
Relevant Asset in Group SOFP
(ii)
P’ RE in Group RE working (i.e. seller)
URP is DEDUCTED from:
(i)
Relevant Asset in Group SOFP
(ii)
S' RE in Group RE working (i.e. seller)
Memorandum entry:
Dr. Group RE
Cr. Relevant asset
6.
Dr. Group RE
Dr. NCI
Cr. Relevant asset
S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION
Consolidation adjustment:
IFRS 3 allows to recognize some items (e.g. brand, customer relationship) as intangible asset in Group
SOFP even if it was not recognized by S. Treat this just like a fair value adjustment of an asset which had
“zero” carrying amount in S’s books.
Fair value at acquisition date is:
(i)
ADDED to Intangible assets in Group SOFP
(ii)
ADDED to S’s net assets in “Goodwill working”
Memorandum entry:
Dr. Intangible assets
Cr. Goodwill
Cr. NCI
Accumulated amortization since acquisition is:
(i)
DEDUCTED from relevant asset in Group SOFP
(ii)
DEDUCTED from S’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. Intangible assets
7.
S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
Consolidation adjustment:
IFRS 3 allows the recognition of a contingent liability of S if it is a present obligation that arises from past
events and its fair value can be reliably measured.
Initial measurement
Fair value at acquisition date is:
(i)
ADDED to liabilities in Group SOFP
(ii)
DEDUCTED from S’s net assets in “Goodwill working”
Memorandum entry:
Dr. Goodwill
Dr. NCI
Cr. Liability
Nasir Abbas FCA
234
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Subsequent measurement
After initial recognition and until the liability is settled, cancelled or expires, the liability shall be
measured at the higher of:
(i)
the amount initially recognized
(ii)
the amount that would be recognized in accordance with IAS 37
If (ii) is higher, then the increase is DEDUCTED from S RE in “Group RE working”
[In other words, subsequent measurement is only needed if initially recognized amount is to be
increased]
Memorandum entry:
Dr. Group RE
Dr. NCI
Cr. Liability
Note – If S has subsequently accounted for this obligation in its books, then reverse the treatment done by S
Provisional amounts
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the
combination occurs, the acquirer shall report in its financial statements provisional amounts for the items for which the
accounting is incomplete. During the measurement period, the acquirer shall retrospectively adjust the provisional
amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that
existed as of the acquisition date and, if known, would have affected the measurement of the amounts recognized as of
that date. During the measurement period, the acquirer shall also recognize additional assets or liabilities if new
information is obtained about facts and circumstances that existed as of the acquisition date and, if known, would have
resulted in the recognition of those assets and liabilities as of that date. The measurement period ends as soon as the
acquirer receives the information it was seeking about facts and circumstances that existed as of the acquisition date or
learns that more information is not obtainable. However, the measurement period shall not exceed one year from the
acquisition date.
8.
MODES OF CONSIDERATION GIVEN FOR INVESTMENT [OTHER THAN CASH]
(1) Loan note issue (or debentures, bonds etc.)
In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
this mode of consideration has been recorded by “P” in its books
Calculation of cost of investment:
Cost of investment = no. of P’s loan notes issued x issue price
[Here: P’s notes issued = S’s shares acquired x loan note exchange ratio]
Consolidation adjustment: (If still unrecorded)
(i)
INCLUDE this amount in P’s investment in “Goodwill working”
(ii)
SHOW this amount in “Non-current liabilities” in Group SOFP
If P has already accounted for this issue then no adjustment required in non-current liabilities
(2) Share exchange
In questions, generally, it is unrecorded. Before eliminating investment for consolidation, ensure whether
this mode of consideration has been recorded by “P” in its books
Calculation of cost of investment:
Cost of investment = no. of P’s shares issued x market value of P’s shares at acquisition.
[Here: P’s shares issued = S’s shares acquired x share exchange ratio]
Nasir Abbas FCA
235
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
In case of consideration only in form of share exchange, if fair value of P’s shares is not reliably
measurable then fair value of S’s shares is used to find cost of investment.
Consolidation adjustment: (If still unrecorded)
(i)
INCLUDE this amount in P’s investment in “Goodwill working”
(ii)
ADD nominal value of shares in P’s share capital in Group SOFP
(iii) ADD excess of (i) over (ii), if any, to P’s share premium in Group SOFP
If P has already accounted for this issue then no adjustment required in share capital and premium.
(3) Deferred consideration
In questions, generally, it is unrecorded.
Calculation of cost of investment:
Cost of investment = Present value of deferred consideration at acquisition date discounted at P’s cost of
capital (or any other given discount rate)
Consolidation adjustment: (If still unrecorded)
(i)
INCLUDE above amount in P’s investment in “Goodwill working”
(ii)
SHOW present value of deferred consideration at SOFP date as liability in Group SOFP
(iii) DEDUCT excess of (ii) over (i) from P’s RE as finance cost in “Group RE working”
(4) Contingent consideration
In questions, generally, it is unrecorded.
Calculation of cost of investment:
Cost of investment = Fair value of contingent consideration at acquisition date
Consolidation adjustment: (If still unrecorded)
(i)
INCLUDE above amount in P’s investment in “Goodwill working”
(ii)
SHOW fair value of contingent consideration at SOFP date as liability in Group SOFP
(iii) ADD/DEDUCT any decrease/increase in fair value of contingent consideration since acquisition
date (i.e. changes resulting from events after the acquisition date) from P’s RE in “Group RE
working”
[Contingent consideration classified as equity shall not be remeasured]
(5) Other assets (e.g. land)
In questions, generally, it is unrecorded.
Calculation of cost of investment:
Cost of investment = Fair value of the asset transferred at acquisition date
Consolidation adjustment: (If still unrecorded)
(i)
INCLUDE above amount in P’s investment in “Goodwill working”
(ii)
DERECOGNIZE the carrying amount of asset
(iii) ADD/DEDUCT any gain/loss (i.e. fair value – carrying amount) in P’s RE in “Group RE working”
[If shares were acquired from “S” instead of its former owners and the asset transferred as
consideration remains with S, then “cost of investment” includes carrying amount of that asset and no
derecognition is required.]
If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value gain/loss recorded
Nasir Abbas FCA
236
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
9.
ACQUISITION DURING THE YEAR
Consolidation adjustment:
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves =
S’s reserves at SOFP date – income for the year x n/12
(n = no. of months from acquisition to year end)
Post acq. reserves=
S’s reserves at SOFP date – pre acquisition reserves
OR
Income for the year x n/12
10.
DEFERRED TAX ADJUSTMENTS
(i) Additional Deferred tax asset/liability shall be recognized on fair value adjustments in S net assets at
acquisition date and INCLUDED in:
S net assets in goodwill working
DTA/DTL in Group SOFP
(ii) Additional Deferred tax shall be calculated for all consolidation adjustments in P as well as S net assets
after acquisition and:
CHARGED in respective RE column in Group RE working
ADDED to or DEDUCTED from DTA/DTL in Group SOFP
11.
ADJUSTMENT FOR GROUP ACCOUNTING POLICIES
Group member should follow uniform accounting policies. However, if S follows different accounting
policies, then adjustments are made while consolidation to convert figures from S financial position in
accordance with group policies.
(i) If inventory valuation method is changed
ADD / (DEDUCT) any increase / (decrease) in inventory value due to policy change effect from:
“Inventory” in Group SOFP
“S post acquisition RE” in Group RE working
(ii) If Group follows revaluation model and S follows cost model
ADD post acquisition increase in fair value of relevant assets to:
“relevant asset” in Group SOFP [Total increase]
“P’s revaluation surplus [P’s share of increase]
“Share in S’s other reserves” in NCI working [NCI’s share of increase]
12.
DIVIDEND PAID / PAYABLE BY “S”
Types of dividends:
Pre acq. dividend:
Post acq. dividend:
Dividend paid / payable (after acquisition) out of pre-acquisition profits
Dividend paid / payable out of post-acquisition profits
Consolidation adjustment of pre-acquisition dividend
If P has recognized it as an income, then:
(i) DEDUCT it from Investment in “Goodwill working” AND
(ii) DEDUCT if from P’s RE in “Group RE working”
Consolidation adjustment of post-acquisition dividend
Adjustments are tabulated on last page of these notes using following example:
Example
S declares a dividend of Rs. 100
P owns 80% shares of S
Nasir Abbas FCA
237
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
FORMATS AND WORKINGS
P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE
(P’s + S’s + FV adj. at acquisition – Acc. extra dep. on FV adj. – URP on asset sale + revaluation
policy application +/- any other adjustment)
XXX
Intangible assets
(P’s + S’s + NBV of Identifiable asset recognized at acquisition)
XXX
Goodwill (W – 1)
XXX
Investment
(P’s + S’s – P’s investment in S eliminated)
XXX
CURRENT ASSETS:
Inventory
(P’s + S’s – URP [P to S / S to P] + Goods in transit)
XXX
Receivables
XXX
(P’s + S’s +/- correction of error– cash in transit – intercompany balance + any other asset recognized at acquisition)
Dividend receivables
(P’s + S’s + unrecorded dividend – intercompany receivable)
XXX
Cash / Bank
(P’s + S’s + Cash in transit +/- correction of error)
XXX
XXX
Rs.
CAPITAL AND RESERVES:
Share capital
(P’s + unrecorded P’s shares issued as purchase consideration)
XXX
Share premium
(P’s + unrecorded premium on P’s shares issued as purchase consideration)
XXX
Other reserves (W – 2)
XXX
Retained earnings (W – 3)
XXX
Non-controlling interest (W – 4)
XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures
(P’s + S’s – Intercompany balance + unrecorded P’s loan notes issued as purchase consideration)
Nasir Abbas FCA
XXX
238
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Deferred consideration
(Present value at SOFP date)
XXX
Contingent consideration
(Fair value at SOFP date)
XXX
Deferred tax
(P’s + S’s +/- deferred tax on consolidation adjustments)
XXX
CURRENT LIABILITIES:
Payables
(P’s + S’s + goods in transit +/- correction of error – intercompany balance + contingent liab. recognized)
XXX
Dividend payable
(P’s + S’s + unrecorded dividend – intercompany payable)
XXX
XXX
WORKINGS
(W – 1) Goodwill
Case I – NCI is valued at Fair value
Rs.
Consideration transferred for ordinary shares:
Cash paid
Loan notes issued
Share exchange
Any other non-cash asset transferred
Deferred consideration
Contingent consideration
Fair Value of NCI (Note 1)
XXX
XXX
XXX
XXX
XXX
XXX
Less: S’s net assets at acquisition:
S’s Capital
Add: S’s Premium
Add: S’s Pre-acquisition other reserves
Add: S’s Pre-acquisition RE
Add/Less: Fair value adjustment
Less: Liabilities recognized
Add: Assets recognized at acquisition
Goodwill at acquisition
Less: Accumulated impairment loss (Total)
Carrying amount of goodwill
Rs.
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
XXX
(XXX)
XXX
(XXX)
XXX
Note 1: Fair value of NCI can be determined as follows in exam questions:
1)
Fair value of NCI is given in question.
2)
Share price of S at acquisition date is given then:
Fair value of NCI = no. of shares held by NCI x Share price
Nasir Abbas FCA
239
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Case II – NCI is valued at proportionate share
Rs.
Consideration transferred:
Cash paid
Loan notes issued
Share exchange
Any other non-cash asset transferred
Deferred consideration
Contingent consideration
Proportionate value of NCI [S’s net assets at acquisition x NCI%]
XXX
XXX
XXX
XXX
XXX
XXX
Less: S’s net assets at acquisition:
S’s Capital
Add: S’s Premium
Add: S’s Pre-acquisition other reserves
Add: S’s Pre-acquisition RE
Add/Less: Fair value adjustment
Less: Liabilities recognized
Add: Assets recognized at acquisition
Rs.
XXX
XXX
XXX
XXX
XXX
XXX
XXX
XXX
(XXX)
XXX
(XXX)
XXX
(XXX)
XXX
Goodwill at acquisition
Less: Accumulated impairment loss (Total)
Carrying amount of goodwill
(W – 2) Other reserves
Rs.
P’s other reserves
Add: S’s Other reserves
Less: S’s other reserves at acquisition date
Rs.
XXX
XXX
(XXX)
XXX
Group share @ (% share in ordinary shares)
XXX
XXX
(W – 3) Retained earnings
Rs.
P’s RE
Less: Accumulated impairment loss of goodwill [Note 2]
Less: URP on goods [ P to S ]
Less: URP on asset sale [ P to S ]
Less: Finance cost on deferred consideration
Less: change in fair value of contingent consideration
Add / Less: correction of error
Add: negative goodwill (total)
Add: Unrecorded income (including dividend from S)
Add: S’s RE
Less: Pre-acquisition RE
Less: Acc. Impairment loss of goodwill [Note 2]
Less: URP on goods [ S to P ]
Less: Profit on asset sale [ S to P ]
Less: FV adjustment of asset sold after acquisition
Less/Add: Extra depreciation on FV adjustment
Nasir Abbas FCA
Rs.
XXX
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
XXX
XXX
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
240
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
Less: Amortization on asset recognized at acq.
Less: change in value of contingent liab. recognized
Less: unrecorded post acquisition dividend
Add / Less: correction of error
Add: unrecorded income
Group share @ (% share in ordinary shares)
Note 2:
NCI is valued at fair value:
NCI is valued at proportionate basis:
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
XXX
XXX
Impairment loss of goodwill is deducted from S RE
Impairment loss of goodwill is deducted from P RE
(W – 4) Non-controlling interest
Case I – NCI is valued at Fair value
Rs.
Fair value of NCI at acquisition date
XXX
Add: Share in S’s post acquisition other reserves (W – 2)
[NCI % share in ordinary shares]
XXX
Add: Share in S’s post acquisition RE (W – 3)
[NCI % share in ordinary shares]
XXX
XXX
Case II – NCI is valued at proportionate share
Rs.
Proportionate value of NCI at acquisition date (W – 1)
XXX
Add: Share in S’s post acquisition other reserves (W – 2)
[NCI % share in ordinary shares]
XXX
Add: Share in S’s post acquisition RE (W – 3)
[NCI % share in ordinary shares]
XXX
XXX
Nasir Abbas FCA
241
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] – Class notes
POST AQCUISITION DIVIDEND
PAID
1-Recorded by both
NOT YET PAID [Declared before year end]
2-Recorded by both
3-Not recorded by (P)
4-Not recorded by (S)
5-Not recorded by both
Entries which have been made in separate books:
P
Cash 80
Income 80
S
R.E. 100
Cash 100
P
D.R. 80
Income 80
S
R.E. 100
D.P. 100
P
S
R.E. 100
D.P. 100
P
D.R. 80
Income 80
S
P
S
Consolidation adjustments required – In Group SOFP:
No adjustment required.
Eliminate Inter company
balance of 80
Dividend Payable 80
Dividend Receivable 80
(i). Add P’s share in S’s
dividend to P’s RE in “Group
RE working”
(i). Deduct S’s total dividend
from S’s post acquisition
profits
(i). Add P’s share in S’s
dividend to P’s RE in “Group
RE working”
Dividend Receivable 80
Group RE 80
Group RE 80
NCI
20
Dividend Payable 100
Dividend Receivable 80
Group RE 80
(ii). Then eliminate inter
company balance of 80
Dividend Payable 80
Dividend Receivable 80
(ii). Then eliminate inter
company balance of 80
(ii). Deduct S’s total dividend
from S’s post acquisition
profits
Dividend Payable 80
Dividend Receivable 80
Group RE 80
NCI
20
Dividend Payable 100
(iii). Then eliminate inter
company balance of 80
Dividend Payable 80
Dividend Receivable 80
Nasir Abbas FCA
242
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
PRACTICE QUESTIONS
Question No. 1
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
(i)
(ii)
(iii)
(iv)
65,000
50,000
75,000
10,000
12,000
12,000
7,000
146,000
11,000
13,000
8,000
117,000
45,000
5,000
14,000
61,000
32,000
3,000
7,000
53,000
-
-
21,000
22,000
146,000
117,000
Following further information is available:
P acquired 90% shares of S some years ago for Rs. 47,000 when other reserves were Rs. 3,000 and retained
earnings were Rs. 7,500.
Fair value of non-controlling interest at acquisition date was Rs. 16 per share.
At year end, goodwill is impaired by Rs. 1,000.
During the year P sold some goods to S in respect of which, Rs. 6,000 is still included in debtors. This balance does
not agree with S records due to a cash in transit of Rs. 1,000.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 2
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
NASIR ABBAS FCA
60,000
40,000
60,000
-
10,000
12,000
4,000
126,000
12,000
10,000
7,000
89,000
243
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Debentures
Current liabilities
Creditors
P
S
---------- Rs.-------45,000
24,000
4,500
2,400
9,000
6,000
49,500
25,600
-
20,000
18,000
11,000
126,000
89,000
Following further information is available:
(i)
P acquired 1800 shares of S some years ago for Rs. 31,000 when other reserves were Rs. 3,000 and retained
earnings were Rs. 8,200.
(ii)
At year end, goodwill is impaired by Rs. 1,000.
(iii)
During the year P sold goods to S for Rs. 9,000 at a profit margin of 20%. Half of these goods are still included in
S stock.
(iv)
In respect of above sales, P debtors include Rs. 7,000. This balance does not agree with S records due to a
payment of Rs. 500 double recorded by S.
(v)
P investments also include investment in 20% of S debentures.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 3
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs. ---------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
S current account
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Bank loan
Current liabilities
Creditors
P current account
NASIR ABBAS FCA
65,000
30,000
60,000
5,000
9,000
5,000
11,000
5,000
125,000
10,000
10,000
8,000
93,000
40,000
4,000
13,000
52,000
30,000
3,000
22,000
-
20,000
16,000
125,000
11,000
7,000
93,000
244
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Following further information is available:
(i)
P acquired 80% shares of S some years ago for Rs. 21,000 when retained earnings had a debit balance of
Rs.4,000.
(ii)
Fair value of non controlling interest at acquisition date was Rs. 9.5 per share.
(iii)
During the year S sold goods to P for Rs. 10,000. Profit included in this sale was Rs. 1,000. P still has worth Rs.
5,000 of these goods held in its inventory.
(iv)
There is no intercompany balance included in debtors and creditors at year end. P provides certain management
services to S in respect of which intercompany current account is maintained. The difference in current account
balances at year end is due to an error when P recorded a receipt of Rs. 1,000 as Rs. 3,000.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 4
Following are the balance sheets as at June 30, 2019:
P
S
----------- Rs.----------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
S current account
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
P current account
90,000
80,000
64,000
5,000
11,000
8,000
10,000
5,000
204,000
10,000
11,000
8,000
98,000
80,000
5,000
9,000
94,000
40,000
4,000
6,000
25,000
-
-
16,000
204,000
18,000
5,000
98,000
Following further information is available:
(i)
P acquired 3600 shares of S last year for Rs. 75,000 when other reserves were 6,000 and retained
earnings were Rs. 28,000.
(ii)
At acquisition date, fair value of land of S was Rs. 2,000 higher than its carrying amount. Fair values of
other nets assets were approximately equal to their carrying amounts.
(iii)
At year end, recoverable amount attributable to goodwill is Rs. 1,200.
(iv)
During the year P sold goods, costing Rs. 9,000, to S for Rs. 12,000. 40% of these goods are still held in
stock of S at year end.
(v)
P provides certain management services to S in respect of which intercompany current account is
maintained. The difference in current account balances at year end is due to an invoice for such services
amounting to Rs. 3,000 sent and recorded by P but not received and recorded by S.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
NASIR ABBAS FCA
245
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Question No. 5
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investment
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
90,000
41,000
70,000
-
12,000
10,000
5,000
158,000
10,000
12,000
5,000
97,000
60,000
6,000
71,000
40,000
4,000
37,000
-
-
21,000
16,000
158,000
97,000
Following further information is available:
(i)
P acquired 60% shares of S some years ago when retained earnings were Rs. 11,000.
(ii)
At acquisition date, land of S was undervalued by Rs. 2,000. This land was sold last year. Fair values of other
nets assets were approximately equal to their carrying amounts at acquisition date.
(iii)
Fair value of non-controlling interest at acquisition date was Rs. 25,600.
(iv)
At year end, impairment loss of goodwill is Rs. 1,600.
(v)
During the year S sold goods to P for Rs. 5,000 at a profit markup of 25% on credit. By year end, these goods
were not received by P and therefore not recorded in its books.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 6
Following are the balance sheets as at June 30, 2019:
P
S
------------ Rs.---------Non-current assets
Property, plant & equipment
Investment
Current assets
Inventories
Debtors
Cash & bank
NASIR ABBAS FCA
60,000
38,000
70,000
-
12,000
21,000
5,000
136,000
15,000
13,000
7,000
105,000
246
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
P
S
---------- Rs.-------54,000
36,000
5,000
5,000
63,000
47,000
Current liabilities
Creditors
14,000
17,000
136,000
105,000
Following further information is available:
(i)
P acquired 55% shares of S on July 1, 2017 when other reserves were Rs. 2,000 and retained earnings were Rs.
18,000.
(ii)
At acquisition date, fair value of total net assets was Rs. 60,000. The excess of fair value was attributable to
plant and machinery. At that date, remaining life of plant and machinery was 5 years.
(iii)
Fair value of non controlling interest at acquisition date was Rs. 18 per share.
(iv)
(v)
At year end, impairment loss of goodwill is Rs. 2,000.
P had been selling goods to S on credit throughout the year at a markup of 20%. Following information has been
extracted from their books:
Books of P:
Goods sold to S
Receivable from S (included in debtors)
Rs. 35,000
Rs. 7,000
Books of S:
Goods purchased from P
Payable to P (included in creditors)
Rs. 32,000
Rs. 8,000
Some goods were dispatched by P on June 29th. These goods were not received and therefore not recorded by
S b year end. Any remaining difference in intercompany balance, after adjusting for goods in transit, is due to
double recording by P in respect of a receipt from S.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 7
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.---------Non-current assets
Property, plant & equipment
Investment
Loan to S
Current assets
Inventories
Debtors
Cash & bank
NASIR ABBAS FCA
75,000
42,500
15,000
75,000
-
16,000
11,000
5,000
164,500
15,000
18,000
3,000
111,000
247
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Loan from P
Current liabilities
Creditors
P
S
---------- Rs.-------50,000
35,000
4,000
3,500
11,000
6,000
78,500
39,500
-
12,000
21,000
15,000
164,500
111,000
Following further information is available:
(i)
P acquired 70% shares of S on July 1, 2017 when other reserves were Rs. 2,500 and retained earnings were Rs.
14,000.
(ii)
At acquisition date, a building of S was overvalued by Rs. 3,000. At that date, remaining life of building was 5
years.
(iii)
On July 1, 2018, S obtained a loan of Rs. 15,000 from P at an annual interest of 10%. On June 30, 2019 S made
a total payment of Rs. 4,500 including interest for the year to P. However, P did not receive this payment by
year end. P has also not accrued the interest income for the year.
(iv)
On January 1, 2019, P sold a machine costing Rs. 15,000 to S for Rs. 17,000. S depreciates its plant and machinery
@ 20% on straight line basis.
(v)
At year end, impairment loss of goodwill is Rs. 1,100.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 8
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
NASIR ABBAS FCA
80,000
60,000
60,000
10,000
16,000
11,000
5,000
172,000
10,000
6,000
2,000
88,000
50,000
5,000
12,000
88,000
30,000
3,000
5,000
39,000
-
-
17,000
11,000
172,000
88,000
248
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Following further information is available:
P acquired 2700 shares of S on January 1, 2018 for Rs. 54,000 when other reserves were Rs. 1,000 and retained
(i)
earnings were Rs. 15,000.
(ii)
At acquisition date, fair value of an internally generated brand of S was Rs. 5,000. Useful life of this brand is
estimated at 5 years.
(iii)
Fair value of non controlling interest at acquisition date was Rs. 5,700.
(iv)
To date, consolidated goodwill is impaired by 40%.
(v)
During the year S sold goods to P for Rs. 16,000 at a markup of 33 % on cash. By year end, P has sold only 40%
1
3
of these goods to its customers.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 9
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investment
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Loan notes
Current liabilities
Creditors
80,000
16,000
57,000
-
8,000
9,000
7,000
120,000
5,000
12,000
6,000
80,000
45,000
5,000
3,000
41,500
40,000
4,000
1,000
23,400
16,000
-
9,500
11,600
120,000
80,000
Following further information is available:
P acquired 80% shares of S on July 1, 2018. The purchase consideration consisted of two elements: a share
(i)
exchange of three shares in P for every five acquired shares in S and the issue of Rs. 100 8% loan note for every
20 shares acquired. The share issue has not yet been recorded by P but the issue of the loan notes has been
recorded. At acquisition date, shares in P had a market value of Rs. 18 each and the shares in S had a market
value of Rs. 14 each.
(ii) At acquisition date, the fair value of property of S was Rs. 4,000 below its carrying amount. This would lead to
a reduction of depreciation charge of Rs. 400 in 2019. Fair values of other nets assets were approximately equal
to their carrying amounts.
(iii) It is group’s policy to value non controlling interest at fair value.
(iv) At year end, impairment loss of goodwill is Rs. 1,000.
(v) During the year S sold goods to P for Rs. 5,000 at a profit markup of 25%. By year end, half of these goods were
held in P’s stock.
(vi) Net profit for the year 2019 earned by S was Rs. .9,000. There has been no increase in other reserves from last
year.
NASIR ABBAS FCA
249
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 10
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
75,000
60,000
65,000
8,000
16,000
11,000
5,000
167,000
9,000
11,000
4,500
97,500
50,000
5,000
15,000
75,000
40,000
4,000
3,000
38,500
-
-
22,000
12,000
167,000
97,500
Following further information is available:
(i)
P acquired 75% shares of S on January 1, 2019 for Rs. 58,000.
(ii)
Following were the net assets of S at June 30, 2018:
Rs.
Share capital (Rs. 10 per share)
40,000
Share premium
4,000
Other reserves
3,000
Retained earnings
20,500
(iii)
At acquisition date, fair value of an internally generated brand of S was Rs. 4,500. This brand can be assumed
to have indefinite useful life.
(iv)
After acquisition, P sold certain raw material to S at their cost of Rs. 7,000. S processed all of this material at an
additional cost of Rs. 3,000 and sold back the finished goods to P at a markup of 25%. At year end 40% of these
goods are still included in stock of P.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
NASIR ABBAS FCA
250
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Question No. 11
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
70,000
60,000
60,000
5,000
16,000
11,000
5,000
162,000
10,000
9,000
6,000
90,000
60,000
6,000
12,000
67,000
30,000
3,000
43,000
-
-
17,000
162,000
14,000
90,000
Following further information is available:
(i)
P acquired 80% shares of S on November 1, 2018 for Rs. 25 per share.
(ii)
At acquisition date, fair value of an internally generated brand of S was Rs. 6,000. Useful life of this brand is
estimated at 5 years.
(iii)
Fair value of non controlling interest at acquisition date was Rs. 24 per share.
(iv)
On January 1, 2019 S sold an owned machine to P earning a profit of Rs. 4,000. Cost of this machine was Rs.
Rs. 30,000 and at the date of sale it had been depreciated to Rs. 18,000. P is depreciating this machine at 20%
on straight line basis.
(v)
S earned a net profit of Rs. 21,000 for the year.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 12
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
NASIR ABBAS FCA
90,000
50,000
80,000
5,000
12,000
11,000
7,000
170,000
11,000
12,000
8,000
116,000
251
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Current liabilities
Creditors
Dividend payable
P
S
---------- Rs.-------50,000
50,000
5,000
5,000
15,000
7,000
81,000
42,000
-
-
14,500
4,500
170,000
12,000
116,000
Following further information is available:
(i)
P acquired 60% shares of S on July 1, 2018 for Rs. 15 per share when other reserves were Rs. 4,000 and retained
earnings were Rs. 11,000.
(ii)
At acquisition date, fair value of plant and machinery was Rs. 4,000 less than the carrying amount. Remaining
life of plant and machinery at that date was 5 years.
(iii)
On June 30, 2019 S declared a dividend of Re. 1 per share. Neither P nor S has recorded this dividend.
(iv) At year end, goodwill is impaired by Rs. 2,000.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 13
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Revaluation surplus
Retained earnings
Non-current liabilities
Current liabilities
Creditors
100,000
50,000
70,000
10,000
9,000
10,000
4,000
173,000
7,000
8,000
5,000
100,000
60,000
6,000
8,000
84,500
50,000
5,000
35,500
-
-
14,500
9,500
173,000
100,000
Following further information is available:
(i)
P acquired 70% shares of S some years ago for Rs. 50,000 when retained earnings were Rs. 10,000.
(ii)
At acquisition date, fair value of non controlling interest was Rs. 14 per share.
NASIR ABBAS FCA
252
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
(iii)
At acquisition date, fair value of land of S had a fair value higher than book value by Rs. 3,000. Since acquisition
this fair value has further increased by Rs. 4,000.
(iv)
S follows cost model for all of its fixed assets whereas group’s policy is to carry land at revaluation model.
(v)
On June 30, 2019 P and S both declared a dividend of Re. 1 per share. Neither P nor S has recorded any dividend.
(vi) At year end, goodwill is impaired by Rs. 500.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
Question No. 14
The following summarized statements of financial position pertain to Alpha Limited (AL) and its subsidiary Delta Limited
(DL) as at 30 June 2014.
Property plant and equipment
Investment (2 million shares of DL)
Long term loan granted to DL
Current assets
Share capital (Rs. 100 each)
Retained earnings
Long term borrowings
Current liabilities
AL
DL
----------- Rs. in million -------460
200
340
30
595
400
1,425
600
600
325
200
300
1,425
250
200
72
78
600
Following relevant information is available:
(i)
(ii)
(iii)
AL acquired investment in DL on 1 July 2013 when retained earnings of DL were Rs. 140 million and the fair value
of DL's net assets was equal to their carrying values.
Both the companies depreciate equipment at 10%, on straight line basis. On 30 June 2014, AL sold certain
equipment to DL as detailed below:
Rs. in million
Cost
40
Accumulated depreciation
30
Sale proceeds
25
Inter-company sales of goods are invoiced at a mark-up of 20%. The relevant details are as under:
AL’s inventory includes goods purchased from DL
DL’s inventory includes goods purchased from AL
Receivable from DL on June 30, 2014 as per AL’s books
Payable to AL on June 30, 2014 as per DL’s books
(iv)
(v)
Rs. in million
27
24
19
19
Long term loan was granted to DL on 1 July 2013. It is repayable after five years and carries interest at 12% per
annum, payable on 30 June and 31 December, each year.
AL values non-controlling interest at the acquisition date at its fair value which was Rs. 80 million.
Required:
Prepare a consolidated statement of financial position as at 30 June 2014 in accordance with the requirements of
International Financial Reporting Standards.
(15)
(Autumn 2014,Q#6)
NASIR ABBAS FCA
253
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Question No. 15
On 1 July 2014, Galaxy Limited (GL) acquired controlling interest in Beta Limited (BL). The following information has been
extracted from the financial statements of GL and BL for the year ended 30 June 2015:
GL
BL
----------- Rs. in million -------100
50
40
18
20
6
160
74
Share capital (Rs. 100 each)
Retained earnings – 1 July 2014
Profit for the year ended 30 June 2015
Shareholders’ equity / Net assets
Investment in BL (300,000 shares)
Inter-company sales (at invoice value)
Inter-company purchase remained unsold at year end
Inter-company current account balances [Dr. / (Cr.)]
50
25
9
7
30
5
(4)
Other relevant information is as under:
(i)
On the date of acquisition, fair value of BL's net assets was equal to their book value except for the following:
Fair value of a land exceeded its carrying value by Rs. 20 million.
The value of a plant was impaired by Rs. 10 million. The impairment was also recorded by BL on 2 July
2014.
BL measures its property, plant and equipment using cost model.
(ii)
(iii)
There is no change in share capital since 1 July 2014.
Inter-company sales are invoiced at cost plus 20%. The difference between the current account balances is due
to goods dispatched by GL on 30 June 2015 which were received by BL on 5 July 2015.
GL values non-controlling interest at the acquisition date at its fair value which was Rs. 35 million.
As at 30 June 2015, goodwill of BL was impaired by 10%.
(iv)
(v)
Required:
Compute the amounts of goodwill, consolidated retained earnings and non-controlling interest as they would appear in
GL's consolidated statement of financial position as at 30 June 2015.
(15)
(Autumn 2015,Q#6)
Question No. 16
Following information has been extracted from the financial statements of Yasir Limited (YL) and Bilal Limited (BL) for the
year ended 30 June 2016.
Assets
Fixed assets
Accumulated depreciation
Investment in BL – at cost
Loan to BL
Stock in trade
Other current assets
Cash and bank
NASIR ABBAS FCA
YL
BL
Rs. in million
250
540
(70)
(70)
180
470
675
16
160
150
71
50
63
151
1,165
821
Equity & Liabilities
Share capital (Rs. 10 each)
Retained earnings
Loan from YL
Creditors & other liabilities
YL
BL
Rs. in million
750
500
340
258
1,090
758
12
75
51
1,165
821
254
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Additional information:
(i)
(ii)
On 1 July 2014, YL acquired 75% shares of BL at Rs. 18 per share. On the acquisition date, fair value of BL’s net
assets was equal to its book value except for an office building whose fair value exceeded its carrying value by
Rs. 12 million. Both companies provide depreciation on building at 5% on straight line basis.
Year-wise net profit of both companies are given below:
(iii)
2016
2015
-------- Rs. in million -----YL
219
105
BL
11
168
The following inter-company sales were made during the year ended 30 June 2016:
Included in buyer’s
closing stock in trade
----------- Rs. in million ---------120
20
80
32
Sales
YL to BL
BL to YL
(iv)
(v)
(vi)
(vii)
Profit %
30% on cost
15% on sale
BL declared interim dividend of 12% in the year 2015 and final dividend of 20% for the year 2016.
The loan was granted by YL to BL on 1 July 2014 and carries interest rate of 12% payable annually. The principal
is repayable in five equal annual installments of Rs. 4 million each. On 30 June 2016, BL issued a cheque of Rs.
5.92 million which was received by YL on 2 July 2016. No interest has been accrued by YL.
YL values non-controlling interest on the date of acquisition at its fair value. BL’s share price was Rs. 15 on
acquisition date.
An impairment test has indicated that goodwill of BL was impaired by 10% on 30 June 2016. There was no
impairment during the previous year.
Required:
Prepare a consolidated statement of financial position as at 30 June 2016 in accordance with the requirements of
International Financial Reporting Standards.
(18)
(Autumn 2016, Q#1)
Question No. 17
The draft summarized statements of financial position of Golden Limited (GL) and its subsidiary Silver Limited (SL) as at
31 December 2016 are as follows: GL SL
GL
SL
------------ Rs. in million ---------Building
1,600
500
Plant & machinery
1,465
690
Investment in SL
327
Current assets
2,068
780
5,460
1,970
Share capital (Rs. 10 each)
Share premium
Retained earnings
Liabilities
(i)
980
730
3,150
4,860
600
5,460
450
150
210
810
1,160
1,970
GL acquired 60% of the shares of SL on 1 April 2016 at following consideration:
Issuance of 20 million ordinary shares at premium of Rs. 2 each;
Cash amounting to Rs. 87 million, which includes consultancy charges of Rs. 10 million and legal expenses of
Rs. 5 million.
NASIR ABBAS FCA
255
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
(ii)
The market value of each share of GL and SL on acquisition date was Rs. 25 and Rs. 11 respectively. At acquisition
date, retained earnings of SL were Rs. 100 million.
The following table sets out those items whose fair value on the acquisition date was different from their book
value. These values have not been incorporated in SL’s books of account.
Book value
Fair value
------------ Rs. in million ---------Building
250
170
Inventory
112
62
Provision for bad debts
(15)
(24)
(iii)
Upon acquisition of SL, a contract for management services was also signed under which GL would provide
various management services to SL at an annual fee of Rs. 50 million from the date of acquisition. The payment
would be made in two equal instalments payable in arrears on 1 April and 1 October.
(iv)
On 30 September 2016, GL acquired a plant from SL in exchange of a building which was currently not in use of
GL. The details of plant and building are as follows:
Cost
Building
Plant
* Equivalent to fair value
Accumulated
*Exchange
depreciation
price
----------------- Rs. in million ---------------240
130
120
200
80
120
Both companies follow cost model for subsequent measurement of property, plant and equipment and charge
depreciation on building and plant at 5% and 20% respectively on cost.
(v)
SL paid an interim cash dividend of 10% on 31 July 2016.
(vi)
GL values non-controlling interest at the acquisition date at its fair value.
Required:
Prepare a consolidated statement of financial position as at 31 December 2016 in accordance with the requirements of
International Financial Reporting Standards.
(17)
(Spring 2017, Q#5)
Question No. 18
Following are the draft statement of financial position of Jasmine Limited (JL) and its subsidiary, Sunflower Limited (SL) as
on 31 December 2017:
JL
SL
------ Rs. in million -----Property, plant and equipment
880
330
Intangible assets
40
50
Investment in SL
520
Loan to JL
120
640
345
Current assets
Share capital (Rs. 10 each)
Share premium
Retained earnings
Loan from SL
Current liabilities
NASIR ABBAS FCA
2,080
845
700
240
720
96
324
2,080
200
410
235
845
256
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Questions
Additional information:
(i)
JL acquired 75% shares of SL on 1 January 2017. Cost of investment in JL’s books consists of:
10 million JL's ordinary shares issued at Rs. 24 per share; and
cash payment of Rs. 280 million (including professional fee of Rs. 10 million for advice on acquisition of SL)
(ii)
On acquisition date, carrying value of SL's net assets was equal to fair value except an intangible asset (brand)
whose fair value was Rs. 40 million as against carrying value of Rs. 25 million. The remaining useful life of the
brand is estimated at 5 years. The recoverable amount of the brand at 31 December 2017 was estimated at
Rs. 28 million.
(iii)
JL values non-controlling interest at fair value. The market price of SL's shares was Rs. 36 at the date of
acquisition, which has increased to Rs. 40 as of 31 December 2017.
(iv)
JL and SL showed a net profit of Rs. 200 million and Rs. 60 million respectively for the year ended
31 December 2017.
(v)
The loan was granted on 1 July 2017 and carries mark-up of 10% per annum. A cheque of Rs. 30 million including
interest was dispatched by JL on 31 December 2017 but was received by SL after the year end. No interest has
been accrued by SL in its financial statements.
(vi)
On 1 May 2017 SL sold a machine to JL for Rs. 52 million at a gain of Rs. 12 million. However, no payment has yet
been made by JL. The remaining useful life of the machine at the time of disposal was 2 years.
(vii)
During the year, JL made sales of Rs. 250 million to SL at 20% above cost. 60% of these goods are included in SL’s
closing stock.
(viii)
SL declared interim cash dividend of 10% in November 2017 which was paid on 2 January 2018. The dividend has
correctly been recorded by both companies.
Required:
Prepare JL's consolidated statement of financial position as at 31 December 2017.
NASIR ABBAS FCA
(15)
(Spring 2018, Q#3)
257
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
SOLUTIONS TO PRACTICE QUESTIONS
Solution No. 1
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non-current assets
PPE [65 + 75]
Investments [50 - 47 + 10]
Goodwill [W-1]
140,000
13,000
5,620
Current assets
Inventories [12 + 11]
Debtors [12 + 13 - 1 - 5]
Cash and bank [7 + 8 + 1]
23,000
19,000
16,000
216,620
Equity
Share
capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
45,000
5,000
17,600
101,050
9,970
Current liabilities
Creditors [21 + 22 - 5]
Workings
W-1 Goodwill
Investment
Fair value of NCI [320 x 16]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
Goodwill at acquisition
Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq.
38,000
216,620
Rs.
32,000
3,000
3,000
7,500
Rs.
7,000
(3,000)
4,000
90%
Rs.
47,000
5,120
(45,500)
6,620
(1,000)
5,620
Rs.
14,000
3,600
17,600
NASIR ABBAS FCA
258
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-3 Retained earnings
P RE
Add: S RE
Less: Pre-acq
Less: Impairment loss
Rs.
53,000
(7,500)
(1,000)
44,500
90%
W-4 NCI
FV of NCI
Other reserves [4 x 10%]
RE [44.5 x 10%]
Rs.
61,000
40,050
101,050
Rs.
5,120
400
4,450
9,970
Solution No. 2
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non-current assets
PPE [60 + 60]
Investments [40 - 31 - 4]
Goodwill [W-1]
120,000
5,000
1,800
Current assets
Inventories [10 + 12 - 0.9]
Debtors [12 + 10 - 7]
Cash and bank [4 + 7 + 0.5]
21,100
15,000
11,500
174,400
Equity
Share
capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Non-current liabilities
Debentures [20 - 4]
Current liabilities
Creditors [18 + 11 + 0.5 - 7]
45,000
4,500
11,250
60,650
14,500
16,000
22,500
174,400
NASIR ABBAS FCA
259
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Workings
W-1 Goodwill
Investment
Value of NCI [37,600 x 25%]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
Rs.
Rs.
31,000
9,400
24,000
2,400
3,000
8,200
(37,600)
Goodwill at acquisition
Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
2,800
(1,000)
1,800
Rs.
6,000
(3,000)
3,000
75%
Rs.
9,000
2,250
11,250
W-3 Retained earnings
P RE
Less: Impairment loss
Less: URP [9 x 20% x 1/2]
Add: S RE
Less: Pre-acq
Rs.
25,600
(8,200)
17,400
75%
Rs.
49,500
(1,000)
(900)
13,050
60,650
W-4 NCI
Value at acq.
Other reserves [3 x 25%]
RE [17.4 x 25%]
NASIR ABBAS FCA
Rs.
9,400
750
4,350
14,500
260
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Solution No. 3
P Group
Consolidated statement of financial position
as at June 30, 2019
Non current assets
PPE [65 + 60]
Investments [30 - 21 + 5]
Current assets
Inventories [9 + 10 - 0.5]
Current account [5 + 2 - 7]
Debtors [11 + 10]
Cash and bank [5 + 8 - 2]
Rs.
125,000
14,000
18,500
21,000
11,000
189,500
Equity
Share capital
Share premium
Other reserves
Retained earnings [W-2]
Non-controlling interest [W-3]
Non current liabilities
Bank loan
Current liabilities
Creditors [16 + 11]
Current account [7 - 7]
Workings
W-1 Goodwill
Investment
Fair value of NCI [600 x 9.5]
Less: net assets at acq.:
Share capital
Share premium
Pre-acq RE
W-2 Retained earnings
P RE
Add: Negative goodwill
Add: S RE
Less: Pre-acq
Less: URP [1 x 5/10]
W-3 NCI
Fair value
RE [25.5 x 20%]
NASIR ABBAS FCA
40,000
4,000
13,000
74,700
10,800
20,000
27,000
189,500
Rs.
30,000
3,000
(4,000)
Rs.
22,000
4,000
(500)
25,500
80%
Rs.
21,000
5,700
(29,000)
(2,300)
Rs.
52,000
2,300
20,400
74,700
Rs.
5,700
5,100
10,800
261
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Solution No. 4
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 64 + 2]
Investments [80 - 75 +5]
Goodwill [W-1]
Current assets
Inventories [11 + 10 - 1.2]
Current account [8 - 8]
Debtors [10 + 11]
Cash and bank [5 + 8]
156,000
10,000
1,200
19,800
21,000
13,000
221,000
Equity
Share capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [16 + 18]
Current account [5 + 3 - 8]
80,000
5,000
9,000
85,600
7,400
34,000
221,000
-
Workings
W-1 Goodwill
Investment
Value of NCI [80,000 x 10%]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
Fair value adj.
Rs.
40,000
4,000
6,000
28,000
2,000
(80,000)
3,000
(1,800)
1,200
Goodwill at acquisition
Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
NASIR ABBAS FCA
Rs.
75,000
8,000
Rs.
6,000
(6,000)
90%
Rs.
9,000
9,000
262
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-3 Retained earnings
P RE
Less: Impairment loss
Less: URP [3 x 40%]
Add: S RE
Less: Pre-acq
Less: Management fees
Rs.
25,000
(28,000)
(3,000)
(6,000)
90%
W-4 NCI
Value at acq.
RE [6 x 10%]
Rs.
94,000
(1,800)
(1,200)
(5,400)
85,600
Rs.
8,000
(600)
7,400
Solution No. 5
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [90 + 70]
Goodwill [W-1]
Current assets
Inventories [12 + 10 + 5 - 1]
Debtors [10 + 12 - 5]
Cash and bank [5 + 5]
160,000
8,000
26,000
17,000
10,000
221,000
Equity
Share capital
Share premium
Retained earnings [W-2]
Non-controlling interest [W-3]
Current liabilities
Creditors [21 + 16 + 5 - 5]
60,000
6,000
83,840
34,160
37,000
221,000
Workings
W-1 Goodwill
Investment
Fair value of NCI
Less: net assets at acq:
Share capital
Share premium
Pre-acq RE
Fair value adj.
Goodwill at acquisition
Impairment loss
NASIR ABBAS FCA
Rs.
40,000
4,000
11,000
2,000
Rs.
41,000
25,600
(57,000)
9,600
(1,600)
8,000
263
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Retained earnings
P RE
Add: S RE
Less: Pre-acq
Less: Fair value adj.
Less: Impairment loss
Less: URP [5 x 25/125]
Rs.
37,000
(11,000)
(2,000)
(1,600)
(1,000)
21,400
60%
W-3 NCI
Fair value
RE [21.4 x 40%]
Rs.
71,000
12,840
83,840
Rs.
25,600
8,560
34,160
Solution No. 6
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [60 + 70 + 4 - 1.6]
Goodwill [W-1]
Current assets
Inventories [12 + 15 + 3 - 0.5]
Debtors [21 + 13 + 4 - 11]
Cash and bank [5 + 7 - 4]
132,400
5,160
29,500
27,000
8,000
202,060
Equity
Share capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [14 + 17 + 3 - 11]
Workings
W-1 Goodwill
Investment
Fair value of NCI [1620 x 18]
Less: net assets at acq.:
Share capital
Other reserves
Pre-acq RE
FV adjustment - P&M
Goodwill at acquisition
Impairment loss
NASIR ABBAS FCA
54,000
5,000
1,650
76,470
41,940
23,000
202,060
Rs.
36,000
2,000
18,000
4,000
Rs.
38,000
29,160
(60,000)
7,160
(2,000)
5,160
264
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
W-3 Retained earnings
P RE
Less: URP [3 x 20/120]
Add: S RE
Less: Pre-acq
Less: Extra depreciation [4 x 2/5]
Less: Impairment loss
Rs.
5,000
(2,000)
3,000
55%
Rs.
47,000
(18,000)
(1,600)
(2,000)
25,400
55%
W-4 NCI
FV of NCI
Other reserves [3 x 45%]
RE [25.4 x 45%]
W-5 Intercompany Debtor / Creditor
Given balance
Goods in transit [35 - 32]
Wrong receipt
Correct balance
Rs.
P
7,000
4,000
11,000
Rs.
1,650
1,650
Rs.
63,000
(500)
13,970
76,470
Rs.
29,160
1,350
11,430
41,940
Rs.
S
8,000
3,000
11,000
Solution No. 7
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [75 + 75 - 3 + 1.2 - 2 + 0.2]
Goodwill [W-1]
Loan to S [15 - 3 - 12]
Current assets
Inventories [16 + 15]
Debtors [11 + 18]
Cash and bank [5 + 3 + 4.5]
NASIR ABBAS FCA
146,400
5,000
31,000
29,000
12,500
223,900
265
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Equity
Share capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Non-current liabilities
Loan from P [12 - 12]
Current liabilities
Creditors [21 + 15]
Rs.
50,000
4,000
13,450
95,790
24,660
36,000
223,900
Workings
W-1 Goodwill
Investment
Value of NCI [52,000 x 70%]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
Fair value adj.
Rs.
35,000
3,500
2,500
14,000
(3,000)
(52,000)
6,100
(1,100)
5,000
Goodwill at acquisition
Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
W-3 Retained earnings
P RE
Less: Impairment loss
Add: Interest income [15 x 10%]
Less: Profit on machine
Add: Excess dep. [2 x 20% x 6/12]
Add: S RE
Less: Pre-acq
Add: Extra dep. [3 x 2/5]
NASIR ABBAS FCA
Rs.
42,500
15,600
Rs.
6,000
(2,500)
3,500
70%
Rs.
Rs.
11,000
2,450
13,450
Rs.
78,500
(1,100)
1,500
(2,000)
200
39,500
(14,000)
1,200
26,700
70%
18,690
95,790
266
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-4 NCI
Rs.
Value at acq.
Other reserves [3.5 x 30%]
RE [26.7 x 30%]
15,600
1,050
8,010
24,660
Solution No. 8
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 60]
Brand [5 - 1.5]
Investments [60 - 54 + 10]
Goodwill [W-1]
Current assets
Inventories [16 + 10 - 2.4]
Debtors [11 + 6]
Cash and bank [5 + 2]
140,000
3,500
16,000
3,420
23,600
17,000
7,000
210,520
Equity
Share capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [17 + 11]
Workings
W-1 Goodwill
Investment
Fair value of NCI
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
Brand
Goodwill at acquisition
Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
[2700 / 3000]
NASIR ABBAS FCA
50,000
5,000
15,600
104,038
7,882
28,000
210,520
Rs.
30,000
3,000
1,000
15,000
5,000
Rs.
54,000
5,700
(54,000)
5,700
(2,280)
3,420
12,000
5,000
(1,000)
4,000
90%
3,600
15,600
267
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-3 Retained earnings
P RE
Add: S RE
Less: Pre-acq
Less: Amortization [5 x 1.5/5]
Less: URP [16 x 60% x 1/4]
Less: Impairment loss
Rs.
39,000
(15,000)
(1,500)
(2,400)
(2,280)
17,820
90%
W-4 NCI
FV of NCI
Other reserves [4 x 10%]
RE [17.82 x 10%]
Rs.
88,000
16,038
104,038
Rs.
5,700
400
1,782
7,882
Solution No. 9
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 57 - 4 + 0.4]
Goodwill [W-1]
Current assets
Inventories [8 + 5 - 0.5]
Debtors [9 + 12]
Cash and bank [7 + 6]
133,400
5,360
12,500
21,000
13,000
185,260
Equity
Share capital [45 + 3.2 x 3/5 x Rs. 10]
Share premium [5 + 3.2 x 3/5 x Rs. 8]
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Non current liabilities
Loan notes
Current liabilities
Creditors [9.5 + 11.6]
W-1 Goodwill
Investment:
Shares [3200 x 3/5 x 18]
Loan notes
Fair value of NCI [800 x 14]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
FV adj.
Pre-acq RE [23.4 - 9]
Goodwill at acquisition
Impairment loss
NASIR ABBAS FCA
64,200
20,360
3,000
47,820
12,780
16,000
21,100
185,260
Rs.
Rs.
34,560
16,000
11,200
40,000
4,000
1,000
(4,000)
14,400
(55,400)
6,360
(1,000)
5,360
268
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
W-3 Retained earnings
P RE
Add: S RE
Less: Pre-acq
Add: Extra dep.
Less: URP [5 x 25/125 x 50%]
Less: Impairment loss
Rs.
1,000
(1,000)
80%
Rs.
23,400
(14,400)
400
(500)
(1,000)
7,900
80%
W-4 NCI
FV of NCI
RE [7.9 x 20%]
Rs.
3,000
3,000
Rs.
41,500
6,320
47,820
Rs.
11,200
1,580
12,780
Solution No. 10
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [75 + 65]
Investments [60 - 58 + 8]
Brand
Current assets
Inventories [16 + 9 - 1]
Debtors [11 + 11]
Cash and bank [5 + 4.5]
140,000
10,000
4,500
24,000
22,000
9,500
210,000
Equity
Share capital
Share premium
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [22 + 12]
W-1 Goodwill
Investment
Value of NCI [81,000 x 25%]
NASIR ABBAS FCA
50,000
5,000
15,000
83,750
22,250
34,000
210,000
Rs.
Rs.
58,000
20,250
269
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE [20.5 + 18 x 6/12]
Brand
40,000
4,000
3,000
29,500
4,500
(81,000)
(2,750)
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
W-3 Retained earnings
P RE
Add: Negative goodwill
Add: S RE
Less: Pre-acq
Less: URP [(7 + 3) x 25% x 40%]
W-4 NCI
Value at acq.
RE [8 x 25%]
Rs.
3,000
(3,000)
75%
Rs.
38,500
(29,500)
(1,000)
8,000
75%
Rs.
15,000
15,000
Rs.
75,000
2,750
6,000
83,750
Rs.
20,250
2,000
22,250
Solution No. 11
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [70 + 60 - 4 + 0.4]
Investment
Brand [6 - 0.8]
Goodwill [W-1]
Current assets
Inventories [16 + 10]
Debtors [11 + 9]
Cash and bank [5 + 6]
126,400
5,000
5,200
6,400
26,000
20,000
11,000
200,000
Equity
Share capital
Share premium
NASIR ABBAS FCA
Rs.
60,000
6,000
270
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Other reserves
Retained earnings [W-2]
Non-controlling interest [W-3]
Current liabilities
Creditors [17 + 14]
12,000
74,680
16,320
31,000
200,000
-
Workings
W-1 Goodwill
Investment [2,400 x 25]
Fair value of NCI [600 x 24]
Less: net assets at acq.:
Share capital
Share premium
Pre-acq RE [43 - 21 x 8/12]
Brand
W-2 Retained earnings
P RE
Add: S RE
Less: Pre-acq
Less: Profit on machine
Add: Excess dep. [4 x 20% x 6/12]
Less: Amortization [6 x 1/5 x 8/12]
W-3 NCI
FV of NCI
RE [9.6 x 20%]
Rs.
30,000
3,000
29,000
6,000
Rs.
43,000
(29,000)
(4,000)
400
(800)
9,600
80%
Rs.
60,000
14,400
(68,000)
6,400
Rs.
67,000
7,680
74,680
Rs.
14,400
1,920
16,320
Solution No. 12
P Group
Consolidated statement of financial position
as at June 30, 2019
Non current assets
PPE [90 + 80 - 4 + 0.8]
Investments [50 - 45 + 5]
Goodwill [W-1]
Current assets
Inventories [12 + 11]
Debtors [11 + 12]
Cash and bank [7 + 8]
Rs.
166,800
10,000
3,400
23,000
23,000
15,000
241,200
Equity
Share capital
Share premium
NASIR ABBAS FCA
Rs.
50,000
5,000
271
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [14.5 + 12]
Dividend payable [4.5 + 2]
16,800
98,080
38,320
26,500
6,500
241,200
Workings
W-1 Goodwill
Investment [3,000 x 15]
Value of NCI [66,000 x 40%]
Less: net assets at acq.:
Share capital
Share premium
Other reserves
Pre-acq RE
FV adj. - P&M
Rs.
50,000
5,000
4,000
11,000
(4,000)
(66,000)
5,400
(2,000)
3,400
Less: Impairment loss
W-2 Other reserves
P Other reserves
Add: S Other reserves
Less: Pre-acq
W-3 Retained earnings
P RE
Less: Impairment loss
Add: Dividend income [3,000 x 1]
Add: S RE
Less: Pre-acq
Less: Dividend [5,000 x 1]
Add: Extra dep. [4 x 1/5]
NASIR ABBAS FCA
Rs.
45,000
26,400
Rs.
7,000
(4,000)
3,000
60%
Rs.
42,000
(11,000)
(5,000)
800
26,800
60%
Rs.
15,000
1,800
16,800
Rs.
81,000
(2,000)
3,000
16,080
98,080
272
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-4 NCI
Value at acq.
Other reserves [3 x 40%]
RE [26.8 x 40%]
Rs.
26,400
1,200
10,720
38,320
Solution No. 13
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [100 + 70 + 3 + 4]
Investments
Goodwill [W-1]
177,000
10,000
2,500
Current assets
Inventories [9 + 7]
Debtors [10 + 8]
Cash and bank [4 + 5]
16,000
18,000
9,000
232,500
Equity
Share capital
Share premium
Revaluation surplus [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [14.5 + 9.5]
Dividend payable [6 + 1.5]
60,000
6,000
10,800
96,000
28,200
24,000
7,500
232,500
-
Workings
W-1 Goodwill
Investment
Fair value of NCI [1,500 x 14]
Less: net assets at acq.:
Share capital
Share premium
Pre-acq RE
FV adj. - land
Goodwill at acquisition
Impairment loss
NASIR ABBAS FCA
Rs.
50,000
5,000
10,000
3,000
Rs.
50,000
21,000
(68,000)
3,000
(500)
2,500
273
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Revaluation surplus
P surplus
Add: S post acq. Surplus [4 x 70%]
W-3 Retained earnings
P RE
Add: Dividend income [3,500 x 1]
Less: Dividend declared
Add: S RE
Less: Pre-acq
Less: Dividend declared
Less: Impairment loss
Rs.
8,000
2,800
10,800
Rs.
35,500
(10,000)
(5,000)
(500)
20,000
70%
W-4 NCI
FV of NCI
Revaluation surplus [4 x 30%]
RE [20 x 30%]
Rs.
84,500
3,500
(6,000)
14,000
96,000
Rs.
21,000
1,200
6,000
28,200
Solution No. 14
AL group
Consolidated statement of financial position
as at June 30, 2014
Rs. in million
Non current assets
PPE [460 + 200 - 15]
Goodwill [W-1]
Current assets [W-2]
645.00
30.00
967.50
1,642.50
Equity
Share capital
Retained earnings [W-3]
Non controlling interest [W-4]
Non current liabilities [200 + 72 -30]
Current liabilities [300 + 78 - 19]
600.00
350.40
91.10
242.00
359.00
1,642.50
Workings [All figures in Rs. million]
W-1 Goodwill
Investment
FV of NCI
Less: net assets
Capital
Retained earnings
340.00
80.00
250.00
140.00
(390.00)
30.00
NASIR ABBAS FCA
274
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Current assets
AL current assets
DL current assets
Inter-company balance
URP [(27 + 24) x 20/120]
Rs. in million
Rs. in million
595.00
400.00
(19.00)
(8.50)
967.50
W-3 Retained earnings
AL RE
Less: URP on goods [24 x 20/120]
Less: URP on equipment [25 - (40 - 30)]
DL RE
Less: Pre acq.
Less: URP [27 x 20/120]
[2 m / 2.5m shares]
325.00
(4.00)
(15.00)
200.00
(140.00)
(4.50)
55.50
80%
44.40
350.40
W-4 NCI
Fair value
Share in RE [55.5 x 20%]
80.00
11.10
91.10
Solution 15
Galaxy Group
as at June 30, 2015
Rs. in million
Goodwill
Investment
Fair value of NCI
Less: net assets
Capital
Retained earnings
Impairment of plant
50.00
18.00
(10.00)
Fair value adj. – land
20.00
Less: Impairment loss [10%]
Rs. in million
50.00
35.00
(78.00)
7.00
(0.70)
6.30
NASIR ABBAS FCA
275
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Retained earnings
GL RE [40 + 20]
Less: URP on goods [(5 + 7 - 4) x 20/120]
BL RE [18 + 6]
Less: Pre acq.
Add: Impairment of plant
Less: Impairment loss of GW
Less: URP on goods [9 x 20/120]
[300 / 500 shares]
Rs.
Rs.
60.00
(1.33)
24.00
(18.00)
10.00
(0.70)
(1.50)
13.80
60%
8.28
66.95
NCI
Fair value of NCI
NCI share in post acq. Profits [13.8 x 40%]
35.00
5.52
40.52
Solution No. 16
Notes:
- Depreciation rate of 5% must be used for remaining life of building after acquisition
- Final dividend of 20% for 2016 was declared during 2017, therefore, not accounted for in 2016
Yasir Limited
Consolidated statement of financial position
as at June 30, 2016
Rs.
(million)
Non current assets
Fixed assets [180 + 470 + 12 - 1.2]
Goodwill [W-1]
660.80
190.35
Current assets
Stock in trade [160 + 150 - 4.62 - 4.8]
Other current assets [71 + 50]
Cash and bank [63 + 151 + 5.92]
300.58
121.00
219.92
1,492.65
Equity
Share capital
Retained earnings [W-3]
Non-controlling interest [W-4]
Current liabilities
Creditors [75 + 51]
NASIR ABBAS FCA
750.00
406.19
210.46
126.00
1,492.65
276
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Workings
W-1 Goodwill
Investment
Fair value of NCI [50 x 25% x 15]
Less: net assets at acq.:
Share capital
Pre-acq RE [W-2]
FV adj. (building)
Goodwill at acquisition
Impairment loss (10%)
Rs.
(million)
500.00
139.00
12.00
W-2 Pre acq. RE
RE as at June 30, 2016
PAT 2016
PAT 2015
Dividend 2015 [500 x 12%]
W-3 Retained earnings
YL RE
Less: URP [20 x 30/130]
Add: Interest not recorded [16 x 12%]
Add: BL RE
Less: Pre-acq [W-2]
Less: Impairment loss [W-1]
Less: URP [32 x 15/100]
Less: Extra dep. [12 x 5% x 2]
Rs.
(million)
675.00
187.50
(651.00)
211.50
(21.15)
190.35
258.00
(11.00)
(168.00)
60.00
139.00
340.00
(4.62)
1.92
258.00
(139.00)
(21.15)
(4.80)
(1.20)
91.85
75%
68.89
406.19
W-4 NCI
FV of NCI
Share in post acq RE [91.85 x 25%]
NASIR ABBAS FCA
187.50
22.96
210.46
277
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Solution No. 17
Notes:
-
Remaining life should have been given for depreciation on fair value adjustment on building. However,
in absence of remaining life, same 5% rate has been used for extra depreciation.
-
It is assumed that assets requiring fair value adjustments still exist at year end. Therefore, effect of value
adjustment has been taken to balance sheet instead of SL's retained earnings.
-
It is assumed that accrual in respect of management fees receivable on April 1, 2017 has been made.
Golden Limited
Consolidated statement of financial position
as at December 31, 2016
Rs. (million)
Non-current assets
Building [1,600 + 500 - 80 - 10 + 0.13 + 3]
Plant [1,465 + 690]
Goodwill [W-1]
2,013.13
2,155.00
209.00
Current assets
Current assets [2,068 + 780 - 50 - 9 - 50 x 3/12]
2,776.50
7,153.63
Equity
Share capital
Share premium [730 + 20 x 13]
Retained earnings [W-2]
Non-controlling interest [W-3]
980.00
990.00
3,192.93
243.20
Current liabilities
Current liabilities [600 + 1,160 - 50 x 3/12]
1,747.50
7,153.63
Workings
W-1 Goodwill
Investment:
Cash [87 - 15]
Shares [20 x 25]
Fair value of NCI [45 x 40% x 11]
Less: net assets at acq.:
Share capital
Share premium
Pre-acq RE
FV adj. (building)
FV adj. (stock)
FV adj. (debtors)
Goodwill at acquisition
NASIR ABBAS FCA
Rs.
(million)
72.00
500.00
Rs.
(million)
572.00
198.00
450.00
150.00
100.00
(80.00)
(50.00)
(9.00)
(561.00)
209.00
278
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
W-2 Retained earnings
GL RE
Less: acquisition expenses
Less: Profit on sale of building [120 - (240 - 130)]
Add: Excess dep. on profit [10 x 5% x 3/12]
Add: SL RE
Less: Pre-acq [W-2]
Add: Extra dep. on FV adj. [80 x 5% x 9/12]
Less: Profit on plant [120 - (200 - 80)]
Rs.
(million)
Rs.
(million)
3,150.00
(15.00)
(10.00)
0.13
210.00
(100.00)
3.00
113.00
60%
67.80
3,192.93
W-3 NCI
FV of NCI
Share in post acq RE [113 x 40%]
198.00
45.20
243.20
Solution No. 18
Jasmine Limited
Consolidated statement of financial position
as at December 31, 2017
Non current assets
PPE [880 + 330 - 8(W-3)]
Intangible assets [40 + 50 + 15(W-1) - 3(W-2) - 4(W-2)]
Goodwill [W-1]
1,202.00
98.00
105.00
Current assets
Current assets [640 + 345 + 30 - 52 - 25 - 20 x 75%]
923.00
2,328.00
Equity
Share capital
Share premium
Retained earnings [W-2]
Non-controlling interest [W-4]
700.00
240.00
708.25
187.75
Current liabilities
Current liabilities [324 + 235 - 52 - 20 x 75%]
492.00
2,328.00
-
NASIR ABBAS FCA
279
BASIC CONSOLIDATION [SOFP WITH ONE SUBSIDIARY] - Solutions
Workings
W-1 Goodwill
Investment:
Cash [280 - 10]
Shares [10 x 24]
Fair value of NCI [20 x 25% x 36]
Less: net assets acquired:
Share capital
Pre-acq RE [410 - 60 + 20]
FV adj. (brand) [40 - 25]
Goodwill at acquisition
W-2 Retained earnings
GL RE
Less: acquisition expenses
Less: URP on goods [250 x 60% x 20/120]
Add: SL RE
Less: Pre-acq [W-2]
Less: Extra amort. on FV adj. [15 / 5]
Less: Impairment [(40 - 40/5) - 28]
Add: Interest on loan [120 x 10% x 6/12]
Less: URP on machine [W-3]
W-3 URP on machine
Profit on machine
Excess dep. [12 x 8/24]
W-4 NCI
FV of NCI
Share in post acq RE [31 x 25%]
NASIR ABBAS FCA
----- Rs. (million) ---270.00
240.00
510.00
180.00
200.00
370.00
15.00
(585.00)
105.00
720.00
(10.00)
(25.00)
410.00
(370.00)
(3.00)
(4.00)
6.00
(8.00)
31.00
75%
23.25
708.25
12.00
(4.00)
8.00
180.00
7.75
187.75
280
Question
Following are the balance sheets as at June 30, 2020:
Pulp
Seed
-------------- Rs.-------------Non-current assets
Property, plant & equipment
Investment in Seed
Current assets
Inventories
Debtors
Other receivables
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Other reserves
Retained earnings
Non-current liabilities
Deferred tax
Current liabilities
Creditors
Other payables
125,000
21,000
120,000
-
18,000
22,000
11,000
9,000
206,000
14,000
24,000
8,000
9,000
175,000
Pulp
Seed
------------- Rs.----------70,000
40,000
10,000
20,000
9,000
7,000
74,000
58,000
13,000
16,000
16,000
14,000
206,000
15,000
19,000
175,000
Following further information is available:
(1)
Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
An immediate cash payment of Rs. 7 per share.
A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
were Rs. 32 (Pulp) and Rs. 26 (Seed).
A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
the date of acquisition was Rs. 1.25 per share. Pulp’s cost of capital is 10%.
(2)
At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
Book value
Fair value
----------- Rs. ---------Land
15,000
17,000
Plant
24,000
27,000
281
Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3)
At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4)
At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
10,000.
(5)
It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6)
There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
(7)
The following intercompany sales were made during the year 2020:
Sales
Pulp to Seed
Seed to Pulp
Included in buyer’s
closing stock in trade
------------------- Rs. -------------20,000
5,000
36,000
8,000
Gross
Profit %
20%
25%
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
received and recorded by Seed on July 3, 2020.
(8)
On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
on that machine for Rs. 1,900.
(9)
During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
(10)
Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
Prepare consolidated statement of financial position as at June 30, 2020.
282
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
CONSOLIDATION – SOCI WITH ONE SUBSIDIARY
Consolidated statement of comprehensive income (or Group statement of comprehensive income) is line by line
addition of all values from “Sales” to “Total comprehensive income” of “P” and “S”, subject to certain adjustments.
BASIC PRESENTATION
After line by line addition till Total comprehensive income, “Profit after tax” and “Total comprehensive
income” is attributed to:
Shareholders of “P”
NCI
We have already studied consolidation adjustments in sufficient detail in “Consolidation of SOFP”. In this chapter will
discuss the effect of those adjustments in Consolidated SOCI for the year as follows:
Note – In case of 1st year, If P has recorded investment in S as per IFRS 9, then do not forget to reverse any fair value
gain/loss recorded.
1.
IMPAIRMENT LOSS FOR THE YEAR
Consolidation adjustment:
(1) Impairment loss for the current year attributable to other assets shall be:
- ADDED to “Admin expenses/Cost of sales”
- DEDUCTED from “S’s PAT” in NCI working
(2) Impairment loss attributable to goodwill shall be treated as follows:
2.
(a) NCI valued at proportionate share
(b) NCI valued at Fair value
Impairment loss is ADDED to “Admin
expenses”
Impairment loss is:
(i)
ADDED to “Admin expenses”
(ii)
DEDUCTED from S PAT in “NCI working”
ACQUISITION RELATED COSTS
In case of first year of acquisition, acquisition related costs which were capitalized by P in its cost of
investment, shall be adjusted as follows:
Consolidation adjustment:
Acquisition related transactions costs (except for the issue costs relating to debt or equity
securities issued as consideration, in which case such costs are accounted for as IAS 32 and IFRS 9)
shall ADDED to “Finance cost” OR “Admin expenses”
3.
INTER COMPANY SALES
Either sales are from “P to S” or “S to P”, these transactions are adjusted in the same manner
Consolidation adjustment:
“Sales value” is ELIMINATED from:
(i)
Sales
(ii)
Cost of sales (or Purchases, if breakup of Cost of sales is given)
NASIR ABBAS FCA
283
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
4.
INTER COMPANY MANAGENT FEES
P or S may provide management services to other and charge certain fees. This fee is an inter-company
transaction and must be eliminated.
Consolidation adjustment:
“Management fees” is DEDUCTED from:
(i)
Other income of “P”
(ii)
Admin expenses of “S”
5.
UNREALIZED PROFIT IN INVENTORY [URP]
URP is the profit included in the amount of inventory out of inter-company sale. Inventory value may be given
in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP =
Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP =
Total profit in the inter company sale x % goods held in stock
Consolidation adjustment:
6.
P to S sale
S to P sale
URP is ADDED to “Cost of sales”
URP is:
(i)
ADDED to “cost of sales”
(ii)
DEDUCTED from S’s PAT in “NCI working”
EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of S in its books
Calculation of Extra depreciation for the year:
= FV adjustment ÷ remaining useful life
(above formula is for straight line method)
Consolidation adjustment:
Extra depreciation for the year is:
(i)
ADDED to “cost of sales” or “admin expenses”
(ii)
DEDUCTED from S’s PAT in “NCI working”
In case of negative adjustment to S’s net assets, above adjustments will be reversed
Note – If subsequently S has accounted for any such fair value adjustment in its books, then its effect in current year
SOCI must be reversed.
NASIR ABBAS FCA
284
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
7.
INTER COMPANY SALE OF NON-CURRENT ASSET DURING THE YEAR
Calculation of Profit:
Profit =
Sale value of asset x margin %
OR
Sale value of asset x markup / (100 + markup)
Consolidation adjustment:
In the year of disposal:
(1) If seller recorded this sale of asset as “Sales”
- DEDUCT sale price from “Sales”
- DEDUCT cost from “Cost of sales”
In case of S to P sale, also DEDUCT the profit on sale from S’s PAT in NCI working
(2) If seller recorded profit on sale of asset as “Other income”
8.
P to S sale
S to P sale
Profit is DEDUCTED from “Other income”
Profit is DEDUCTED from:
(i)
“Other income”
(ii)
S's PAT in “NCI working”
EXCESS DEPRECIATION FOR INTER-COMPANY SALE OF DEPRECIABLE ASSET
When asset is depreciated, seller’s profit is realized, therefore, this adjustment is made in seller’s profits. It is
calculated using same depreciation basis as of buyer company in its books
Calculation of Excess depreciation during the year:
=
Profit x depreciation %
Consolidation adjustment:
9.
P to S sale
S to P sale
Excess depreciation is DEDUCTED from
“cost of sales” or “admin expenses”
Excess depreciation is:
(i) DEDUCTED from “cost of sales” or “admin
expenses”
(ii) ADDED to S’s PAT in “NCI working”
INTEREST ON DEBENTURES / DIVIDEND ON PREFERENCE SHARES
First ensure whether both entities have recorded the interest / dividend as per accrual concept. If not
properly recorded, then accordingly account for it.
Consolidation adjustment (After proper recording):
P’s share in the interest / dividend is DEDUCTED from:
(i)
Other income
(ii)
Finance cost
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
10.
ORDINARY DIVIDEND BY “S”
First ensure whether both entities have recorded the dividend as per relevant IAS. If not properly recorded,
then accordingly account for it.
Consolidation adjustment (After proper recording):
P’s share in Post-acquisition dividend is DEDUCTED from “other income”
11.
NEGATIVE GOODWILL
Consolidation adjustment:
It is recognized as income and generally shown as a separate line item of income on Group statement of
comprehensive income ONLY in the year of acquisition.
12.
S’s INTANGIBLE ASSET RECOGNIZED AT ACQUISITION
Consolidation adjustment:
Amortization for the year, if any, is ADDED to “admin expenses” and DEDUCTED from S’s PAT in NCI
working
13.
S’s CONTINGENT LIABILITY RECOGNIZED AT ACQUISITION
Consolidation adjustment:
Any change for the year in value of contingent liability of S recognized at acquisition, is ADDED to “admin
expenses” and DEDUCTED from S’s PAT in NCI working
Note – If S has subsequently accounted for this obligation in its books, then reverse its effect in SOCI for
the year accounted for by S.
14.
DEFERRED CONSIDERATION
Calculation for finance cost for the year:
= Present value of deferred consideration at year end – present value of deferred consideration at year start
OR
= Present value of deferred consideration at year start x discount rate
Consolidation adjustment (if still unrecorded):
Finance cost on deferred consideration for the year will be ADDED to the finance cost for the year in
Group SOCI.
15.
CONTINGENT CONSIDERATION
Calculation for adjustment for the year:
= Fair value of contingent consideration at year end – fair value of contingent consideration at year start
Consolidation adjustment (if still unrecorded):
Fair value change on contingent consideration for the year will be ADDED to the Admin expenses for the
year in Group SOCI.
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
16.
ACQUISITION DURING THE YEAR
If sufficient data is available to prepare separate SOCI of S for post-acquisition period then use this specific
period SOCI for consolidation purposes. However generally in questions such data is not available ,therefore,
all incomes and expenses of S are assumed to occur evenly throughout the year unless any specific expense
or income is mentioned to be exceptional and specifically relates to a particular period. In which case
following adjustments are made:
Consolidation adjustment:
Acquisition during the year has following effects on consolidated figures:
Effect on:
Adjustment:
All items of S’s SOCI
Figures are time apportioned as per months since acquisition,
except specific period related items (see note below)
Intercompany eliminations
Intercompany transactions in post-acquisition period are
eliminated.
Extra depreciation on FV adjustment
Calculated for post-acquisition period in the year
For NCI working, S’s PAT is adjusted as:
[S’PAT +/- specific period related item (see note below)] x n/12
–/+ specific period related item
Note:
Generally all expenses and incomes of S are assumed to occur evenly throughout the year therefore all these items are
time apportioned according to post acquisition months. However there may be certain expenses and incomes which are
mentioned to be exceptional and they specifically relate to pre or post acquisition period.
Example:
P acquired controlling interest in S on August 1, 2013. S’s PAT for the year is Rs. 74,000. Its other income for the year
includes Rs. 2,000 which specifically relates to December 2013. Now S’s PAT in NCI working will be as [(74,000 - 2,000) x
5/12 + 2,000 = 32,000]
17.
DEFERRED TAX
Tax effect of consolidation adjustments for the year shall be accounted in deferred tax expense for the year.
Consolidation adjustment:
Deferred tax on P’s adjustments
Deferred tax on S’s adjustments
It is INCLUDED in “Tax expense”
It is:
(i) INCLUDED in “Tax expense”
(ii) CHARGED to S’s PAT in “NCI working”
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
FORMATS AND WORKINGS
P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Rs.
Sale
(P’s + S’s x n/12 – Inter-company transaction)
XXX
Cost of sales
(P’s + S’s x n/12 – Inter-company transaction + URP on goods [P or S] + Extra depreciation
on Fair value adjustment – Excess depreciation on asset sale)
(XXX)
Gross profit (Cast down)
XXX
Distribution cost
(P’s + S’s x n/12)
(XXX)
Administrative expenses
(P’s + S’s x n/12 + unrecorded expense – Inter-company transaction – Excess depreciation
on asset sale + Extra depreciation on fair value adjustment + Amortization on asset
recognized at acquisition + total impairment loss of goodwill for the year + value increase
of contingent liability of S + fair value change in contingent consideration)
(XXX)
Finance cost
(P’s + S’s x n/12 – Intercompany finance cost + finance cost on deferred consideration)
(XXX)
Other income
(P’s + S’s x n/12 – Intercompany interest / dividend – Profit [P or S] on asset sale during
the year + unrecorded income)
XXX
Profit before tax (Cast down)
XXX
Tax
(P’s + S’s x n/12 + tax on consolidation adjustments)
(XXX)
Profit after tax (Cast down)
XXX
Other comprehensive income:
Revaluation gain / (loss)
(P’s + S’s)
XXX
Fair value gain / (loss)
(P’s + S’s)
XXX
Total comprehensive income for the year
XXX
Profit for the year attributable to:
Shareholders of Parent
XXX
Non-controlling interest (W – 1)
XXX
XXX
Total comprehensive income attributable to:
Shareholders of Parent
XXX
Non-controlling interest
(“Answer of W – 1” + NCI % x S’s other comprehensive income)
XXX
XXX
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] – Class notes
WORKINGS
(W – 1) Non controlling interest
Rs.
S’s profit after taxation (Notes)
Less: URP on goods [ S to P ] (sale during the year)
Less: Profit on assets [ S to P ] (sale during the year)
Less: Extra depreciation for the period on FV adjustment
Less: Amortization for the period on asset recognized
Less: Value change in contingent liability of S
Less: unrecorded expense
Less: Impairment loss for the year on other assets of CGU
Less: Impairment loss for the year on goodwill [If NCI is at fair value]
Add / Less: correction of error
Add: unrecorded income
Add: Excess dep. for the period on asset sale [S to P]
NCI share @ (% share in ordinary shares)
XXX
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
(XXX)
XXX
XXX
XXX
XXX
XXX
Notes:
1.
Intercompany eliminations have nothing to do with NCI working
2.
Also see note on page no. 5
“n” means number of months from acquisition date to year end, in case of acquisition during the year.
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
PRACTICE QUESTIONS
Question No. 1
Following are the statements of comprehensive income for the year ending June 30, 2019:
Sales
Cost of sales
Gross profit
Distribution cost
Admin expenses
Finance cost
Other income
Profit before tax
Tax
Profit after tax
Other comprehensive income:
Revaluation gain
Total comprehensive income
P
S
---------- Rs.-------120,000
100,000
(75,000)
(65,000)
45,000
35,000
(12,000)
(8,000)
(10,000)
(6,000)
(3,000)
(2,000)
1,500
500
21,500
19,500
(7,000)
(5,500)
14,500
14,000
14,500
1,200
15,200
Following additional information is available:
(i)
P acquired 70% shares of S some years ago.
(ii)
Impairment loss of goodwill for the year was Rs. 3,000.
(iii)
Non-controlling interest is valued at fair value.
(iv)
During the year P sold goods to S for Rs. 9,000.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 2
Following are the statements of comprehensive income for the year ending June 30, 2019:
Sales
Cost of sales
Gross profit
Distribution cost
Admin expenses
Finance cost
Other income
Profit before tax
Tax
Profit after tax
Other comprehensive income:
Revaluation gain
Total comprehensive income
P
S
---------- Rs.-------125,000
90,000
(82,000)
(57,000)
43,000
33,000
(13,000)
(9,000)
(12,000)
(14,000)
(4,000)
(1,000)
6,000
20,000
9,000
(7,500)
(3,200)
12,500
5,800
12,500
5,800
Following additional information is available:
(i)
P acquired 75% shares of S some years ago.
(ii)
During the year S sold goods to P for Rs. 8,200.
(iii)
Since acquisition, P has been providing management services to S and charging fees for those
services. During the year P invoiced Rs. 3,500 for such services to S.
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 3
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
90,000
80,000
Cost of sales
(54,000)
(42,000)
Gross profit
36,000
38,000
Distribution cost
(8,000)
(9,000)
Admin expenses
(7,000)
(7,800)
Finance cost
(3,000)
(1,200)
Other income
1,000
800
Profit before tax
19,000
20,800
Tax
(6,000)
(7,200)
Profit after tax
13,000
13,600
Other comprehensive income:
Revaluation gain
1,500
2,000
Total comprehensive income
14,500
15,600
Following additional information is available:
(i)
P acquired 60% shares of S some years ago.
(ii)
Impairment loss of goodwill for the year was Rs. 2,000.
(iii)
Non-controlling interest is valued at fair value.
(iv)
During the year S sold goods to P for Rs. 7,000 charging a margin of 20%. At year end 30% of these
goods are still held in P’s inventory.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 4
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
110,000
95,000
Cost of sales
(82,000)
(62,000)
Gross profit
28,000
33,000
Distribution cost
(6,400)
(8,000)
Admin expenses
(4,200)
(7,100)
Finance cost
(2,000)
(1,500)
Other income
1,600
700
Profit before tax
17,000
17,100
Tax
(6,000)
(6,050)
Profit after tax
11,000
11,050
Other comprehensive income:
Revaluation gain / (loss)
1,000
(300)
Total comprehensive income
12,000
10,750
Following additional information is available:
(i)
P acquired 90% shares of S on January 1, 2018. At acquisition date, office building of S was
undervalued by Rs. 3,000. Its remaining useful life at that date was 10 years.
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
(ii)
(iii)
(iv)
Impairment loss of goodwill for the year was Rs. 1,000.
Non controlling interest is valued at proportionate share.
During the year P sold goods to S for Rs. 8,000 at a markup of 25%. One-fourth of these goods are
still held in S’s stock.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 5
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
150,000
120,000
Cost of sales
(96,000)
(74,000)
Gross profit
54,000
46,000
Distribution cost
(12,000)
(9,500)
Admin expenses
(10,000)
(7,000)
Finance cost
(4,000)
(3,000)
Other income
1,000
4,200
Profit before tax
29,000
30,700
Tax
(7,500)
(7,000)
Profit after tax
21,500
23,700
Other comprehensive income:
Revaluation gain
(500)
200
Total comprehensive income
21,000
23,900
Following additional information is available:
(i)
P acquired 85% shares of S some years ago. At acquisition date plant and machinery of S was
overvalued by Rs. 15,000. Its remaining life at that date was 10 years.
(ii)
Impairment loss of goodwill for the year was Rs. 1,200.
(iii)
Non-controlling interest is valued at fair value.
(iv)
On July 1, 2018 S sold a machine to P at a profit of Rs. 2,500. Carrying amount of that machine in
S books was Rs. 35,500. P depreciated this machine on straight line basis over a life of 5 years.
Both companies include depreciation on plant and machinery in cost of sales.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 6
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
140,000
120,000
Cost of sales
(85,000)
(70,000)
Gross profit
55,000
50,000
Distribution cost
(11,000)
(9,000)
Admin expenses
(13,000)
(11,400)
Finance cost
(5,000)
(6,300)
Other income
4,500
1,000
Profit before tax
30,500
24,300
Tax
(8,500)
(7,000)
Profit after tax
22,000
17,300
Other comprehensive income:
Revaluation gain
200
400
Total comprehensive income
22,200
17,700
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Following additional information is available:
(i)
P acquired 5000 shares out of a total of 8000 shares of S some years ago.
(ii)
On January 1, 2019 P gave a loan of Rs. 50,000 to S. Interest on this loan is 4% per annum payable every
six months.
(iii)
During the year S sold goods to P for Rs. 20,000 at a margin of 30%. One-fifth of these goods are still
included in P’s stock.
(iv)
During the year S paid ordinary dividend of Re. 0.5 per share. Both companies have properly recorded
this dividend.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 7
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
100,000
90,000
Cost of sales
(70,000)
(58,000)
Gross profit
30,000
32,000
Distribution cost
(9,500)
(9,000)
Admin expenses
(8,000)
(10,000)
Finance cost
(3,000)
(2,000)
Other income
2,000
2,800
Profit before tax
11,500
13,800
Tax
(4,200)
(6,000)
Profit after tax
7,300
7,800
Other comprehensive income:
Revaluation gain
100
300
Total comprehensive income
7,400
8,100
Following additional information is available:
(i)
P acquired 80% shares of S on July 1, 2018 for Rs. 30,800.
(ii)
At acquisition date fair value of total net assets of S was Rs. 40,000. Included in this value was an
internally generated brand of S having a fair value of Rs. 5,000 and estimate life of 5 years.
(iii)
During the year S paid total ordinary dividend of Rs. 400 to its shareholders.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 8
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
140,000
120,000
Cost of sales
(75,000)
(84,000)
Gross profit
65,000
36,000
Distribution cost
(13,500)
(9,000)
Admin expenses
(7,200)
(12,000)
Finance cost
(3,000)
(6,000)
Other income
1,500
3,600
Profit before tax
42,800
12,600
Tax
(11,200)
(3,000)
Profit after tax
31,600
9,600
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Following additional information is available:
(i)
P acquired 70% shares of S on November 1, 2018.
(ii)
At acquisition date fair value of delivery vans of S were higher than book value by Rs. 4,500.
Remaining life of vans at acquisition date was 3 years. Depreciation of these vans is charged in
distribution cost.
(iii)
P had been selling goods to S for some years. Average sales were Rs. 1,000 per month. Out of the postacquisition sales, goods costing Rs. 2,000 and having sales value Rs. 3,000 were still held by S at year
end.
(iv)
Profits are assumed to occur evenly throughout the year.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
Question No. 9
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
150,000
120,000
Cost of sales
(80,000)
(72,000)
Gross profit
70,000
48,000
Distribution cost
(12,000)
(9,600)
Admin expenses
(11,000)
(10,800)
Finance cost
(3,000)
(3,800)
Other income
4,600
1,800
Profit before tax
48,600
25,600
Tax
(13,500)
(9,000)
Profit after tax
35,100
16,600
Other comprehensive income:
Total comprehensive income
35,100
16,600
Following additional information is available:
(i)
P acquired 60% shares of S on September 1, 2018.
(ii)
At acquisition date office building was undervalued. This fair value adjustment would result in an
increase of Rs. 400 in the depreciation for the post acquisition period of the year.
(iii)
Immediately after acquisition P advanced a loan of Rs. 30,000 to S at an annual interest of 8%. Both
companies have properly accounted for this interest.
(iv)
S had been selling goods to P for some years. Average sales were Rs. 1,000 per month. Out of the postacquisition sales, some goods were still held by P at year end, in which profit of Rs. 900 was included.
(v)
S other income includes an exceptional item of Rs. 300 which was earned in July 2018.
(vi)
All incomes and expenses, except for those mentioned in points (iii) and (v), are assumed to occur
evenly throughout the year.
Required:
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Question No. 10
The following summarized Trial Balances pertain to Rivera Limited (RL) and its subsidiary Chenab Limited (CL) for the year
ended 31 December 2014:
RL
CL
Dr.
Cr.
Dr.
Cr.
-------------- Rs. in million ----------Sales
285
320
Cost of sales
186
240
Selling and distribution expenses
27
25
Administration expenses
17
15
Finance charges
8
10
Tax expense
19
12
Share capital (Rs. 100 each)
350
200
Retained earnings – 1 January 2014
50
36
Property, plant and equipment
190
263
Current assets
23
35
Investment in CL (1.6 million shares)
250
Current liabilities
35
44
720
720
600
600
Other relevant information is as under:
(i)
(ii)
(iii)
(iv)
(v)
RL acquired the controlling interest in CL on 1 January 2014. On the acquisition date, fair value of CL's net assets
was equal to its book value except for an office building whose fair value exceeded its carrying value by Rs. 18
million. The remaining useful life of the office building on the acquisition date was 15 years.
Inter-company sales are invoiced at cost plus 20%. Details of inter-company transactions for the year ended 31
December 2014 are as follows:
RL sold goods amounting to Rs. 60 million to CL. At year-end, inventory of CL included Rs. 9.60 million
in respect of such goods.
CL sold goods amounting to Rs. 48 million to RL. At year-end, inventory of RL included Rs. 16.80 million
in respect of such goods.
There were no inter-company balances outstanding at the year-end.
RL values the non-controlling interest at its proportionate share of CL's identifiable net assets.
As at 31 December 2014, goodwill of CL was impaired by 10%.
Required:
In accordance with the requirements of International Financial Reporting Standards, prepare:
(a) Consolidated Statement of Comprehensive Income for the year ended 31 December 2014.
(b) Consolidated Statement of Financial Position as at 31 December 2014.
(Ignore tax effects on the adjustments)
(11)
(06)
[Spring 2015, Q#1]
Question No. 11
The summarized trial balances of Oscar Limited (OL) and United Limited (UL) as at 31 December 2015 are as follows:
OL
UL
Dr.
Cr.
Dr.
Cr.
-------------- Rs. in million ----------Sales
835
645
Cost of sales
525
396
Operating expenses
115
102
Tax expense
65
48
Share capital (Rs. 10 each)
600
250
Share premium
150
60
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Retained earnings – 1 January 2015
Current liabilities
Property, plant and equipment
Cost of investment
Stock in trade
Trade receivables
Cash and bank
390
500
125
140
105
1,965
265
115
1,965
350
115
125
103
1,239
179
105
1,239
Additional information:
(i)
On 1 May 2015, OL acquired 80% shares of UL. UL has not recognized the value of brand in its books of account.
At the date of acquisition, the fair value of brand was assessed at Rs. 45 million. The remaining useful life of the
brand was estimated as 15 years.
(ii)
OL charged Rs. 2.5 million monthly to UL for management services provided from the date of acquisition and has
credited it to operating expenses.
(iii)
On 1 October 2015, UL sold a machine to OL for Rs. 24 million. The machine had been purchased on 1 October
2013 for Rs. 26 million. On the date of purchase of machine, it was assessed as having a useful life of ten years
and that estimate has not changed. Gain on disposal was erroneously credited to sales account.
Other inter-company transactions during the year 2015 were as follows:
(iv)
OL to UL
UL to OL
Included in buyer’s
Sales
closing stock
------------ Rs. in million --------60
20
30
5
Profit %
25% of cost
20% of sales
UL settled the inter-company balance as on 31 December 2015 by issuing a cheque of Rs. 30 million. However,
the cheque was received by OL on 1 January 2016.
(v)
The non-controlling interest is measured at the proportionate share of UL’s identifiable net assets.
It may be assumed that profits of both companies had accrued evenly during the year.
Required:
Prepare consolidated statement of comprehensive income for the year ended 31 December 2015 and consolidated
statement of financial position as at 31 December 2015.
(18)
[Spring 2016, Q#1]
Question No. 12
The following balances are extracted from the records of Present Limited (PL) and Future Limited (FL) for the year ended
30 June 2017:
PL
FL
Debit
Credit
Debit
Credit
--------------- Rs. in million --------------Sales
2,060
1,524
Cost of sales
1,300
846
Selling and administrative expenses
350
225
Investment income
190
50
Gain on disposal of fixed assets – net
35
Taxation
80
60
Share capital (Rs. 10 each)
3,500
2,600
Retained earnings as on 30 June 2017
1,996
704
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BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Additional information:
(i)
PL acquired 65% shares of FL on 1 September 2016 against the following consideration:
Cash payment of Rs. 900 million.
Issuance of shares having nominal value of Rs. 1,000 million.
The fair value of each share of PL and FL on acquisition date was Rs. 16 and Rs. 12 respectively. Retained earnings
of PL and FL on the acquisition date were Rs. 1,671 million and Rs. 506.5 million respectively.
At acquisition date, fair value of FL’s net assets was equal to their book value except a brand which had not been
recognised by FL. The fair value of the brand is assessed at Rs. 90 million. PL estimates that benefit would be
obtained from the brand for the next 10 years.
(ii)
The incomes and expenses of FL had accrued evenly during the year except investment income. The investment
income is exempt from tax and had been recognised in August 2016 and received in September 2016.
(i)
On 1 January 2017 PL sold a manufacturing plant having carrying value of Rs. 42 million to FL against cash
consideration of Rs. 30 million. The plant had a remaining useful life of 6 years on the date of disposal.
(ii)
On 1 February 2017 FL delivered goods having sale price of Rs. 100 million to PL on ‘sale or return basis’. 40% of
these goods were returned on 1 May 2017 and the remaining were accepted by PL. 20% of the goods accepted
were included in the closing inventory of PL. FL earned a profit of 33.33% on cost.
(iii)
Both companies paid interim cash dividend at the rate of 5% in May 2017.
(iv)
An impairment test carried out at year end has indicated that goodwill of FL has been impaired by 10%.
(v)
PL measures the non-controlling interest at its fair value.
Required:
(a)
Prepare consolidated statement of profit or loss for the year ended 30 June 2017.
(13)
(b)
Compute the amounts of consolidated retained earnings and non-controlling interest as would appear in the
consolidated statement of financial position as at 30 June 2017.
(04)
[Autumn 2017, Q#4]
Question No. 13
The following summarized trial balances pertain to Arrow Limited (AL) and its subsidiary Box Limited (BL) for the year
ended 31 December 2018:
Sales
Cost of sales
Operating expenses
Other income
Tax expense
Share capital (Rs. 10 each)
Share premium
Retained earnings as at January 1, 2018
Current liabilities
Property, plant and equipment
Investments
Loan to BL’s director
Current assets
NASIR ABBAS FCA
AL
BL
Debit
Credit
Debit
Credit
--------------- Rs. in million --------------5,177
3,996
3,255
2,448
713
636
350
18
403
288
3,720
1,600
1,430
322
2,293
516
713
651
5,418
1,934
1,600
10
2,284
1,797
13,683
13,683
7,103
7,103
297
3
+
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Questions
Additional information:
(i)
AL acquired 96 million shares of BL on 1 May 2018 at following consideration:
Cash payment of Rs. 450 million
Issuance of 40 million shares of AL at Rs. 25 each
(ii)
On acquisition date, carrying values of BL's net assets were equal to fair value except the following:
A building whose fair values and value-in-use were Rs. 390 million and Rs. 520 million respectively as against
carrying value of Rs. 480 million. The group follows cost model for subsequent measurement of property,
plant and equipment. The remaining life of building on acquisition date was 20 years. Fair value of the
building has increased to Rs. 440 million at 31 December 2018.
A brand which had not been recognized by BL. The fair value of the brand was assessed at Rs. 162 million. It
is estimated that benefit would be obtained from the brand for the next 6 years.
(iii)
AL measures the non-controlling interest at fair value. On the date of acquisition, the market price of BL's shares
was Rs. 14 per share.
(iv)
On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of Rs. 20 million. BL has charged
depreciation of Rs. 12.5 million on this equipment.
(v)
In each month of 2018, BL sold goods costing Rs. 40 million to AL at cost plus 20%. At year end, 75% of the goods
purchased in December were included in stock of AL.
(vi)
BL's credit balance of Rs. 38 million in AL’s books does not agree with BL's books due to Rs. 7 million charged by
AL for management service on 26 December 2018. Total management fee charged by AL to BL since acquisition
amounted to Rs. 16 million.
(vii)
BL declared interim cash dividend of Re. 0.50 per share in December 2018. AL has correctly recorded the dividend
in its books. However, BL has not yet accounted for the dividend.
(viii)
The incomes and expenses of BL may be assumed to have accrued evenly during the year.
Required:
Prepare the following:
consolidated statement of profit or loss for the year ended 31 December 2018.
consolidated statement of financial position as at 31 December 2018.
NASIR ABBAS FCA
(15)
(10)
[Spring 2019, Q#2]
298
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
SOLUTIONS TO PRACTICE QUESTIONS
Solution No. 1
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [120 + 100 - 9]
Cost of sales [75 + 65 - 9]
211,000
(131,000)
Gross profit
Distribution cost [12 + 8]
80,000
(20,000)
Admin expenses [10 + 6 + 3]
(19,000)
Finance cost [3 + 2]
(5,000)
Other income [1.5 + 0.5]
2,000
Profit before tax
38,000
Tax [7 + 5.5]
(12,500)
Profit after tax
Other comprehensive income:
25,500
Revaluation gain
1,200
Total comprehensive income
26,700
Profit attributable to:
Shareholders of P
22,200
NCI [W-1]
3,300
25,500
TCI attributable to:
Shareholders of P
23,040
NCI [3.3 + 1.2 x 30%]
3,660
26,700
W-1 NCI
S PAT
14,000
Less: Impairment loss
(3,000)
11,000
30.00%
3,300
Solution No. 2
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [125 + 90 - 8.2]
206,800
Cost of sales [82 + 57 - 8.2]
(130,800)
Gross profit
Distribution cost [13 + 9]
Admin expenses [12 + 14 - 3.5]
76,000
(22,000)
(22,500)
NASIR ABBAS FCA
299
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Finance cost [4 + 1]
Other income [6 - 3.5]
Rs.
(5,000)
2,500
Profit before tax
29,000
Tax [7.5 + 3.2]
(10,700)
Profit after tax
18,300
Profit / TCI attributable to:
Shareholders of P
16,850
NCI [5.8 x 25%]
1,450
18,300
Solution No. 3
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [90 + 80 - 7]
163,000
Cost of sales [54 + 42 - 7 + 0.42]
(89,420)
Gross profit
73,580
Distribution cost [8 + 9]
(17,000)
Admin expenses [7 + 7.8 + 2]
(16,800)
Finance cost [3 + 1.2]
Other income [1 + 0.8]
(4,200)
1,800
Profit before tax
37,380
Tax [6 + 7.2]
(13,200)
Profit after tax
Other comprehensive income:
24,180
Revaluation gain [1.5 + 2]
3,500
Total comprehensive income
27,680
Profit attributable to:
Shareholders of P
NCI [W-1]
19,708
4,472
24,180
TCI attributable to:
Shareholders of P
22,408
NCI [4.472 + 2 x 40%]
5,272
27,680
W-1 NCI
S PAT
13,600
Less: URP on goods [7 x 30% x 20%]
(420)
Less: Impairment loss
(2,000)
11,180
40.00%
NASIR ABBAS FCA
4,472
300
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 4
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [110 + 95 - 8]
Cost of sales [82 + 62 - 8 + 0.4]
197,000
(136,400)
Gross profit
Distribution cost [6.4 + 8]
60,600
(14,400)
Admin expenses [4.2 + 7.1 + 1 + 0.3]
(12,600)
Finance cost [2 + 1.5]
Other income [1.6 + 0.7]
(3,500)
2,300
Profit before tax
Tax [6 + 6.05]
32,400
(12,050)
Profit after tax
Other comprehensive income:
20,350
Revaluation gain [1 - 0.3]
700
Total comprehensive income
21,050
Profit attributable to:
Shareholders of P
19,275
NCI [W-1]
1,075
20,350
TCI attributable to:
Shareholders of P
20,005
NCI [1.075 - 0.3 x 10%]
1,045
21,050
W-1 NCI
S PAT
11,050
Less: Extra dep on FV adj. [3 / 10]
(300)
10,750
10.00%
NASIR ABBAS FCA
1,075
301
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 5
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [150 + 120]
Cost of sales [96 + 74 - 1.5 - 0.5]
270,000
(168,000)
Gross profit
Distribution cost [12 + 9.5]
Admin expenses [10 + 7 + 1.2]
102,000
(21,500)
(18,200)
Finance cost [4 + 3]
(7,000)
Other income [1 + 4.2 - 2.5]
2,700
Profit before tax
Tax [7.5 + 7]
58,000
(14,500)
Profit after tax
43,500
Other comprehensive income:
Revaluation loss [0.2 - 0.5]
(300)
Total comprehensive income
43,200
Profit attributable to:
Shareholders of P
40,200
NCI [W-1]
3,300
43,500
TCI attributable to:
Shareholders of P
39,870
NCI [3.3 + 0.2 x 15%]
3,330
43,200
W-1 NCI
S PAT
23,700
Less: Profit on PPE
(2,500)
Add: Extra dep on FV adj. [15 / 10]
1,500
Less: Impairment loss
(1,200)
Add: Excess dep on PPE sale
500
22,000
15.00%
NASIR ABBAS FCA
3,300
302
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 6
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [140 + 120 - 20]
Cost of sales [85 + 70 - 20 +1.2]
240,000
(136,200)
Gross profit
Distribution cost [11 + 9]
103,800
(20,000)
Admin expenses [13 + 11.4]
(24,400)
Finance cost [5 + 6.3 - 1]
Other income [4.5 + 1 - 1 - 2.5]
(10,300)
2,000
Profit before tax
Tax [8.5 + 7]
51,100
(15,500)
Profit after tax
Other comprehensive income:
35,600
Revaluation gain [0.2 + 0.4]
600
Total comprehensive income
36,200
Profit attributable to:
Shareholders of P
29,562
NCI [W-1]
6,038
35,600
TCI attributable to:
Shareholders of P
30,012
NCI [6.038 + 0.4 x 37.5%]
6,188
36,200
W-1 NCI
S PAT
17,300
Less: URP of goods [20 x 30% x 1/5]
(1,200)
16,100
37.50%
NASIR ABBAS FCA
6,038
303
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 7
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [100 + 90]
Cost of sales [70 + 58]
190,000
(128,000)
Gross profit
Distribution cost [9.5 + 9]
62,000
(18,500)
Admin expenses [8 + 10 + 1]
(19,000)
Finance cost [3 + 2]
Other income [2 + 2.8 + 1.2 (W-2) - 0.32]
(5,000)
5,680
Profit before tax
Tax [4.2 + 6]
25,180
(10,200)
Profit after tax
Other comprehensive income:
14,980
Revaluation gain [0.1 + 0.3]
400
Total comprehensive income
15,380
Profit attributable to:
Shareholders of P
13,620
NCI [W-1]
1,360
14,980
TCI attributable to:
Shareholders of P
13,960
NCI [1.36 + 0.3 x 20%]
1,420
15,380
W-1 NCI
S PAT
7,800
Less: Amortization of brand [5 x 1/5]
(1,000)
6,800
20.00%
1,360
W-2 Negative goodwill
Investment
30,800
Fair value of net assets [40 x 80%]
(32,000)
(1,200)
NASIR ABBAS FCA
304
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 8
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [140 + 120 x 8/12 - 8]
212,000
Cost of sales [75 + 84 x 8/12 - 8 + 1]
(124,000)
Gross profit
Distribution cost [13.5 + 9 x 8/12 + 1]
88,000
(20,500)
Admin expenses [7.2 + 12 x 8/12]
Finance cost [3 + 6 x 8/12]
(15,200)
(7,000)
Other income [1.5 + 3.6 x 8/12]
3,900
Profit before tax
Tax [11.2 + 3 x 8/12]
49,200
(13,200)
Profit after tax
36,000
Profit / TCI attributable to:
Shareholders of P
NCI [W-1]
34,380
1,620
36,000
W-1 NCI
S PAT [9.6 x 8/12]
6,400
Less: Extra dep on FV adj. [4.5 x 1/3 x 8/12]
(1,000)
5,400
30.00%
1,620
Solution No. 9
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [150 + 120 x 10/12 - 10]
Cost of sales [80 + 72 x 10/12 - 10 + 0.9]
240,000
(130,900)
Gross profit
Distribution cost [12 + 9.6 x 10/12]
109,100
(20,000)
Admin expenses [11 + 10.8 x 10/12 + 0.4]
(20,400)
Finance cost [3 + (3.8 - 2) x 10/12 + 2 - 2]
(4,500)
Other income [4.6 + (1.8 - 0.3) x 10/12 - 2]
3,850
Profit before tax
Tax [13.5 + 9 x 10/12]
68,050
(21,000)
Profit after tax
47,050
NASIR ABBAS FCA
305
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Profit / TCI attributable to:
Shareholders of P
Rs.
42,270
NCI [W-1]
4,780
47,050
W-1 NCI
S PAT [(16.6 - 0.3 + 2) x 10/12 - 2]
13,250
Less: Extra dep on FV adj.
(400)
Less: URP on goods
(900)
11,950
40.00%
4,780
Solution No. 10
Rivera Group
Consolidated statement of comprehensive income
for the year ending December 31, 2014
Sales [285 + 320 - 60 - 48]
Rs. in million
497.00
Cost of sales [186 + 240 - 60 - 48 + 2.8 (W-2) + 1.6 (W-2)]
(322.40)
Gross profit
174.60
Selling and distribution expense [27 + 25]
(52.00)
Administration expenses [17 + 15 + 1.2 (W-3) + 4.68 (W-1)]
(37.88)
Finance cost [8 + 10]
(18.00)
Profit before tax
Tax [19 + 12]
66.72
(31.00)
Profit after tax
35.72
Profit attributable to:
Shareholders of RL
32.92
Non-controlling interest (W-4)
2.80
35.72
Rivera Group
Consolidated statement of financial position
as at December 31, 2014
Non current assets
PPE [190 + 263 + 18 - 1.2]
469.80
Goodwill [W-1]
42.12
Current assets [W-2]
53.60
565.52
Equity
Share capital
350.00
Retained earnings [W-3]
82.92
Non controlling interest [W-5]
53.60
Current liabilities [35 + 44]
79.00
565.52
NASIR ABBAS FCA
306
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Workings [All figures in Rs. million]
W-1 Goodwill
------------------ Rs in million ------------------
Investment
250.00
Less: net assets
Capital
200.00
Retained earnings
Fair value adj – building
36.00
18.00
254.00
[1.6 m / 2 shares]
80%
(203.20)
46.80
Less: Impairment loss [10%]
(4.68)
42.12
W-2 Current assets
RL current assets
23.00
CL current assets
URP on RL stock [16.8 x 20/120]
35.00
(2.80)
URP on CL stock [9.6 x 20/120]
(1.60)
53.60
W-3 Retained earnings
RL RE (W-6)
78.00
Less: URP on goods [9.6 x 20/120]
(1.60)
Less: Impairment loss
(4.68)
CL RE (W-6)
54.00
Less: Pre acq.
(36.00)
Less: Extra depreciation [18/15]
(1.20)
Less: URP on goods [16.8 x 20/120]
(2.80)
14.00
80%
11.20
82.92
Alternatively: [It is applicable on in 1st year of acquisition]
RL RE at start of year
50.00
Profit attributable to shareholders of RL
32.92
82.92
W - 4 NCI (SCI)
PAT (W-6)
18.00
Less: Extra depreciation [18/15]
(1.20)
Less: URP on goods [16.8 x 20/120]
(2.80)
14.00
20%
2.80
-------------- Rs in million ---------NASIR ABBAS FCA
307
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
W-5 NCI
NCI share in net assets acquired [254 (W-1) x 20%]
50.80
NCI share in post acq. Profits [14 (W-3) x 20%]
2.80
53.60
W-6 Retained earnings
RL
CL
50.00
36.00
Sales
285.00
320.00
Cost of sales
Selling and distribution
(186.00)
(240.00)
(27.00)
(25.00)
Admin expense
(17.00)
(15.00)
Finance cost
(8.00)
(19.00)
(10.00)
(12.00)
28.00
18.00
78.00
54.00
Opening RE
Profit for the year:
Tax
Closing RE
Solution No. 11
Notes:
- It is assumed that inter-company sales given are for full year.
- It is assumed that depreciation on machine is included in operating expenses.
- Elimination of inter company management services is ignored as it would have a net effect of zero.
Oscar Group
Consolidated statement of financial position
as at December 31, 2015
Non current assets
PPE [390 + 350 - 3.2 (W-4) + 0.1 (W-4)]
Rs. in million
736.90
Intangible asset [45 – 2 (W-5)]
43.00
Goodwill (W-1)
46.40
Current assets
Stock in trade [125 + 115 - 4 - 1]
235.00
Trade receivables [140 + 125 - 30]
235.00
Cash and bank [105 + 103 + 30]
238.00
1,534.30
Capital and reserves
Share capital
Share premium
600.00
150.00
Retained earnings (W-2)
438.92
NCI (W-3)
Current liabilities
Current liabilities [115 + 105]
125.38
220.00
1,534.30
Oscar Group
NASIR ABBAS FCA
308
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Consolidated statement of comprehensive income
for the year ended December 31, 2015
Rs. in million
Sales [835 + 645 x 8/12 - 60 x 8/12 - 30 x 8/12 - 3.2(W-4)]
1,201.80
Cost of sales [525 + 396 x 8/12 - 60 x 8/12 - 30 x 8/12 + 4(W-2) + 1(W-5)]
(734.00)
Gross profit
467.80
Operating expenses [115 + 102 x 8/12 + 2(W-5) - 0.1 (W-4)]
(184.90)
Profit before tax
282.90
Tax [65 + 48 x 8/12]
Profit after tax
(97.00)
185.90
Profit attributable to:
Shareholders of OL
173.92
NCI (W-4)
11.98
185.90
Workings:
W - 1 Goodwill
----- Rs in million -----
Investment
500.00
Less: net assets acquired:
Share capital
250.00
Share premium
Retained earnings
[179 + 99 (W-2.1) – 66 (W-5)]
60.00
212.00
Brand
45.00
567.00
80%
(453.60)
46.40
W - 2 Retained earnings
OL RE [265 + 130]
395.00
Less: URP on goods [20 x 25/125]
(4.00)
Add: Share in post acq RE of UL [59.9(W-5) x 80%]
47.92
438.92
Alternatively:
OL opening RE
Add: Profit attributable to shareholders of OL
NASIR ABBAS FCA
265.00
173.92
438.92
309
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
W - 2.1
----- Rs in million -----
Sales
OL
835.00
UL
645.00
Cost of sales
Operating expense
(525.00)
(115.00)
(396.00)
(102.00)
Tax expense
(65.00)
(48.00)
Profit after tax
130.00
99.00
W - 3 NCI (SOFP)
Share in net assets acquired [ 567(W-1) x 20%]
113.40
Share in post acq. RE
11.98
125.38
W-4 Sale of machine
Profit on machine [24 - 26 x 8/10]
3.20
Excess depreciation [3.2/8 x 3/12]
0.10
W - 5 NCI (SCI)
Post acq. PAT [99(W-2.1) x 8/12]
66.00
Less: Profit on machine (W-4)
(3.20)
Add: Excess depreciation (W-4)
0.10
Less: URP on goods [5 x 20%]
Less: Amortization of brand [45/15 x 8/12]
(1.00)
(2.00)
59.90
20%
NASIR ABBAS FCA
11.98
310
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 12
Assumptions
- Dividend relates to post acquisition profits only.
- Retained earnings given are after including current year profits
- Loss on plant was only due to inter company price agreement and no impairment on plant is required
(a)
PL Group
Consolidated Income Statement
for the year ended June 30, 2017
------------ Rs in million -----------Sales [2,060 + 1,524 x 10/12 - 60]
Cost of sales [1,300 + 846 x 10/12 - 60 + 3 (W-1) + 1 (W-2)]
Gross profit
Selling and admin expenses [350 + 225 x 10/12 + 39.55 (W-3) + 7.5 (W-5)]
Investment income [190 - 84.5 (W-4)]
Gain on disposal of fixed assets [35 + 12 (W-2)]
Profit before tax
Tax [80 + 60 x 10/12]
Profit after tax
3,270.00
(1,949.00)
1,321.00
(584.55)
105.50
47.00
888.95
(130.00)
758.95
Profit / TCI attributable to:
Shareholders of PL
NCI (W-5)
(b)
Consolidated retained earnings
as at June 30, 2017
PL RE
Add: Loss on plant
Less: Depreciation on loss
Add: FL RE
Less: Pre acq. RE
Less: Impairment loss
Less: URP on goods
Less: Amortization of brand [90/10 x 10/12]
Alternatively
PL retained earnings as at 01-07-16 [1,996 – 555 (W-6)]
Profit attributable to shareholders of PL
Non-controlling interest
as at June 30, 2017
Fair value at acq. Date [260 x 35% x Rs. 12]
Share in FL post RE [147.45 x 35%]
NASIR ABBAS FCA
661.84
97.11
758.95
1,996.00
12.00
(1.00)
704.00
(506.50)
(39.55)
(3.00)
(7.50)
147.45
65%
95.84
2,102.84
1,441.00
661.84
2,102.84
1,092.00
51.61
1,143.61
311
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
WORKING
W-1 URP on goods
------------ Rs in million ------------
[100 x 60% x 20% x 33.33/133.33]
3.00
W-2 URP on plant
Loss on sale
Depreciation on loss [12/6 x 6/12]
(12.00)
1.00
Note
It is assumed that loss was only due to inter-company agreed price and there was no need of impairment testing
for that plant
W-3 Goodwill impairment
Investment:
Cash
Shares [100 x Rs. 16]
Fair of NCI
Less: net assets at acquisition
Share capital
Retained earnings
Brand
Goodwill at acq.
Impairment loss
900.00
1,600.00
1,092.00
2,600.00
506.50
90.00
10%
W-4 Inter company dividend
[2,600 x 65% x 5%]
(3,196.50)
395.50
39.55
84.50
W-5 NCI (I/S)
FL PAT [(443 (W-6) - 50) x 10/12]
Amortization
Impairment loss
URP on goods
35%
327.50
(7.50)
(39.55)
(3.00)
277.45
97.11
W-6 PAT
Sales
Cost of sales
Selling & admin
Investment income
Gain on disposal
Tax
PAT
NASIR ABBAS FCA
PL
2,060.00
(1,300.00)
(350.00)
190.00
35.00
(80.00)
555.00
FL
1,524.00
(846.00)
(225.00)
50.00
(60.00)
443.00
312
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
Solution No. 13
AL Group
Consolidated balance sheet
as at December 31, 2018
Rs. million
Non current assets
PPE [5,418 + 1,934 - 90 + 3 - 19 (W-9)]
Investments [1,600 - 1,450]
Brand [162 - 18]
Loan to BL's director
7,246.00
150.00
144.00
10.00
Current assets [2,284 + 1,797 - 80 x 60% - 7 - 38 - 6]
3,982.00
11,532.00
Equity
Share capital
Share premium
Retained earnings [W-2]
Non controlling interest [W-3]
3,720.00
1,430.00
4,000.00
1,024.00
Current liabilities [713 + 651 + 80 - 80 x 60% - 38]
1,358.00
11,532.00
-
AL Group
Consolidated Income Statement
for the year ended December 31, 2018
Rs. million
7,457.00
(4,509.00)
2,948.00
(1,142.00)
656.00
2,462.00
(595.00)
1,867.00
Sales [5,177 + 3,996 x 8/12 - 384]
Cost of sales [W-4]
Gross profit
Operating expenses [W-5]
Other income [W-6]
Profit before tax
Tax [403 + 288 x 8/12]
Profit after tax
Profit / TCI attributable to:
Shareholders of AL
NCI [W-7]
Workings [All figures in Rs. million]
W-1
Goodwill
Investment:
Cash
Shares [40 x 25]
Fair value of NCI [64 x 14]
Less: net assets:
Capital
Premium
RE [516 + 642 x 4/12]
Building [390 - 480]
Brand
NASIR ABBAS FCA
1,707.00
160.00
1,867.00
450.00
1,000.00
896.00
1,600.00
322.00
730.00
(90.00)
162.00
(2,724.00)
(378.00)
313
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
------------ Rs in million -----------W-2 Retained earnings
PL's RE [2,293 + 1,156 (W-8)]
Less: URP on equipment [W-9]
Add: negative goodwill
Add: SL's RE [516 + 642(W-8)]
Less: Pre-acquisition profits
Less: Dividend [160 x 0.5]
Less: Unrecorded management fees
Less: URP on goods [40 x 75% x 20%]
Add: Dep on FV adj. [90/20 x 8/12]
Less: Amortization on brand [162/6 x 8/12]
3,449.00
(19.00)
378.00
1,158.00
(730.00)
(80.00)
(7.00)
(6.00)
3.00
(18.00)
320.00
60.00%
W-3 NCI (Balance sheet)
FV of NCI
Post-acq RE [320 x 40%]
896.00
128.00
1,024.00
W-4 Cost of sales
AL
BL [2,448 x 8/12]
Inter-company purchase [40 x 1.2 x 8]
URP on goods
3,255.00
1,632.00
(384.00)
6.00
4,509.00
W-5 Operating expenses
AL
BL [636 x 8/12]
Unrecorded management fee expense
Inter-company management fee
Excess dep on equipment
Amortization of brand
Dep on FV adj
713.00
424.00
7.00
(16.00)
(1.00)
18.00
(3.00)
1,142.00
W-6 Other income
AL
BL [18 x 8/12]
Inter-company management fee
Negative goodwill (W-1)
Dividend [80 x 60%]
Profit on equipment
350.00
12.00
(16.00)
378.00
(48.00)
(20.00)
656.00
W-7 NCI (Income statement)
SL's PAT [642 x 8/12(W-8)]
Less: Unrecorded management fees
Less: URP on goods [40 x 75% x 20%]
Add: Dep on FV adj. [90/20 x 8/12]
Less: Amortization on brand [162/6 x 8/12]
40%
NASIR ABBAS FCA
192.00
4,000.00
428.00
(7.00)
(6.00)
3.00
(18.00)
400.00
160.00
314
BASIC CONSOLIDATION [SOCI WITH ONE SUBSIDIARY] - Solutions
W-8 Separate Income statement
Sales
Cost of sales
Operating expenses
Other income
Tax
PAT
W-9 URP on equipment
Profit
Excess depreciation [12.5/250 x 20]
NASIR ABBAS FCA
AL
5,177.00
(3,255.00)
(713.00)
350.00
(403.00)
1,156.00
BL
3,996.00
(2,448.00)
(636.00)
18.00
(288.00)
642.00
20.00
(1.00)
19.00
315
Solution
Pulp Group
Consolidated statement of financial position
as at June 30, 2020
Rs.
Non current assets
PPE [125 + 120 - 8 + 3 - 1.2 - 7.6 - 7.8]
Intangible asset [12 - 4.8]
Goodwill [W-1]
223,400
7,200
-
Current assets
Inventories [18 + 14 + 4 - 1.8 - 2]
Debtors [22 + 24 - 13]
Other receivables [11 + 8 - 2.8]
Cash and bank [9 + 9]
32,200
33,000
16,200
18,000
330,000
Equity
Share capital [70 + 2.8 x 2/5 x 10]
Share premium [10 + 2.8 x 2/5 x 22]
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
81,200
34,640
10,750
71,844
35,610
Non-current liabilities
Deferred consideration [7,650 x 1.12]
Deferred tax (W-5)
9,256
26,100
Current liabilities
Contingent consideration [2,800 x 3]
Creditors [14 + 19 + 4 - 13]
Other payables [16 + 15 - 2.8]
Workings
W-1 Goodwill
Consideration transferred:
- Cash [7 x 2,800]
- Share exchange [2,800 x 2/5 x 32]
- Deferred consideration [2,800 x 4 x 1.1-4]
- Contingent consideration [2,800 x 1.25]
- Land
Value of NCI [84,500 x 30%]
Less: net assets acquired:
Share capital
Share premium
Other reserves
8,400
24,000
28,200
330,000
Rs.
Rs.
19,600
35,840
7,650
3,500
10,000
25,950
40,000
20,000
4,500
316
RE
FV adj. - Land
FV adj. - Plant
Brand
Contingent liability
DTL [(3,000 + 12,000 - 7,000) x 25%]
Goodwill at acquisition
Impairment loss [22,914(W-3.1) x 70%]
14,000
2,000
3,000
12,000
(7,000)
(2,000)
W-2 Other reserves
Pulp
Seed
--------- Rs. -------9,000
7,000
(4,500)
2,500
1,750
10,750
Other reserves
Less: Pre-acq
Add: Share in Seed [2,500 x 70%]
W-3 Retained earnings
RE
Less: Pre-acq
Less: Finance cost [7,650 x 1.12 - 7,650]
Less: Change in value of contingent cons. [2,800 x 1.75]
Add: Gain on land transfer
Less: Acquisition related cost [21,000 - 19,600]
Less: Extra dep. on FV adj. of plant [3,000 x 2/5]
Less: FV adj. of land
Less: Amortization of brand [12,000 x 2/5]
Add: Contingent liability settled
Less: URP on goods [(4,000 + 5,000) x 20%] [8,000 x 25%]
Less: URP on machine [8,000 - 8,000 x 1,900/38,000]
Less: Impairment loss of GW
Less: Impairment loss of PPE (W-3.1)
Add: Deferred tax expense (W-5)
Add: Share in S [29,700 x 70%]
(86,500)
16,040
(16,040)
-
Pulp
Seed
--------- Rs. -------74,000
58,000
(14,000)
(1,606)
(4,900)
2,000
(1,400)
(1,800)
(16,040)
800
(1,200)
(2,000)
(4,800)
7,000
(2,000)
(7,600)
(7,800)
4,100
29,700
20,790
71,844
317
W-3.1 Impairment loss
Carrying amount as per question:
PPE
Fair value adjustment of Plant [3,000 - 1,200]
Goodwill [16,040 ÷ 0.7]
Rs.
Recoverable amount
Impairment loss
120,000
1,800
22,914
144,714
114,000
30,714
Allocation of impairment loss:
- Goodwill
- PPE [30,714 - 22,914]
22,914
7,800
W-4 NCI
Value of NCI (W-1)
Other reserves [2,500 x 30%]
RE [29,700 x 30%]
Rs.
25,950
750
8,910
35,610
W-5 Deferred tax
Pulp
Seed
--------- Rs. -------Adjustments in carrying amounts of net assets:
Acquisition related cost
Extra dep. on FV adj. of plant
Amortization of brand
Contingent liability settled
URP on goods
URP on machine
Impairment loss of PPE
[A]
Tax on adjustments after acquisition [A x 25%]
Tax on acquisition (W-1)
Balance as per question
(1,400)
(1,800)
(3,200)
(1,200)
(4,800)
7,000
(2,000)
(7,600)
(7,800)
(16,400)
(800)
13,000
12,200
(4,100)
2,000
16,000
13,900
318
Question
Following are the statements of comprehensive income for the year ending June 30, 2020:
Pulp
Seed
---------- Rs.-------Sales
140,000
141,000
Cost of sales
(80,000)
(82,000)
Gross profit
60,000
59,000
Distribution cost
(12,000)
(10,000)
Admin expenses
(11,000)
(13,000)
Finance cost
(4,000)
(5,000)
Other income
9,000
13,000
Profit before tax
42,000
44,000
Tax
(15,000)
(18,000)
Profit after tax
27,000
26,000
Other comprehensive income:
Revaluation gain
1,800
1,500
Total comprehensive income
28,800
27,500
Following further information is available:
(1)
Pulp acquired 70% shares of Seed on July 1, 2018 when its other reserves were Rs. 4,500 and retained earnings
were Rs. 14,000. Following purchase consideration was agreed:
An immediate cash payment of Rs. 7 per share.
A deferred cash payment of Rs. 4 per share payable on June 30, 2022.
A contingent cash payment of Rs. 3 per share payable on September 30, 2020 if sale of a new product
achieves its promised benchmark till June 30, 2020. The said target was duly achieved in June 2020.
A share exchange of 2 shares of Pulp for every 5 shares of Seed. Market shares prices at acquisition date
were Rs. 32 (Pulp) and Rs. 26 (Seed).
A plot of Land with fair value at acquisition date of Rs. 10,000 (carrying value was Rs. 8,000).
Pulp only recorded immediate cash payment plus commission paid to investment banker as cost of investment.
Land transferred as consideration is still appearing in Pulp’s books. Fair value of contingent consideration at
the date of acquisition was Rs. 1.25 per share. It did not change on June 30, 2019. Pulp’s cost of capital is 10%.
(2)
At acquisition date, carrying amounts of all assets and liabilities of Seed were equal to fair values except
following:
Book value
Fair value
----------- Rs. ---------Land
15,000
17,000
Plant
24,000
27,000
Remaining useful life of Plant at acquisition date was 5 years. The land was sold by Seed during 2020 for Rs.
19,500.
(3)
At acquisition date there was an internally generated brand of Seed, however, its fair value could not be
estimated reliably at that date due to insufficient information. Though its remaining life was estimated to be 5
years. The financial consultant provided with reliable estimate of fair value at Rs. 12,000 on receipt of sufficient
information 4 months later.
(4)
At acquisition date there was a pending court case against Seed for which no provision was recognized in its
books as outflow of economic resources was not probable. At that date fair value of the contingent liability
was determined at Rs. 7,000. In respect of this claim, on June 30, 2019 Seed recognized a provision for Rs.
319
9,000 as outflow of economic resources became probable. The claim was finally settled during 2020 for Rs.
10,000.
(5)
It is PL’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(6)
There was no need for impairment test in 2019, however, recoverable amount of CGU of Seed (i.e. comprising
of PPE and Goodwill) on June 30, 2020 was Rs. 114,000.
(7)
The following intercompany sales were made during the year 2020:
Sales
Pulp to Seed
Seed to Pulp
Included in buyer’s
closing stock in trade
------------------- Rs. -------------20,000
5,000
36,000
8,000
Gross
Profit %
20%
25%
In respect of above intercompany sales, Seed’s books show a net balance owed to Pulp is Rs. 9,000. However,
it differs from balance as per Pulp’s books due to goods sold by Pulp for Rs. 4,000 on June 28, 2020 but were
received and recorded by Seed on July 3, 2020.
(8)
On January 1, 2020 Seed sold a machine to Pulp for Rs. 38,000 at a profit of Rs. 8,000. Pulp charged depreciation
on that machine for Rs. 1,900. Both companies include the depreciation on plant and machinery in cost of
sales.
(9)
During June 2020, Pulp and Seed declared ordinary dividend of 5% and 10% respectively which would be
payable in next month. Both companies have duly recorded the dividends.
(10)
Deferred tax liabilities are calculated on all temporary differences at a tax rate of 25%. Gain on sale of land is
not taxable. No tax deduction will be allowed on deferred consideration and contingent consideration.
Required:
Prepare consolidated statement of comprehensive income and consolidated statement of changes in equity for the
year ending June 30, 2020.
320
Solution
Pulp Group
Consolidated statement of comprehensive income
for the year ended June 30, 2020
Sales [140 + 141 - 20 - 36]
Cost of sales (W-1)
Gross profit
Distribution cost [12 + 10]
Admin expenses (W-2)
Finance cost (W-3)
Other income (W-4)
Profit before tax
Tax (W-7)
Profit after tax
Other comprehensive income:
Revaluation gain [1.8 + 1.5]
Total comprehensive income
Proft attributable to:
- Shareholders of Pulp
- NCI (W-6)
TCI attributable to:
- Shareholders of Pulp
- NCI [2.61 + 1.5 x 30%]
Workings
W-1 Cost of sales
Pulp
Seed
Intercompany sales [36,000 + 20,000]
URP on goods [(4,000 + 5,000) x 20% + 8,000 x 25%]
Extra depreciation on FV adjustment of Plant [3,000 x 1/5]
Excees depreciation on sale of plant [8,000 x 1,900/38,000]
W-2 Admin expenses
Pulp
Seed
Change in fair value of contingent consideration
Impairment loss of GW (W-5)
Impairment loss of PPE (W-5.1)
Amortization of brand [12,000 x 1/5]
Rs.
225,000
(110,000)
115,000
(22,000)
(55,140)
(9,842)
9,200
37,219
(27,450)
9,769
3,300
13,069
7,159
2,610
9,769
10,009
3,060
13,069
Rs.
80,000
82,000
(56,000)
3,800
600
(400)
110,000
11,000
13,000
4,900
16,040
7,800
2,400
55,140
321
W-3 Finance cost
Pulp
Seed
Finance cost on deferred cost [7,650 x 1.1 x 10%]
Rs.
4,000
5,000
842
9,842
W-4 Other income
Pulp
Seed
Dividend income [40,000 x 10% x 70%]
Profit on sale of machine
FV adjustment (land)
W-5 Goodwill
Consideration transferred:
- Cash [7 x 2,800]
- Share exchange [2,800 x 2/5 x 32]
- Deferred consideration [2,800 x 4 x 1.1-4]
- Contingent consideration [2,800 x 1.25]
- Land
Value of NCI [84,500 x 30%]
Less: net assets acquired:
Share capital
Share premium
Other reserves
RE
FV adj. - Land
FV adj. - Plant
Brand
Contingent liability
DTL [(3,000 + 12,000 - 7,000) x 25%]
Goodwill at acquisition
Impairment loss [22,914(W-5.1) x 70%]
W-5.1 Impairment loss
Carrying amount as per question:
PPE
Fair value adjustment of Plant [3,000 - 1,200]
Goodwill [16,040 ÷ 0.7]
9,000
13,000
(2,800)
(8,000)
(2,000)
9,200
Rs.
Rs.
19,600
35,840
7,650
3,500
10,000
25,950
40,000
20,000
4,500
14,000
2,000
3,000
12,000
(7,000)
(2,000)
(86,500)
16,040
(16,040)
Rs.
Recoverable amount
Impairment loss
120,000
1,800
22,914
144,714
114,000
30,714
Allocation of impairment loss:
- Goodwill
- PPE [30,714 - 22,914]
22,914
7,800
322
W-6 NCI
Seed's PAT
Less: Extra dep. on FV adj. of plant [3,000 x 1/5]
Less: FV adj. of land
Less: Amortization of brand [12,000 x 1/5]
Less: URP on goods [8,000 x 25%]
Less: URP on machine [8,000 - 8,000 x 1,900/38,000]
Less: Impairment loss of PPE (W-3.1)
Add: Deferred tax expense [(22,400 - 2,000) x 25%]
30%
W-7 Tax
Pulp
Seed
Tax on P's adjustments [URP on goods i.e. 1,800 x 25%]
Tax on S's adjustments (W-6)
Rs.
26,000
(600)
(2,000)
(2,400)
(2,000)
(7,600)
(7,800)
(22,400)
5,100
8,700
2,610
15,000
18,000
(450)
(5,100)
27,450
323
Pulp Group
Consolidated Statement of changes in equity
for the year ending June 30, 2020
Balance as on 01-07-19
Dividend *
Total comprensive income for the year
Balance as on 30-06-20
Attributable to shareholders of P
Noncontrolling
Total
Share
Share
Other
Retained
Total
capital
premium
reserves
earnings
interest
------------------------------------------- Rs. -----------------------------------------------81,200
34,640
7,900
68,185
191,925
33,750
225,675
(3,500)
(3,500)
(1,200)
(4,700)
2,850
7,159
10,009
3,060
13,069
81,200
34,640
10,750
71,844
198,434
35,610
234,044
* Dividend in RE column = 70,000 x 5% = 3,500
Dividend in NCI column = 40,000 x 10% x 30% = 1,200
324
Solution
Workings
W-1 Goodwill
Consideration transferred:
- Cash [7 x 2,800]
- Share exchange [2,800 x 2/5 x 32]
- Deferred consideration [2,800 x 4 x 1.1-4]
- Contingent consideration [2,800 x 1.25]
- Land
Value of NCI [84,500 x 30%]
Less: net assets acquired:
Share capital
Share premium
Other reserves
RE
FV adj. - Land
FV adj. - Plant
Brand
Contingent liability
DTL [(3,000 + 12,000 - 7,000) x 25%]
Goodwill at acquisition
W-2 Other reserves
Other reserves
Less: Pre-acq
Add: Share in Seed [1,000 x 70%]
W-3 Retained earnings
RE [Closing - PAT + Dividend]
Less: Pre-acq
Less: Finance cost [7,650 x 1.1 - 7,650]
Add: Gain on land transfer
Less: Acquisition related cost [21,000 - 19,600]
Less: Extra dep. on FV adj. of plant [3,000 x 1/5]
Less: Amortization of brand [12,000 x 1/5]
Less: Contingent liability
Add: Provision recognized by S
Add: Deferred tax expense (W-4)
Add: Share in S [25,000 x 70%]
Rs.
Rs.
19,600
35,840
7,650
3,500
10,000
25,950
40,000
20,000
4,500
14,000
2,000
3,000
12,000
(7,000)
(2,000)
(86,500)
16,040
Pulp
Seed
--------- Rs. -------7,200
5,500
(4,500)
1,000
700
7,900
Pulp
Seed
--------- Rs. -------50,500
36,000
(14,000)
(765)
2,000
(1,400)
(600)
(2,400)
(2,000)
9,000
350
(1,000)
25,000
17,500
68,185
325
W-4 NCI
Value of NCI (W-1)
Other reserves [1,000 x 30%]
RE [25,000 x 30%]
Rs.
25,950
300
7,500
33,750
W-5 Deferred tax
Pulp
Seed
--------- Rs. -------Adjustments in carrying amounts of net assets:
Acquisition related cost
Extra dep. on FV adj. of plant
Amortization of brand
Contingent liability settled
Provision reversal
[A]
Tax on adjustments after acquisition [A x 25%]
(1,400)
(1,400)
(600)
(2,400)
(2,000)
9,000
4,000
(350)
1,000
326
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
CONSOLIDATION – SOFP WITH ONE ASSOCIATE
Equity method is applied for investment in associate in consolidated statement of financial position (or Group statement
of financial position). Under this method “Investment in associate” is shown at investor’s share in net assets of
associate. Following are various adjustments to be made for application of equity method in consolidated balance
sheet:
1. POST ACQUISITION PROFITS AND OTHER RESERVES OF “A”
Consolidation adjustment:
P’s shares in A’s post-acquisition retained earnings and post-acquisition other reserves are:
(i)
ADDED to P’s RE in “Group RE working” and P’s other reserves in “Group other reserves working”
respectively.
(ii)
both ADDED to “Investment in associate”
(Also include the adjustment for uniform accounting policies, if required. E.g. the If A does not follow
revaluation model BUT group follows it, then for consolidation purpose you will have to make
revaluation adjustments.)
Memorandum entry:
Dr. Investment in A
Cr. Group RE (Group’s share in A’s post acquisition profits)
Cr. Group other reserves (Group’s share in A’s post acquisition other reserves)
Notes:
– In case of losses, “investment in A” will not be taken below zero.
– If P measures its investment in A as per IFRS 9, then do not forget to reverse any gain or loss recognized
2.
IMPAIRMENT OF INVESTMENT IN ASSOCIATE
In questions, impairment loss of investment in associate may be:
Given OR
Determined by deducting “recoverable amount” from “carrying amount” of investment
Consolidation adjustment:
Total accumulated impairment loss is DEDUCTED from:
(i) P’s RE in Group RE working
(ii) “Investment in A”
Memorandum entry:
Dr. Group RE
Cr. Investment in A
3.
INTER COMPANY BALANCES
No elimination:
Since there is no consolidation of receivables and payables of A, therefore, there is no need to eliminate any
intercompany balance
4.
UNREALIZED PROFIT IN INVENTORY [URP]
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP =
Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP =
Total profit earned in the inter-company sale x % goods held in stock
NASIR ABBAS FCA
327
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
Consolidation adjustment:
5.
P to A sale
A to P sale
P’s share of URP is DEDUCTED from:
(i)
Investment in A
(ii)
P’ RE in Group RE working
P’s share of URP is DEDUCTED from:
(i)
Inventory in Group SOFP
(ii)
P’ RE in Group RE working
Memorandum entry:
Dr. Group RE
Cr. Investment in A
Dr. Group RE
Cr. Inventory
(a) FAIR VALUE ADJUSTMENT FOR A’s NET ASSETS
Information about fair value adjustments at acquisition date may be given as follows:
Difference between fair values and book values is given (e.g. building was overvalued by Rs. 50,000) OR
Both Fair values and book values of A’s assets and liabilities are given (i.e. net assets)
Consolidation adjustment:
No adjustment for fair values is accounted for in Group SOFP as no consolidation of assets is being made.
However, these are considered for calculation of goodwill and adjustment of “extra depreciation”.
5.
(b) EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of A in its books
Calculation of Extra accumulated depreciation:
= FV adjustment ÷ remaining useful life x years since acquisition
(above formula is for straight line method)
Consolidation adjustment:
Extra Accumulated depreciation is DEDUCTED from A’s RE in “Group RE working”
Memorandum entry:
Dr. Group RE
Cr. Investment in A
In case of negative adjustment to A’s net assets, above adjustments will be reversed
6.
UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET DURING THE YEAR
Unrealized profit is the profit included in carrying amount of a non-current asset sold in an inter-company
transaction.
Calculation of URP:
URP =
NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP =
Profit on sale – excess depreciation charged by buyer
NASIR ABBAS FCA
328
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
Consolidation adjustment:
7.
P to A sale
A to P sale
P’s% share of URP is DEDUCTED from:
(i)
Investment in A
(ii)
P’s RE in Group RE working
P’s% share of URP is DEDUCTED from:
(i)
Relevant asset in Group SOFP
(ii)
P’s RE in Group RE working
Memorandum entry:
Dr. Group RE
Cr. Investment in A
Dr. Group RE
Cr. PPE
NEGATIVE GOODWILL
Do calculate goodwill just like it is done in case of subsidiary where NCI is valued on proportionate basis. If the
answer is positive then leave it there but if answer is negative then make following adjustment:
Consolidation adjustment:
Negative goodwill is ADDED to:
(i) P’s RE in Group RE working
(ii) Investment in A
Memorandum entry:
Dr. Investment in A
Cr. Group RE
8.
OTHER INVESTMENT BY “P” IN “A”
Group may have other long term investments such as:
Investment in preference shares / debentures of A
Loan to A
Such investments are also considered as and included in “Investment in associates”
9.
ACQUISITION DURING THE YEAR
Consolidation adjustment:
Only effect is on the calculation of Pre and Post acquisition reserves as follows:
Pre acq. reserves =
A’s reserves at balance sheet date – income for the year x n/12
(n = no. of months from acquisition to year end)
Post acq. reserves=
A’s reserves at balance sheet date – pre acquisition reserves
OR
Income for the year x n/12
NASIR ABBAS FCA
329
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
CONSOLIDATION – SOCI WITH ONE ASSOCIATE
Equity method is applied for investment in associate in consolidated statement of comprehensive income (or Group
statement of comprehensive income). Under this method, two line items, namely “Share of profit from associate” and
“share of other comprehensive income from associate” are included in consolidated statement of comprehensive
income. Following are various adjustments to be made for application of equity method in consolidated statement of
comprehensive income:
1. IMPAIRMENT OF INVESTMENT IN ASSOCIATE
In questions, impairment loss for the year on investment in associate may be:
Given OR
Determined by deducting “recoverable amount of current year” from “recoverable amount of previous year”
of investment.
Consolidation adjustment:
Impairment loss for the year is DEDUCTED from share of profit from associate in “Share of profit from associate
working” (W – 1)
2.
INTER COMPANY SALES / INTER COMPANY MANAGEMENT SERVICES / INTET COMPANY INTEREST
No elimination:
Since there is no consolidation of incomes and expenses of A, therefore, there is no need to eliminate any
intercompany transaction.
3.
UNREALIZED PROFIT IN INVENTORY [URP]
Inventory value may be given in question or mentioned as a proportion of intercompany sale.
Calculation of URP:
URP =
Inventory x GP margin %
OR
Inventory x GP markup / (100 + GP markup)
OR
URP =
Total profit earned in the inter-company sale x % goods held in stock
Consolidation adjustment:
4.
P to A sale
A to P sale
P’s % share of URP is ADDED to “Cost of sales”
P’s % share of URP is DEDUCTED in “Share of profit from
associate” working (W – 1)
EXTRA DEPRECIATION FOR FAIR VALUE ADJUSTMENT OF DEPRECIABLE ASSETS
It is calculated using same depreciation basis as of A in its books
Calculation of Extra depreciation for the year:
= FV adjustment ÷ remaining useful life
(above formula is for straight line method)
Consolidation adjustment:
Extra depreciation for the year is DEDUCTED from A’s PAT in “Share of profit from associate working”
In case of negative adjustment to A’s net assets, above adjustments will be reversed
NASIR ABBAS FCA
330
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
5.
UNREALIZED PROFIT ON SALE OF NON-CURRENT ASSET
Following adjustment is required only in case of sale of non-current asset during the current year:
Calculation of URP:
URP =
NBV of asset x margin %
OR
NBV of asset x markup / (100 + GP markup)
OR
URP =
Profit on sale – excess depreciation charged by buyer
Consolidation adjustment:
6.
P to A sale
A to P sale
P’s % share of URP is DEDUCTED from “Other
income”
[If P accounted for this sale as a “sale of goods”,
then adjustment number 3 will be followed]
P’s % share of URP is DEDUCTED in “Share of profit from
associate” working
NEGATIVE GOODWILL
Adjustment for negative goodwill is only made in 1st year of purchase of investment in A.
Consolidation adjustment:
Negative goodwill is ADDED to “share of profits from associate working”
7.
ORDINARY DIVIDEND BY “A”
Consolidation adjustment (After proper recording):
P’s share in A’s dividend recorded by P is DEDUCTED from P’s other income as share in total profit of associate is
separately included as a separate line item.
8.
ACQUISITION DURING THE YEAR
Consolidation adjustment:
A’s PAT in “share of profit from associate working” and A’s other comprehensive income in “share of
other comprehensive income from associate working” are time apportioned as per number of months
after acquisition.
NASIR ABBAS FCA
331
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
FORMATS AND WORKINGS
P Group
Consolidated Statement of Financial Position
As at …………………..
Rs.
NON-CURRENT ASSETS:
PPE
[Same as studied earlier – P’s % share x URP on PPE (A to P)]
XXX
Intangible assets
(Same as studied earlier)
XXX
Goodwill
(Same as studied earlier)
XXX
Investment
(Same as studied earlier)
XXX
Investment in associates (W – 1)
XXX
CURRENT ASSETS:
Inventory
(Same as studied earlier – P’s% share x URP (A to P))
XXX
Receivables
(Same as studied earlier)
XXX
Dividend receivables
(Same as studied earlier)
XXX
Cash / Bank
(Same as studied earlier)
XXX
XXX
Rs.
CAPITAL AND RESERVES:
Share capital
(Same as studied earlier)
XXX
Share premium
(Same as studied earlier)
XXX
Other reserves
XXX
Retained earnings (W – 2)
XXX
Non-controlling interest
XXX
NON-CURRENT LIABILITIES:
Loan notes / Debentures
(Same as studied earlier)
NASIR ABBAS FCA
XXX
332
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
Deferred consideration
(Same as studied earlier)
XXX
Contingent consideration
(Same as studied earlier)
XXX
Deferred tax
(Same as studied earlier)
XXX
CURRENT LIABILITIES:
Rs.
Payables
(Same as studied earlier)
XXX
Dividend payable
(Same as studied earlier)
XXX
XXX
WORKINGS
(W – 1) Investment in associates
Rs.
Investment in associate [Calculated same as for S]
Add: Share of profits from A [(b) from (W – 2)]
Add: Share in A’s post-acquisition other reserves (e.g. Revaluation)
Less: P’s % share x URP on goods or PPE [ P to A ]
XXX
XXX
XXX
(XXX)
XXX
(W – 2) Retained earnings
Rs.
Parent’s RE
------ same adjustments as studied earlier -----
XXX
|
|
XXX
Add: S’s RE
------ same adjustments as studied earlier -----
Group share @ (% share in ordinary shares)
XXX
Add: A’s RE
Less: Pre-acquisition RE
Less: Extra depreciation on fair value adjustment
[a]
Share in A’s post RE [a x P’s % share]
Add: Negative goodwill
Less: Impairment loss on A
Share of profit from A
Less: P’s% share x URP on goods or PPE [P to A] [A to P]
NASIR ABBAS FCA
Rs.
XXX
|
|
XXX
[b]
XXX
(XXX)
(XXX)
XXX
XXX
XXX
(XXX)
XXX
(XXX)
XXX
333
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
FORMATS AND WORKINGS
P Group
Consolidated Statement of Comprehensive income
For the year ended …………………..
Sale
(Same as studied earlier)
Rs.
XXX
Cost of sales
[Same as studied earlier + P’s % share x URP on goods (P to A)]
(XXX)
Gross profit (Cast down)
XXX
Distribution cost
(Same as studied earlier)
(XXX)
Administrative expenses
(Same as studied earlier)
(XXX)
Finance cost
(Same as studied earlier)
(XXX)
Other income
(Same as studied earlier – P’s% share x URP on PPE (P to A) – Dividend from A)
XXX
Share of profit from associate (W – 1)
XXX
Profit before tax (Cast down)
XXX
Tax
(Same as studied earlier)
(XXX)
Profit after tax (Cast down)
XXX
Other comprehensive income:
Revaluation gain / (loss)
(P’s + S’s x n/12)
XXX
Fair value gain / (loss)
(P’s + S’s x n/12)
XXX
Share of other comprehensive income from associate
(P’s% x A’s other comprehensive income x n/12)
XXX
Total comprehensive income for the year
XXX
Profit for the year attributable to:
- Shareholders of Parent
- Non-controlling interest
Total comprehensive income attributable to:
- Shareholders of Parent
- Non-controlling interest
NASIR ABBAS FCA
XXX
XXX
XXX
XXX
XXX
XXX
334
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] – Class notes
(W – 1) Share of profit from associates
A’s Profit after taxation X n/12
Less: Extra depreciation for the year on fair value adjustment
[a]
Share in A’s PAT [a x Ps’% share]
Add: Negative goodwill
Less: URP on goods or PPE x P’s% share [A to P]
Less: Impairment loss for the year
NASIR ABBAS FCA
Rs.
XXX
(XXX)
XXX
Rs.
XXX
XXX
(XXX)
(XXX)
XXX
335
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
PRACTICE QUESTIONS
Question No. 1
Following are the balance sheets as at June 30, 2019:
P
S
---------- Rs.-------Non-current assets
Property, plant & equipment
Investment in Alpha
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Retained earnings – at July 1, 2018
– for the year ended June 30, 2019
Non-current liabilities
8% Loan notes
Current liabilities
Creditors
70,000
11,000
35,000
-
12,000
15,000
1,500
109,500
19,000
13,000
1,000
68,000
50,000
20,000
18,000
20,000
18,000
8,000
5,000
-
16,500
22,000
109,500
68,000
Following further information is available:
(i)
On April 1, 2019 P acquired 75% shares of S by means of a share exchange of two shares in P for every three
shares of S acquired. On that date, further consideration was also issued to the shareholders of S in the form of
four Rs. 100 8% loan notes for every 100 shares acquired in S. None of the purchase consideration, nor the
outstanding interest on these loan notes at June 30, 2019, has yet been recorded by P. At the date of acquisition,
the share price of P and S is Rs. 30 and Rs. 22 respectively.
(ii)
At the date of acquisition, the fair values of S’s assets were equal to their carrying amounts. However, S operates
a mine which requires to be decommissioned in five years’ time. No provision has been made for these
decommissioning costs by S. The present value (discounted at 8%) of the decommissioning is estimated at Rs.
4,000 and will be paid five years from the date of acquisition (i.e. the end of the mine’s life).
(iii)
It is group’s policy to value non-controlling interest at fair value.
(iv)
The inventory of S includes goods bought from P for Rs. 2,100. P applies a consistent mark-up on cost of 40%
when arriving at its selling prices. On June 28, 2019, P dispatched goods to S with a selling price of Rs. 700. These
were not received by S until after the year end and so have not been included in the above inventory at June
30, 2019.
At June 30, 2019, P’s records showed a receivable due from S of Rs. 5,000, this differed to the equivalent payable
in S’s records due to the goods in transit.
(v)
The investment in Alpha represents 30% of its voting share capital acquired on July 1, 2018 and P uses equity
accounting to account for this investment. Alpha’s profit for the year ended June 30, 2019 was Rs. 6,000 and
Alpha paid total dividends during the year ended June 30, 2019 of Rs. 2,000. P has recorded its share of the
dividend received from Alpha in investment income (and cash).
(vi)
All profits and losses accrued evenly throughout the year.
(vii)
At June 30, 2019, investment in Alpha is impaired by Rs. 200.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
NASIR ABBAS FCA
336
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 2
Following are the balance sheets as at June 30, 2019:
P
S
A
---------------------- Rs.-------------------Non-current assets
Property, plant & equipment
Intangible assets
Investments:
- in S
- in A
- other
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Retained earnings – at July 1, 2018
– for the year ended June 30, 2019
Non-current liabilities
Loan notes
Current liabilities
Creditors
80,000
8,000
50,000
-
40,000
-
43,200
10,000
5,000
-
2,000
12,000
9,000
4,000
171,200
8,000
11,000
6,000
75,000
10,000
5,000
4,000
61,000
70,000
36,000
18,000
20,000
19,000
12,000
10,000
21,000
9,000
25,000
15,000
5,000
22,200
171,200
9,000
75,000
16,000
61,000
Following further information is available:
(i)
On July 1, 2018 P acquired 1,600 shares of S in consideration of a cash payment of Rs. 27 per share. At the date
of acquisition, the share price of S was Rs. 25 per share.
(ii)
At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
amounts except for a plant which had a fair value of Rs. 4,000 above its carrying amount. At that date, the plant
had a remaining life of four years. S uses straight-line depreciation for plant assuming a nil residual value.
Also at the date of acquisition, P valued S’s customer relationships as a customer base intangible asset at fair
value of Rs. 3,000. S has not accounted for this asset. Trading relationships with S’s customers last on average
for six years.
(iii)
It is group’s policy to value non-controlling interest at fair value.
(iv)
Following information is relevant to inter-company transactions and balances:
P’s records:
S
A
Purchases from
Rs. 40,000
Rs. 12,000
Year-end payable to
Rs. 4,000
Rs. 3,000
Year-end stock held out inter-company purchase
Rs. 7,000
Rs. 6,000
20%
25%
Profit margin earned by seller
(v)
The investment in A represents 25% of its voting share capital purchased on January 1, 2019. P uses equity
accounting to account for this investment.
(vi)
All profits and losses accrued evenly throughout the year.
(vii)
At June 30, consolidated goodwill has been impaired by Rs. 1,200 and investment in A has been impaired by Rs.
200.
(viiI)
P’s other investments are equity investments measured at fair value through profit and loss. At June 30, 2019
fair value of these investments has moved to Rs. 6,000 but no entry has been made in books by P.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
NASIR ABBAS FCA
337
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 3
Following are the balance sheets as at June 30, 2019:
P
S
A
---------------------- Rs.-------------------Non-current assets
Property, plant & equipment
Investments
Current assets
Inventories
Debtors
Cash & bank
Equity
Share capital (Rs. 10 per share)
Share premium
Retained earnings – at July 1, 2018
– for the year ended June 30, 2019
Non-current liabilities
Loan notes
Current liabilities
Creditors
40,000
40,000
25,000
-
22,000
-
10,000
7,000
2,000
99,000
8,000
2,000
4,000
39,000
5,000
3,000
1,000
31,000
20,000
10,000
26,000
18,000
10,000
8,000
6,000
8,000
7,000
3,000
15,000
-
5,000
10,000
99,000
15,000
39,000
8,000
31,000
Following further information is available:
(i)
On July 1, 2018 P acquired 75% shares of S in a share exchange of two shares in P for every three shares acquired
in S. At the date of acquisition, the market prices of P’s and S’s shares were Rs. 30 and Rs. 18 respectively.
(ii)
At the date of acquisition, the fair values of S’s property, plant and equipment were equal to their carrying
amounts except for a plant which had a fair value of Rs. 2,000 below its carrying amount. As a result, the
differential amount of depreciation would be Rs. 100 per year.
Also at the date of acquisition, S had a software costing Rs. 500 in its statement of financial position. P’s directors
believed the software to have no recoverable value at the date of acquisition and S wrote it off shortly after its
acquisition.
(iii)
It is group’s policy to value non-controlling interest at fair value.
(iv)
On January 1, 2019 P acquired 40% of the equity shares of A paying a cash of Rs. 17 per share and issuing at par
one Rs. 100 loan note for every 20 shares acquired in A. The consideration has been correctly accounted for by
P.
(v)
Following information is relevant to inter-company transactions and balances:
P’s records:
S
A
Sales to
Rs. 20,000
Rs. 10,000
Year-end receivable from
Rs. 2,000
Rs. 1,000
Year-end stock out of inter-company sale held with
Rs. 3,000
Rs. 2,000
30%
25%
Profit margin earned by P
(vi)
All profits and losses accrued evenly throughout the year.
(vii)
At June 30, consolidated goodwill has been impaired by 20%.
Required:
Prepare consolidated balance sheet as at June 30, 2019.
NASIR ABBAS FCA
338
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 4
Following are the summarized statements of financial position of Pistachio Limited (PL), Mint Limited (ML) and Jalapeno
Limited (JL) as on 31 December 2019:
PL
ML
JL
------------------ Rs. million --------------Property, plant & equipment
850
750
500
Investment in ML at cost
900
Investment in JL at cost
170
Inventories
300
340
200
Debtors
240
200
150
Cash & bank
60
170
50
2,520
1,460
900
Share capital (Rs. 10 per share)
Share premium
Retained earnings
Liabilities
1,400
780
340
2,520
700
100
480
180
1,460
400
340
160
900
Following further information is available:
(i)
Details of PL's investments are as follows:
Retained
earnings of
investee
(Rs. million)
01-Jan-19
25%
JL
200
01-Apr-19
80%
ML
360
(ii)
The following considerations relating to acquisition of ML’s shares are still unrecorded:
Transfer of PL's freehold land having carrying value and fair value of Rs. 88 million and Rs. 108 million
respectively.
Cash of Rs. 115 million would be paid in February 2020 if ML's net profit for the year 2019 would increase
by 20% as compared to last year. Fair value of this consideration on acquisition date was estimated at Rs.
70 million. At year-end, the said target has been achieved by ML.
(iii)
On the date of investment, the fair values of each share of ML and JL were Rs. 18 and Rs. 16 respectively.
(iv)
At the date of acquisition of ML, carrying values of ML’s net assets were equal to fair value except for inventory
which was carried at Rs. 130 million and had a fair value of Rs. 180 million. 20% of this inventory is still included
in ML's inventory as at 31 December 2019.
(v)
On 1 July 2019, ML sold a machine to PL for Rs. 55 million at a gain of Rs. 10 million. The remaining useful life
of the machine at the time of disposal was 5 years.
(vi)
JL paid 10% dividend for the half year ended 30 June 2019. PL recorded this as other income.
(vii)
During the year, PL made sales of Rs. 72 million to JL at 20% above cost. 60% of these goods were sold by JL
during the year.
(viii)
As at 31 December 2019, PL has receivable of Rs. 8 million from JL.
(ix)
An impairment test carried out at year-end has indicated that goodwill of ML has been impaired by 10%.
(x)
PL measures non-controlling interest at the acquisition date at its fair value.
(xi)
PL’s discount rate is 14%.
Required:
Prepare PL’s consolidated statement of financial position as at 31 December 2019 in accordance with the requirements
of IFRSs.
(18)
[Q-6 Spr-20]
Date of investment
NASIR ABBAS FCA
Holding %
Investee
339
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 5
Following are the statements of comprehensive income for the year ending June 30, 2019:
P
S
---------- Rs.-------Sales
180,000
150,000
Cost of sales
(120,000)
(80,000)
Gross profit
60,000
70,000
Distribution cost
(18,000)
(20,000)
Admin expenses
(12,000)
(16,000)
Finance cost
(2,000)
(3,000)
Other income
5,000
2,000
Profit before tax
33,000
33,000
Tax
(15,000)
(18,000)
Profit after tax
18,000
15,000
Other comprehensive income:
Revaluation (loss)/gain on land
(2,200)
3,000
Total comprehensive income
15,800
18,000
Following additional information is available:
(i)
On January 1, 2019, P acquired 1,800 of S’s 3,000 Rs. 10 equity shares. The acquisition was achieved through
a share exchange of one share in P for every three shares in S. At that date the stock market prices of P’s and
S’s shares were Rs. 42 and Rs. 22 per share respectively. Additionally, P also paid Rs. 10 cash for each share
acquired. The retained earnings of S brought forward at July 1, 2018 were Rs. 21,000.
(ii)
A fair value exercise conducted on January 1, 2019 concluded that the carrying amounts of S’s net assets
were equal to their fair values with the following exceptions:
–
–
the fair value of S’s land was Rs. 2,000 in excess of its carrying amount
an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of two years at the date of acquisition. Plant depreciation is charged to cost of sales.
P placed a value of Rs. 2,000 on S’s good trading relationships with its customers. P expected, on average,
a customer relationship to last for a further five years. Amortisation of intangible assets is charged to
administrative expenses.
–
(iii)
P’s group policy is to revalue land to market value at the end of each accounting period. Prior to its
acquisition, S’s land had been valued at historical cost, but it has adopted the group policy since its
acquisition. In addition to the fair value increase in S’s land of Rs. (see note (ii)), it had increased by a further
Rs. 1,000 since the acquisition.
(iv)
On July 1, 2018, P acquired 30% of V’s equity shares. V’s profit after tax and other comprehensive income for
the year ended June 30, 2019 were Rs. 10,000 and Rs. 2,000 respectively. During June 2019 V paid a dividend
of Rs. 6,000. P uses equity accounting in its consolidated financial statements for its investment in V. At June
30, 2019, the investment in V is impaired by Rs. 900.
(v)
After the acquisition P sold goods to S for Rs. 20,000. S had one fifth of these goods still in inventory at June
30, 2019. In June 2019 P sold goods to V for Rs. 15,000, all of which were still in inventory at June 30, 2019.
All sales to S and V had a mark-up on cost of 25%.
(vi)
It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
(vii)
Net profits are deemed to accrue evenly over the year.
Required:
(a)
Calculate the consolidated goodwill as at January 1, 2019.
(b)
Prepare consolidated statement of comprehensive income for the year ending June 30, 2019.
NASIR ABBAS FCA
340
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 6
Following are the statements of comprehensive income for the year ending September 30, 2019:
P
S
---------- Rs.-------Sales
90,000
80,000
Cost of sales
(50,000)
(60,000)
Gross profit
40,000
20,000
Distribution cost
(9,000)
(4,000)
Admin expenses
(11,000)
(6,000)
Finance cost
(500)
(800)
Other income
1,200
1,600
Profit before tax
20,700
10,800
Tax
(7,000)
(4,000)
Profit after tax
13,700
6,800
Equity as at October 1, 2018:
Share capital (Rs. 10 each)
Retained earnings
40,000
35,000
20,000
22,000
Following additional information is available:
(i)
On January 1, 2019, P acquired 90% of the equity share capital of S in a share exchange in which P issued two
new shares for every three shares it acquired in S. Additionally, P paid cash of Rs. 8 per share acquired. At
that date the stock market prices of P’s and S’s shares were Rs. 30 and Rs. 26 per share respectively.
(ii)
At the date of acquisition, the carrying amounts of S’s net assets were equal to their fair values with the
following exceptions:
–
an item of plant had a fair value of Rs. 3,000 in excess of its carrying amount. The plant had a remaining
life of three years at the date of acquisition. Plant depreciation is charged to cost of sales.
S had a contingent liability which P estimated to have a fair value of Rs. 500. This has not changed as at
September 30, 2019.
–
(iii)
Although S has been profitable since its acquisition by P, the market for S’s products has been badly hit in
recent months and P has calculated that goodwill has been impaired by Rs. 2,000 as at September 30, 2019.
(iv)
P’s other income is the dividend received from its investment in a 40% owned associate M, which it has held
for several years. Net profit of M for the year ending September 30, 2019 amounts to Rs. 10,000.
(v)
P purchased goods throughout the year 2019 from S and M amounting to Rs. 18,000 and Rs. 12,000
respectively. 30% of the goods purchased from S and half of the goods purchased from M were still held in
inventory of P at September 30, 2019. S earned 25% margin and M earned 20% margin on their respective
sales.
(vi)
It is P’s policy to value non-controlling interest at the date of acquisition at its fair value.
Required:
(a)
Calculate the consolidated goodwill as at January 1, 2019.
(b)
Prepare consolidated statement of comprehensive income for the year ending September 30, 2019.
NASIR ABBAS FCA
341
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
Question No. 7
The following balances are extracted from the records of Golden Limited (GL), Silver Limited (SL) and Bronze Limited (BL)
for the year ended 30 June 2019:
GL
SL
BL
----------------- Rs. in million -----------Sales
2,500
2,050
1,000
Cost of sales
1,550
1,150
590
Operating expenses
810
520
288
Other income
350
180
50
Finance cost
90
60
35
Surplus arising on revaluation of property, plant and
60
20
equipment during the year
Investment in SL – at cost
1,400
Investment in BL – at cost
2,500
Retained earnings as at June 30, 2019
8,000
3,500
2,200
Additional information:
(i)
Details of GL’s investments are as follows:
Date of investment
Holding %
Investee
1 Jan 17
1 Jul 18
35%
70%
BL
SL
Share capital
Retained earnings
(Rs. 10 each)
of investee
of investee
----------- Rs. in million --------5,000
1,800
6,000
3,000
(ii)
Cost of investment in SL includes professional fee of Rs. 20 million incurred on acquisition of SL.
(iii)
The following considerations relating to acquisition of SL's shares are still unrecorded:
Issuance of 175 million ordinary shares of GL.
Cash payment of Rs. 1,000 million after three years.
On the date of investment, the market price of shares of GL and SL were Rs. 20 and Rs. 17 respectively. Applicable
discount rate is 12%.
(iv)
At the date of acquisition of SL, carrying values of its net assets were equal to fair value except the following:
an internally developed software by SL which had a fair value of Rs. 150 million. The cost of Rs. 120 million
incurred by SL on development had been expensed out by SL since the software did not meet the criteria for
capitalization during development. At acquisition date, the software had a remaining useful life of 5 years.
a contingent liability of Rs. 90 million as disclosed in financial statements of SL which had an estimated fair
value of Rs. 60 million. Subsequent to acquisition, the liability has been recognised by SL in its books at Rs.
40 million.
(v)
Following inter-company sales at cost plus 15% were made during the year ended 30 June 2019:
Included in buyer’s
closing stock
-------------- Rs. in million ------------506
138
161
69
Sales
SL to GL
GL to BL
(vi)
On 1 January 2019, GL granted loans of Rs. 150 million and Rs. 130 million to SL and BL respectively, at interest
rate of 12% per annum.
NASIR ABBAS FCA
342
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Questions
(vii)
GL and BL follow revaluation model whereas SL follows cost model for subsequent measurement of property,
plant and equipment. If SL had adopted the revaluation model, SL would have recorded revaluation surplus of
Rs. 35 million for the year ended 30 June 2019.
(viii)
GL measures non-controlling interest at the acquisition date at its fair value.
Required:
(a)
Prepare GL’s consolidated ‘statement of profit or loss and other comprehensive income’ for the year ended 30
June 2019.
(17)
(b)
Compute the amount of investment in associate as would appear in GL’s consolidated statement of financial
position as at 30 June 2019.
(03)
{Autumn 2019, Q#6}
NASIR ABBAS FCA
343
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
SOLUTIONS TO PRACTICE QUESTIONS
Solution No. 1
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [70 + 35 + 4 - 0.2 (W-3)]
Goodwill [W-1]
Investment in Alpha [W-2]
108,800
3,000
12,000
Current assets
Inventories [12 + 19 + 0.7 - 0.8 (W-3)]
Debtors [15 + 13 - 5]
Cash and bank [1.5 + 1]
30,900
23,000
2,500
180,200
Equity
Share capital [50 + 1.5 x 2/3 x Rs. 10]
Share premium [1.5 x 2/3 x Rs. 20]
Retained earnings [W-3]
Non-controlling interest [W-4]
60,000
20,000
39,370
11,430
Non current liabilities
Loan notes [5 + 6]
Provision for dismantling [4 + 0.08 (W-3)]
11,000
4,080
Current liabilities
Accrued interest (W-3)
Creditors [16.5 + 22 + 0.7 - 5]
Workings
W-1 Goodwill
Investment:
Shares [1,500 x 2/3 x Rs. 30]
Loan notes [1,500 x 4/100 x Rs. 100]
Fair value of NCI [500 x Rs. 22]
Less: net assets acquired:
Share capital
RE [18 + 8 x 9/12]
FV adj. - Mine
FV adj. - dismantling prov.
W-2 Investment in Alpha
Investment at cost
Share in profits (W-5)
NASIR ABBAS FCA
120
34,200
180,200
Rs.
Rs.
30,000
6,000
11,000
20,000
24,000
4,000
(4,000)
Rs.
(44,000)
3,000
Rs.
11,000
1,000
12,000
344
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
W-3 Retained earnings
P RE [20 + 18]
Less: Interest [6 x 8% x 3/12]
Less: URP [(2.1 + 0.7) x 40/140]
Add: S RE
Less: Pre-acq
Less: Extra dep [4/5 x 3/12]
Less: Interest [4 x 8% x 3/12]
Rs.
Rs.
38,000
(120)
(800)
26,000
(24,000)
(200)
(80)
1,720
75%
1,290
1,000
39,370
Add: Share in Alpha (W-5)
W-4 NCI
FV of NCI
RE [1.72 x 25%]
11,000
430
11,430
W-5 Share in Alpha
Post acquisition profits
Dividend
6,000
(2,000)
4,000
1,200
(200)
1,000
Share of P
Less: Impairment loss
Solution No. 2
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [80 + 50 + 4 - 1]
Intangibles [8 + 3 - 0.5]
Goodwill [W-1]
Investment in A [W-2]
Other equity investment
133,000
10,500
6,000
10,925
6,000
Current assets
Inventories [12 + 8 – 1.4 – 0.375]
Debtors [9 + 11 - 4]
Cash and bank [4 + 6]
18,225
16,000
10,000
210,650
Equity
Share capital
Retained earnings [W-3]
Non-controlling interest [W-4]
Non current liabilities
Loan notes [25 + 15]
Current liabilities
Creditors [22.2 + 9 - 4]
NASIR ABBAS FCA
70,000
61,870
11,580
Rs.
Rs.
40,000
27,200
210,650
345
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
NASIR ABBAS FCA
346
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Workings
W-1 Goodwill
Investment [1,600 x Rs. 27]
Fair value of NCI [400 x Rs. 25]
Less: net assets acquired:
Share capital
RE
FV adj. - Plant
FV adj. - customer relationship
Rs.
Rs.
43,200
10,000
20,000
19,000
4,000
3,000
Less: Impairment loss
W-2 Investment in A
Investment at cost
Share in profits (W-5)
W-3 Retained earnings
P RE [36 + 18]
Add: fair value gain [6 - 5]
Less: URP on A to P sale [ 6 x 25% x 25%]
Add: S post RE
Less: Extra dep [4/4]
Less: Amort. [3/6]
Less: Impairment loss of GW
Less: URP [7 x 20%]
10,000
925
10,925
54,000
1,000
(375)
12,000
(1,000)
(500)
(1,200)
(1,400)
7,900
80%
Add: Share in A (W-5)
W-4 NCI
FV of NCI
RE [7.9 x 20%]
NASIR ABBAS FCA
6,320
925
61,870
10,000
1,580
11,580
W-5 Share in A
Year end RE
Pre-acquisition RE [21 + 9 x 6/12]
Share of P
Less: Impairment loss
(46,000)
7,200
(1,200)
6,000
25%
30,000
(25,500)
4,500
1,125
(200)
925
347
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Solution No. 3
P Group
Consolidated statement of financial position
as at June 30, 2019
Rs.
Non current assets
PPE [40 + 25 - 2 + 0.1]
Goodwill [W-1]
Investment in A [W-2]
Other investment [40 - 15 - 7.04]
63,100
3,200
7,440
17,960
Current assets
Inventories [10 + 8 - 0.9]
Debtors [7 + 2 - 2]
Cash and bank [2 + 4]
17,100
7,000
6,000
121,800
Equity
Share capital
Premium
Retained earnings [W-3]
Non-controlling interest [W-4]
20,000
10,000
47,850
5,950
Non current liabilities
Loan notes
15,000
Current liabilities
Creditors [10 + 15 - 2]
Workings
W-1 Goodwill
Investment [750 x 2/3 x Rs. 30]
Fair value of NCI [250 x Rs. 18]
Less: net assets acquired:
Share capital
RE
FV adj. - Plant
Software writen off
Less: Impairment loss
W-2 Investment in A
Investment at cost:
Cash [320 x Rs. 17]
Loan notes [320 x 1/20 x Rs. 100]
URP on P to A sale [2 x 25% x 40%]
Share in profits (W-3)
NASIR ABBAS FCA
23,000
121,800
Rs.
15,000
4,500
10,000
8,000
(2,000)
(500)
(15,500)
4,000
(800)
3,200
5,440
1,600
7,040
(200)
600
7,440
348
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
W-3 Retained earnings
P RE [26 + 18]
Less: URP on P to S sale [3 x 30%]
Rs.
Rs.
44,000
(900)
Less: URP on P to A sale [2 x 25% x 40%]
Add: S post RE
(200)
6,000
Add: Extra dep
100
Add: software written off
Less: Impairment loss of GW
500
(800)
5,800
75%
Add: Share in A [3 x 6/12 x 40%]
4,350
600
47,850
W-4 NCI
FV of NCI
4,500
RE [5.8 x 25%]
1,450
5,950
Solution No. 4
PL Group
Consolidated balance sheet
as at December 31, 2019
Rs. million
Non current assets
PPE [850 + 750 - 88 - 9(W-2)]
Goodwill (W-1)
Investment in associates (W-4)
Current assets
Inventories [300 + 340 + 50 x 20%]
Trade receivables [240 + 200]
Cash & bank [60 + 170]
Equity
Share capital
Retained earnings [W-2]
Non controlling interest [W-3]
Current liabilities:
Contingent consideration
Other liabilities [340 + 180]
1,503.00
108.00
203.80
650.00
440.00
230.00
3,134.80
1,400.00
836.00
263.80
115.00
520.00
3,134.80
-
NASIR ABBAS FCA
349
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Workings [All figures in Rs. million]
W-1 Goodwill
Investment:
Cash
Freehold
Contingent consideration
Fair value of NCI [14 x 18]
Less: net assets:
Capital
Premium
RE
FV adj. (inventory)
900.00
108.00
70.00
252.00
700.00
100.00
360.00
50.00
Less: impairment loss
W-2 Retained earnings
PL's RE
Add: Gain on transfer of land [108 - 88]
Less: Increase in contingent consideration [115 - 70]
Add: ML's RE
Less: Pre-acquisition profits
Less: Impairment loss of GW (W-1)
Less: FV adj. (inventory sold) [50 x 80%]
Less: URP on machine [10 - 10/5 x 6/12]
Add: Share in JL's RE [(340 - 200) x 25%]
Less: URP on goods [72 x 20/120 x 40% x 25%]
(1,210.00)
120.00
(12.00)
108.00
780.00
20.00
(45.00)
480.00
(360.00)
(12.00)
(40.00)
(9.00)
59.00
80.00%
47.20
35.00
(1.20)
836.00
W-3 NCI
FV of NCI
Post-acq RE [59 x 20%]
W-4 Investment in JL
Investment as per books
Share in JL's RE (W-2)
URP on goods (W-2)
NASIR ABBAS FCA
252.00
11.80
263.80
170.00
35.00
(1.20)
203.80
350
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Solution No. 5
(a)
Goodwill
Rs.
Rs.
Investment:
Shares [1,800 x 1/3 x Rs. 42]
25,200
Cash [1,800 x Rs. 10]
18,000
Fair value of NCI [1,200 x Rs. 22]
26,400
Less: net assets acquired:
Share capital
30,000
RE [21 + 15 x 6/12]
28,500
FV adj. – land
FV adj. – plant
2,000
3,000
Customer relationship
2,000
(65,500)
4,100
(b)
P Group
Consolidated statement of comprehensive income
for the year ended June 30, 2019
Rs.
Sales [180 + 150 x 6/12 - 20]
Cost of sales (W-1)
Gross profit
Distribution cost [18 + 20 x 6/12]
Admin expenses [12 + 16 x 6/12 + 2/5 x 6/12]
Finance cost [2 + 3 x 6/12]
Other income [5 + 2 x 6/12 - 6 x 30%]
Share of profit from associate (W-2)
Profit before tax
Tax [15 + 18 x 6/12]
Profit after tax
Other comprehensive income:
Revaluation gain [-2.2 + 1]
share of OCI from associate [2 x 30%]
Total comprehensive income
Profit attributable to:
Shareholders of P
NCI [W-3]
TCI attributable to:
Shareholders of P
NCI [2.62 + 1 x 40%]
W-1 Cost of sales
P's cost of sales
S's cost of sales [80 x 6/12]
Inter company purchase
NASIR ABBAS FCA
235,000
(142,450)
92,550
(28,000)
(20,200)
(3,500)
4,200
2,100
47,150
(24,000)
23,150
(1,200)
600
22,550
20,530
2,620
23,150
19,530
3,020
22,550
120,000
40,000
(20,000)
351
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Extra depreciation [3/2 x 6/12]
URP on sales to S [20 x 25/125 x 1/5]
URP on sales to A [15 x 25/125 x 30%]
750
800
900
142,450
W-2 Share of profit from V
V PAT
Share in PAT
Less: Impairment loss
10,000
3,000
(900)
2,100
W-3 NCI
S PAT [15 x 6/12]
Less: Extra depreciation
Less: Amort. of customer relationship
40.00%
7,500
(750)
(200)
6,550
2,620
Solution No. 6
(a)
Goodwill
Investment:
Shares [1,800 x 2/3 x Rs. 30]
Cash [1,800 x Rs. 8]
Fair value of NCI [200 x Rs. 26]
Less: net assets acquired:
Share capital
RE [22 + 6.8 x 3/12]
FV adj. - plant
Contingent liability
(b)
Rs.
Rs.
36,000
14,400
5,200
20,000
23,700
3,000
(500)
(46,200)
9,400
P Group
Consolidated statement of comprehensive income
for the year ended September 30, 2019
Sales [90 + 80 x 9/12 - 18 x 9/12]
Cost of sales (W-1)
Gross profit
Distribution cost [9 + 4 x 9/12]
Admin expenses [11 + 6 x 9/12 + 2]
Finance cost [0.5 + 0.8 x 9/12]
Other income [1.6 x 9/12]
Share of profit from associate (W-2)
Profit before tax
Tax [7 + 4 x 9/12]
Profit after tax
Profit/TCI attributable to:
Shareholders of P
NCI [W-3]
W-1 Cost of sales
P's cost of sales
S's cost of sales [60 x 9/12]
Inter company purchase [18 x 9/12]
NASIR ABBAS FCA
136,500
(83,600)
52,900
(12,000)
(17,500)
(1,100)
1,200
3,520
27,020
(10,000)
17,020
16,920
100
17,020
50,000
45,000
(13,500)
352
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Extra depreciation [3/3 x 9/12]
URP on S to P sales [18 x 25% x 30%]
750
1,350
83,600
W-2 Share of profit from M
M PAT
Less: URP on A to P sales [12 x 50% x 20%]
Share in PAT
40.00%
10,000
(1,200)
8,800
3,520
10.00%
Rs.
5,100
(750)
(1,350)
(2,000)
1,000
100
W-3 NCI
S PAT [6.8 x 9/12]
Less: Extra depreciation
Less: URP on goods
Less: Impairment loss
Solution No. 7
(a)
- Inter-company interest income and interest expense have been accrued by all companies in their books.
- Surplus arising on revaluation relates to current year only and thus shown in OCI for the year.
GL Group
Consolidated Statement of comprehensive income
for the year ended June 30, 2019
Rs. million
Sales [2,500 + 2,050 - 506]
4,044.00
Cost of Sales [1,550 + 1,150 - 506 + 18(W-1) + 3.15(part b)]
(2,215.15)
Gross Profit
1,828.85
Operating expenses [810 + 520 + 20 + 30(W-1) - 40]
(1,340.00)
Other income [350 + 180 + 438.22 (W-2) - 9(W-3)]
959.22
Finance cost [90 + 60 + 711.78(W-2) x 12% - 9(W-3)]
(226.41)
Share of profit from Associate (W-4)
47.95
Profit for the year
1,269.61
Other Comprehensive income:
Revaluation gain [60 + 35]
95.00
Share of OCI from Associate [20 x 35%]
7.00
Total Comprehensive income
1,371.61
Profit Attributable to :
Group
NCI (W-1)
Total Comprehensive income attributable to :
Group
NCI [147.60 + 35 x 30%]
Workings (all figures in million rupees)
(W-1) NCI Share
SL Profit [2,050 - 1,150 - 520 + 180 - 60]
NASIR ABBAS FCA
1,122.01
147.60
1,269.61
1,213.51
158.10
1,371.61
500.00
353
BASIC CONSOLIDATION [SOFP & SOCI WITH ONE SUBSIDIARY AND ONE ASSOCIATE] - Solutions
Extra Amortization [150/5]
URP- Stock [138 x 15/115]
Reversal of liability
30%
(W-2) Goodwill Calculation
Investment:
Cash [1,400 - 20]
Deferred payment [1,000 x 1.12-3]
Shares [175 x 20]
Fair value of NCI [6,000/10 x 30% x 17]
Share capital
Software
Contingent Liability
RE
Goodwill/(bargain purchase gain)
(30.00)
(18.00)
40.00
492.00
147.60
1,380.00
711.78
3,500.00
3,060.00
8,651.78
6,000.00
150.00
(60.00)
3,000.00
(W-3)
Inter company interest = 150 x 12% x 6/12 =
(9,090.00)
(438.22)
9.00
(W-4)
Profit for the year of BL
Sales
Cost of Sales
Operating expenses
Other income
Finance Cost
35%
1,000.00
(590.00)
(288.00)
50.00
(35.00)
137.00
47.95
(b)
Investment in Associate as on 30th June 2019:
Cost
Post acquisition RE [(2,200 - 1,800) x 35%]
URP on goods [69 x 15/115 x 35%]
Share in revaluation surplus [20 x 35%]
NASIR ABBAS FCA
Rs. million
2,500.00
140.00
(3.15)
7.00
2,643.85
354
IFRS 11 – Joint Arrangements – Class notes
Joint arrangement
An arrangement of which two or more parties have joint control. A joint arrangement has 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 is either a:
(i) Joint Operation
(ii) Joint Venture
Joint operation
Joint venture
It is 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.
It is 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 operation that has joint control
of that operation is called a Joint Operator
A party to a joint venture that has a joint control
of that venture is called a Joint Venturer
A joint arrangement that is not structured through
a separate vehicle is a joint operation.
A joint arrangement in which the assets and
liabilities relating to the arrangement are held in a
separate vehicle can either be a joint operation or
a joint venture.
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.
An arrangement can be a joint arrangement even though not all of its parties have joint control of the
arrangement.
Separate vehicle
A separately identifiable financial structure, including separate legal entities or entities recognized by
statute, regardless of whether those entities have a legal personality.
Nasir Abbas FCA
355
IFRS 11 – Joint Arrangements – Class notes
FINANCIAL STATEMENTS OF PARTIES TO A JOINT ARRANGEMENT
Joint Operations
A joint operator shall recognize in relation to its interest in a joint operation:
(a) its assets, including its share of any assets held jointly;
(b) its liabilities, including its share of any liabilities incurred jointly;
(c) its revenue from the sale of its share of the output arising from the joint operation;
(d) its share of the revenue from the sale of the output by the joint operation; and
(e) its expenses, including its share of any expenses incurred jointly.
[It is done by eliminating the investment appearing in the books of Joint operator]
Nasir Abbas FCA
356
IFRS 11 – Joint Arrangements – Class notes
Example – Accounting for a joint operation
On 1 January 20X7, X and Y entered into a joint operation to purchase and operate an oil pipeline. Both
entities contributed equally to the purchase cost of Rs.20 million and this was financed by a joint loan of
Rs.20,000,000.
Contract terms
Y carries out all maintenance work on the pipeline but maintenance expenses are shared between X and
Y in the ratio 40%: 60%.
Both entities use the pipeline for their own operations and share any income from third parties 50%: 50%.
Sales to third parties are invoiced by Y.
The full interest on the loan is initially paid by X but the expense is to be shared equally.
During the year ended 31 December 20X7
Y carried out maintenance at a cost of Rs. 1,200,000.
Income from third parties was Rs. 900,000, all paid to Y.
Interest of Rs. 1,500,000 was paid for the year on 31 December by X.
Required
Show the relevant figures that would be recognized in the financial statements of X and Y for the year to
31 December 20X7.
Nasir Abbas FCA
357
IFRS 11 – Joint Arrangements – Class notes
When an entity acquires an interest in joint operation, it shall apply, to the extent of its share (as studied
above) all the principles on business combinations accounting in IFRS 3. It is summarized as follows:
- Fair values of identifiable assets and liabilities (other than exceptions as per IFRS 3) will be used for
accounting for share.
- Goodwill will be calculated and accounted for by comparing consideration transferred and net assets
acquired.
- Recognize acquisition related costs as expense.
- All intercompany eliminations are made proportionately.
This guidance is applicable to acquisition of both the initial interest and additional interests in joint
operations. However, in case of additional interest, the previously held interests are not remeasured.
Joint Ventures
A joint venturer shall recognize its interest in a joint venture as an investment and shall account for that
investment using the equity method in accordance with IAS 28 Investments in Associates and Joint
Ventures unless the entity is exempted from applying the equity method as specified in that standard.
A party that participates in, but does not have joint control of, a joint venture shall account for its interest
in the arrangement in accordance with IFRS 9 Financial Instruments, unless it has significant influence over
the joint venture, in which case it shall account for it in accordance with IAS 28
Nasir Abbas FCA
358
Solution [Q-1 Jun-10]
Question should be changed as follows:
- Delete point (v) as it is obsolete treatment. As a result ICAP solution is irrelevant.
PL Group
Consolidated statement of financial position
as at December 31, 2009
Rs. million
Non current assets
PPE [120 + 40 + 3 -1]
Goodwill [W-1]
Investment in JCEL (W-3)
Current assets
Stock in trade [20 + 17 - 0.4]
Trade and other receivables [25 + 5]
Cash and bank [3 + 1]
162.00
11.00
37.60
36.60
30.00
4.00
281.20
Equity
Share capital
Retained earnings [W-2]
Non-controlling interest [W-4]
50.00
94.20
7.00
Non current liabilities
Long term loan [75 + 12]
87.00
Current liabilities
Current liabilities [25 + 18]
PL Group
Consolidated Income Statement
for the year ended December 31, 2009
Sales [1,267 + 276 - 10]
Cost of sales (W-5)
Gross profit
Selling expenses [174 + 68]
Administrative expenses [88 + 30 + 1]
Other income
Financial charges [12 + 4]
Share of profit from JV [(18 -2) x 50%]
Profit before tax
Tax [26 + 5]
Profit for the year
Profit attributable to:
- Shareholders of PL
- NCI (W-4)
43.00
281.20
-
Rs. million
1,533.00
(1,081.80)
451.20
(242.00)
(119.00)
10.00
(16.00)
8.00
92.20
(31.00)
61.20
60.20
1.00
61.20
359
Workings
W-1 Goodwill
Consideration transferred
Value of NCI [30 x 20%]
Less: net assets at acquisition:
Share capital
RE [18 - 8]
FV adj. - Equipment [15 - 12]
FV adj. - Inventory [12 - 10]
Goodwill at acquisition
W-2 Retained earnings
RE
Less: Pre-acq
Less: Extra dep. on FV adj. of Equipment [3/3]
Less: FV adj. - Inventory
Less: Policy adjustment - inventory [16 - 14]
Less: URP on goods [2 x 25/125]
Add: Share in SL [5 x 80%]
Add: Share in JCEL [26 x 50%]
Share in URP of goods [4 x 25/125 x 50%]
----- Rs. million ----35.00
6.00
15.00
10.00
3.00
2.00
(30.00)
11.00
PL
SL
JCEL
------------------ Rs. million ---------------78.00
18.00
28.00
(10.00)
(1.00)
(2.00)
(2.00)
(0.40)
5.00
26.00
4.00
13.00
(0.40)
12.60
94.20
W-3 Investment in JCEL
Investment
RE (W-2)
Rs. million
25.00
12.60
37.60
W-4 NCI
Value at acquisition (W-1)
RE [5 x 20%]
Rs. million
6.00
1.00
7.00
W-5 Cost of sales
PL
SL
Intercompany sale
FV adjustment - inventory
URP on goods [0.4 + 0.4]
Rs. million
928.00
161.00
(10.00)
2.00
0.80
1,081.80
360
Solution [Q-1 Dec-16]
Difference in ICAP solution:
- Full amount of 350 was eliminated from sales instead of its 80%
Alpha Limited
Statement of financial position
as at June 30, 2016
Rs. million
Non current assets
PPE [2,650 + 750 x 80%]
Goodwill [W-1]
Investment in SV-2 [W-3]
3,250.00
11.00
241.50
Current assets
Stock in hand [695 + 250 x 80% - 17.60 - 36 - 2.85]
Other assets [570 + 180 x 80% - 320 x 80% - 150 x 80%]
838.55
338.00
4,679.05
Equity
Share capital
Retained earnings [W-2]
2,000.00
1,310.05
Non current liabilities
10% bank loan [500 + 320 x 80%]
756.00
Current liabilities
Current liabilities [665 + 405 x 80% - 320 x 80% - 150 x 80%]
613.00
4,679.05
-
Alpha Limited
Statement of comprehensive income
for the year ended June 30, 2016
Rs. million
4,338.00
(3,009.60)
1,328.40
(776.00)
Sales [4,250 + 650 x 80% - (350 + 190) x 80%]
Cost of sales [W-4]
Gross profit
Expenses [657 + 145 x 80% + 3]
Share of profits from SV-2 [50 x 50% - 2.85(W-2)]
Profit for the year
22.15
574.55
Workings
W-1 Goodwill
Consideration transferred
Less: net assets at acquisition:
Share capital
RE [55 - 25]
----- Rs. million ----140.00
[50% x 60%]
Goodwill at acquisition
400.00
30.00
430.00
30%
(129.00)
11.00
361
W-2 Retained earnings
RE
Less: Pre-change
Less: Acquisition related costs
Less: URP share [22 x 80%]
Add: Share in SV-1:
[25 x 80%]
[30 x 50%]
URP share [45 x 80%]
Add: Share in SV-2 [305 x 50%]
URP share [22 x 50%]
URP share [5.70 x 50%]
AL
SV-1 (new)
SV-1 (old)
SV-2
---------------------- Rs. million -----------------------1,193.00
55.00
30.00
305.00
(30.00)
(3.00)
(17.60)
25.00
30.00
305.00
20.00
15.00
(36.00)
152.50
(11.00)
141.50
(2.85)
1,310.05
W-2.1 URP on goods
AL to SV-1 [220 x 10%]
AL to SV-2 [110 x 20%]
SV-1 to AL [150 x 30%]
SV-2 to AL [38 x 15%]
Rs. million
22.00
22.00
45.00
5.70
W-3 Investment in SV-2
Investment [200 x 50%]
Share in RE (W-2)
Rs. million
100.00
141.50
241.50
W-4 Cost of sales
AL
SV-1 [480 x 80%]
Intercompany sales [(350 + 190) x 80%]
URP on goods [17.60 + 36 + 11] (W-2)
Rs. million
2,993.00
384.00
(432.00)
64.60
3,009.60
362
COMPLEX GROUPS [SOFP & SOCI] – Class notes
TYPES OF COMPLEX GROUPS
1. Vertical group
Here a subsidiary [S] of the parent [P] holds controlling interest in another entity (often called subsubsidiary [SS]). As a result P controls S as well as SS.
Example:
P
holds 70% shares
S
holds 60% shares
SS
2. Mixed group [i.e. D-shaped group]
In addition to S shareholding in SS, P also has a direct holding in SS (which is less than 50%). In this case it
is not necessary that S must hold controlling interest in SS rather P controls SS if combined share of P and
S in SS forms a controlling interest (i.e. more than 50%) even if S holds less than 50% in SS.
P
P
holds 70% shares
holds 70% shares
S
holds 20% shares
S
holds 60% shares
holds 40% shares
SS
SS
holds 25% shares
Hence P must consolidate all subsidiaries and sub-subsidiaries.
If A has a subsidiary then it is not considered as a sub-subsidiary for the group
ACQUISITION DATE FOR SUB-SUBSIDIARIES
Acquisition date for SS is the date when P obtains control over SS. In exam questions it may be found as the
later of:
(i) When P acquires shares of S; and
(ii) When S acquires shares of SS
NASIR ABBAS FCA
363
COMPLEX GROUPS [SOFP & SOCI] – Class notes
EFFECTIVE SHAREHOLDING %
For calculation of Group and NCI shares in equity items of SS, the effective shareholding % are used. It is
explained with the help of following example:
Example
P holds 60% in S and 10% in SS whereas S holds 80% in SS. Effective shareholding % are calculated as follows:
%
P’s direct holding in SS
10
P’s indirect holding through S [60% + 80%]
48
Effective Group shareholding %
58
Effective NCI% [i.e. 100 – Effective group shareholding]
42
Effective shareholding % are used only for calculation and are NOT used for determining the “control” e.g.
effective group shareholding % in SS may be less than 50%.
GOODWILL IN SS
Goodwill on SS is calculated on acquisition date using following working and added with goodwill in S and
presented as total goodwill on SOFP.
Rs.
XXX
XXX
XXX
(XXX)
XXX
(XXX)
XXX
P’s prior direct investment in SS (Note)
Investment through S [S’s investment in SS x P’s % in S]
Value of NCI [i.e. Value of effective NCI]
Less: SS’s net assets at acquisition
Goodwill at acquisition
Less: Impairment loss
Carrying amount of Goodwill
Note – In case of P’s prior direct investment in SS, this investment will be included at its fair value on date of
acquisition of SS in above working. Any resulting change is recognized in P’s profits.
GROUP STATEMENT OF FINANCIAL POSITION
1. Since P controls S and SS both, therefore, assets and liabilities of SS are fully consolidated following same
techniques and adjustments/eliminations as studied for S.
2. In Group other reserves and Group retained earnings workings, effective group shareholding % to post
acquisition reserves of SS.
3. NCI is calculated as follows and total NCI is reported on SOFP:
Value of NCI at acquisition
Add: Other reserves
Add: Retained earnings
Less. Investment in SS
NCI in S
XXX
XXX
NCI in SS
XXX
XXX
[Other reserves x NCI%]
[Other reserves x effective NCI%]
XXX
XXX
[Retained earnings x NCI%]
[Retained earnings x effective NCI%]
(XXX)
-
[S’s investment in SS x NCI%]
XXX
NASIR ABBAS FCA
XXX
364
COMPLEX GROUPS [SOFP & SOCI] – Class notes
GROUP STATEMENT OF COMPREHENSIVE INCOME
1. Since P controls S and SS both, therefore, incomes and expenses of SS are fully consolidated following
same techniques and adjustments/eliminations as studied for S.
2. In NCI workings, NCI for both S (using normal NCI%) and SS (using effective NCI%) is calculated and added
together to show total NCI on face of SOCI. While calculating NCI for S, deduct “dividend income”
received from SS from S’s PAT.
Sub associate
If S has an investment in associate, then there is no effective shareholding% in sub-associate and Investment
in sub-associate is shown in SOFP as per equity method using S’% holding in sub-associate on post-acquisition
reserves/retained earnings and that share is added to S column in group reserves/retained earnings
workings.
NASIR ABBAS FCA
365
Solution [Q-1 Jun-14]
DL Group
Consolidated statement of financial position
as at December 31, 2013
Rs. million
Non current assets
PPE [10,000 + 6,100 + 5,400]
Goodwill (W-1)
21,500.00
352.50
Current assets
Current assets [6,325 + 7,100 + 3,100]
16,525.00
38,377.50
Equity
Share capital
Retained earnings [W-2]
Equity component (W-2.1)
Non-controlling interest [W-3]
9,000.00
7,381.44
12.01
3,882.50
Non-current liabilities
Non-current liabilities [6,000 + 3,000 + 1,000 - 250(W-2.1) + 241.55(W-2.1)]
9,991.55
Current liabilities
Current liabilities [3,500 + 3,210 + 1,400]
8,110.00
38,377.50
-
Workings
GL
SL
----- Rs. million -----
W-1 Goodwill
Consideration transferred:
- Direct [SL: 9 x 200]
- Indirect [SL: 2,800 x 75%(W-1.1)]
Value of NCI [9,530 x 25%] [6,010 x 35%(W-1.2)]
Less: net assets at acquisition:
Share capital
RE
FV adj. - Land
Goodwill at acquisition
W-1.1 % holding in GL
52.50m shares / 70m shares =
7,500.00
2,382.50
1,800.00
2,100.00
2,103.50
7,000.00
2,500.00
30.00
9,530.00
352.50
3,000.00
3,010.00
6,010.00
(6.50)
75.00%
366
W-1.2 Effective holding in SL
Effective holding of SL = 9/30 + 14/30 x 75% =
65.00%
Effective holding of NCI [1 - 0.65] =
35.00%
W-2 Retained earnings
RE
Less: Pre-acq
Add: Negative goodwill (W-1)
Less: Loss on investment in SL [2,175 - 1,800]
Less: Fair value adjustment (land)
Less: Additional finance cost on TFC [28.56 - 25] (W-2.1)
Add: Share in GL [260 x 75%]
Add: Share in SL [90 x 65%(W-1.2)]
DL
GL
SL
------------------ Rs. million ---------------7,500.00
2,790.00
3,100.00
(2,500.00)
(3,010.00)
6.50
(375.00)
(30.00)
(3.56)
260.00
90.00
195.00
58.50
7,381.44
W-2.1 Convertible debt
Rs. million
Liability component:
- Coupon [250 x 10% x 3-year annuity factor at 12%]
- Redemption [250 x 3-year discount factor at 12%]
Total fair value of compound instrument
Equity component
60.05
177.95
237.99
250.00
12.01
Initial liability
Interest expense [237.99 x 12%]
Cashflow [250 x 10%]
Closing balance
237.99
28.56
(25.00)
241.55
W-3 NCI
Value at acquisition (W-1)
RE [GL: 260 x 25%] [SL: 90 x 35%(W-1.1)]
Share in investment in CL [2,800 x 25%]
GL
SL
--------- Rs. million -------2,382.50
2,103.50
65.00
31.50
(700.00)
1,747.50
2,135.00
3,882.50
367
Solution [Q-1 Jun-19]
BL Group
Consolidated statement of financial position
as at December 31, 2018
Rs. million
Non current assets
PPE [25,370 + 14,288 + 7,900 - 663.16(W-3.1)]
Goodwill [170 + 609(W-1)]
Investment in PL (W-6)
46,894.84
779.00
582.00
Current assets
Current assets [17,480 + 4,800 + 2,800]
25,080.00
73,335.84
Equity
Share capital
Share premium
Revaluation surplus [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
15,000.00
8,000.00
6,175.00
13,054.29
4,600.76
Liabilities
Liabilities [12,000 + 8,800 + 6,400 - 694.21(W-3.1)]
26,505.79
73,335.84
-
Workings
W-1 Goodwill
Consideration transferred:
- Direct [CL: 912 x 0.35/0.24]
- Indirect [CL: 912 x 75%]
Value of NCI [6,600(W-1.1) x 25%] [3,500 x 47%(W-1.2)]
Less: net assets at acquisition:
Share capital
Share premium
RE [OL: balancing]
FV adj. - Building
Goodwill at acquisition
OL
CL
----- Rs. million ----5,400.00
1,650.00
1,330.00
684.00
1,645.00
5,000.00
2,000.00
(700.00)
300.00
6,600.00
450.00
1,200.00
1,100.00
1,200.00
3,500.00
159.00
609.00
W-1.1 Net assets of OL
Net assets of OL = x
5,400 + 0.25x - x = 450
Solving: x = 6,600
368
W-1.2 Effective holding in CL
Effective holding of CL = 35% + 24% x 75% =
53.00%
Effective holding of NCI [1 - 0.53] =
47.00%
W-2 Revaluation surplus
BL
OL
--------- Rs. million -------5,500.00
1,200.00
(300.00)
900.00
675.00
Revaluation surplus
Less: Fair value adjustment (building)
Add: Share in OL [900 x 75%]
6,175.00
W-3 Retained earnings
RE [PL: 800 + 400 - 220 - 360 ÷ 0.6]
Less: Pre-acq
Add: Gain on Investment in CL [1,330 - 1,220]
Add: Adjustment of lease [694.21 - 663.16](W-3.1)
Add: Share in OL [3,731.05 x 75%]
BL
OL
CL
PL
------------------------ Rs. million ----------------------9,500.00
3,000.00
2,000.00
380.00
700.00
(1,200.00)
110.00
31.05
3,731.05
800.00
380.00
2,798.29
Add: Share in CL [800 x 53%(W-1.1)]
424.00
Add: Share in PL [380 x 60%]
Less: Share in URP of goods [50 x 0.25/1.25 x 60%]
228.00
(6.00)
13,054.29
W-3.1 Lease
Since it was an operating lease and related machine is already included in PPE of BL, therefore, we will
remove ROU asset and related lease liability.
ROU
Lease liab.
--------- Rs. million -------Initital [400 x 3-year annuity factor at 10%]
994.74
994.74
Depreciation [994.74/3]
(331.58)
Finance cost [994.74 x 10%]
99.47
Lease payment
(400.00)
663.16
694.21
369
W-4 NCI
Value at acquisition (W-1)
Revaluation surplus [900 x 25%]
RE [OL: 3,731.05 x 25%] [CL: 800 x 47%(W-1.1)]
Share in investment in CL [912 x 25%]
W-6 Investment in PL
Investment
Share in RE (W-3)
URP on goods (W-3)
OL
CL
--------- Rs. million -------1,650.00
1,645.00
225.00
932.76
376.00
(228.00)
2,579.76
2,021.00
4,600.76
Rs. million
360.00
228.00
(6.00)
582.00
370
Question [Complex group]
Following are the financial statements of group companies for the year ended June 30, 2020:
Statement of financial position
Non-current assets
Property, plant and equipment
Investment in Sure (at cost)
Investment in Cure (at cost)
Current assets
Inventory
Debtors
Cash & bank
Equity
Share capital (Rs. 10 each)
Share premium
Other reserves
Retained earnings
Current liabilities
Creditors
Pure
Sure
Cure
----------------- Rs. -----------------58,750
53,000
100,000
64,000
5,250
44,000
18,000
22,000
9,000
177,000
14,000
24,000
9,000
144,000
10,000
18,000
9,000
137,000
70,000
10,000
9,000
74,000
40,000
20,000
7,000
58,000
35,000
12,000
8,000
64,000
14,000
177,000
19,000
144,000
18,000
137,000
Statement of comprehensive income
Sales
Cost of sales
Gross profit
Distribution cost
Admin expenses
Finance cost
Other income
Profit before tax
Tax
Profit after tax
Other comprehensive income:
Revaluation gain
Total comprehensive income
Pure
Sure
Cure
----------------- Rs. -----------------140,000
141,000
120,000
(80,000)
(82,000)
(70,000)
60,000
59,000
50,000
(12,000)
(10,000)
(8,000)
(11,000)
(13,000)
(9,000)
(4,000)
(5,000)
(3,000)
9,000
13,000
12,000
42,000
44,000
42,000
(10,000)
(9,000)
(8,000)
32,000
35,000
34,000
1,800
33,800
1,500
36,500
1,000
35,000
Following further information is available:
(1)
Pure acquired 80% shares of Sure on July 1, 2017 when its other reserves were Rs. 2,000 and retained earnings
were Rs. 10,000. At that date the fair values of net assets of Sure were equal to the carrying amounts except
for a building which was undervalued by Rs. 2,000. Its remaining life was 10 years.
Pure also acquired 10% shares of Cure on the same date when its other reserves were Rs. 1,000 and retained
earnings were Rs. 4,000.
(2)
On July 1, 2018 Sure acquired 60% shares of Cure when its other reserves were Rs. 3,000 and retained earnings
were Rs. 11,000. At that date, carrying amounts of all assets and liabilities of Sure were equal to fair values
371
except for a plant whose fair value was higher than carrying amount by Rs. 4,000. Its remaining life was 8 years.
Fair value of Cure’s shares on that date was Rs. 20 per share.
(3)
During 2020 companies paid following dividends:
Pure
10%
Sure
15%
Cure
20%
(4)
It is Pure’s policy to value non-controlling interest at proportionate share in identifiable net assets.
(5)
There was no need for impairment test in 2019, however, on June 30, 2020 goodwill in Sure was impaired by
Rs. 1,000 and goodwill in Cure was impaired by Rs. 1,500.
(6)
The following intercompany sales were made during the year 2020:
Included in
buyer’s closing
stock
-------------------------- Rs. ------------------------------40,000
5,000
7,000
30,000
6,000
10,000
3,000
4,000
Sales
Pure to Sure
Sure to Pure
Cure to Sure
Included in
receivables
Gross
Profit %
20%
25%
15%
Required:
Prepare consolidated statement of financial position and consolidated statement of comprehensive income for the
year ended June 30, 2020.
372
STEP ACQUISITION [SOFP & SOCI] – Class notes
SITUATIONS
1. Equity investment to S
2. A/JV to S
3. Further investment in S
Subsequent purchase of shares under each of the above situation is discussed in detail as follows:
1) Equity investment to Subsidiary
1st investment was accounted for as an investment (as per IFRS 9). Control is obtained on 2nd investment,
therefore, acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately
for SOFP and SOCI.
STATEMENT OF FINANCIAL POSITION
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill working:
Fair value of 1st investment at acquisition date
X
Additional investment
X
Value of NCI
X
Less: Net assets of S at acquisition date
(X)
Goodwill at acquisition
X
Less: Impairment loss
(X)
Goodwill carrying amount
X
(iii) “Other reserves” working will be made as studied earlier.
(iv) “Retained earnings” working will be made as studied earlier except that a gain/(loss) on derecognition of
earlier investment is recognized in P’s column calculated as follows:
Fair value of 1st investment at acquisition date
Less: Carrying amount of 1st investment
Gain / (loss)
X
(X)
X
Note – If entity has classified earlier investment at “fair value through OCI” then this gain/(loss) is
recognized in Other reserves. However, it may still be included in RE, giving a note that cumulative gain/loss
recognized can be transferred to RE on de-recognition as per IFRS 9.
(v) NCI working will be made as studied earlier.
STATEMENT OF COMPREHENSIVE INCOME
SOCI is better understood if we assume 2nd investment made during the current year (i.e. control achieved
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) Profit on de-recognition of earlier investment is recognized in “Other income” (if classified as FV through
P&L) or “Other comprehensive income (if classified as FV through OCI).
(iii) NCI working is made on time proportionate basis as studied earlier in basic consolidation.
NASIR ABBAS FCA
373
STEP ACQUISITION [SOFP & SOCI] – Class notes
2) A/JV to Subsidiary
1st investment was accounted for as per equity method. Control is obtained on 2nd investment, therefore,
acquisition date is the date of 2nd investment. Treatment after 2nd investment is discussed separately for SOFP
and SOCI.
STATEMENT OF FINANCIAL POSITION
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill working:
Fair value of 1st investment at acquisition date
Additional investment
Value of NCI
Less: Net assets of S at acquisition date
Goodwill at acquisition
Less: Impairment loss
Goodwill carrying amount
X
X
X
(X)
X
(X)
X
(iii) In “Other reserves” working, S other reserves will be split into:
1) Other reserves between 1st investment and 2nd investment [it will be considered as share from
Associate/JV and old% will be applied].
2) Other reserves after 2nd investment [it will be considered as share from S and new% will be applied]
(iv) In “Retained earnings” working, S RE will be split into:
1) RE between 1st investment and 2nd investment [it will be considered as share from Associate/JV and
old% will be applied].
2) RE after 2nd investment [it will be considered as share from S and new% will be applied]
Moreover a gain/(loss) on derecognition of earlier investment is recognized in P’s column calculated as follows:
Fair value of 1st investment at acquisition date
Less: Cost of 1st investment
Share in Other reserves [as per (iii) (1) above]
Share in RE [as per (iv) (1) above]
X
X
X
X
Gain/(loss)
(X)
X
(v) NCI working will be made as studied earlier in basic consolidation.
STATEMENT OF COMPREHENSIVE INCOME
SOCI is better understood if we assume 2nd investment made during the current year (i.e. control obtained
during the current year).
(i) Time proportionate consolidation of incomes and expenses will be made for the year.
(ii) “Share of profit/OCI from associate/JV” shall be calculated on S’s PAT/OCI between year start and 2nd
investment date.
(iii) Profit on de-recognition of earlier investment is recognized in “Other income”.
(iv) NCI working is made on time proportionate basis as studied earlier in basic consolidation.
NASIR ABBAS FCA
374
STEP ACQUISITION [SOFP & SOCI] – Class notes
2) Further investment in Subsidiary
Control was obtained in 1st investment, therefore, acquisition date is the date of 1st investment. 2nd investment
is just considered as a transaction within equity. Treatment after 2nd investment is discussed separately for
SOFP and SOCI.
STATEMENT OF FINANCIAL POSITION
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill is calculated at the date of 1st investment and it is not recalculated on 2nd investment.
(iii) In “Other reserves” working, S other reserves will be split into:
1) Other reserves between 1st investment and 2nd investment [old% will be applied to this portion].
2) Other reserves after 2nd investment [new% will be applied to this portion.]
(iv) In “Retained earnings” working, S RE will be split into:
1) RE between 1st investment and 2nd investment [old% will be applied to this portion].
2) RE after 2nd investment [new% will be applied to this portion]
(v) An adjustment in equity is calculated as follows:
Decrease in NCI:
- In Value of NCI at acquisition [Value at acquisition x decrease%/old NCI%]
- In Other reserves [(iii) (1) above x decrease%]
- In RE [(iv) (1) above x decrease%]
Consideration paid for 2nd investment
Adjustment in equity [+/-]
X
X
X
X
(X)
X
This adjustment shall be made in P column in “Other reserves” or “Retained earnings”. [IFRS 10 has just
mentioned the word “equity” and not specified the account. However, some books use “other reserves”
while some use “Retained earnings”].
(vi) NCI working will be made as follows:
Value at acquisition [Value at acquisition x new NCI%/old NCI%]
Other reserves [Total post after 1st investment x new NCI%]
Retained earnings [Total post after 1st investment x new NCI%]
X
X
X
X
STATEMENT OF COMPREHENSIVE INCOME
SOCI is better understood if we assume subsequent acquisition during the current year.
(i) Full consolidation of incomes and expenses will be made for the year.
(ii) NCI working is made on time proportionate basis in following two components:
S’s PAT [from year start to 2nd investment date x old NCI %]
S’s PAT [from 2nd investment date to year end x new NCI %]
NASIR ABBAS FCA
X
X
X
375
SOFP Question (Step acquisition)
Following statements of financial positions relate to Peru and Solid as at June 30, 2020:
PPE
Investments
Current assets
Shar capital (Rs. 10 each)
Other reserves
Retained earnings
Current liabilities
Peru
Solid
--------------- Rs. ---------87,000
89,000
60,000
10,000
20,000
25,000
167,000
124,000
70,000
40,000
9,000
7,000
74,000
58,000
14,000
19,000
167,000
124,000
Peru made investments in Solid twice; fist on July 1, 2015 and second on July 1, 2017. Following
information relates to Solid on these dates:
01-07-15
01-07-17
Market price of Solid’s shares
Rs. 14
Rs. 16
Other reserves
Rs. 1,500
Rs. 4,500
Retained earnings
Rs. 3,200
Rs. 8,000
At June 30, 2020 impairment review shows that goodwill is impaired by 10%. It is Peru’s policy to follow
full goodwill method.
Required:
Prepare group SOFP as at June 30, 2020 under each of the following situations:
(a) Peru acquired 10% shares on July 1, 2015 at market price and 70% shares on July 1, 2017 at a price of
Rs. 17 per share.
(b) Peru acquired 25% shares on July 1, 2015 at market price and 55% shares on July 1, 2017 at a price of
Rs. 17 per share.
(c) Peru acquired 70% shares on July 1, 2015 at a price of Rs. 15 per share and 10% shares on July 1, 2017
at market price.
376
SOCI Question (Step acquisition)
Following statements of comprehensive income relate to Blue and Green for the year June 30, 2020:
Sales
Cost of sales
Gross profit
Operating expenses
Other income
Profit before tax
Tax
Profit after tax
Peru
Solid
--------------- Rs. ---------140,000
120,000
(105,000)
(90,000)
35,000
30,000
(14,000)
(12,000)
4,000
6,000
25,000
24,000
(8,000)
(9,000)
17,000
15,000
Blue made investments in Green twice; fist on July 1, 2018 and second on October 1, 2019. Following
information relates to Green on these dates:
01-07-18
01-10-19
Market price of Green’s shares
Rs. 25
Rs. 30
Fair value adjustment on building
Rs. 4,800
Rs. 4,400
Remaining useful life of building
4 years
2.75 years
Share capital (Rs. 10 each)
Rs. 40,000
Rs. 40,000
Green earned profit after tax of Rs. 12,000 in the year 2019. During the year 2020, Green sold goods for
Rs. 1,000 every month to Blue. Out of intercompany sale, unrealized profit included in Blue’s stock at June
30, 2020 amounts to Rs. 500.
Required:
Prepare group SOCI for the year ended June 30, 2020 under each of the following situations:
(a) Blue acquired 10% shares on July 1, 2018 at market price and 70% shares on October 1, 2019 at a
price of Rs. 32 per share.
(b) Blue acquired 30% shares on July 1, 2018 at market price and 50% shares on October 1, 2019 at a
price of Rs. 32 per share.
(c) Blue acquired 70% shares on July 1, 2018 at a price of Rs. 27 per share and 10% shares on October 1,
2019 at market price.
377
Solution [Q-1 Jun-11]
OGL Group
Consolidated statement of financial position
as at March 31, 2011
Rs. million
Non current assets
PPE [700 + 200 + 25]
Goodwill (W-1)
Current assets
Current assets [350 + 150 - 1.25 - 15]
925.00
21.00
483.75
1,429.75
Equity
Share capital
Retained earnings [W-2]
Non-controlling interest [W-3]
Non-current liabilities
Non-current liabilities [150 + 40]
Current liabilities
Current liabilities [182 + 130 - 15]
Workings
W-1 Goodwill
Consideration transferred
Fair value of earlier investment
Fair value of NCI
Less: net assets at acquisition:
Share capital
RE
FV adj. - Land
Goodwill at acquisition
W-2 Retained earnings
RE
Less: Pre-acq
Less: Professional fees for acquisition
Add: Cummulative fair value gain transferred to RE
Add: Profit on earlier investment [28 - 23]
Less: URP on goods [5 x 25%]
Add: Share in RGL [18.75 x 55%]
W-3 NCI
Value at acquisition (W-1)
RE [18.75 x 45%]
300.00
564.31
78.44
190.00
297.00
1,429.75
----- Rs. million ----108.00
28.00
70.00
100.00
60.00
25.00
(185.00)
21.00
OGL
RGL
--------- Rs. million -------550.00
80.00
(60.00)
(4.00)
3.00
5.00
(1.25)
18.75
10.31
564.31
Rs. million
70.00
8.44
78.44
378
Solution [Q-1 Jun-16]
Difference in ICAP solution:
- Modification loss is mentioned as impairment loss (i.e. old IAS 39 concept)
THL Group
Consolidated statement of financial position
as at December 31, 2015
Rs. million
Non current assets
PPE [481 + 735 - 60 + 16 - 46]
Goodwill (W-1)
Investments [(1,420 - 100 - 82.64 - 327.75 - 54 - 260) + (10 + 5)]
Long term receivable (W-3.1)
1,126.00
16.00
610.61
20.36
Current assets
Disposal group held for sale [60 + 25 - 20(W-3)]
Other current assets [2,142 + 1,636 - 25]
65.00
3,753.00
5,590.96
Equity
Share capital
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
1,120.00
156.52
1,081.52
247.92
Non-current liabilities
Non-current liabilities [263 + 248]
511.00
Current liabilities
Current liabilities associated with disposal group
Current liabilities [1,514 + 954 - 10 + 6]
10.00
2,464.00
5,590.96
-
Workings
W-1 Goodwill
Consideration transferred:
- Cash
- Deferred cash [100 x 1.1-2]
- Share exchange [28.5 x 11.50]
- Land
Fair value of NCI [24 x 16.50]
Less: net assets at acquisition:
Share capital
Other reserves
RE
FV adj. - Land
Contingent liability
Goodwill at acquisition
Less: Impairment loss (W-3.2)
----- Rs. million ----100.00
82.64
327.75
54.00
396.00
600.00
26.00
299.00
16.00
(6.00)
(935.00)
25.39
(9.39)
16.00
379
W-2 Other reserves
Other reserves
Less: Pre acquisition
Add: Adjustment in equity (W-2.1)
Add: Share in ZFL [111 x 60%]
THL
ZFL
--------- Rs. million -------102.00
137.00
(26.00)
(12.08)
111.00
66.60
156.52
W-2.1 Adjustment in equity
Rs. million
Decrease in NCI:
- Value at acquisition [396 x 20/40]
- Other reserves [111(W-2) x 20%]
- RE [138.61(W-3) x 20%]
Consideration paid
W-3 Retained earnings
RE
Less: Pre-acq
Less: Excess gain recorded on land transfer
Add: Fair value gain on investments [15 - 10]
Less: Modification loss on loan to CEO (W-3.1)
Less: Loss on disposal group [55 - (60 + 25 - 10)]
Less: Impairment loss of goodwill (W-3.2)
Add: Share in FZL [138.61 x 60%]
198.00
22.20
27.72
247.92
260.00
(12.08)
THL
FZL
--------- Rs. million -------1,066.00
442.00
(299.00)
(46.00)
5.00
(1.64)
(20.00)
(9.39)
138.61
83.16
1,081.52
W-3.1 Modification of loan to CEO
Present value of modified cashflows [8 x 3-year annuity factor at 8.7%]
Carrying amount of loan
Modification loss
Rs. million
20.36
22.00
(1.64)
380
W-3.2 Impairment loss
Carrying amount as per question:
Net assets [600 + 442 + 137]
Fair value gain on investment
FV adj. - Land
Contingent liability
Goodwill
Recoverable amount
Impairment loss
W-4 NCI
Value at acquisition [396 x 20/40]
Other reserves [111 x 20%]
RE [138.61 x 20%]
Rs. million
1,179.00
5.00
16.00
(6.00)
25.39
1,219.39
1,210.00
9.39
Rs. million
198.00
22.20
27.72
247.92
381
Solution [Q-2 Jun-18]
Difference in ICAP solution:
- Contingent liability of FL was reduced from 50 to 40
AL Group
Consolidated statement of financial position
as at December 31, 2017
Rs. million
Non current assets
PPE [3,510 + 2,835 + 2,200 - 20 + 1.50 + 4.50]
Goodwill (W-1)
Investment property [130 + 45 + 5 + 8]
8,531.00
287.50
188.00
Current assets
Current assets [2,120 + 1,420 + 2,800]
6,340.00
15,346.50
Equity
Share capital
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
5,500.00
49.95
2,426.80
2,625.75
Non-current liabilities
Gratuity (W-3.1)
33.00
Current liabilities
Current liabilities [1,775 + 1,386 + 1,500 + 50]
4,711.00
15,346.50
-
Workings
W-1 Goodwill
Consideration transferred:
- Direct
- Indirect [FL: 2,400 x 75%]
Value of NCI [4,400 x 35%] [3,600 x 55%(W-1.1)]
Less: net assets at acquisition:
Share capital
RE
Fair value adj. - Plant
Contingent liability
Goodwill at acquisition
Less: Impairment loss (W-3)
BL
FL
----- Rs. million ----3,100.00
-
1,575.00
1,800.00
1,980.00
4,000.00
520.00
(20.00)
4,500.00
175.00
175.00
2,500.00
1,150.00
(50.00)
3,600.00
180.00
(67.50)
112.50
287.50
382
W-1.1 Effective holding in FL
Effective holding of AL = 75% x 60% =
45.00%
Effective holding of NCI [1 - 0.45] =
55.00%
W-2 Other reserves
Re-measurement gain
Adjustment for change in shareholding (W-2.1)
Rs. million
10.00
39.95
49.95
W-2.1 Adjustment in equity
Decrease in NCI:
- Value at acquisition [1,575 x 10/35]
- Post acquisition RE [299.50(W-3) x 10%]
450.00
29.95
479.95
440.00
39.95
Consideration paid
W-3 Retained earnings
RE
Less: Pre-acq
Add: Extra dep. Plant [20 x 0.75/10] [20 x 2.25/10]
Less: URP on building *
Less: Depreciation of building ** [50 ÷ 5 x 6/12]
Add: Fair value gain [58 - 50]
Add: Reversal of contributions paid
Less: Employee cost [41.40 + 85 - 38.40] (W-3.1)
Less: Impairment loss of goodwill [150(W-3.2) x 45%]
AL
BL (new)
BL (old)
FL
------------------------ Rs. million ----------------------2,000.00
1,314.00
815.00
1,000.00
(815.00)
(520.00)
(1,150.00)
1.50
4.50
5.00
8.00
70.00
(88.00)
(67.50)
513.50
299.50
(150.00)
Add: Share in BL
[513.50 x 75%]
[299.50 x 65%]
385.13
194.68
Add: Share in FL [150 x 45%(W-1.1)]
(67.50)
2,426.80
* Since Investment property is valued upwards subsequently therefore URP is not reversed.
** Since investment property is to be measured at fair value model as per group policy, therefore, depreciation
charged by BL shall be reversed
383
W-3.1 Gratuity
Bal. at 01-01-17
Interest [Opening bal. x 12%]
Current service cost
Contributions
Benefits paid
Remeasurement gain
Net gratuity balance
W-3.2 Impairment loss
Carrying amount as per question:
Net assets [2,500 + 1,000]
Contingent liability
Goodwill [180 ÷ 0.45]
Recoverable amount
Impairment loss
W-4 NCI
Value at acquisition [BL: 1,575(W-1) x 0.25/0.35]
RE [BL: (513.50 + 299.50) x 25%] [FL: 150 x 55%(W-1.1)]
Share in investment in CL [2,400 x 25%]
[320 + 25]
PV of DBO
Plan assets
--------- Rs. million -------345.00
320.00
41.40
38.40
85.00
70.00
(55.00)
(55.00)
(10.00)
406.40
373.40
33.00
Rs. million
3,500.00
(50.00)
400.00
3,850.00
3,700.00
150.00
BL
FL
--------- Rs. million -------1,125.00
1,980.00
203.25
(82.50)
(600.00)
728.25
1,897.50
2,625.75
384
Solution [Q-4 Dec-19]
RL Group
Consolidated statement of financial position
as at December 31, 2018
Rs. million
Non current assets
PPE [7,450 + 3,000 - 300 + 70 + 180 - 24]
Goodwill [W-1]
Investment in YL (W-5)
10,376.00
375.49
1,128.00
Current assets
Current assets [650 + 500 - 15 - 37.50]
1,097.50
12,976.99
Equity
Share capital
Share premium
Retained earnings [W-2]
Non-controlling interest [W-3]
4,000.00
1,100.00
2,989.33
469.62
Non-current liabilities
Bank loan [1,700 + 800 + 182.87(W-1.1)]
Deferred tax [244.75 + 145.42](W-4)
2,682.87
390.17
Current liabilities
Current liabilities [950 + 355 + 40]
1,345.00
12,976.99
-
Workings
W-1 Goodwill
Consideration transferred:
- Cash
- Land
- Bank loan (W-1.1)
Value of NCI [1,943 x 20%]
Less: net assets at acquisition:
Share capital
Share premium
RE
FV adj. - Land
FV adj. - Building
Contingent liability
DTL [(180 - 40) x 30%]
Goodwill at acquisition
----- Rs. million ----1,300.00
450.00
179.89
388.60
800.00
225.00
750.00
70.00
180.00
(40.00)
(42.00)
(1,943.00)
375.49
385
W-1.1 Bank loan
Value at 01-01-18:
Interest [Rs. 24m x 5-year annuity factor at 15%]
Redemption [Rs. 200m x 5-year discount factor at 15%]
Initial recognition
Interest expense [179.89 x 15%]
Cashflow
Closing balance
W-2 Retained earnings
RE
Less: Pre-acq
Less: Finance cost on loan [26.98 - 24.00]
Add: Gain on land transfer [450 - 300]
Less: Extra dep. on FV adj. of Building [180 / 7.5]
Less: URP on goods [100 x 15%] [150 x 25%]
Add: Deferred tax expense (W-4)
Add: Share in TL [405.08 x 80%]
Add: Share in YL [380 x 60%]
Rs. million
80.45
99.44
179.89
26.98
(24.00)
182.87
RL
TL
YL
------------------ Rs. million ---------------2,300.00
1,200.00
380.00
(750.00)
(2.98)
150.00
(24.00)
(15.00)
(37.50)
5.25
16.58
405.08
380.00
324.06
228.00
2,989.33
W-3 NCI
Value at acquisition (W-1)
RE [405.08 x 20%]
Rs. million
388.60
81.02
469.62
W-4 Deferred tax
RL
TL
--------- Rs. million -------Tax on adjustments:
Finance cost [2.98 x 25%]
Extra dep. on FV adj. of building [24 x 30%]
URP on goods [15 x 30%] [37.50 x 25%]
Tax on acquisition (W-1)
Balance as per question
W-5 Investment in YL
Investment
RE (W-2)
(0.75)
(4.50)
(5.25)
250.00
244.75
(7.20)
(9.38)
(16.58)
42.00
120.00
145.42
Rs. million
900.00
228.00
1,128.00
386
Replacement rewards
Example 1
Acquiree awards Vesting period completed before the business combination
Replacement awards Additional employee services are not required after the acquisition date
Discussion
AC issues replacement awards of CU110 (market-based measure) at the acquisition date for TC awards of
CU100 (market-based measure) at the acquisition date. No post-combination services are required for the
replacement awards and TC’s employees had rendered all of the required service for the acquiree awards
as of the acquisition date.
The amount attributable to pre-combination service is the market-based measure of TC’s awards (CU100)
at the acquisition date; that amount is included in the consideration transferred in the business
combination. The amount attributable to post-combination service is CU10, which is the difference
between the total value of the replacement awards (CU110) and the portion attributable to precombination service (CU100). Because no post-combination service is required for the replacement
awards, AC immediately recognizes CU10 as remuneration cost in its post-combination financial
statements.
Example 2
Acquiree awards Vesting period completed before the business combination
Replacement awards Additional employee services are required after the acquisition date
Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based
payment awards of TC, for which employees had completed the vesting period before the business
combination. The market-based measure of both awards is CU100 at the acquisition date. When originally
granted, TC’s awards had a vesting period of four years. As of the acquisition date, the TC employees
holding unexercised awards had rendered a total of seven years of service since the grant date.
Even though TC employees had already rendered all of the service, AC attributes a portion of the
replacement award to post-combination remuneration cost in accordance with paragraph B59 of IFRS 3,
because the replacement awards require one year of post-combination service. The total vesting period
is five years—the vesting period for the original acquiree award completed before the acquisition date
(four years) plus the vesting period for the replacement award (one year).
The portion attributable to pre-combination services equals the market-based measure of the acquiree
award (CU100) multiplied by the ratio of the pre-combination vesting period (four years) to the total
vesting period (five years). Thus, CU80 (CU100 × 4/5 years) is attributed to the pre-combination vesting
period and therefore included in the consideration transferred in the business combination. The
remaining CU20 is attributed to the post-combination vesting period and is therefore recognized as
remuneration cost in AC’s post-combination financial statements in accordance with IFRS 2.
387
Example 3
Acquiree awards Vesting period not completed before the business combination
Replacement awards Additional employee services are required after the acquisition date
Discussion
AC exchanges replacement awards that require one year of post-combination service for share-based
payment awards of TC, for which employees had not yet rendered all of the service as of the acquisition
date. The market-based measure of both awards is CU100 at the acquisition date. When originally
granted, the awards of TC had a vesting period of four years. As of the acquisition date, the TC employees
had rendered two years’ service, and they would have been required to render two additional years of
service after the acquisition date for their awards to vest. Accordingly, only a portion of the TC awards is
attributable to pre-combination service.
The replacement awards require only one year of post-combination service. Because employees have
already rendered two years of service, the total vesting period is three years. The portion attributable to
pre-combination services equals the market-based measure of the acquiree award (CU100) multiplied by
the ratio of the pre-combination vesting period (two years) to the greater of the total vesting period (three
years) or the original vesting period of TC’s award (four years). Thus, CU50 (CU100 × 2/4 years) is
attributable to pre-combination service and therefore included in the consideration transferred for the
acquiree.
The remaining CU50 is attributable to post-combination service and therefore recognised as
remuneration cost in AC’s post-combination financial statements.
Example 4
Acquiree awards Vesting period not completed before the business combination
Replacement awards Additional employee services are not required after the acquisition date
Discussion
Assume the same facts as in Example 3 above, except that AC exchanges replacement awards that require
no post-combination service for share-based payment awards of TC for which employees had not yet
rendered all of the service as of the acquisition date. The terms of the replaced TC awards did not
eliminate any remaining vesting period upon a change in control. (If the TC awards had included a
provision that eliminated any remaining vesting period upon a change in control, the guidance in Example
1 would apply.) The market-based measure of both awards is CU100. Because employees have already
rendered two years of service and the replacement awards do not require any post-combination service,
the total vesting period is two years.
The portion of the market-based measure of the replacement awards attributable to pre-combination
services equals the market-based measure of the acquiree award (CU100) multiplied by the ratio of the
pre-combination vesting period (two years) to the greater of the total vesting period (two years) or the
original vesting period of TC’s award (four years). Thus, CU50 (CU100 × 2/4 years) is attributable to precombination service and therefore included in the consideration transferred for the acquiree. The
remaining CU50 is attributable to post-combination service. Because no post-combination service is
required to vest in the replacement award, AC recognises the entire CU50 immediately as remuneration
cost in the post-combination financial statements.
388
DISPOSAL [SOFP & SOCI] – Class notes
SITUATIONS
Control is lost
1. Full disposal [i.e. S to 0]
2. Part disposal [S to Equity investment]
3. Part disposal [S to Associate]
Control is retained
4. S to S
Following discussions are made in respect of the “subsidiary sold” in consolidated financial statements
because there are other subsidiaries as well for which consolidated financial statements are prepared.
STATEMENT OF FINANCIAL POSITION
1) Full disposal [i.e. S to 0]
(i) No consolidation of assets and liabilities will be made at year end.
(ii) “Other reserves” working will include share in post-acquisition other reserves till the date of disposal.
(iii) “Retained earnings” working will include following adjustments:
(a) Reverse any profit on derecognition already recognized in P’s RE
(b) Include share in post-acquisition RE till the date of disposal
(c) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Consideration received
Less: Share of net assets derecognized:
Carrying amount of net assets at the date of disposal
Consolidation adjustments in assets & liabilities
Carrying amount of goodwill
Less: NCI derecognized:
Value at acquisition
Other reserves [Post-acq. till disposal x NCI%]
RE [Post-acq. till disposal x NCI%]
Gain / (loss) on disposal
X
X
X
X
X
X
X
X
(X)
(X)
X
(iv) No NCI working will be made as there is no consolidation.
2) Part disposal [S to Equity investment]
(i) No consolidation of assets and liabilities will be made at year end.
(ii) “Other reserves” working will include share in post-acquisition other reserves till the date of disposal.
(iii) “Retained earnings” working will include following adjustments:
(a) Reverse any profit on derecognition already recognized in P’s RE
(b) Include share in post-acquisition RE till the date of disposal
NASIR ABBAS FCA
389
DISPOSAL [SOFP & SOCI] – Class notes
(c) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Consideration received
Fair value of investment retained
Less: Share of net assets derecognized:
Carrying amount of net assets at the date of disposal
Consolidation adjustments in assets & liabilities
Carrying amount of goodwill
Less: NCI derecognized:
Value at acquisition
Other reserves [Post-acq. till disposal x NCI%]
RE [Post-acq. till disposal x NCI%]
X
X
X
X
X
X
X
X
X
(X)
(X)
X
Gain / (loss) on disposal
(d) Include any fair value gain/loss on application of IFRS 9 at year end on investment retained (if not
already done by P).
(iv) No NCI working will be made as there is no consolidation.
3) Part disposal [S to Associate]
(i) No consolidation of assets and liabilities will be made at year end.
(ii) In “Other reserves” working, S other reserves will be split into:
1) Post-acquisition Other reserves till disposal [it will be considered as share from S and old% will be
applied].
2) Other reserves after disposal till year-end [it will be considered as share from A and new% will be
applied]
(iii) In “RE” workings, S RE will be split into:
1) Post-acquisition RE till disposal [it will be considered as share from S and old% will be applied].
2) RE after disposal till year-end [it will be considered as share from A and new% will be applied]
Following further adjustments are made:
(a) Reverse any profit on derecognition already recognized in P’s RE
(b) Include “Gain/Loss on disposal of subsidiary” calculated as follows:
Consideration received
Fair value of investment retained
Less: Share of net assets derecognized:
Carrying amount of net assets at the date of disposal
Consolidation adjustments in assets & liabilities
Carrying amount of goodwill
Less: NCI derecognized:
Value at acquisition
Other reserves [(ii) (1) x NCI%]
NASIR ABBAS FCA
X
X
X
X
X
X
X
X
390
DISPOSAL [SOFP & SOCI] – Class notes
RE [(iii) (1) x NCI%]
X
(X)
(X)
X
Gain / (loss) on disposal
(iv) No NCI working will be made as there is no consolidation.
(v) Investment retained will be accounted for as per equity method as follows:
Fair value of investment retained [as used in (iii)(b)]
Other reserves [(ii)(2)]
RE [(iii)(2)]
X
X
X
X
4) Control is retained [i.e. S to S]
(i) Full consolidation of assets and liabilities will be made at year end.
(ii) Goodwill is not recalculated on the date of disposal.
(iii) In “Other reserves” working, S other reserves will be split into:
1) Post-acquisition Other reserves till disposal [old% will be applied to this portion].
2) Other reserves after disposal till year-end [new% will be applied to this portion.]
(iv) In “Retained earnings” working, S RE will be split into:
1) Post-acquisition RE till disposal [old% will be applied to this portion].
2) RE after disposal till year-end [new% will be applied to this portion]
(v) An adjustment in equity is calculated as follows:
Consideration received
Increase in NCI:
- In Value of NCI at acquisition [Value at acquisition x Increase%/old NCI%]
- In Other reserves [(iii) (1) above x Increase%]
- In RE [(iv) (1) above x Increase%]
Adjustment in equity [+/-]
X
X
X
X
(X)
X
This adjustment shall be made in P column in “Other reserves” or “Retained earnings”. [IFRS 10 has just
mentioned the word “equity” and not specified the account. However, some books use “other reserves”
while some use “Retained earnings”].
(vi) NCI working will be made as follows:
Value at acquisition [Value at acquisition x new NCI%/old NCI%]
Other reserves [Total post x new NCI%]
Retained earnings [Total post x new NCI%]
NASIR ABBAS FCA
X
X
X
X
391
DISPOSAL [SOFP & SOCI] – Class notes
STATEMENT OF COMPREHENSIVE INCOME
[SOCI is better understood if we assume that disposal was made during the current year.]
CASE I – DISCLOSURES OF DISCONTINUED OPERAIONS (AS PER IFRS-5) ARE TO BE IGNORED
1) Full disposal [i.e. S to 0]
(i) Time proportionate (i.e. year start till disposal) consolidation of incomes and expenses will be made for
the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) “Gain/(loss) on disposal of S” shall be recognized in Group SOCI.
(iv) NCI working is made on time proportionate basis (i.e. year start till disposal)
2) Part disposal [Subsidiary to Equity investment]
(i) Time proportionate (i.e. year start till disposal) consolidation of incomes and expenses will be made for
the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) “Gain/(loss) on disposal of S” shall be recognized in Group SOCI.
(iv) Recognize fair value gain/(loss) as per IFRS 9 in SOCI on equity investment retained.
(v) NCI working is made on time proportionate basis (i.e. year start till disposal).
3) Part disposal [Subsidiary to Associate]
(i) Time proportionate (i.e. year start till disposal) consolidation of incomes and expenses will be made for
the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) “Gain/(loss) on disposal of S” shall be recognized in Group SOCI.
(iv) “Share of profit/OCI from associate” shall be calculated on S’s PAT/OCI between disposal date and year
end.
(v) NCI working is made on time proportionate basis (i.e. year start till disposal).
4) Control is retained [i.e. S to S]
(i) Full consolidation of incomes and expenses will be made for the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) NCI working is made on time proportionate basis in following two components:
S’s PAT [from year start to disposal date x old NCI %]
S’s PAT [from disposal date to year end x new NCI %]
NASIR ABBAS FCA
X
X
X
392
DISPOSAL [SOFP & SOCI] – Class notes
CASE II – DISCLOSURES OF DISCONTINUED OPERAIONS ARE REQUIRED [default case]
1) Full disposal [i.e. S to 0]
(i) No line by line consolidation of incomes and expenses will be made for the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) A separate line item “Profit from discontinued operations” will be shown which is calculated as follows:
Profit from discontinued operations:
S PAT (time proportionate basis)
X
Gain/(loss) on disposal of subsidiary
X
X
(iv) NCI working is made on time proportionate basis (i.e. year start till disposal)
(v) Profit/TCI attributable to shareholders of P and NCI is split into:
- Profit/TCI from continuing operations
- Profit/TCI from discontinued operations
2) Part disposal [Subsidiary to Equity investment]
(i) No line by line consolidation of incomes and expenses will be made for the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) A separate line item “Profit from discontinued operations” will be shown.
(iv) Recognize fair value gain/(loss) as per IFRS 9 in SOCI on equity investment retained.
(v) NCI working is made on time proportionate basis (i.e. year start till disposal).
(vi) Profit/TCI attributable to shareholders of P and NCI is split into:
- Profit/TCI from continuing operations
- Profit/TCI from discontinued operations
3) Part disposal [Subsidiary to Associate]
(i) No line by line consolidation of incomes and expenses will be made for the year.
(ii) Profit on sale of shares already recognized in SOCI of P shall be reversed.
(iii) A separate line item “Profit from discontinued operations” will be shown.
(iv) “Share of profit/OCI from associate” shall be calculated on S’s PAT/OCI between disposal date and year
end.
(v) NCI working is made on time proportionate basis (i.e. year start till disposal).
(vi) Profit/TCI attributable to shareholders P and NCI is split into:
- Profit/TCI from continuing operations
- Profit/TCI from discontinued operations
4) Control is retained [i.e. S to S]
It is same as studied in case-I
NASIR ABBAS FCA
393
SOFP Question (Disposal)
Following statements of financial positions relate to Solid, Liquid and Gas as at June 30, 2020:
Solid
Liquid
Gas
------------------- Rs. -----------------75,000
89,000
70,000
70,000
10,000
5,000
20,000
25,000
20,000
165,000
124,000
95,000
50,000
40,000
30,000
14,000
7,000
5,000
82,000
58,000
44,000
19,000
19,000
16,000
165,000
124,000
95,000
PPE
Investments (at cost)
Current assets
Shar capital (Rs. 10 each)
Other reserves
Retained earnings
Current liabilities
Gas earned Profit after tax of Rs. 12,000 and no other comprehensive income for the year ending June 30,
2020.
Solid acquired 80% shares in Liquid on July 1, 2017 for Rs. 48,000 [Fair value of NCI at that date was Rs.
11,200] and 70% shares in Gas on July 1, 2018 for Rs. 33,600 [Fair value of NCI at that date was Rs. 13,500].
Following information relates to Liquid and Gas:
Other reserves
Retained earnings
Liquid
(01-07-17)
Rs. 4,500
Rs. 8,000
Gas
(01-07-18)
Rs. 2,000
Rs. 10,000
Fair values relating to office buildings were higher than book values as follows:
Liquid
Gas
01-07-17 by Rs. 3,000
(remaining life 8 years)
01-07-18 by Rs. 2,000
(remaining life 8 years)
01-01-20 by Rs. 1,300
(remaining life 6.5 years)
Goodwill of each company was impaired by 10% on June 30, 2019. It is Solid’s policy to follow full goodwill
method.
Required:
Prepare group SOFP as at June 30, 2020 under each of the following situations:
(a) Solid sold its entire shareholding in Gas for Rs. 28 per share on January 1, 2020.
(b) Solid sold 60% shares of Gas for Rs. 28 per share on January 1, 2020. Market price of remaining shares
of Gas on that date was Rs. 27. Moreover this market price moved to Rs. 29 per share on June 30,
2020.
(c) Solid sold 40% shares of Gas for Rs. 27 per share on January 1, 2020 (i.e. market price at that date).
(d) Solid sold 10% shares of Gas for Rs. 27 per share on January 1, 2020 (i.e. market price at that date).
394
Solution [Q-1 Jun-12]
Difference in ICAP solution:
- Fair value of contingent liability was ignored in CL's net assets
BL Group
Consolidated statement of financial position
as at December 31, 2011
Rs. million
Non current assets
PPE [75,600 + 2,800]
Goodwill (W-1)
Investment in TL (W-4)
78,400.00
964.17
660.00
Current assets
Stock in trade [24,100 + 1,700 - 2.56]
Trade and other receivables [16,400 + 2,900 - 12]
Cash and bank [800 + 700]
25,797.44
19,288.00
1,500.00
126,609.61
Equity
Share capital
Retained earnings [W-2]
Non-controlling interest [W-5]
44,300.00
16,821.87
399.74
Non-current liabilities
Long term loan
36,400.00
Current liabilities
Trade and other payables [24,600 + 4,100 - 12]
28,688.00
126,609.61
-
Workings
W-1 Goodwill
Consideration transferred
Value of NCI [3,143 x 10%] [1,100 x 20%]
Less: net assets at acquisition:
Share capital
RE
Contingent liability
Goodwill at acquisition
Less: Impairment loss [1,071.30 x 10%]
CL
TL
----- Rs. million ----3,900.00
1,200.00
314.30
220.00
2,800.00
350.00
(7.00)
3,143.00
1,071.30
(107.13)
964.17
1,000.00
100.00
1,100.00
320.00
320.00
395
W-2 Retained earnings
RE
Less: Pre-acq
Add: Gain on sale of TL (W-3)
Less: Reversal of profit on disposal TL [2,000 - 1,200 x 75%]
Add: Contingent liability settled
Less: Impariment of goodwill (W-1)
Less: URP on goods [32 x 40% x 25/125]
BL
CL
--------- Rs. million --------15,800.00
1,200.00
(350.00)
850.00
(1,100.00)
7.00
(107.13)
(2.56)
854.44
Add: Share in CL [854.44 x 90%]
769.00
Add: Share in TL:
Subsidiary [(900 - 200 x 3/12 - 100) x 80%]
Associate [200 x 3/12 x 20%]
600.00
10.00
16,821.87
W-3 Gain on disposal of TL
Consideration received
Fair value of investment retained
Less:
Carrying amount of net assets derecognized as at 01-10-11:
Share capital
RE [900 - 200 x 3/12]
Goodwill
Less: NCI derecognized:
- Value at acquisition (W-1)
- Post acquisition RE [(850 - 100) x 20%]
Gain on disposal of TL
--------- Rs. million --------2,000.00
650.00
1,000.00
850.00
320.00
2,170.00
(220.00)
(150.00)
(370.00)
1,800.00
850.00
W-4 Investment in TL
Fair value of investment
RE (W-2)
Rs. million
650.00
10.00
660.00
W-5 NCI
Value at acquisition
RE [854.44 x 10%]
Rs. million
314.30
85.44
399.74
396
Solution [Q-1 Dec-09]
HL Group
Consolidated statement of financial position
as at June 30, 2009
Difference in ICAP solution:
- Adjustment in equity was recognized in RE
- URP on machine is wrongly calculated
Rs. million
Non current assets
PPE [978 + 595 - 3.5]
Goodwill (W-1)
1,569.50
28.90
Current assets
Stock in trade [210 + 105 - 5]
Trade and other receivables [122 + 116 - 24]
Cash and bank [20 + 38 + 500]
310.00
214.00
558.00
2,680.40
Equity
Share capital
Other reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-5]
800.00
32.00
1,024.30
142.10
Non current liabilities
12% debentures
270.00
Current liabilities
Short term loan
Trade and other payables [172 + 140 - 24]
124.00
288.00
2,680.40
-
Workings
W-1 Goodwill
Consideration transferred
Value of NCI [610 x 40%] [360 x 30%]
Less: net assets at acquisition:
Share capital
RE
Goodwill at acquisition
Less: Impairment loss [34 x 15%]
W-2 Other reserves
Adjustment for change in shareholding (W-2.1)
FL
ML
----- Rs. million ----400.00
300.00
244.00
108.00
360.00
250.00
610.00
34.00
(5.10)
28.90
100.00
260.00
360.00
48.00
48.00
Rs. million
32.00
32.00
397
W-2.1 Adjustment in equity
Decrease in NCI:
- Value at acquisition [244 x 20/40]
- Post acquisition RE [150(W-3) x 20%]
122.00
30.00
152.00
120.00
32.00
Consideration paid
W-3 Retained earnings
RE
Less: Pre-acq
Add: Gain on sale of ML (W-4)
Less: Impariment of goodwill (W-1)
Less: URP on machine [4 - 4/4 x 6/12]
Less: URP on goods [75 x 20/120 x 40%]
HL
FL (new)
FL (old)
--------- Rs. million --------784.00
354.00
400.00
(400.00)
(250.00)
84.50
(5.10)
(3.50)
(5.00)
(49.50)
150.00
Add: Share in FL:
[49.50 x 80%]
[150 x 60%]
(39.60)
90.00
Add: Share in ML [(450 - 260 - 50 x 6/12) x 70%]
115.50
1,024.30
W-4 Gain on disposal of ML
Consideration received
Less:
Carrying amount of net assets derecognized as at 31-12-08:
Share capital
RE [450 - 50 x 6/12]
Goodwill
Less: NCI derecognized:
- Value at acquisition (W-1)
- Post acquisition RE [(425 - 260) x 30%]
Gain on disposal of ML
W-5 NCI
Value at acquisition [244 x 20/40]
RE [(150 - 49.50) x 20%]
--------- Rs. million --------500.00
100.00
425.00
48.00
573.00
(108.00)
(49.50)
(157.50)
415.50
84.50
Rs. million
122.00
20.10
142.10
398
SOCI Question (Disposal)
Following statements of comprehensive income for the year ending June 30, 2020:
Sales
Cost of sales
Gross profit
Operating expenses
Other income
Profit before tax
Tax
Profit after tax
Alpha
Bravo
Charlie
------------------- Rs. -----------------250,000
150,000
120,000
(160,000)
(110,000)
(90,000)
90,000
40,000
30,000
(25,000)
(13,000)
(12,000)
40,000
7,000
6,000
105,000
34,000
24,000
(30,000)
(11,000)
(9,000)
75,000
23,000
15,000
Charlie earned Profit after tax of Rs. 12,000 for the year ending June 30, 2019.
Alpha acquired 60% shares in Bravo on July 1, 2017. There were no fair value adjustments necessary at
acquisition.
Alpha acquired 80% shares in Charlie on July 1, 2018 for Rs. 80,000 when its retained earnings were Rs.
48,000 and share capital was Rs. 40,000 (Rs. 10 each).
Fair values relating to office building of Charlie were higher than book values as follows:
01-07-18 by Rs. 4,800
(remaining life 4 years)
01-01-20 by Rs. 4,000
(remaining life 2.5 years)
It is Alpha’s policy to value NCI using proportionate share method.
Required:
Prepare group SOCI for the year ending June 30, 2020 under each of the following situations:
(a) Alpha sold its entire shareholding in Charlie for Rs. 35 per share on January 1, 2020.
(b) Alpha sold 70% shares of Charlie for Rs. 35 per share on January 1, 2020. Market price of remaining
shares of Charlie on that date was Rs. 34. Moreover this market price moved to Rs. 36 per share on
June 30, 2020.
(c) Alpha sold 50% shares of Charlie for Rs. 35 per share on January 1, 2020. Market price of remaining
shares of Charlie on that date was Rs. 34.
(d) Alpha sold 10% shares of Charlie for Rs. 34 per share on January 1, 2020 (i.e. market price at that
date).
399
P Group
Consolidated Statement of changes in equity
for the year ending June 30, 2020
Attributable to shareholders of P
Share capital
Balance as on 01-07-19
Dividend
Issue of shares
Purchase of subsidiary *
Sale of subsidiary **
Total comprehensive income for the year
Transfers
Balance as on 30-06-20
X
X
X
Share
premium
Other
reserves
Retained
earnings
Total
Noncontrolling
interest
------------------------------------------- Rs. -----------------------------------------------X
X
X
X
X
(X)
(X)
(X)
X
X
X
X
X
X
(X)
X
X
X
X
(X)
X
X
X
X
X
X
Total
X
(X)
X
X
(X)
X
X
* It relates to acquisition for subsidiary acquired during the year:
- Other reserves column :- It is the adjustment in equity figure we calculate on S to S acquisition
- NCI column :- It is the "Value of NCI" at acquisition
** It relates to disposal of subsidiary during the year:
- Other reserves column :- It is the adjustment in equity figure we calculate on S to S disposal
- NCI column :- It is the "Total NCI" derecognized as determined in "gain/(loss) on disposal" working
400
Solution [Q-1 Dec-12]
TL Group
Consolidated Income Statement
for the year ended June 30, 2012
Difference in ICAP solution:
- Dividend from LL was also eliminated from NCI share
- Disposal of PL was shown in RE column
Sales [6,760 + 426 - 50 x 1.20]
Cost of sales [4,370 + 218 - 50 x 1.20 + 4]
Gross profit
Operating expenses [1,270 + 132 + 7]
Profit from operations
Other income [730 + 10 - (1,300 - 1,000) - 60 x 70%]
Profit before tax
Tax [400 + 17]
Profit for the year from continuing operations
Profit for the year from discontinued operations (W-1)
Profit for the year
Profit attributable to:
- Shareholders of TL
from continuing operations
from discontinued operations
- NCI (W-2)
from continuing operations
from discontinued operations
Rs. million
7,126.00
(4,532.00)
2,594.00
(1,409.00)
1,185.00
398.00
1,583.00
(417.00)
1,166.00
185.80
1,351.80
1,146.50
178.00
1,324.50
19.50
7.80
27.30
1,351.80
TL Group
Consolidated Statement of changes in equity
for the year ended June 30, 2012
Balance at 01-07-11 (W-3)/(W-4)
Dividend [NCI: 60 x 30%]
Profit for the year
Purchase of subsidiary (W-1.2)
Disposal of subsidiary (W-1.1)
Balance at 30-06-12
Attributable to shareholders of TL
NCI
Total
Retained
Share
Total
earnings
capital
------------------------------ Rs. million -------------------------------10,000.00
2,502.00
12,502.00
214.00
12,716.00
(1,000.00) (1,000.00)
(18.00) (1,018.00)
1,324.50
1,324.50
27.30
1,351.80
201.00
201.00
(221.80)
(221.80)
10,000.00
2,826.50 12,826.50
202.50 13,029.00
401
Workings
W-1 Profit from discontinued operations
Profit for the year [78 x 6/12]
Gain disposal of PL (W-1.1)
W-1.1 Gain on disposal of PL
Consideration received
Less:
Carrying amount of net assets derecognized as at 31-12-11:
Share capital
RE [270 + 78 x 6/12]
Goodwill (W-1)
Less: NCI derecognized:
- Value at acquisition (W-1.2)
- Post acquisition RE [(309 - 55) x 20%]
Rs. million
39.00
146.80
185.80
--------- Rs. million --------1,300.00
800.00
309.00
266.00
1,375.00
(171.00)
(50.80)
(221.80)
1,153.20
146.80
Gain on disposal of PL
W-1.2 Goodwill
Consideration transferred
Value of NCI [855 x 20%] [670 x 30%]
Less: net assets at acquisition:
Share capital
RE
Goodwill at acquisition
Less: Impairment loss
W-2 NCI
PAT
URP on goods [50 x 40% x 20%]
PL
LL
----- Rs. million ----1,000.00
171.00
550.00
201.00
800.00
55.00
855.00
316.00
(50.00)
266.00
600.00
70.00
670.00
81.00
(7.00)
74.00
PL
LL
--------- Rs. million -------39.00
39.00
20%
7.80
69.00
(4.00)
65.00
30%
19.50
402
W-3 Opening Retained earnings
RE
Less: Pre-acq
Less: Impairment loss of goodwill
Add: Share in PL [215 x 80%]
TL
PL
--------- Rs. million -------2,380.00
(50.00)
270.00
(55.00)
215.00
172.00
2,502.00
W-4 NCI opening balance
Value at acquisition (W-1.2)
RE [215 x 20%]
Rs. million
171.00
43.00
214.00
403
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
[Indirect method]
Company name
Statement of cash flows
For the year ended ----------------Rs.’000
Rs.’000
Cash flow from operating activities:
Profit before tax (W-1)
XXX
Add: Depreciation (W-8) / Amortization (W-9)
XXX
Loss on disposal of asset (W-8, W-9)
XXX
Impairment loss (W-8, W-9)
XXX
Total interest expense / Finance cost (W-2)
XXX
Bad debt expense (W-3)
XXX
Retirement benefits cost (e.g. gratuity) (W-4)
XXX
Fair value loss [P&L] (W-12, W-14)
XXX
Less: Interest income / Investment income (W-5)
(XXX)
Dividend income (W-6)
(XXX)
Fair value gain [P&L] (W-12, W-14)
(XXX)
Grant income (W-13)
(XXX)
Profit on sale of asset (W-8, W-9)
(XXX)
Operating profit before working capital changes:
XXX
(Increase) / Decrease in debtors (Note-1)
(Increase) / Decrease in stocks
(Increase) / Decrease in advances
(Increase) / Decrease in prepayments
(XXX) / XXX
(XXX) / XXX
(XXX) / XXX
(Note-2)
(XXX) / XXX
Increase / (Decrease) in creditors
XXX / (XXX)
Increase / (Decrease) in accruals
XXX / (XXX)
Increase / (Decrease) in short term provisions
XXX / (XXX)
Cash generated from operations
XXX
Tax paid / Tax refund (W-7)
Retirement benefits paid (W-4)
(XXX) / XXX
(XXX)
Interest / Finance cost paid (W-2)
(XXX)
Cash inflow / (Outflow) from operating activities (A)
XXX
Cash flow from investing activities:
Purchase of PPE (W-8)
(XXX)
Sale of PPE (W-8)
XXX
Purchase of investment property (W-12)
(XXX)
Sale of investment property (W-12)
XXX
Purchase of intangible asset (W-9)
(XXX)
Sale of intangible asset (W-9)
XXX
Expenditure on capital WIP (W-11)
(XXX)
Long term deposits
(XXX)
Govt. grant received (W-13)
XXX
Govt. grant repaid (W-13)
(XXX)
Purchase of investment (W-14)
(XXX)
Sale of investment (W-14)
XXX
NASIR ABBAS FCA
404
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
Interest received (W-5)
XXX
Dividend received (W-6)
XXX
Cash inflow / (outflow) from investing activities (B)
XXX
Cash flow from financing activities:
Issue of shares (W-15) (including share premium)
XXX
Proceeds from loan (W-16) (short term / long term)
XXX
Dividend paid (W-10)
(XXX)
Repayment / redemption of loan (W-16) (short term / long term)
(XXX)
Repayment of lease liabilities (W-17)
(XXX)
Cash inflow / (outflow) from financing activities (C)
XXX
Net cash inflow / (outflow) during the year (A + B + C)
XXX
Cash and cash equivalents at start of year
XXX
Cash and cash equivalents at end of year
XXX
CASH AND CASH EQUIVALENTS:
Opening
Closing
Cash in hand
XXX
XXX
Bank balance
XXX
XXX
Bank overdraft / running finance
(XXX)
(XXX)
Short term investments (e.g. treasury bills)
XXX
XXX
XXX
XXX
EXAM NOTES:
1.
Increase / decrease in debtors can be determined in following two ways:
(a) Movement in gross debtors (as done in above format)
= closing gross debtors + bad debt written off during the year – opening gross debtors
(b) Movement in net debtors
= closing debtors (net of provision) – opening debtors (net of provision)
Tips:
If (b) is used then bad debt expense line will not appear in adjustments to profit before tax
(a) is more practically used treatment however (b) is also acceptable in exams
2.
Changes in all current assets and current liabilities are shown in this section except for followings:
(i)
cash and cash equivalents
(ii)
tax assets and liabilities
(iii)
Dividend payable and receivable
(iv)
Interest payable and receivable
(v)
Any other asset or liability which is shown under investing or financing activities e.g. short-term finance,
investment, payable for purchase of a PPE and current portion of loan etc.
These items may be hidden in other current assets or liabilities (e.g. interest payable may be hidden in
“accrued expenses”). In this case exclude above items first while calculating working capital changes.
NASIR ABBAS FCA
405
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
3.
IAS 7 allows to show:
Under
Dividend received
Operating activities
Interest received
Operating activities
Dividend paid
Operating activities
Interest paid
Operating activities
WORKINGS
W–1
OR
OR
Under
Investing activities
Investing activities
Financing activities
Financing activities
Profit before tax
Retained earnings
Cash dividend declared (W – 10)
Bonus dividend declared
Transfer to general reserve
Closing balance
XXX
XXX
XXX
XXX
Opening balance
PAT
Transfer from surplus
XXX
XXX
XXX
PBT = PAT + Tax expense (W – 7)
W–2
Finance cost or Interest expense / paid
Interest payable
Finance cost paid
Closing balance
W–3
XXX
XXX
Opening balance
Finance cost for the year
(Excluding unwinding of discount in IAS 37)
XXX
XXX
Provision for doubtful debts
Provision for doubtful debts
Bad debts written off
Closing balance
W–4
XXX
XXX
Opening balance
Bad debt expense for the year
XXX
XXX
Retirement benefits
Retirement benefit obligation
Retirement benefits paid [contributions]
Closing balance
W–5
XXX
XXX
Opening balance
Retirement benefits expense for the year
XXX
XXX
Interest income / Investment income
Interest receivable
Opening balance
Interest income for the year
W–6
XXX
XXX
Interest received
Closing balance
XXX
XXX
Dividend income / Dividend received
Dividend receivable
Opening balance
Dividend income for the year
NASIR ABBAS FCA
XXX
XXX
Dividend received
Closing balance
XXX
XXX
406
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
W–7
Tax
Tax
Opening balance (DTA)
Opening balance (Advance tax)
Tax income (total) ------------------- OR --------Tax paid -------------------- OR ---------------------Closing balance (DTL)
Closing balance (tax payable)
W–8
XXX
XXX
XXX
XXX
XXX
XXX
Opening balance (DTL)
Opening balance (tax payable)
------ Tax expense (total)
------ Tax refund
Closing balance (DTA)
Closing balance (Advance tax)
XXX
XXX
XXX
XXX
XXX
XXX
Property, plant and equipment [PPE]
PPE at NBV
Opening balance (NBV)
Addition:
Cash
Non cash
Transfer from capital WIP (W – 11)
Revaluation gain
Leased during the year (W – 17)
XXX
XXX
XXX
XXX
XXX
XXX
Disposal (NBV)
Revaluation loss
Depreciation
Impairment loss
Closing balance (NBV)
XXX
XXX
XXX
XXX
XXX
Examples of non-cash additions – Trade in allowance, provision for dismantling, and credit purchase.
PPE Disposal
NBV
Profit on disposal
XXX
XXX
Sale price (net of disposal expenses) OR
Trade in allowance
Loss on disposal
XXX
XXX
XXX
Note – While working for PPE, do not forget to prepare accounts for “Lease liability”, “Capital WIP” and “Revaluation
surplus”
W–9
Intangible assets
Intangible asset at NBV
Opening balance (NBV)
Addition:
Cash
Non cash
Revaluation gain
XXX
XXX
XXX
XXX
Disposal (NBV)
Revaluation loss
Amortization
Impairment loss
Closing balance (NBV)
XXX
XXX
XXX
XXX
XXX
Disposal
NBV
Profit on disposal
NASIR ABBAS FCA
XXX
XXX
Sale price (net of disposal expenses) OR
Trade in allowance
Loss on disposal
XXX
XXX
XXX
407
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
W – 10
Dividend payable
Dividend payable
Dividend paid
Closing balance
XXX
XXX
Opening balance
Cash dividend declared (W – 1)
XXX
XXX
Note – Even if there is no information regarding dividend paid / declared in other information do not forget to prepare
“Retained earnings” account as it may give cash dividend declared as a balancing figure on debit side.
W – 11
Capital WIP
Capital WIP
Opening balance
Expenditure during the year
W – 12
XXX
XXX
Transfer to PPE (W – 8)
Closing balance
XXX
XXX
Investment property (carried at fair value model)
Investment property
Open. Balance (Fair value)
Fair value gain
Addition
XXX
XXX
XXX
Disposal (Carrying amount)
Fair value loss
Clos. Balance (Fair value)
XXX
XXX
XXX
Disposal
Carrying amount
Profit on disposal
W – 13
XXX
XXX
Sale price
Loss on disposal
XXX
XXX
Government grant (deferred income method)
Govt. grant
Taken to income
Grant repaid during the year
Clos. Balance (current)
Clos. Balance (non current)
W –14
XXX
XXX
XXX
XXX
Open. Balance (non current)
Open. Balance (current)
Grant received during the year
XXX
XXX
XXX
Investments
Investment
Opening balance
Addition
Fair value gain
W –15
XXX
XXX
XXX
Disposal
Fair value loss
Closing balance
XXX
XXX
XXX
Issue of shares
Share capital
Closing balance
NASIR ABBAS FCA
XXX
Opening balance
Share issue (cash)
Bonus issue
XXX
XXX
XXX
408
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
Share premium
Closing balance
Bonus issue (only if issued out of premium)
XXX
XXX
Opening balance
Share issue (cash)
XXX
XXX
Note – Bonus issue is by default made out of retained earnings (i.e. bonus dividend)
W –16
Loans
Loans
Loan repaid (principal only)
Closing balance (non current)
Closing balance (current)
W –17
XXX
XXX
XXX
Opening balance (Non current)
Opening balance (current)
New loan
XXX
XXX
XXX
Lease liability
Lease liability
Lease payments (principal only)
Closing balance (non current)
Closing balance (current portion)
NASIR ABBAS FCA
XXX
XXX
XXX
Opening balance (Non current)
Opening balance (current portion)
Asset leased during the year (W – 8)
XXX
XXX
XXX
409
IAS 7 – CASHFLOW STATEMENT [REVISION] – Class notes
[Direct method]
Company name
Statement of cash flows
For the year ended ----------------Rs.’000
Cash flow from operating activities:
Receipts from customers (W-1)
Payments to suppliers (W-2)
Payment for other operating expenses (W-3)
Cash generated from operations
``
``
Remaining format after “cash generated from operations” is exactly
same as Indirect method
``
``
W–1
Rs.’000
XXX
(XXX)
(XXX)
XXX
Receipts from customers
Debtors
Opening balance (Gross)
Sales (Total)
W–2
XXX
XXX
Bad debts written off
Receipts (balancing)
Closing balance (Gross)
XXX
XXX
XXX
Payments to suppliers
Creditors
Payments (balancing)
Closing creditors (Note)
XXX
XXX
Opening creditors (Note)
Purchases (from COS a/c)
XXX
XXX
Note – If accrued interest is included, then exclude it first before using here.
Cost of sales / Inventory
Opening stock
Purchases (balancing)
XXX
XXX
Cost of sales (Note)
Closing balance
XXX
XXX
Note – If depreciation is included, then exclude it first before using here.
W–3
Payment for other operating expenses
Operating expenses
Opening advances & prepayments (Note-1)
Payments (balancing)
Closing accrued expenses (Note-2)
XXX
XXX
XXX
Opening accrued expenses (Note-2)
Operating expenses (Note-3)
Closing advances & prepayments (Note-1)
XXX
XXX
XXX
Notes:
1. If advance income tax is included, then exclude it first before using here.
2. If accrued interest is included, then exclude it first before using here.
3. Operating expenses = Admin expenses + Distribution cost + Other expenses – Depreciation – Amortization
– Bad debt expense – Impairment loss – retirement benefit expense – loss on disposal of
asset – fair value loss – exchange loss
NASIR ABBAS FCA
410
Question No. 1
The following information has been extracted from the draft financial statements of Alpha Limited for the year
ended 31 December 2015.
ASSETS
Property, plant & equipment
Intangible assets
Trade receivables
Advances and prepayments
Inventories
Short-term investments
Cash at bank
2015
2014
Rs. in million
223
193
68
23
45
33
84
70
60
46
12
9
8
7
500
Equity & Liabilities
Share capital (Rs. 10 each)
Share premium
Retained earnings
Long term loan
Deferred liabilities
Trade payables
Accrued expenses
Tax payable
381
2015
2014
Rs. in million
180
150
15
114
53
40
15
10
42
56
60
70
34
42
500
381
Following relevant information is available:
(i)
Depreciation has been provided on straight line basis. Estimated useful lives are as under:
Building
All other fixed assets
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
20 years
10 years
On 1 September 2015, the company purchased new machinery costing Rs. 65 million.
A portion of building costing Rs. 20 million which was purchased on 1 July 2013 was sold for Rs. 20 million
on 30 June 2015.
Trade receivables written off during the year amounted to Rs. 5 million. It is the policy of the company to
maintain the provision for doubtful debts at 5% of trade receivables.
Advances and prepayments include advance tax of Rs. 8 million (2014: Rs. 6 million).
Long term loan was obtained on 1 August 2015. Interest on loan @ 13% is payable on 31st July each year.
Interest payable for 5 months has beenaccrued.
Deferred liabilities comprise of unfunded gratuity of Rs. 6 million (2014: Rs. 3 million) and deferred tax of
Rs. 9 million (2014: Rs. 7 million). During the year, the company paid gratuity of Rs. 6.5 million to outgoing
employees.
Tax expense for the year was Rs. 17 million. (2014: Rs. 8 million).
Right shares were issued on 1 December 2015 at Rs. 15 per share in the ratio of 1 right share for every 5
shares held.
Required:
Prepare statement of cash flows for the year ended 31 December 2015 in accordance with the requirements of
International Financial Reporting Standards using theindirect method.
(15)
(Q5, Spring 2016)
411
Question No. 2
Following are the extracts from the financial statements of Universal Limited (UL) for the year ended 30 June 2017:
Statement of financial position as on 30 June 2017
Property, plant and equipment
2017 2
2016
Rs. in ‘000
158,500
120,000
Deferred tax asset
Stock in trade
Trade receivables
Cash
8,500
58,000
68,000
39,434
45,000
56,000
48,000
332,434
269,000
Assets
Equity & liabilities
Share capital (Rs. 10 each)
Retained earnings
Revaluation surplus
Debentures (Rs. 100 each)
Deferred tax liability
Interest payable
Trade payables
Accrued liabilities
Unearned maintenance
Provision for taxation
2017
2016
Rs. in ‘000
175,000
150,000
54,434
21,500
10,000
18,000
20,000
6,000
1,000
2,500
42,000
39,000
20,000
18,000
2,000
4,000
10,000
8,000
332,434
269,000
Statement of profit or loss for the year ended 30 June 2017
Sales
Cost of sales
Gross profit
Operating expenses
Other income
Profit before interest and tax
Interest expense
Profit before tax
Tax expense
Profit after tax
Rs. in '000’
273,000
(187,500)
85,500
(46,766)
11,200
49,934
(2,000)
47,934
(15,000)
32,934
Additional information:
(i)
60% of sales were made on credit.
(ii)
UL maintains a provision for doubtful receivables at 6%. During the year, trade receivables of Rs. 7 million
were written off.
(iii)
Depreciation expense for the year was Rs. 22.5 million. 70% of the depreciation was charged to cost of
sales.
(iv)
Other income comprises of:
gain of Rs. 3 million on disposal of vehicles for Rs. 12 million;
maintenance income of Rs. 8 million; and
discount of Rs. 10 per debenture which were redeemed during the year.
Required:
Prepare UL’s statement of cash flows for the year ended 30 June 2017 using direct method.
(15)
(Q1, Autumn 2017)
412
Solution No. 1
Alpha Limited
Statement of cash flows
For the year ended December 31, 2015
Rs in million
Cash flows from operating activities
Profit before tax (114 – 53 + 17)
Adjustments for:
Interest expense (40 × 0.13 × 5 ÷ 12)
Depreciation (W-1)
Gain on sale of building (20 – 18)
Bad debts expense (W-2)
Provision for gratuity (6 + 6.5 – 3)
Operating profit before working capital changes
(Increase)/decrease in current assets
Increase in trade debts (W-2)
Increase in inventories (60 - 46)
Increase in advance, and prepayments [(84 – 8) – (70 – 6)]
Increase/(decrease) in current liabilities
Decrease in trade payables (42 - 56)
Decrease in accrued expense [(60 – 2.17) – 70]
78.00
2.17
17.00
(2.00)
5.63
9.50
32.30
110.30
(17.63)
(14.00)
(12.00)
Net cash flows from operating activities
(14.00)
(12.17)
(69.80)
40.50
(25.00)
(6.50)
(31.50)
9.00
Cash flows from investing activities
Purchase of machinery
Sale proceeds from disposal of plant
Acquisition of intangibles (68 – 23)
Net cash used in investing activities
(65.00)
20.00
(45.00)
(90.00)
Cash flows from financing activities
Proceeds from issuance of right shares (150 × 0.2 × 1.5)
Proceeds from long term loan
Net cash flow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year (9+7)
Cash and cash equivalents at the end of the year (12+8)
45.00
40.00
85.00
4.00
16.00
20.00
Cash flows from operations
Tax paid (W-3)
Gratuity paid
413
Workings:
W-1: Computation of depreciation
Rs. in million
193
65
(18)
(223)
Depreciation expense
17
Property, plant & equipment – Opening WDV
Purchases during the year
NBV of assets disposed off during the year
Property, plant & equipment – Closing WDV
for the year
W-2: Computation of bad debts expense
Trade
receivable
Closing balance [45 / 0.95] [47.37 – 45]
Opening balance [33 / 0.95] [34.74 – 33]
Written off
Provision for bad
debts
-------- Rs. in million -------47.37
2.37
(34.74)
(1.74)
5.00
5.00
17.63
5.63
W-3: Computation of tax paid
Opening liability
Opening deferred tax liability
Closing Advance tax
Tax expense for the year
Less: Closing liability
Closing deferred tax liability
Opening advance tax
Rs. in million
42
7
8
17
(34)
(9)
(6)
25
414
Solution No. 2
Universal Limited
Cash flow statement
for the year ended June 30, 2017
Cash flow from operating activities
Receipt from customers [W-1]
Payment to suppliers [W-2]
Payment for operating expenses [W-3]
Cash generated from operations
Finance cost paid [2.5 + 2 - 1]
Tax paid [W-4]
Maint. Income received [2 + 8 - 4]*
Cash inflow from operating activities
Cash flow from investing activities
Purchase of PPE [W-5]
Sale of PPE
Cash outflow from investing activities
Cash flow from financing activities
Issue of shares [175 - 150]
Redemption of debentures [W-6]
Cash inflow from financing activities
Net cash outflow during the year
Cash & cash equivalent at start of year
Cash & cash equivalent at end of year
Rs.'000
253,234
(181,750)
(30,250)
41,234
(3,500)
(27,500)
6,000
Rs.'000
16,234
(60,000)
12,000
(48,000)
25,000
(1,800)
23,200
(8,566)
48,000
39,434
-
* Alternatively it can be shown before cash generated from operations
W-1
b/d
Sales
W-2
Payments (bal.)
c/d
b/d
Purchases (bal.)
Customers
Rs.'000
59,574 Receipts (bal.)
273,000 Write off
c/d
332,574
Rs.'000
253,234
7,000
72,340
332,574
Suppliers
Rs.'000
181,750 b/d
42,000 Purchases
223,750
Rs.'000
39,000
184,750
223,750
Inventory
Rs.'000
45,000 COS [187.5 - 22.5 x 70%]
184,750 c/d
229,750
Rs.'000
171,750
58,000
229,750
415
W-3
Payments (bal.)
c/d
Operating expenses
Rs.'000
30,250 b/d
20,000 Exp. [W-3.1]
50,250
Rs.'000
18,000
32,250
50,250
W-3.1
Cash expenses = Operating exp - Dep - Bad debts [W-3.2]
=
32,250
W-3.2
Write off
c/d
W-4
Payments (bal.)
c/d
W-5
b/d
Revaluation
Addition (bal.)
Prov. for bad debts
Rs.'000
7,000 b/d
4,340 Exp. (bal.)
11,340
Rs.'000
3,574
7,766
11,340
Tax
Rs.'000
27,500 b/d [6 + 8]
10,000 Expense
c/d
37,500
Rs.'000
14,000
15,000
8,500
37,500
PPE
Rs.'000
120,000 Disposal [12 - 3]
10,000 Depreciation
60,000 c/d
190,000
Rs.'000
9,000
22,500
158,500
190,000
W-6
Other income
Gain on vehicle
Maintenance income
Discount on redemption
Total redemption payment [A x 90/10]
W-7
Dividends (bal.)
c/d
[A]
Rs.'000
11,200
(3,000)
(8,000)
200
1,800
RE
Rs.'000
54,434
54,434
b/d
PAT
Rs.'000
21,500
32,934
54,434
416
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
[Indirect method]
Group name
Consolidated Statement of cash flows
For the year ended ----------------Rs.’000
Rs.’000
Cash flow from operating activities:
Profit before tax
XXX
Add: Depreciation / Amortization
XXX
Loss on disposal of asset
XXX
Loss on disposal of subsidiary/associate
XXX
Impairment loss
XXX
Impairment loss of goodwill (W-1)
XXX
Total interest expense / Finance cost
XXX
Bad debt expense
XXX
Retirement benefits cost (e.g. gratuity)
XXX
Fair value loss [P&L]
XXX
Less: Interest income / Investment income
(XXX)
Dividend income
(XXX)
Fair value gain [P&L]
Grant income
(XXX)
(XXX)
Share or profit from associate [Share of PAT – URP (P to A)] (W-2)
Profit on derecognition of earlier investment [i.e. direct investment in SS]
(XXX)
(XXX)
Gain on disposal of subsidiary/associate
Profit on sale of asset
(XXX)
(XXX)
Operating profit before working capital changes:
XXX
(Increase) / Decrease in debtors
(XXX) / XXX
(Increase) / Decrease in stocks
(Increase) / Decrease in advances
(XXX) / XXX
(XXX) / XXX
(Increase) / Decrease in prepayments
(Note-2)
(XXX) / XXX
Increase / (Decrease) in creditors
XXX / (XXX)
Increase / (Decrease) in accruals
XXX / (XXX)
Increase / (Decrease) in short term provisions
XXX / (XXX)
Cash generated from operations
XXX
Tax paid / Tax refund
Retirement benefits paid
(XXX) / XXX
(XXX)
Interest / Finance cost paid
(XXX)
Cash inflow / (Outflow) from operating activities (A)
XXX
Cash flow from investing activities:
Purchase of PPE
(XXX)
Sale of PPE
XXX
Purchase of investment property
(XXX)
Sale of investment property
XXX
Purchase of intangible asset
(XXX)
Sale of intangible asset
XXX
Expenditure on capital WIP
(XXX)
NASIR ABBAS FCA
417
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
Long term deposits
(XXX)
Govt. grant received
XXX
Govt. grant repaid
(XXX)
Purchase of subsidiary (W-3)
Sale of subsidiary (W-4)
(XXX)
XXX
Purchase of associate (W-2)
(XXX)
Sale of associate
Purchase of investment
XXX
(XXX)
Sale of investment
XXX
Interest received
XXX
Dividend received from associate (W-2)
XXX
Dividend received
XXX
Cash inflow / (outflow) from investing activities (B)
XXX
Cash flow from financing activities:
Issue of shares
XXX
Issue of shares to NCI
XXX
Proceeds from loan
XXX
Dividend paid
(XXX)
Dividend paid to NCI (W-5)
(XXX)
Repayment / redemption of loan
(XXX)
Repayment of lease liabilities
(XXX)
Cash inflow / (outflow) from financing activities (C)
XXX
Net cash inflow / (outflow) during the year (A + B + C)
XXX
Cash and cash equivalents at start of year
XXX
Cash and cash equivalents at end of year
XXX
CASH AND CASH EQUIVALENTS:
Cash in hand
Opening
Closing
XXX
XXX
Bank balance
XXX
XXX
Bank overdraft / running finance
(XXX)
(XXX)
Short term investments (e.g. treasury bills)
XXX
XXX
XXX
XXX
XXX
-
XXX
XXX
Exchange gain / (loss) on cash & cash equivalent
OTHER EXAM NOTES:
1.
Inter-company receipts and payments are eliminated (i.e. not shown on consolidated cashflow statement)
2.
While calculating working capital changes DEDUCT:
-
Value (at acquisition date) of relevant asset/liability of S acquired during the year FROM year-end
balance of corresponding asset/liability
Value (at disposal date) of relevant asset/liability of S disposed during the year FROM year-start
balance of corresponding asset/liability.
NASIR ABBAS FCA
418
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
3.
In all other workings we studied in revision, put values at acquisition date and values at disposal date of
assets/liabilities arising on purchase of subsidiary and disposal of subsidiary respectively during the year in relevant
accounts as non-cash items. For example:
PPE at NBV
Opening balance (NBV)
Addition:
- Cash (balancing)
- Non cash
Recognized on acquisition of subsidiary
Transfer from capital WIP (W – 11)
Revaluation gain
Leased during the year (W – 17)
WORKINGS
W–1
XXX
XXX
XXX
XXX
XXX
XXX
XXX
Disposal (NBV)
Revaluation loss
Depreciation
Impairment loss
Derecognized on disposal of subsidiary
Closing balance (NBV)
XXX
XXX
XXX
XXX
XXX
XXX
Impairment loss of goodwill
Goodwill
Opening balance
XXX
Carrying amount of goodwill derecognized
on disposal of subsidiary during the year
XXX
Goodwill arising on acquisition of subsidiary
during the year
XXX
Impairment loss
XXX
Closing balance
XXX
W–2
Investment in associates
Investment in associates
Opening balance
XXX
Share of dividend declared by associate
during the year
XXX
New investment in associate made during
the year
XXX
Carrying amount of investment in associate
derecognized during the year
XXX
Share of PAT for the year
XXX
URP on goods/PPE [P to A]
XXX
Share of OCI for the year
XXX
Closing balance
XXX
Dividend received from associate
= Opening dividend receivable + Share of dividend declared by associate – Closing dividend receivable
W–3
Purchase of subsidiary
Purchase of subsidiary = Cash consideration paid – Cash & cash equivalents of S at acquisition date
W–4
Sale of subsidiary
Sale of subsidiary = Cash consideration received – Cash & cash equivalents of S at disposal date
NASIR ABBAS FCA
419
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
W–5
Dividend paid to NCI
NCI
NCI share of dividend declared by S during
the year
XXX
Opening balance
XXX
NCI derecognized on disposal of subsidiary
during the year
XXX
TCI attributable to NCI
XXX
Closing balance
XXX
NCI recognized at acquisition of subsidiary
during the year
XXX
Dividend paid to NCI
= Opening dividend payable + NCI share of dividend declared by S – Closing dividend payable
[Direct method]
Group name
Consolidated Statement of cash flows
For the year ended ----------------Rs.’000
Cash flow from operating activities:
Receipts from customers (W-1)
Payments to suppliers (W-2)
Payment for other operating expenses (W-3)
Cash generated from operations
``
``
Remaining format after “cash generated from operations” is exactly
same as Indirect method
``
``
W–1
Receipts from customers
Debtors
Opening balance (Gross)
Recognized on acquisition of subsidiary
Sales
W–2
XXX
XXX
XXX
Rs.’000
XXX
(XXX)
(XXX)
XXX
Bad debts written off
Derecognized on disposal of subsidiary
Receipts (balancing)
Closing balance (Gross)
XXX
XXX
XXX
XXX
Payments to suppliers
Creditors
Payments (balancing)
Derecognized on disposal of subsidiary
Closing creditors (Note)
XXX
XXX
XXX
Opening creditors
Recognized on purchase of subsidiary
Purchases (from Inventory account)
XXX
XXX
XXX
Inventory
Opening stock
Recognized on purchase of subsidiary
Purchases (balancing)
NASIR ABBAS FCA
XXX
XXX
XXX
Cost of sales
Derecognized on disposal of subsidiary
Closing stock
XXX
XXX
XXX
420
IAS 7 – CASHFLOW STATEMENT [Consolidated] – Class notes
W–3
Payment for other operating expenses
Operating expenses
Opening advances & prepayments
Accrued expenses derecognized on disposal
of subsidiary
Recognition of prepayments on purchase of
subsidiary
Payments (balancing)
Closing accrued expenses
XXX
XXX
XXX
XXX
XXX
Opening accrued expenses
Accrued expenses recognized on purchase of
subsidiary
Derecognition of prepayments on disposal
of subsidiary
Operating expenses (Note)
Closing advances & prepayments
XXX
XXX
XXX
XXX
XXX
Notes – Operating expenses = Admin expenses + Distribution cost + Other expenses – Depreciation – Amortization
– Bad debt expense – Impairment loss – retirement benefit expense – loss on disposal of
asset/subsidiary – fair value loss – exchange loss
DISCLOSURES
1. When subsidiary is purchased or disposed during the year, following shall be disclosed:
- Total consideration paid or received
- Portion of consideration consisting of cash and cash equivalents
- Amount of cash and cash equivalents in subsidiaries purchased or disposed
- Amount of assets and liabilities other than cash and cash equivalents in subsidiaries purchased or
disposed
2. Non-cash transactions in investing and financing activities such as:
- Acquisition of assets assuming directly related liabilities (e.g. loan)
- Leases
- Acquisition of an entity by an equity issue
- Conversion of debt to equity
3. Components of cash and cash equivalents.
NASIR ABBAS FCA
421
Solution [Q-3 Dec-11]
Difference in ICAP solution:
APL Group
- Suppliers, operating expenses and incomes are combined.
- Interest income on loans was netted against finance cost
Consolidated cashflow statement
for the year ended September 30, 2011
-------- Rs. million ------Cashflow from operating activities
Receipts from customers (W-1)
62,759.00
Payment to suppliers (W-2)
(60,786.00)
Receipts from other operating income (W-3)
1,824.00
Payment for operating expenses (W-4)
(2,866.00)
Cash generated from operations
931.00
Finance cost paid [30 + 890 - 35]
(885.00)
Loan recovery from employees [33 - 27]
6.00
Tax paid [10 + 25 + 1,200 - 210 - 200]
(825.00)
Cash inflow from operating activities
(773.00)
Cashflow from investing activities
Purchase of PPE (W-5)
(40.00)
Cash outflow from investing activities
(40.00)
Cashflow from financing activities
Dividend paid [10 + 500 x 2/10 - 8]
(102.00)
Dividend paid to NCI (W-6)
(185.00)
Long term loan [440 - 250 - 145]
45.00
Cash inflow from financing activities
(242.00)
Net cash inflow for the year
(1,055.00)
Cash and cash equivalent at start of the year
(2,970.00)
Cash and cash equivalent at end of the year
(4,025.00)
Notes to accounts
1 - Property, plant and equipment
During the year property, plant and equipment amounting to Rs. 250 million was acquired against
a long term loan
2 - Cash and cash equivalents
Cash and bank balances
Short term borrowings*
2011
2010
-------- Rs. million ------2,645.00
2,980.00
(6,670.00) (5,950.00)
(4,025.00) (2,970.00)
* It is assumed to be bank overdraft
W-1 Receipts from customers
Rs. million
Opening balance
5,421.00
Sales [65,000 - 140]
64,860.00
Bad debts expense*
(44.00)
Receipts (balancing)
(62,759.00)
Closing balance [7,534 - 140 x 40%]
7,478.00
* Since debtors account is given net of provision, therefore, no entry of write off is needed
422
W-2 Payment to suppliers
Opening balance [3,970 - 10]
Purchases (W-2.1)
Payments (balancing)
Closing balance [4,688 - 140 x 40% - 8]
W-2.1 Inventory
Opening balance
Purchases (balancing)
Cost of sales [59,110 - 140 + 8.40*]
Closing balance [6,760 - 8.40]
* URP on goods = 140 x 25/125 x 30% =
W-3 Receipts from other income
Opening balance
Operating income [2,000 - 1*]
Receipts (balancing)
Closing balance
* Interest income = 24 + 6 -29 =
3,960.00
61,450.00
(60,786.00)
4,624.00
4,280.00
61,450.00
(58,978.40)
6,751.60
8.40
725.00
1,999.00
(1,824.00)
900.00
1.00
W-4 Payment for operating expenses
Opening balance
Operating expense [3,000 - 44 - 75 - 15]
Payments (balancing)
Closing balance
2,866.00
(2,866.00)
-
W-5 PPE
Opening balance
Addition (balancing)
Loan
Depreciation [75 + 15]
Closing balance
900.00
40.00
250.00
(90.00)
1,100.00
W-4 NCI
Opening balance
TCI attributable to NCI
Dividend paid (balancing)
Closing balance
120.00
300.00
(185.00)
235.00
423
Solution [Q-4 Dec-10]
Difference in ICAP solution:
- Short term deposit was considered as cash equivalent
- Use of proceeds of loan to purchase PPE was considered non-cash
KGL
- Slight differences in notes
Consolidated cashflow statement
for the year ended June 30, 2010
-------- Rs. million ------Cashflow from operating activities
Profit before tax
Depreciation
Finance cost
Impairment loss of trademark [6 x 50%]
Loss on exchange of machine [(7 - 1) - 6.50]
Share of profit from associate
Operating profit
Working capital changes: (W-2)
Increase in inventories
Increase in trade and other receivables
Increase in short term deposits
Decrease in trade and other payables
Cash generated from operations
Finance cost paid [5 + 14 - 8]
Tax paid [50 + 65 - 60]
Cash inflow from operating activities
Cashflow from investing activities
Purchase of PPE (W-3)
Purchase of subsidiary [30 - 6]
Dividend from associate (W-4)
Cash outflow from investing activities
Cashflow from financing activities
Dividend paid [200 x 15%]
Dividend paid to NCI (W-5)
Bank loan [125 + 20 - 120]
Cash inflow from financing activities
Net cash inflow for the year
Cash and cash equivalent at start of the year
Cash and cash equivalent at end of the year
180.00
70.00
14.00
3.00
0.50
(5.00)
262.50
(51.00)
(10.00)
(10.00)
(42.00)
149.50
(11.00)
(55.00)
83.50
(60.00)
(24.00)
3.00
(81.00)
(30.00)
(2.50)
25.00
(7.50)
(5.00)
25.00
20.00
424
Notes to accounts
1 - Purchase of AEWL
Total consideration paid
Assets and liabilities at acquisition:
PPE
Inventories
Trade debts and other receivables
Cash and bank balances
Trade creditors and other payables
Rs. million
30.00
20.50
10.00
8.00
6.00
(17.00)
27.50
2 - PPE
Rs. million
During the year following non-cash transactions took place under property, plant and equipment:
Trade in allowance for new machine
6.00
Acquisition of subsidiary
20.50
WORKINGS
W-1 Intangible assets
Opening balance
Goodwill on acquisition (W-1.1)
Impairment of trademark
Impairment loss of goodwill (balancing)
Closing balance
Rs. million
25.00
8.00
(3.00)
30.00
W-1.1 Goodwill on AEWL
Consideration transferred
Value of NCI [27.50 x 20%]
Less: Net assets at acquisition
Goodwill at acquisition
30.00
5.50
(27.50)
8.00
W-2 Changes in working capital
Inventories [261 - 10 - 200]
Trade and other receivables [180 - 8 - 162]
Short term deposits
Trade and other payables [262 - 17 - 287]
(51.00)
(10.00)
(10.00)
(42.00)
W-3 PPE
Opening balance
Acquisition of AEWL
Addition (balancing)
Trade in allowance [7 - 1]
Depreciation
Disposal
Closing balance
500.00
20.50
60.00
6.00
(70.00)
(6.50)
510.00
425
W-4 Investment in associate
Opening balance
Share of profit
Dividend
Closing balance
10.00
5.00
(3.00)
12.00
W-5 NCI
Opening balance
TCI attributable to NCI
Acquisition of AEWL
Dividend paid (balancing)
Closing balance
10.00
15.00
5.50
(2.50)
28.00
426
IAS 24 – Class notes
PURPOSE OF RELATED PARTY DISCLOSURES
-
-
-
A related party relationship could have an effect on the profit or loss and financial position of an
entity. For example, an entity that sells goods to its parent at cost might not sell on those terms to
another customer.
The profit or loss and financial position of an entity may be affected by a related party relationship
even if related party transactions do not occur. For example, a subsidiary may terminate relations
with a trading partner on acquisition by the parent of a fellow subsidiary engaged in the same activity
as the former trading partner.
One party may refrain from acting because of the significant influence of another—for example, a
subsidiary may be instructed by its parent not to engage in research and development.
For these reasons, knowledge of an entity’s transactions, outstanding balances, including commitments,
and relationships with related parties may affect assessments of its operations by users of financial
statements, including assessments of the risks and opportunities facing the entity.
DEFINITIONS
A related party is a person or entity that is related to the entity that is preparing its financial statements
(in this Standard referred to as the ‘reporting entity’).
(a) A person or a close member of that person’s family is related to a reporting entity if that person:
(i)
has control or joint control of the reporting entity;
(ii) has significant influence over the reporting entity; or
(iii) is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity.
(b) An entity is related to a reporting entity if any of the following conditions applies:
(i)
The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
(ii) One entity is an associate or joint venture of the other entity (or an associate or joint venture
of a member of a group of which the other entity is a member).
(iii) Both entities are joint ventures of the same third party.
(iv) One entity is a joint venture of a third entity and the other entity is an associate of the third
entity.
(v) The entity is a post-employment benefit plan for the benefit of employees of either the
reporting entity or an entity related to the reporting entity. If the reporting entity is itself such
a plan, the sponsoring employers are also related to the reporting entity.
(vi) The entity is controlled or jointly controlled by a person identified in (a).
(vii) A person identified in (a)(i) has significant influence over the entity or is a member of the key
management personnel of the entity (or of a parent of the entity).
(viii) The entity, or any member of a group of which it is a part, provides key management personnel
services to the reporting entity or to the parent of the reporting entity.
In above definition, Associate/Joint venture also includes its subsidiaries.
Nasir Abbas FCA
427
IAS 24 – Class notes
Important
In the context of this Standard, the following are not related parties:
(a) two entities simply because they have a director or other member of key management
personnel in common or because a member of key management personnel of one entity has
significant influence over the other entity.
(b) two joint venturers simply because they share joint control of a joint venture.
(c)
(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).
(d) 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 dependence.
A related party transaction is a transfer of resources, services or obligations between a reporting entity
and a related party, regardless of whether a price is charged.
Close members of the family of a person are 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.
Key management personnel are 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.
A government‑related entity is an entity that is controlled, jointly controlled or significantly influenced by
a government.
DISCLOSURES
1. Relationships between a parent and its subsidiaries shall be disclosed irrespective of whether there
have been transactions between them. An entity shall disclose the name of its parent and, if different,
the ultimate controlling party. If neither the entity’s parent nor the ultimate controlling party
produces consolidated financial statements available for public use, the name of the next most senior
parent that does so shall also be disclosed.
Nasir Abbas FCA
428
IAS 24 – Class notes
2. An entity shall disclose key management personnel compensation in total and for each of the
following categories:
(a) short‑term employee benefits;
(b) post‑employment benefits;
(c) other long‑term benefits;
(d) termination benefits; and
(e) share‑based payment.
3. If an entity has had related party transactions during the periods covered by the financial statements,
it shall disclose, at a minimum:
(a) the amount of the transactions;
(b) the amount of outstanding balances, including commitments, and their terms and conditions,
including whether they are secured, and the nature of the consideration to be provided in
settlement and details of any guarantees given or received;
(c) provisions for doubtful debts related to the amount of outstanding balances; and
(d) the expense recognised during the period in respect of bad or doubtful debts due from related
parties.
Above disclosures shall be made separately for each of the categories of related parties.
Nasir Abbas FCA
429
IAS 24 – QUESTIONS
PRACTICE QUESTIONS
QUESTION NO. 1
During the year ended 30 June 2013, Uzair Limited (UL), a listed company, undertook the following transactions:
(i) All the raw materials were supplied by Hamid Limited for Rs. 180 million.
(ii) Goods costing Rs. 15 million were sold by UL for Rs. 18 million to its subsidiary Tania (Pvt.) Limited as against its
normal policy of adding 30% margin on cost. At the year end, the amount receivable in respect of this sale was Rs.
5.5 million.
(iii) A machine costing Rs. 20 million was purchased from Perveen Limited, one of whose executive director is a director
in UL.
(iv) UL’s approved gratuity fund is administered by the trustees appointed by the company. During the year, contribution
made to the approved gratuity fund amounted to Rs. 3.2 million.
(v) During the year, UL sold goods amounting to Rs. 12 million to Gohar Limited, which is controlled by the uncle of Mr.
Haris, a key shareholder and a member of UL’s board of directors.
(vi) An interest free loan of Rs. 4 million was granted to the Chief Financial Officer (CFO) of the company under the terms
of employment. During the year, Rs. 0.5 million were repaid by the CFO.
Required:
In the light of International Financial Reporting Standards:
(a) Comment as to whether or not the above entities are related parties of Uzair Limited.
(06)
(b) Prepare a note on related party transactions for inclusion in Uzair Limited’s financial statements for the year ended 30
June 2013. (Ignore corresponding figures)
(07)
{Autumn 2013, Q # 1}
QUESTION NO. 2
On 1 July 2009, Metal Limited (ML) acquired 80% shareholdings in Copper Limited (CL), 90% shareholdings in Zinc Limited
(ZL) and 55% shareholdings in Steel Limited (SL). The following transactions took place among these companies, during
the period up to 30 June 2011:
(i)
On 1 May 2010, ML sold a machine to CL at 20% above the carrying amount of Rs. 16 million. CL paid the entire
amount on 15 July 2010. The useful life of the machine is 10 years.
(ii)
On 1 July 2010, ZL awarded a contract of Rs. 15 million to Iron Builders and Developers (IBD) for the extension of
its existing factory. One of the directors of ML is also a partner in IBD.
(iii)
Since the date of acquisition, ML has been providing management services to CL and ZL. ML did not charge
management fee for its services during the first year. However, with effect from 1 July 2010, management fee
has been charged from each company at the rate of Rs. 0.5 million per month. Payment is made on the 10th day
of the next month.
(iv)
On 1 January 2011, ML sold goods amounting to Rs.10 million to Gold Limited (GL). The wife of chief financial
officer of ZL is a major shareholder in GL.
Required:
Prepare a note on related party disclosure including comparative figures, for inclusion in the individual financial
statements of ML, CL, ZL and SL, for the year ended 30 June 2011.
(18)
{Autumn 2011, Q # 3}
QUESTION NO. 3
The following related party transactions were carried out by Golden Limited (GL) during the first year of its operation i.e.
year ended December 31, 2009.
(i)
Inventory costing Rs. 15 million was sold for Rs. 18 million to Platinum Limited (PL) which owns 60% shares in GL.
It is GL’s policy to add 30% margin on cost. Outstanding liability at year end, in respect of these purchases was
Rs. 6.5 million.
(ii)
PL provided administrative services to GL. The cost of these services, if billed in the open market, would have
amounted to Rs. 350,000. No entries were made to record these transactions, as it was agreed that the services
would be provided free of charge.
(iii)
A property was sold to Silver Limited (SL), an associated company, at its fair market value of Rs. 10 million. 50%
of the amount was settled prior to year end. GL reimbursed Rs. 500,000 to SL on account of transfer and other
incidental charges related to this property.
(iv)
An interest free loan of Rs. 2 million was granted to an executive director of the company under the terms of
employment. During the year, Rs. 200,000 were repaid by the executive director.
(v)
On July 1, 2009 GL obtained a short term loan of Rs. 25 million from one of its major shareholder, at the prevailing
annual interest rate of 12%. The principal as well as the accrued mark-up were outstanding at the close of the
year.
NASIR ABBAS FCA
430
IAS 24 – QUESTIONS
Required:
Prepare a note on related party transactions for inclusion in GL’s financial statements for the year ended December 31,
2009 showing disclosures as required under IAS - 24 (Related Party Disclosures).
(15)
{Spring 2010, Q # 2}
QUESTION NO. 4
During the year ended June 30, 2008, Baber Limited (BL) has carried out several transactions with the following individuals
/ entities:
(i)
AK Associates provides information technology services to BL. One of the directors of BL is also the partner in AK
Associates.
(ii)
SS Bank Limited is the main lender. By virtue of an agreement it has appointed a nominee director on the Board
of BL.
(iii)
Mr. Zee who supplies raw materials to BL, is the brother of the Chief Executive Officer of the company.
(iv)
JB Limited is the distributor of BL’s products and have exclusive distribution rights for the province of Punjab.
(v)
Mr. Tee is the General Manager-Marketing of BL and is responsible for all major decisions made in respect of
sales prices and discounts.
(vi)
BL’s gratuity fund is administered by the Trustees appointed by the company.
(vii)
MM Limited is the leading supplier of BL and supplies 60% of BL’s raw materials.
(viii)
Ms. Vee who conducted various training programmes for the employees of the company, is the wife of BL’s Chief
Executive Officer.
Required:
Comment as to whether the above individuals/entities are ‘related parties’ of the company or not. Support your
arguments with references from International Accounting Standards.
(15)
{Autumn 2008, Q # 4}
QUESTION NO. 5
Fazal Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers. During the year 2007,
the company has undertaken the following transactions with its related parties:
(i)
Sales of Rs. 500 million were made to its only subsidiary M/s Sami Motors Limited (SML). Being the subsidiary, a
special discount of Rs. 25 million was allowed to SML.
(ii)
SML returned spare parts worth Rs. 5.5 million.
(iii)
Raw materials of Rs. 5 million were purchased from Jalal Enterprises, which is owned by the wife of the CFO of
Fazal Limited.
(iv)
Equipment worth Rs. 3 million was purchased from Khan Limited (KL). The wife of the Production Director of the
company is a director in KL.
(v)
The company awarded a contract for supply of two machines amounting to Rs. 7 million per machine to an
associated company.
(vi)
In 2005, an advance of Rs. 2 million was given to the Chief Executive of the company. During the year 2007, he
repaid Rs. 0.3 million. The balance outstanding as on December 31, 2007 was Rs. 1,100,000.
Required:
In accordance with the requirement of IAS-24 “Related Party Disclosures”, prepare a note to the financial statements, for
inclusion in the company’s financial statements.
(12)
{Spring 2008, Q # 4}
QUESTION NO. 6
Following transactions were carried out by Yellow Limited during the year ended June 30, 2006.
(i)
Mr. Sharp, a well-known management consultant was hired, to conduct a three weeks workshop on time
management for the staff of the company at a fee of Rs. 0.5 million. Mr. Sharp is the son of the Chief Executive
Officer.
(ii)
A loan of Rs. 30 million was obtained from Blue Bank Limited. The loan was negotiated by Mr. Slim, General
Manager Finance of Yellow Limited, who was formerly a senior executive of the Bank.
(iii)
Three used delivery trucks of the company were sold to Red Supplies Limited, which supplies approximately 60%
of the total raw material used by the company.
(iv)
Granted interest bearing loan to its Chief Executive Officer for construction of house in accordance with the
company’s policy relating to employees’ benefit.
NASIR ABBAS FCA
431
IAS 24 – QUESTIONS
(v)
Paid mobilization advance of Rs. 9 million against a construction contract to Orange Limited which is owned by
Mr. Clear, a member of a reputed business family. Two influential directors of the company are nephews of Mr.
Clear.
(vi)
The company awarded a contract for plant maintenance services to its subsidiary Brown (Pvt.) Limited effective
August 01, 2007.
Required:
For each case, discuss the requirement of IAS 24 (Related Party Disclosures) as regards the following disclosures in the
financial statements for the year ended June 30, 2006:
(a) Related party relationship; and
(b) Related party transactions.
(14)
{Spring 2007, Q # 6}
NASIR ABBAS FCA
432
IAS – 24 - SOLUTIONS
SOLUTIONS
SOLUTION TO QUESTION NO.1
(a)
(i) UL and Hamid Limited are not related parties. According to IFRS, significant volume of transactions between two
parties even it results in economic dependence does not create related party relationship.
(ii) Tania (Private) Limited is a related party of UL because both the companies have parent-subsidiary relationship.
(iii) They are not related parties. According to IFRS, having common director does not necessarily create a related party
relationship.
(iv) A post-employment benefit plan for the benefits of employees is treated as related party.
(v) The uncle of Mr. Haris is not related party of UL because an uncle is not considered as a close member of a person's
family.
(vi) CFO is a related party as he is the key management personnel of the company.
(b)
SOLUTION TO QUESTION NO.2
Financial Statements of Metal Limited
Subsidiaries:
(a)
Copper Limited:
(i)
(ii)
Rs. In million
Receivable balance on 01 July 2010
19.2
Less: Recovered
19.2
Outstanding balance
0
The balance represented sale of machinery at 20% above its carrying amount.
Additionally, management services were provided to Copper Limited during the year as follows:
Rs. In million
Fee for services
6.0
Less: Recovered
5.5
NASIR ABBAS FCA
433
IAS – 24 - SOLUTIONS
(b)
(c)
Note:
Outstanding balance
In the previous year, services were given without any charges.
Zinc Limited:
Management services were provided to Zinc Limited during the year as follows:
Fee for services
Less: Recovered
Outstanding balance
In the previous year, services were given without any charges.
Steel Limited:
There was no transaction with Steel Limited.
Gold Limited is a related party of Zinc Limited, not of Metal Limited.
0.5
Rs. In million
6.0
5.5
0.5
Financial Statements of Copper Limited
Parent:
(a)
Metal Limited:
(i)
Rs. In million
Payable balance on 01 July 2010
19.2
Less: Paid
19.2
Outstanding balance
0
The balance represented sale of machinery at 20% above its carrying amount.
(ii)
Additionally, management services were provided by Metal Limited during the year as follows:
Rs. In million
Fee for services
6.0
Less: Paid
5.5
Outstanding balance
0.5
In the previous year, services were given without any charges.
Financial Statements of Zinc Limited
Parent:
(a)
Metal Limited:
Management services were provided by Metal Limited during the year as follows:
Fee for services
Less: Paid
Outstanding balance
In the previous year, services were given without any charges.
Rs. In million
6.0
5.5
0.5
Others:
(a)
Iron Builders and Developers:
Rs. In million
Contract awarded for extension of building
15
Note: Iron Builders and Developers is a related party of Metal Limited, not of Zinc Limited.
Financial Statements of Steel Limited
Parent:
(a)
Metal Limited:
There was no transaction with Metal Limited.
SOLUTION TO QUESTION NO.3
A)
Holding company:
Nature of relationship: Platinum Limited (PL) is a Holding company of Golden Limited.
Inventory was sold to PL at 20% mark-up on cost where as normal mark-up rate is 30%. Movement of
the account is as under:
Sale value
18 millions
Amount received
11.5 millions
NASIR ABBAS FCA
434
IAS – 24 - SOLUTIONS
Amount outstanding
6.5 millions
PL provided administrative services to GL free of cost. The market value of these services is Rs. 350,000.
B)
C)
D)
Associate company:
Nature of relationship: Silver Limited (SL) is an associate company of Golden limited (GL).
A property was sold to SL at Rs. 10 millions. Additionally, transfer and other incidental charges were
paid by GL amounting to Rs. 0.5 million. Movement of the account is as under:
Total amount receivable
10 millions
Amount settled prior to year end
5 millions
Amount receivable at year end
5 millions
Key management personal:
Nature of relationship: Executive director is a related party to Golden Limited (GL).
An interest free loan was granted to executive director under the terms of employment. Movement of
the account is as under:
Amount of loan
2 millions
Amount repaid by director
0.2 million
Amount outstanding
1.8 millions
Others:
Nature of relationship: Related party is a major shareholder of Golden Limited (GL).
GL obtained a short term loan @ 12% rate of interest from this related party on 01.07.09. Movement of
the account is as under:
Amount of loan obtained
25 millions
Mark-up payable (25 x 12% x 6 / 12)
1.5 millions
Total amount payable
26.5 millions
Note: Assuming that major shareholder is having significant influence in the entity.
SOLUTION TO QUESTION NO.4
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
AK associates are related party to BL because director of BL has joint control over AK associates.
SS Bank ltd. is not a related party to BL due to the reason that two entities simply because they have a director
or other member of key management personnel in common.
As Mr. Zee is the brother of CEO of the company and brother does not fall under close members of the family of
an individual and include only those family members who may be expected to influence, or be influenced by,
that individual in their dealings with the entity so Mr. Zee is not a related party to BL.
JB is only a distributor of BL’s products and according to IAS-24 a customer, supplier, franchisor, distributor
with whom an entity transacts a significant volume of business, merely by virtue of the resulting economic
dependence are not related party.
Mr. Tee is a related party to BL as he has a key management personnel which include those persons having
authority and responsibility for planning, directing and controlling the activities of the entity, directly or
indirectly.
A party is related to an entity if the party is a post-employment benefit plan for the benefit of employees of the
entity. So, gratuity fund is a related party to BL.
MM is only a major supplier and according to IAS-24, a customer, supplier or distributor with whom an entity
transacts a significant volume of business by virtue of the resulting economic dependence are not related parties.
Ms. Vee is a related party as she is a close family member of an individual which includes only those family
members who may be expected to influence or be influenced by that C.E.O of BL in their dealings with the entity.
SOLUTION TO QUESTION NO.5
A)
B)
SUBSIDIARIES:
Nature of Relationship: Sami Motors Limited (SML) is a subsidiary of Fazal Limited.
Sales of Rs. 500 million were made to SML after allowing a special discount of Rs. 25 million.
Amount outstanding
500 millions
Provision of balance
Nil
SML returned spare parts worth Rs. 5.5 million.
ASSOCIATES:
Nature of relationship: It is an associate of the Fazal Limited.
NASIR ABBAS FCA
435
IAS – 24 - SOLUTIONS
C)
D)
Note:
A contract for the supply of two machines amounting to RS. 7 million per machine was awarded to this
subsidiary.
KEY MANAGEMENT PERSONNEL:
Nature of Relationship: Chief Executive is a related party to Fazal Limited.
Advance of Rs 2 million was given to him during 2005.
Amount of transaction:
2.0 millions
Amount outstanding at start:
1.4 millions
Amount repaid during 2007:
0.3millions
Amount outstanding at end:
1.1 millions
Provision:
Nil
Guarantee:
Nil
OTHERS:
(i)
Nature of Relationship: Jalal Enterprises is owned by the wife of CFO of Fazal Limited.
Raw mateials worth Rs 5 million were purchased from Jalal Enterprises.
Amount of transaction:
5 millions
Amount outstanding:
5 millions
Provision:
Nil
Guarantee:
Nil
(ii)
Nature of Relationship: Equipment purchased from Khan limited whose director is the wife of
Production Director of Fazal Limited.
Amount of transaction:
Amount outstanding:
Provision:
Guarantee:
It is stated in the question that all parties are related parties.
3 millions
3 millions
Nil
Nil
SOLUTION TO QUESTION NO.6
(i)
(a)
Mr. Sharp is a related party because he is a close member of the family of an individual i.e. son of CEO
who may influence in his son’s dealing with the entity.
(b)
Transaction with Mr. Sharp i.e. fee of Rs. 0.5 million for training paid to Mr. Sharp will be disclosed.
(ii)
(a)
Blue Bank Ltd. is not a related party as Mr. Slim G.M. of yellow Ltd. does not have any relation with the
bank now.
(b)
No disclosure of transaction with Blue Bank Ltd. is required as per IAS-24. However, loan will be
disclosed according to other relevant disclose requirements.
(iii)
(a)
Red Supplies Ltd. is not necessarily a related party because it does not have significant influence.
(b)
Sale of delivery trucks to Red Supplies Ltd. is a routine transaction, not a related party transaction.
(iv)
(a)
CEO is a key management personnel so he is a related party.
(b)
Loan given to CEO will be disclosed alongwith terms and conditions and the respective interest rate.
Additionally the balance of loan will also be disclosed.
(v)
(a)
Orange Ltd. is not a related party because nephews are not considered close members of Mr. Clear.
(b)
No transaction with Orange Ltd. is to be disclosed.
(vi)
(a)
Brown (Pvt.) Ltd. is a subsidiary of Yellows Ltd. Therefore, it is a related party.
(b)
Transactions with Brown (Pvt.) Ltd. regarding plant maintenance services are to be disclosed.
NASIR ABBAS FCA
436
FOREIGN OPERATION [SOFP & SOCI] – Class notes
FOREIGN OPERATION
Foreign operation is an entity that is a subsidiary, associate, joint arrangement or a branch of a reporting entity,
the activities of which are based or conducted in a country or currency other than those of the reporting entity.
FOREIGN OPERATION IN CONSOLIDATED FINANCIAL STATEMENTS
STATEMENT OF FINANCIAL POSITION
1) Subsidiary
1) Ensure that all errors are corrected and application of IFRSs is made in individual SOFPs of P and FS.
2) Also incorporate fair value adjustments at acquisition date and post-acquisition effects of these
adjustments (except for goodwill and its impairment) in FS’s SOFP in foreign currency.
3) Now translate FS’s adjusted SOFP (as per 2 above) into functional currency of P as follows:
(a) All assets and liabilities at closing rate
(b) Share capital and pre-acquisition reserves at acquisition date rate
(c) Post-acquisition profits/OCI at actual or average rate of each year separately
(d) Post-acquisition dividends at actual rates of the respective dates
(e) Any balancing figure in such translated SOFP will be an equity reserve named “Exchange
reserve/Translation reserve”
4) Calculate goodwill and its impairment loss in foreign currency. Then translate impairment loss of each year
at average rate or closing rate for that year and translate closing carrying amount of goodwill at end of
every year at closing rate. Any resulting balancing figure is the exchange gain/loss on goodwill for each
year. Such exchange gain/loss is also taken to Exchange reserve as discussed below in 5.
5) “Exchange reserves” to be shown in equity is calculated as follows:
Exchange gain/(loss) on translation of SOFP as per 3(e) [Exchange gain/loss x Group %]
Cumulative Exchange gain/(loss) on goodwill as per 4 (Note)
X
X
X
Note:
If NCI is valued at fair value
If NCI is valued at proportionate share
Exchange gain/(loss) on GW x Group %
Exchange gain/(loss) on GW
6) Now consolidate P’s SOFP (as per 1) and FS’s translated SOFP (as per 3) normally as studied earlier. In this
respect following is important:
(i) Fair value adjustments have already made in 2 above therefore no need to perform such adjustments
again, however, inter-company eliminations will be performed.
(ii) URP will be calculated at actual rate of transaction date.
(iii) Exchange reserve (as per 5) shall be shown in equity.
(iv) Any exchange gain/(loss) on investment in foreign operation already included in P’s RE shall be
reversed.
(v) NCI will also include:
- Its share in Exchange gain/(loss) on translation of FS’s SOFP [as per 3(e)].
- Its share in Exchange gain/(loss) of goodwill (as per 5) ONLY if NCI is valued at fair value.
NASIR ABBAS FCA
437
FOREIGN OPERATION [SOFP & SOCI] – Class notes
Disposal of foreign subsidiary
All guidance is same as studied earlier in “disposal” chapter except here the cumulative balance in
“exchange reserve” shall be reclassified to P&L and included in “Gain/loss on disposal of subsidiary”.
Portion of exchange reserve attributable to NCI shall not be reclassified to P&L.
2) Associate/JV]
Same rules are used for translation of foreign operations as studied above for application of equity method.
STATEMENT OF COMPREHENSIVE INCOME
1) Subsidiary
1) Ensure that all errors are corrected and application of IFRSs is made in individual SOCIs of P and FS.
2) Also incorporate post-acquisition effects of these adjustments (except for goodwill and its impairment) in
FS’s SOCI in foreign currency.
3) Now translate FS’s adjusted SOCI (as per 2 above) into functional currency of P by applying actual or
average rate to all incomes and expenses and OCI items.
4) Now consolidate P’s SOCI (as per 1) and FS’s translated SOCI (as per 3) normally as studied earlier. In this
respect following is important:
(i) Fair value adjustments have already made in 2 above therefore no need to perform such adjustments
again, however, inter-company eliminations will be performed.
(ii) URP will be calculated at actual rate of transaction date.
(iii) Any exchange gain/(loss) on investment in foreign operation for the year already recognized in P’s SOCI
shall be reversed.
(iv) “Exchange gain or loss/Translation gain or loss on foreign operation” for the year shall be recognized
in OCI which is calculated as follows:
Closing net assets of FS translated at closing rate
X
Opening net assets FS translated at opening rate
[OR Net assets of FS at acquisition at acquisition date rate (in case of 1st year)]
(X)
PAT/OCI for the year translated at actual rate or average rate
(X)
Dividend for the year translated at actual transaction date rate
Exchange gain/(loss) on translation for the year [A]
Exchange gain/(loss) on goodwill for the year [B]
X
X
X
X
(v) NCI share in OCI will also include:
- Its share in Exchange gain/(loss) on translation of FS’s SOCI [as per (iv)[A]].
- Its share in Exchange gain/(loss) of goodwill [as per (iv)[B]] ONLY if NCI is valued at fair value.
NASIR ABBAS FCA
438
FOREIGN OPERATION [SOFP & SOCI] – Class notes
Disposal of foreign subsidiary
All guidance is same as studied earlier in “disposal” chapter except here the cumulative balance in
“exchange reserve” shall be reclassified to P&L and included in “Gain/loss on disposal of subsidiary”. It
is shown as a negative in OCI for the year.
Portion of exchange reserve attributable to NCI shall not be reclassified to P&L.
2) Associate/JV]
Same rules are used for translation of foreign operations as studied above for application of equity method.
NASIR ABBAS FCA
439
Question [Foreign subsidiary]
Following are the financial statements of group companies for the year ended June 30, 2020:
Statement of financial position
Non-current assets
Property, plant and equipment
Investment in FS [$ 160 million]
Current assets
Inventory
Debtors
Cash & bank
Equity
Share capital
Retained earnings
Current liabilities
Creditors
LP
Rs. million
30,000
20,800
FS
$ million
200
-
4,000
8,000
3,000
65,800
40
20
10
270
25,000
31,000
100
120
9,800
65,800
50
270
LP
Rs. million
35,000
(18,000)
17,000
(4,000)
1,600
5,000
19,600
(4,000)
15,600
FS
$ million
220
(130)
90
(30)
8
68
(20)
48
Statement of comprehensive income
Sales
Cost of sales
Gross profit
Operating cost
Exchange gain
Other income
Profit before tax
Tax
Profit after tax
Following further information is available:
(1)
LP acquired 80% shares of FS on July 1, 2018. At that date the fair values of net assets of FS were equal to the
carrying amounts except for a building which was undervalued by $ 18 million. Its remaining life was 6 years.
At that date fair value of NCI was $ 50 million.
(2)
FS paid ordinary dividend of 10% and 20% on January 1, 2019 and January 1, 2020 respectively.
(3)
Goodwill was not impaired in 2019 however, it was impaired by $ 5 million at June 30, 2020.
(4)
On January 1, 2020 LP sold goods to FS for Rs. 12,500 million invoiced in PKR at a profit margin of 30%. Half of
the amount is still owed by FS on June 30, 2020. Moreover, 40% of these goods are held in FS inventory at year
end. In this respect FS has not yet recorded exchange gain/loss on this foreign currency payable at year end.
(5)
FS earned a net profit of $ 40 million for the year ending June 30, 2019.
440
(6)
Following exchange rates are available:
01-07-18
01-01-19
30-06-19
Average for 2019
01-01-20
30-06-20
Average for 2020
Rs. per $
100
112
120
116
125
130
128
Required:
Prepare consolidated statement of financial position and consolidated statement of comprehensive income for the
year ended June 30, 2020.
441
Solution [Q-1 Dec-14]
PCL Group
Consolidated statement of financial position
as at June 30, 2014
Rs. million
Non current assets
PPE [4,200 + 3,500 + 4,325(W-2.1)]
Goodwill (W-1)
12,025.00
2,526.00
Current assets
Current assets [3,500 + 4,000 + 7,785(W-2.1)]
15,285.00
29,836.00
Equity
Share capital
Exchange reserves [W-2]
Retained earnings [W-3]
Non-controlling interest [W-4]
6,000.00
799.65
5,565.15
2,781.20
Current liabilities
Current liabilities [4,700 + 4,800 + 5,190(W-2.1)]
14,690.00
29,836.00
PCL Group
Consolidated statement of other comprehensive income
for the year ended June 30, 2014
Rs. million
Other comprehensive income:
Exchange gain on translation of foreign operation (W-2)
Workings
W-1 Goodwill
Consideration transferred
Value of NCI
Less: net assets at acquisition:
Share capital [LS: 1,800 x 100/120]
RE
Contingent liability
Goodwill at acquisition
Exchange gain (balancing)
Impairment loss
Exchange gain (balancing)
Carrying amount of goodwill
250.80
LS
Rs. million
2,000.00
540.00
FS
CU million
300.00
90.00
1,500.00
250.00
(6.00)
1,744.00
796.00
796.00
796.00
120.00
160.00
280.00
110.00
110.00
(10.00)
100.00
Exchange
rate
FS
Rs. million
15.00
1,650.00
198.00
1,848.00
(173.00)
55.00
1,730.00
16.80
17.30
17.30
442
W-2 Exchange reserves
Exchange gain on GW (W-1) [(198 + 55) x 75%]
Exchange gain on foreign operation [463.05 + 195.80(W-2.2) x 75%]
W-2.1 Translation of foreign operation
PPE
Current assets
Current liabilities
Rs. million
189.75
609.90
799.65
FS
CU million
250.00
450.00
300.00
W-2.2 Exchange gain
Closing net assets [400 x 17.30]
Opening net assets [(400 - 30 + 18*) x 16.80]
Dividend [18 x 16.90]
PAT [30 x 17]
Exchange gain on translation
Exchange gain on GW
Exchange
rate
17.30
17.30
17.30
FS
Rs. million
4,325.00
7,785.00
5,190.00
Rs. million
6,920.00
(6,518.40)
304.20
(510.00)
195.80
55.00
250.80
* Dividend = 120 x 15% = 18
W-3 Retained earnings
RE [FS: (W-3.1)]
Less: Pre-acq [FS: 160(W-1) x 15]
Add: Contingent liability settled
Add: Bonus issue out of RE [1,500 x 20%]
Less: Impairment of goodwill (W-1)
Add: Share in LS [956 x 80%]
Add: Share in FS [1,733.80 x 75%]
PCL
LS
FS
--------- Rs. million --------3,500.00
900.00
4,306.80
(250.00)
(2,400.00)
6.00
300.00
(173.00)
956.00
1,733.80
764.80
1,300.35
5,565.15
W-3.1 Closing RE
Closing net assets [400 x 17.30]
Share capital [120 x 15]
Translation reserves [609.90(W-2) / 0.75]
W-4 NCI
Value at acquisition [FS: 90 x 15]
Exchange reserves [FS: 799.65 x 25/75]
RE [LS: 956 x 20%] [FS: 1,733.80 x 25%]
Rs. million
6,920.00
(1,800.00)
(813.20)
4,306.80
LS
FS
--------- Rs. million -------540.00
1,350.00
266.55
191.20
433.45
731.20
2,050.00
2,781.20
443
Solution [Q-1 Jun-17]
WL Group
Difference in ICAP solution:
- Revaluation surplus was recorded in WL books
- Depreciation on property was charged in WL books
Consolidated statement of financial position
as at December 31, 2016
Rs. million
Non current assets
PPE [14,900 + 3,000 + 6,500 + 800]
Goodwill (W-1)
Investment property [800 - 800]
25,200.00
1,134.00
-
Current assets
Current assets [6,660 + 2,500 + 6,100]
15,260.00
41,594.00
Equity
Share capital
Exchange reserves [W-2]
Revaluation surplus [{800 - (650 - 32.50)} x 90%]
Retained earnings [W-3]
Non-controlling interest [W-4]
11,400.00
1,270.65
164.25
15,109.10
1,090.00
Current liabilities
Current liabilities [6,360 + 2,300 + 3,900]
12,560.00
41,594.00
-
Workings
W-1 Goodwill
Consideration transferred:
- Direct [YL: 4.5 x 23]
- Indirect [YL: 270 x 90%]
Value of NCI [5,000 x 10%] [315 x 8%(W-1.1)]
Less: net assets at acquisition:
Share capital
RE
Goodwill at acquisition
Exchange gain (balancing)
Carrying amount of goodwill
GL
Rs. million
YL
T$ million
4,200.00
500.00
103.50
243.00
25.20
1,500.00
3,500.00
5,000.00
(300.00)
225.00
90.00
315.00
56.70
56.70
Exchange
rate
YL
Rs. million
17.00
963.90
170.10
1,134.00
20.00
W-1.1 Effective holding in YL
Effective holding of WL = 20% + 80% x 90% =
92.00%
Effective holding of NCI [1 - 0.92] =
8.00%
444
W-2 Exchange reserves
Exchange gain on GW (W-1)
Exchange gain on foreign operation [1,196.25(W-2.1) x 92%]
W-2.1 Translation of foreign operation
PPE
Current assets
Share capital
Pre-acquisition RE
Post-acquisition profit [210 - 90 + 22.5]
Dividend
Exchange reserve (balancing)
Current liabilities
W-3 Retained earnings
RE [YL: (W-2)]
Less: Pre-acq [YL: (W-2)]
Less: Reversal of exchange gain on investment:
WL's investment in YL [1,500 - 75 x 17]
GL's investment in YL [5,400 - 270 x 17]
Add: Profit on earlier investment [(103.50 - 75) x 17]
Add: Negative goodwill on WL
Less/Add: Rent on property*
Less: Depreciation on property* [650/20]
Less: Reversal of fair value gain on investment property* [800 - 650]
Add: Share in GL [3,347.50 x 90%]
Add: Share in YL [2,148.75 x 92%]
Rs. million
170.10
1,100.55
1,270.65
YL
T$ million
325.00
305.00
630.00
Exchange
rate
20.00
20.00
YL
Rs. million
6,500.00
6,100.00
12,600.00
225.00
17.00
3,825.00
90.00
17.00
1,530.00
142.50
18.00
2,565.00
(22.50)
18.50
(416.25)
3,678.75
210.00
1,196.25
195.00
3,900.00
20.00
630.00
12,600.00
WL
YL
GL
--------- Rs. million --------9,500.00
7,900.00
3,678.75
(3,500.00)
(1,530.00)
(225.00)
484.50
300.00
60.00
-
(810.00)
(60.00)
(32.50)
(150.00)
3,347.50
2,148.75
GL
YL
--------- Rs. million -------500.00
428.40
18.25
95.70
334.75
171.90
(459.00)
394.00
696.00
1,090.00
3,012.75
1,976.85
15,109.10
* Since it is a PPE from group's viewpoint, therefore, IAS 40 accounting is reversed.
W-4 NCI
Value at acquisition [YL: 25.20(W-1) x 17]
Revaluation surplus [{800 - (650 - 32.50)} x 10%]
Exchange reserves [YL: 1,196.25 x 8%]
RE [GL: 3,347.50 x 10%] [YL: 2,148.75 x 8%]
Share in investment in YL [270 x 17 x 10%]
445
Solution [Q-1 Dec-10]
RTL Group
Consolidated statement of comprehensive income
for the year ended June 30, 2010
Rs. million
1,538.75
(765.75)
773.00
(392.43)
0.66
(47.75)
333.48
(122.75)
210.73
Sales [1,000 + 568.75(W-2) - 30]
Cost of sales [450 + 341.25(W-2) - 30 + 1 x 22.50 x 20%]
Gross profit
Selling and administrative expenses [250 + 117.16(W-2) + 25.26(W-1)]
Exchange gain (W-2)
Finance cost [25 + 22.75(W-2)]
Profit before tax
Tax [100 + 22.75(W-2)]
Profit after tax
Other comprehensive income:
Exchange gain on foreign operation (W-3)
Total comprehensive income
25.13
235.86
Profit attributable to:
- Shareholders of TL
- NCI (W-4)
191.08
19.65
210.73
TCI attributable to:
- Shareholders of TL
- NCI [19.65 + 18.68(W-3) x 30%]
WORKINGS
W-1 Goodwill
Consideration transferred
Value of NCI [11 x 30%]
Less: net assets at acquisition:
Share capital
RE
FV adj. - leasehold property
Goodwill at acquisition
Impairment loss
Exchange gain (balancing)
Carrying amount of goodwill
210.61
25.25
235.86
FDL
FC million
12.00
3.30
5.00
3.00
3.00
11.00
4.30
(1.08)
3.23
Exchange
rate
FDL
Rs. million
22.00
23.50
94.60
(25.26)
6.45
75.79
23.50
446
W-2 Translation of foreign operation
Sales
Cost of sales
Gross profit
Selling and administrative expenses [5 + 3/20]
Exchange gain [30/22.5 - 30/23]
Finance cost
Profit before tax
Tax
Profit after tax
FDL
FC million
25.00
(15.00)
10.00
(5.15)
0.03
(1.00)
3.88
(1.00)
2.88
Exchange
rate
22.75
22.75
22.75
22.75
22.75
22.75
FDL
Rs. million
568.75
(341.25)
227.50
(117.16)
0.66
(22.75)
88.25
(22.75)
65.50
W-3 Exchange gain
Closing net assets [(11 + 2.88) x 23.50]
Net assets at acquisition [11 x 22]
PAT (W-2)
Exchange gain on translation
Exchange gain on GW
W-4 NCI
PAT
Rs. million
326.18
(242.00)
(65.50)
18.68
6.45
25.13
FDL
Rs. million
65.50
30%
19.65
447
Solution [Q-5 Dec-18]
VL Group
Consolidated cashflow statement
for the year ended June 30, 2018
-------- Rs. million ------Cashflow from operating activities
Profit before tax [817(W-5) + 223(W-6)]
Depreciation
Finance cost [189(W-1.1) x 8%]
Exchange loss on deferred consideration [223 - 189 - 15]
Impairment loss of goodwill (W-1)
Gain on disposal of subsidiary [1,600 - 1,250 - 200]
Gain on sale of PPE [(350 - 170) - (250 - 230)]
Income from associate (W-4) [160 - 12]
Operating profit
Working capital changes (W-2)
Cash generated from operations
Tax paid
Cash inflow from operating activities
1,040
480
15
19
65
(150)
(160)
(148)
1,161
(951)
210
-
Cashflow from investing activities
Purchase of PPE (W-3)
Purchase of subsidiary [495 - 1 x 110]
Sale of PPE
Sale of subsidiary [1,600 - 100]
Dividend received from associate (W-4)
Purchase of investment in associate
Cash outflow from investing activities
(1,043)
(385)
350
1,500
78
(600)
Cashflow from financing activities
Sale of partial investment in subsidiary
Issue of shares [2,800 + 300 - 2,500 - 375(W-1.1)]
Cash inflow from financing activities
Net cash inflow for the year
Cash and cash equivalent at start of the year
Cash and cash equivalent at end of the year
Cash and cash equivalents
Cash & bank
Exchange gain
210
(100)
450
225
675
785
783
1,568
Opening
Closing
-------- Rs. million ------770
1,568
13
783
1,568
448
W-1 Goodwill
Opening balance
Acquisition (W-1.1)
Exchange gain on GW of FL (W-1.1)
Disposal
Impairment loss (balancing)
Closing balance
Rs. million
639
179
16
(200)
(65)
569
W-1.1 Goodwill on FL
Consideration transferred:
- Cash
- Share [15 x 25] [375/110]
- Deferred [2 x 1.08-2] [1.715 x 110]
Value of NCI [10 x 20%][1,100 x 20%]
Less: Net assets at acquisition [10 x 110]
Goodwill at acquisition
Exchange gain (balancing)
Goodwill at year end
$ million
W-2 Changes in working capital
Opening
Closing
-------- Rs. million ------1,050
1,950
823
957
(1,630)
(912)
(230)
(385)
(36)
150
393
1,344
Inventories
Trade and other receivables
Trade and other payables
Receivable for PPE
Acquisition of FL [3.5 x 110]
Exchange gain on FL
Disposal of SL
Increase in working capital
W-3 PPE
Opening balance
Acquisition of FL [5.5 x 110]
Exchange gain on FL [122(W-7) - 13 - 16 - 36]
Addition (balancing)
Depreciation
Disposal [250 + 170]
Disposal of SL
Closing balance
4.500
3.409
1.715
2.000
(10.000)
1.624
1.624
Exchange
rate
120.00
Rs. million
495
375
189
220
(1,100)
179
16
195
(951)
Rs. million
4,173
605
57
1,043
(480)
(420)
(1,300)
3,678
449
W-4 Investment in associate
Opening balance
Addition
Share of profit [800 x 6/12 x 40%]
URP on goods [400 x 30% x 25% x 40%]
Dividend received (balancing)
Closing balance
Rs. million
600
160
(12)
(78)
670
W-5 Other reserves
Opening balance
Profit attributable to shareholders of VL (balancing)
Exchange reserve [106(W-7) x 80% + 16]
Adjustment in equity on sale of WL [450 - 1,000 x 30%]
Closing balance
Rs. million
2,451
817
101
150
3,519
W-6 NCI
Opening balance
Acquisition of FL W-1.1)
Profit attributable to NCI (balancing)
Exchange reserve [106(W-7) x 20%]
Increase on partial sale of WL [1,000 x 30%]
Closing balance
Rs. million
874
220
223
21
300
1,638
W-7 Exchange reserves
Closing net assets [(10 + 1.5) x 120]
Net assets at acquisition (W-1.1)
PAT [1.5 x 116]
Exchange gain on translation
Exchange gain on GW (W-1.1)
Rs. million
1,380
(1,100)
(174)
106
16
122
450
IFRS 16 [Lessor] – Class notes
Lease
A contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a
period of time in exchange for consideration.
A contract conveys the right to control the use of an identified asset for a period of time if the customer
has, throughout the period, both of the following:
(a) The right to obtain substantially all of the economic benefits from use of the identified asset; and
(b) The right to direct the use of the identified asset
A customer does not have the right to use an identifiable asset if the supplier has the substantive right
to substitute the asset throughout the period of use.
Nasir Abbas FCA
451
IFRS 16 [Lessor] – Class notes
BOOKS OF LESSOR
Lessor
An entity that provides the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
1. Types of leases
- A finance lease is a lease that transfers substantially all the risks and rewards incidental to
ownership of an underlying asset. [Title may or may not eventually be transferred]
- An operating lease is a lease that does not transfer substantially all the risks and rewards
incidental to ownership of an underlying asset.
2. The inception of the lease is the earlier of the date of a lease agreement and the date of commitment
by the parties to the principal terms and conditions of the lease.
3. The commencement date of lease is the date on which a lessor makes an underlying asset available
for use by a lessee.
4. The lease term is the non-cancellable period for which a lessee has the right to use an underlying
asset, together with both:
(a) periods covered by an option to extend the lease if the lessee is reasonably certain to exercise
that option; and
(b) periods covered by an option to terminate the lease if the lessee is reasonably certain NOT to
exercise that option.
5. Lease modification is a change in the scope of a lease, or the consideration for a lease that was not
part of the original terms and conditions of the lease (e.g. extending or shortening the contractual
lease term).
6. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
In-substance fixed payments exist, for example, if:
(a) payments are structured as variable lease payments, but there is no genuine variability in
those payments. Those payments contain variable clauses that do not have real economic
substance. Examples of those types of payments include:
(i) payments that must be made only if an asset is proven to be capable of operating during
the lease, or only if an event occurs that has no genuine possibility of not occurring; or
(ii) payments that are initially structured as variable lease payments linked to the use of
the underlying asset but for which the variability will be resolved at some point after
the commencement date so that the payments become fixed for the remainder of the
lease term. Those payments become in-substance fixed payments when the variability
is resolved.
(b) there is more than one set of payments that a lessee could make, but only one of those sets
of payments is realistic. In this case, an entity shall consider the realistic set of payments to
be lease payments.
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IFRS 16 [Lessor] – Class notes
(c) there is more than one realistic set of payments that a lessee could make, but it must make
at least one of those sets of payments. In this case, an entity shall consider the set of
payments that aggregates to the lowest amount (on a discounted basis) to be lease
payments.
Lease incentives are the payments made by a lessor to a lessee associated with a lease, or the
reimbursement or assumption by a lessor of costs of a lessee.
(b) variable lease payments that depend on an index (e.g. consumer index) or a rate (e.g. KIBOR);
(c) the exercise price of a purchase option [i.e. BPO price] if the lessee is reasonably certain to
exercise that option; and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Lease payments also include any residual value guarantees [GRV] provided to the lessor by the lessee,
a party related to the lessee or a third party unrelated to the lessor.
7. Residual value guarantee [GRV] is a guarantee made to a lessor by a party unrelated to the lessor
that the value (or part of the value) of an underlying asset at the end of a lease will be at least a
specified amount.
8. Unguaranteed residual value [UGRV] is that portion of the residual value of the underlying asset, the
realization of which by a lessor is not assured or is guaranteed solely by a party related to the lessor.
i.e. UGRV = Total expected RV – GRV
9. Initial direct costs [IDC] are Incremental costs of obtaining a lease that would not have been incurred
if the lease had not been obtained.
10. Gross investment in the lease [GIL] is the sum of:
(a) The lease payments receivable by the lessor under a finance lease, and
(b) Any unguaranteed residual value accruing to the lessor.
i.e. GIL = LP receivable + UGRV
11. Net investment in lease [NIL] is the gross investment in the lease discounted at the interest rate
implicit in the lease.
12. Unearned finance income [UFI] is the difference between:
(a) the gross investment in the lease, and
(b) the net investment in the lease.
i.e. UFI = GIL – NIL
13. The interest rate implicit in the lease is the rate of interest that causes the present value of:
(a) the lease payments; and
(b) the unguaranteed residual value to equal the sum of;
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IFRS 16 [Lessor] – Class notes
(i) the fair value of the underlying asset; and
(ii) any initial direct cost of the lessor.
Calculation of implicit rate:
GIL comprises of down payment and equal
GIL comprises of down payment, rentals and
rentals:
BPO / RV:
Annuity factor = [NIL – Down payment] ÷ Rental Assume any two discount rates of your choice
and apply following formula:
Now look for this factor in annuity table against Implicit rate = LR + [PVL / (PVL – PVH)] x (HR – LR)
relevant “n”. Implicit rate will be the rate under Here:
which this factor or closest to this factor is - LR = lower rate (say 10%)
appearing in table.
- HR = higher rate (say 15%)
- PVL = “PV of GIL @ LR” – “NIL”
- PVH = “PV of GIL @ HR” – “NIL”
Types of lessors:
For better understanding, following types of lessors can be described in case of finance lease:
Financier lessor
Dealer / manufacturer lessor
A lessor who technically provides loan as it A lessor who provides asset out of its stock because
purchases asset from market for leasing e.g. it also sells such assets earning some selling profit.
banks, leasing companies
e.g. a car dealer who sells cars on cash as well as on
lease.
CLASSIFICATION OF LEASES
1. A lessor shall classify each of its leases as either an operating lease or a finance lease. Whether lease
is a finance lease or an operating lease depends on the substance of the transaction rather than form
of the contract. Examples of situations that individually or in combination would normally lead to a
lease being classified as a finance lease are:
(a) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term;
(b) The lessee has the option to purchase the underlying asset at a price that is expected to be
sufficiently lower than fair value at the date the option becomes exercisable for it to be reasonably
certain, at inception date, that the option will be exercised [called Bargain Purchase Option];
(c) The lease term is for the major part of the economic life of the underlying asset even if title is not
transferred. [Generally it is 75% of economic life or may be considered as 2/3 of economic life];
or
(d) At the inception of the lease, the present value of the lease payments amounts to at least
substantially all of the fair value of the underlying asset. [Here substantially means 90 % or more];
(e) The underlying asset is of such a specialized nature that only the lessee can use it without major
modifications.
2. Indicators of situations that individually or in combination could also lead to a lease being classified
as a finance lease are:
(a) If the lessee can cancel the lease, the lessor’s losses associated with the cancellation are borne by
the lessee;
(b) Gains or losses form the fluctuation in the fair value of the residual value accrue to the lessee (for
example proceeds at the end of the lease); and
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IFRS 16 [Lessor] – Class notes
(c) The lessee has the ability to continue the lease for a secondary period at a rent that is substantially
lower than market rent.
OPERATING LEASE
Recognition and measurement
1. A lessor shall recognize lease payments from operating leases as income on either a straight-line basis
or another systematic basis. The lessor shall apply another systematic basis if that basis is more
representative of the pattern in which benefit from the use of the underlying asset is diminished.
2. A lessor shall add initial direct costs incurred in obtaining an operating lease to the carrying amount
of the underlying asset and recognize those costs as an expense over the lease term on the same basis
as the lease income.
3. The depreciation policy for depreciable underlying assets subject to operating leases shall be
consistent with the lessor’s normal depreciation policy for similar assets.
4. A lessor shall account for a modification to an operating lease as a new lease from the effective date
of modification. The original lease is considered cancelled and any prepaid/accrued lease payments
of the original lease shall be considered as part of the lease payments for the new lease.
Disclosures
1. A lessor shall disclose lease income for the reporting period.
2. For items of PPE subject to an operating lease, a lessor shall apply the disclosure requirements of IAS
16.
3. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
FINANCE LEASE
Recognition and initial measurement
Financier lessor
Manufacturer or dealer lessor
1) At commencement date, a lessor shall 1) At commencement date, a lessor shall
recognize the lease receivable at an amount
recognize following:
equal to net investment in lease.
Dr. Net investment in lease [NIL]
Dr. Net investment in lease [NIL]
Dr. Cost of sales [Cost/NBV – PV of UGRV]
Cr. Cash
Cr. Sales [NIL – PV of UGRV]
Cr. Inventory [Cost]
(If a lessor provides any of its PPE on finance
lease then NBV of PPE is credited instead of
cash and a profit/loss on disposal is recorded)
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IFRS 16 [Lessor] – Class notes
Exam note:
NIL = PV of GIL discounted at implicit rate
OR
NIL = fair value of asset + IDC
Exam note:
NIL = Fair value (i.e Sale price – trade discount)
OR
NIL = PV of GIL discounted at higher of market
interest rate or implicit rate
2) IDCs incurred by lessor are included in the 2) IDC type expenses incurred by lessor are
initial measurement of NIL. When NIL is
recognized as expense at the commencement
determined by discount GIL at implicit rate
of lease. d former employees.
then IDCs are automatically in the amount of
NIL therefore no need to add them separately.
IDCs reduce the finance income over the lease
term.
Calculation of lease rental
Lease rental may be required to calculated in exam question. It will be calculated using following
equation:
NIL = Rental x annuity factor at implicit rate + PV of other items of GIL discounted at implicit rate
Here: NIL = Fair value of asset + IDC (only in case of financier lessor)
Exam note:
In case of dealer/manufacturer lessor, if implicit rate and market interest rate both are available then:
Implicit rate will be used for rental calculation, if required
For all other calculations and accounting, higher of the both rates will be used.
Subsequent measurement
1. A lessor shall recognize finance income over the lease term, based on a pattern reflecting a constant
periodic rate of return on the lessor’s NIL.
2. Finance income is calculated using a lease amortization schedule which starts from initial
measurement amount of net investment in lease.
Payment
date
Lease
payment
[A]
Interest
Principal
Balance
[B = Opening balance x interest
%]
[C = A – B]
[Opening balance – C]
X
X
X
X
X
When finance income for the period is accrued
Dr. Net investment in lease
Cr. Finance income [SOCI]
When lease payment is received
Dr. Cash
Cr. Net investment in lease
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IFRS 16 [Lessor] – Class notes
3. A lessor shall review regularly estimated unguaranteed residual values used in computing the GIL. If
there has been a reduction, the lessor shall revise the income allocation over the lease term.
Lease modification
Case I – Modification shall be accounted for as a new lease
A lessor shall account for a modification to a finance lease as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
Case II – Modification shall not be accounted for as a new lease
If the lease would have been classified as an
operating lease had the modification been in
effect at the inception:
Otherwise:
At the effective date of modification, a PPE is
recognized with remaining balance in NIL:
Dr. PPE (i.e. underlying asset)
Cr. Net investment in lease
The lessor shall apply the modification
requirements of IFRS 9 which are as follows:
- lessor shall recalculate net investment in lease
as PV of modified contractual cashflows that
are discounted at original implicit rate.
- Any modification gain/loss shall be recognized
in P&L
Onwards the lease shall be accounted for a new
operating lease.
Disclosures
1. A lessor shall disclose following amounts for the reporting period in a tabular format:
- Selling profit or loss
- Finance income on the net investment in lease
- Income relating to variable lease payments not included in the measurement of the net
investment in lease.
2. A lessor shall disclose a maturity analysis of undiscounted lease payments to be received on an annual
basis for a minimum of each of the first five years and a total of the amounts for the remaining years.
3. A lessor shall reconcile the undiscounted lease payments to the net investment in lease. The
reconciliation shall identify the unearned finance income relating to the lease payments receivable
and any discounted unguaranteed residual value.
Nasir Abbas FCA
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IFRS 16 [Lessor] – Class notes
LEASE OF LAND AND BUILDING
1. When a lease includes both land and building elements, a lessor shall assess the classification of each
element as finance lease or operating lease.
2. Whenever necessary in order to classify and account for a lease of land and buildings, a lessor shall
allocate lease payments (including any lump-sum upfront payments) between the land and the
buildings elements in proportion to the relative fair values of the leasehold interests in the land
element and buildings element of the lease at the inception date.
3. If the lease payments cannot be allocated reliably between these two elements, the entire lease is
classified as a finance lease, unless it is clear that both elements are operating leases, in which case
the entire lease is classified as an operating lease.
4. For a lease of land and buildings in which the amount for the land element is immaterial to the lease,
a lessor may treat the land and buildings as a single unit for the purpose of lease classification and
classify it as a finance lease or an operating lease. In such a case, a lessor shall regard the economic
life of the buildings as the economic life of the entire underlying asset.
Nasir Abbas FCA
458
LEASES (IFRS-16) [Lessor] – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a noncancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of FVLL to record the above transactions.
(15)
[Spr-20, Q-5]
Question 2
Neptune Limited (NL) had established its business in December 2008 as a supplier of plant and machinery. During the year
ended December 31, 2009 the company sold two machines under lease arrangements. The details are as under:
Date of commencement of lease
Lease term
Lease installments payable annually in advance
A
January 1, 2009
6 years
Rs. 2,000,000
Cost of machine
Economic life
Rs. 6,963,448
6 years
B
January 1, 2009
3 years
Rs. 4,000,000
(to be reduced annually by 5%)
Rs. 15,000,000
6 years
NL sells machines on cash at cost plus 25%. It depreciates its assets under straight line method with no residual value. Fair
market annual interest rate is 15%.
Required:
(a)
Prepare journal entries to record the above transactions.
(b)
Prepare notes to the financial statements for the year ended December 31, 2009 in accordance with the
requirements of IFRS - 16 (Leases).
(19)
(Ignore taxation and comparative figures)
{Spring 2010, Q # 1}
Question 3
Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013. In this respect, the
following information is available:
Cost of equipment
Amount received on 1 July 2013
Four annual installments payable in arrears on 30 June, each year
Guaranteed residual value on expiry of the lease
Rs. in million
28.69
3.00
7.80
5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
Required:
(a)
Prepare accounting entries for the year ended 30 June 2014 in the books of GLL to record the transactions related
to the above lease arrangement in accordance with the requirements of International Financial Reporting
Standards.
(07)
(b)
Prepare a note for inclusion in GLL's financial statements for the year ended 30 June 2014, in accordance with
the requirements of International Financial Reporting Standards.
(10)
{Autumn 2014, Q # 5}
NASIR ABBAS FCA
459
LEASES (IFRS-16) [Lessor] – QUESTIONS
Question 4
Quartz Auto Limited (QAL) is engaged in the business of manufacturing of trucks. Since a number of the prospective
customers do not have adequate funds to purchase the vehicles against full payment, QAL provides lease financing facility
to its customers. It expects to receive a return at the rate of 15% per annum on the amount of lease finance.
On 1 July 2010, QAL sold seven trucks to Emerald Goods Transport Company (EGTC) on lease. The terms of the lease and
related information are as follows:
(i)
The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
(ii)
EGTC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth year. However, the
guarantee would lapse if the lease term is extended to the fifth year. EGTC will return the truck at the end of the
lease term.
(iii)
Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
(iv)
The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
(v)
The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and Rs. 100,000
respectively.
Required:
Assuming that QAL and EGTC intend to extend the lease for a period of five years, prepare:
(a)
Journal entries to record the transactions for the year ended 30 June 2011.
(08)
(b)
A note for inclusion in the financial statements, for the year ended 30 June 2011, in accordance with the
requirements of IFRS-16 ‘Leases’.
(07)
{Autumn 2011, Q # 4}
Question 5
Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on the following terms:
(i)
(ii)
(iii)
(iv)
(v)
The non-cancellable lease period is 3.5 years. Each semi-annual lease instalment of Rs. 48 million is
receivable in arrears.
The useful life of machine is 6 years.
The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease instalment
in the extended period will be of Rs. 15 million, receivable in arrears. It is reasonably certain that HL
will exercise this option.
The rate implicit in the lease is 10% p.a.
The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million.
GLL incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete the transaction.
Required:
Prepare note(s) for inclusion in GLL’s financial statements, for the year ended 30 June 2018.
(09)
{Autumn 2018, Q # 6(a)}
Question 6
Square Limited (SL) is a dealer of electronic items. SL acquires refrigerators of a particular model from a manufacturer at
a discount of 15% on the retail price of Rs. 300,000 per unit.
On 1 January 2018, SL sold 12 refrigerators to Cube Hotel at retail price on lease. The rate of interest implicit in the lease
was 10% per annum. The payment is to be made in three equal annual instalments payable in advance. Residual value at
the end of 3 years is nil.
The market rate of interest is 14% per annum.
Required:
Prepare journal entries in the books of SL in respect of above transaction for the year ended 31 December 2018.
(07)
{Spring 2019, Q # 1(b)}
NASIR ABBAS FCA
460
LEASES (IFRS-16) [Lessor] – QUESTIONS
Question 7
Lessor limited leased land and building to Lessee limited. The detail of which is as follows:
Commencement date of lease is January 1, 2019
Lease term is for 20 years
Lease payments are Rs. 500,000 payable at end of every year.
At the inception of the lease the fair value of leasehold interest in land was Rs. 5,000,000 while the fair value of the
leasehold interest in the building was Rs. 2,240,832.
The building had been purchased for Rs. 3,000,000 and were being depreciated over its total estimated useful life of 30
years to a nil residual value. At inception of lease, the building had a remaining useful life of 22 years.
Land was purchased 10 years ago for Rs. 2,200,000 and was not depreciated.
The interest rate implicit in lease is 3.293512%.
After a careful assessment of all facts and circumstances, each of elements was correctly classified as follows:
Lease over land was classified as operating lease
Lease over building was classified as finance lease
Required:
Prepare accounting entries for the years ending December 31, 2019 and 2020.
NASIR ABBAS FCA
461
LEASES (IFRS-16) [Lessor] – SOLUTIONS
SOLUTIONS
Solution No. 1
Books of FVLL
01-01-19
Machine
Cash
[Purchase of machine]
30-11-19
Cash
--------- Rs. million -------200.00
200.00
12.00
Lease income
[1st rental received]
31-12-19
31-12-19
12.00
Rent receivable [38.40(W-1) x 10/12 - 12]
Lease income
[Accrual adjustment at year-end]
20.00
Depreciation [(200 - 16)/8]
Accumulated depreciation
23.00
20.00
23.00
[Depreciation for 2019]
W-1
Rs. million
Total lease payments [12 x 8]
Lease income per year [96 / 2.5]
96.00
38.40
Solution 2
(a)
Date
Particulars
Dr.
Cr.
------------ Rs. '000 ----------
LEASE - A [FINANCE LEASE]
01-Jan-09
01-Jan-09
Lease receivable [W-1]
Cost of sales
Sales
Inventory
[Initial recognition of lease]
8,704
6,963
Bank
2,000
8,704
6,963
Lease receivable
[receipt of 1st rental]
31-Dec-09
Lease receivable
Finance income
[accrual of interest income for the year]
2,000
1,006
1,006
LEASE - B [OPERATING LEASE]
01-Jan-09
Bank
4,000
4,000
Rent income
[Rent received for 2009]
31-Dec-09
NASIR ABBAS FCA
Rent income [W-2]
Advance rent
[Recording unearned income]
197
197
462
LEASES (IFRS-16) [Lessor] – SOLUTIONS
31-Dec-09
Depreciation [15,000 / 6]
Accumulated depreciation
[Depreciation charge for the year]
W–1
PV of LP =
2,500
2,000 x Annuity factor
=
Sale value / FV =
2,500
8,704
6,963.448 x (1 + 25%)
=
8,704
Since PV of LP is equal to FV and lease term covers whole life, therefore, lease A is a finance lease
W–2
Rent as per agreement:
Rs,'000’
year 1
4,000
year 2 (95%)
3,800
year 3 (95%)
3,610
11,410
Income for the year
Receipt in 2009
3,803
4,000
Unearned income
197
Since LP is much lower than cost and lease term covers 50% life, therefore, lease B is an operating lease.
W - 3 Lease schedule
Date
Open. Bal.
01-Jan-09
8,704
01-Jan-10
6,704
01-Jan-11
5,710
01-Jan-12
4,566
01-Jan-13
3,251
01-Jan-14
1,739
Payment
2,000
2,000
2,000
2,000
2,000
2,000
Interest
1,006
856
685
488
261
Principal
2,000
994
1,144
1,315
1,512
1,739
Clos. Bal.
6,704
5,710
4,566
3,251
1,739
(0)
(b)
NOTES TO THE ACCOUNTS
1 - Net investment in lease
Lease term is 6 years. Rental is receivable at start of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
Lease payments receivable:
1 year
2 years
3 years
4 years
5 years
NASIR ABBAS FCA
2,000
2,000
2,000
2,000
2,000
10,000
463
LEASES (IFRS-16) [Lessor] – SOLUTIONS
Reconciliation:
Total lease payments receivable
Unguaranteed residual value
Gross investment in lease
Less: Unearned finance income
Net investment in lease
2 - Operating lease
Maturity analysis:
Lease payments receivable:
1 year
2 years
Rs.'000’
10,000
10,000
2,290
7,710
3,800
3,610
7,410
Solution 3
(a)
Date
01-Jul-13
01-Jul-13
Particulars
Dr.
Cr.
------------ Rs. '000’ ----------
Lease receivable
Bank
[Initial recognition of lease]
28,690
Bank
3,000
28,690
Lease receivable
[Receipt of down payment]
30-Jun-14
3,000
Bank
7,800
Finance income
Lease receivable
[receipt of 1st rental]
3,597
4,203
(b)
NOTES TO THE ACCOUNTS
5 - Net investment in lease
Lease term is 4 years and instalment is receivable at end of every year. Implicit rate is 14%.
Maturity analysis:
Rs.'000’
Lease payments receivable:
1 year
2 years
3 years
7,800
7,800
12,800
28,400
Reconciliation:
Total lease payments receivable
Unguaranteed residual value
Gross investment in lease
Less: Unearned finance income
Net investment in lease
NASIR ABBAS FCA
Rs.'000’
28,400
28,400
6,914
21,487
464
LEASES (IFRS-16) [Lessor] – SOLUTIONS
W-1
Lease schedule
Date
01-Jul-13
30-Jun-14
30-Jun-15
30-Jun-16
30-Jun-17
Open. Bal.
28,690
25,690
21,487
16,695
11,232
Payment
3,000
7,800
7,800
7,800
7,800
Interest
3,597
3,008
2,337
1,568
Principal
3,000
4,203
4,792
5,463
6,232
Clos. Bal.
25,690
21,487
16,695
11,232
5,000
Solution 4
(a)
Date
01-Jul-10
30-Jun-11
Particulars
Dr.
Cr.
------------ Rs. '000’ ---------9,450
5,952
9,102
6,300
Lease receivable [1,350 x 7]
Cost of sales [900 x 7 – 348 (W-1)]
Sales [9,450 – 348 (W-1)]
Inventory [900 x 7]
[Initial recognition of lease]
Bank
Finance income
Lease receivable
[receipt of 1st rental]
2,715
1,418
1,297
(b)
NOTES TO THE ACCOUNTS
4 - Net investment in lease
Lease term is 4 years extendable upto 5 years. Rental is receivable at end of every year. Implicit rate is 15%.
Maturity analysis:
Rs.'000’
Lease payments receivable:
1 year
2,715
2 years
2,715
3 years
2,715
4 years
2,715
10,861
Reconciliation:
Total lease payments receivable
Unguaranteed residual value
Gross investment in lease
Less: Unearned finance income
Net investment in lease
NASIR ABBAS FCA
10,861
700
11,561
3,409
8,152
465
LEASES (IFRS-16) [Lessor] – SOLUTIONS
W–1
Residual value
Less: GRV
UGRV
PV of UGRV
W–2
NIL = FV =
700
700
348
2,715.224 x Annuity factor + 700 x Discount factor
=
W-3
9,450
Lease schedule
Date
30-Jun-11
30-Jun-12
30-Jun-13
30-Jun-14
30-Jun-15
Open. Bal.
9,450
8,152
6,660
4,944
2,970
Payment
2,715
2,715
2,715
2,715
2,715
Interest
1,418
1,223
999
742
445
Principal
1,298
1,492
1,716
1,974
2,270
Clos. Bal.
8,152
6,660
4,944
2,970
700
Solution 5
Guava Leasing Limited
Notes to financial statements
for the year ended June 30, 2018
9 - Net investment in lease
Lease term is 3.5 years, extendable upto 5 years. Installment is receivable at end of every six months.
Implicit rate is 10%.
Maturity analysis:
Lease payments receivable as follows:
1 year
2 years
3 years
4 years
Rs. million
96.00
96.00
63.00
30.00
285.00
Reconciliation:
Rs. million
285.00
20.00
305.00
51.64
253.36
Total lease payments receivable
Unguaranteed residual value
Gross investment in lease
Less: Unearned finance income
Net investment in lease
W-1 Initial recognition
= Rs. 48 million x A.F. + Rs. 15 million x A.F. + Rs. 20 million x D.F.
=
Date
319.05
Op. bal
Payment
Interest
Principal
Cl. Bal
31-Dec-17
319.05
48.00
15.95
32.05
287.01
30-Jun-18
287.01
48.00
14.35
33.65
253.36
31-Dec-18
30-Jun-19
253.36
218.03
48.00
48.00
12.67
10.90
35.33
37.10
218.03
180.93
NASIR ABBAS FCA
466
LEASES (IFRS-16) [Lessor] – SOLUTIONS
Solution 6
01-01-18
Lease receivable (W-2)
Cost of sales [3.60 x 85%]
Sales [W-2]
Inventory
[Initial recognition of lease]
01-01-18
Cash (W-1)
----- Rs. million ---3.483
3.060
3.483
3.060
1.316
Lease receivable
[1st rental received]
31-12-18
Lease receivable [(3.483 - 1.316) x 14%]
Finance income
[Finance income for 2018]
1.316
0.303
0.303
W-1
Rental = [0.30m x 12] / (1 + annuity factor at 10%)
=
1.316
W-2
NIL = Sales = Lease receivable = 1.316 + 1.316 x annuity factor at 14%
=
3.483
Solution 7
------------ Rs. ----------01-01-19
31-12-19
31-12-19
Lease receivable
Acc. dep - building [3,000,000 x 8/30]
Building
Profit on disposal
[Initial recognition of lease]
2,240,832
800,000
3,000,000
40,832
Lease receivable (W-2)
Finance income
[Interest income for 2019]
73,802
Cash
500,000
73,802
Lease receivable (W-1)
Lease income (W-1)
[1st rental received]
31-12-20
31-12-20
154,736
345,264
Lease receivable (W-2)
Finance income
[Interest income for 2020]
71,137
Cash
500,000
Lease receivable (W-1)
Lease income (W-1)
71,137
154,736
345,264
[2nd rental received]
NASIR ABBAS FCA
467
LEASES (IFRS-16) [Lessor] – SOLUTIONS
W-1 Allocation of lease payments
Rs.
345,264
154,736
Land [500,000 x 5,000,000/7,240,832]
Building [500,000 x 2,240,832/7,240,832]
W-3 Lease schedule
Date
31-12-19
31-12-20
Open. Bal
2,240,832
2,159,898
NASIR ABBAS FCA
Interest
73,802
71,137
Lease
payment
(154,736)
(154,736)
Clos. Bal
2,159,898
2,076,299
468
IFRS 16 [Lessee] – Class notes
BOOKS OF LESSEE
Lessee
Lessee is an entity that obtains the right to use an underlying asset for a period of time in exchange for
consideration.
IMPORTANT TERMS
Status of terms studied in books of lessor portion:
Same as studied for lessor:Inception of lease, commencement of lease, lease term, lease
modification, GRV, IDC, implicit rate
Not applicable for lessee:Types of lease, UGRV, GIL, NIL, UFI
Additional/different terms for lessee:
1. Lease payments [LP] are the payments made by a lessee to a lessor relating to the right to use an
underlying asset during the lease term, comprising the following:
(a) fixed payments (including in-substance fixed payments), less any lease incentives;
(b) variable lease payments that depend on an index or a rate;
(c) the exercise price of a purchase option if the lessee is reasonably certain to exercise that option;
and
(d) payments of penalties for terminating the lease, if the lease term reflects the lessee exercising an
option to terminate the lease.
Lease payments also include amounts expected to be payable by the lessee under residual value
guarantees.
2. The lessee’s incremental borrowing rate of interest is the rate of interest that a lessee would have to
pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset
of a similar value to the right-of-use asset in a similar economic environment.
3. Right-of-use asset is an asset that represents a lessee’s right to use an underlying asset for the lease
term.
4. Short term lease is a lease that, at the commencement date, has a lease term of 12 months or less. A
lease that contains a purchase option is not a short-term lease.
SEPARATING COMPONENTS OF A CONTRACT
For a contact that contains a lease component and one or more additional lease or non-lease components,
a lessee shall allocate the consideration in the contract to each lease component on the basis of the
relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease
components. [i.e. same concept as for allocation of transaction price to separate performance obligations
in IFRS-15]
Nasir Abbas FCA
469
IFRS 16 [Lessee] – Class notes
NORMAL LEASE ACCOUNTING
Recognition and initial measurement
1. At the commencement of lease, a lessee shall recognize a right-of-use asset and a lease liability at the
present value of lease payments discounted at implicit rate. If implicit rate can not be readily
determined, the lessee shall use the lessee’s incremental borrowing rate.
Dr. Right-of-use
Cr. Lease liability
[Any lease payments made at or before the commencement date, less any lease incentives shall also
be included in the cost of right-of-use asset]
2. Any initial direct cost incurred by the lessee shall be included in the cost of right-of-use asset.
Dr. Right-of-use asset
Cr. Cash
3. PV of estimated dismantling and site restoration shall be included in the cost of right-of-use asset if
lessee has an obligation in accordance with IAS 37.
Dr. Right-of-use asset
Cr. Provision for dismantling cost
4. If a lessee incurs costs relating to the construction or redesigning for use of underlying asset, the
lessee shall account for those costs in accordance with other applicable standards e.g. IAS 16.
Subsequent measurement
Right-of-use asset
1. A lessee shall measure the right-of-use asset using cost model, revaluation model or fair value model
(i.e. IAS 40) as per its selected policy.
2. Depreciation on right-of-use asset shall be charged by lessee as follows:
If underlying asset will be retained by lessee after
lease:
If underlying asset will be returned by lessee:
Depreciation shall be charged from the Depreciation shall be charged from the
commencement date to the end of useful life of commencement date to the earlier of:
the underlying asset.
- the end of useful life of the right-of-use
asset.
- the end of lease term.
Nasir Abbas FCA
470
IFRS 16 [Lessee] – Class notes
Exam tip:
Asset will be retained by lessee after lease if any one of the following terms are agreed:
- ownership of the underlying asset will be transferred to lessee at end of lease term.
- If lease contains BPO
Asset will be returned to lessor after lease if any one of the following terms are agreed:
- If lease contains GRV
- It is clearly mentioned that asset will be returned to lessor.
Lease liability
1. A lessee shall recognize interest cost over the lease term, based on a pattern reflecting a constant
periodic rate of interest on remaining lease liability. Interest is calculated using a lease amortization
schedule.
When interest cost for the period is accrued
Dr. Interest expense
Cr. Lease liability
When lease payment is made
Dr. Lease liability
Cr. Cash
2. Variable lease payments not included in the measurement of lease liability shall be recognized in P&L
in the period in which the event or condition that triggers those payments occurs.
Re-assessment of lease liability
1. A lessee shall re-measure the lease liability and recognize the amount of remeasurement as an
adjustment to the right-of-use asset. However, if the carrying amount of the asset is reduced to zero,
then further reduction in the measurement of liability shall be recognized in P&L.
2. Discount rate to be used for remeasurement of lease liability shall be as follows:
Revised implicit
rate/incremental borrowing
rate shall be used if:
There is a change in lease term due to change in assessment of
exercise of options (i.e. extension option and termination
option). In this case revised lease payments shall be calculated
on revised lease term.
OR
There is a change in assessment of an option to purchase the
underlying asset. In this case revised lease payments shall reflect
the change in amounts payable under the purchase option.
Original implicit
rate/incremental borrowing
rate shall be used if:
There is a change in amount expected to be payable under a
residual value guarantee. In this case revised lease payments
shall reflect this change in amount.
OR
Nasir Abbas FCA
471
IFRS 16 [Lessee] – Class notes
There is a change in future lease payments resulting from a
change in index used to determine those payments. In this case
revised lease payments shall be determined for the remaining
lease term based on revised contractual cashflows.
Revised discount rate,
reflecting the changes in
interest rate, shall be used if:
There is a change in future lease payments resulting from a
change in rate used to determine those payments. In this case
revised lease payments shall be determined for the remaining
lease term based on revised contractual cashflows.
Lease modification
Case I – Modification shall be accounted for as a new lease
A lessee shall account for a lease modification as a separate lease if both:
(a) the modification increases the scope of the lease by adding the right to use one or more underlying
assets; and
(b) the consideration for the lease increases by an amount commensurate with the stand-alone price for
the increase in scope and any appropriate adjustments to that stand-alone price to reflect the
circumstances of the particular contract.
Case II – Modification shall not be accounted for as a new lease
1. For all modifications (except for the scope reduction in point 2 below) a lessee shall remeasure the
lease liability by discounting the revised lease payments using a revised discount rate. The revised
discount rate is determined as the interest rate implicit in the lease for the remainder of the lease
term, if that rate can be readily determined, or the lessee’s incremental borrowing rate at the
effective date of the modification, if the interest rate implicit in the lease cannot be readily
determined. A corresponding shall be made to the right-of-use asset.
2. Adjustment for scope reduction (e.g. reduction in right of use, reduction in lease term) will be made
by decreasing the carrying amounts of lease liability and right of use. This adjustment will be made
before adjusting any other modification. The lessee shall recognize in profit or loss any gain or loss
relating to this scope reduction as follows:
Dr. Lease liability (W-1)
Cr. Right-of-use [Carrying amount of ROU asset x proportionate reduction in scope of lease]
Dr./Cr. Loss or gain on modification [balancing figure]
W-1
Carrying amount of lease liability on the date of modification
PV of lease payments after scope reduction discounted at original rate
(ignoring any other modification)
X
(X)
X
Nasir Abbas FCA
472
IFRS 16 [Lessee] – Class notes
Presentation and disclosures
Students should study this portion themselves either from IFRS or ICAP study text.
EXCEPTION ACCOUTING FOR LEASE
A lessee may elect not to apply normal lease accounting for:
(a) Short term leases
(b) Leases for low value assets
Low value asset
A lessee shall assess the value of an underlying asset based on the value of the asset when it is new,
regardless of the age of the asset being leased. The assessment of whether an underlying asset is of
low value is performed on an absolute basis regardless of whether those leases are material to the
lessee. The assessment is not affected by the size, nature or circumstances of the lessee. Examples
of low-value underlying assets can include tablet and personal computers, small items of office
furniture and telephones.
Exceptional accounting:
The lessee shall recognize the lease payments associated with those leases as an expense on either a
straight-line basis over the lease term or another systematic basis. The lessee shall apply another
systematic basis if that basis is more representative of the pattern of the lessee’s benefit.
SUB-LEASE
A transaction for which an underlying asset is re-leased by a lessee (‘intermediate lessor’) to a third party,
and the lease (‘head lease’) between the head lessor and lessee remains in effect.
Classification of sublease:
In classifying a sublease, an intermediate lessor shall classify the sublease as a finance lease or an
operating lease as follows:
(a) if the head lease is a short-term lease that the entity, as a lessee, has followed exceptional accounting,
the sublease shall be classified as an operating lease.
(b) otherwise, the sublease shall be classified by reference to the right-of-use asset arising from the head
lease, rather than by reference to the underlying asset (for example, the item of property, plant or
equipment that is the subject of the lease).
Sublease classified as finance lease
When the intermediate lessor enters into the sublease, the intermediate lessor:
(a) derecognizes the right-of-use asset relating to the head lease that it transfers to the sublessee and
recognizes the net investment in the sublease;
(b) recognizes any difference between the right-of-use asset and the net investment in the sublease in
profit or loss; and
(c) retains the lease liability relating to the head lease in its statement of financial position, which
represents the lease payments owed to the head lessor.
During the term of the sublease, the intermediate lessor recognizes both finance income on the
sublease and interest expense on the head lease.
Nasir Abbas FCA
473
IFRS 16 [Lessee] – Class notes
Sublease classified as operating lease
When the intermediate lessor enters into the sublease, the intermediate lessor retains the lease liability
and the right-of-use asset relating to the head lease in its statement of financial position.
During the term of the sublease, the intermediate lessor:
(a) recognizes a depreciation charge for the right-of-use asset and interest on the lease liability; and
(b) recognizes lease income from the sublease.
Nasir Abbas FCA
474
LEASES (IFRS-16) [Lessee] – QUESTIONS
PRACTICE QUESTIONS
Question 1
On 1 January 2019, French Vanilla Leasing Limited (FVLL) purchased a machine costing Rs. 200 million having useful life
of 8 years. Residual value of the machine at end of its useful life is estimated at Rs. 16 million.
On 1 February 2019, FVLL entered into a lease agreement for this machine with Cotton Candy Limited (CCL) for a noncancellable period of 2.5 years with effect from 1 March 2019. Under the agreement, eight instalments of Rs. 12 million
are to be paid quarterly in arrears commencing from the end of 3rd quarter i.e. 30 November 2019.
FVLL has incorporated an implicit rate of 15% per annum which is not known to CCL. Incremental borrowing rate of CCL
is 16% per annum.
On 1 April 2019, CCL completed installation of the machine at a cost of Rs. 4 million and put it into use.
Both companies follow straight line method for charging depreciation.
Required:
Prepare journal entries for the year ended 31 December 2019 in the books of CCL to record the above transactions.
(15)
[Spr-20, Q-5]
Question 2
On 1 July 2010, Miracle Textile Limited (MTL) acquired a machine on lease, from a bank. Details of the lease are as follows:
(i) Fair value of machine is Rs. 20 million. It is also equal to present value of lease payments.
(ii) The lease term and useful life is 4 years and 10 years respectively.
(iii) Installment of Rs. 5.80 million is to be paid annually in advance on 1 July.
(iv) The interest rate implicit in the lease is 15.725879%.
(v) At the end of lease term, MTL has an option to purchase the machine on payment of Rs. 2 million. The fair value of
the machine at the end of lease term is expected to be Rs. 3 million.
MTL depreciates the machine on the straight line method to a nil residual value.
Required:
Prepare relevant extracts of the statement of financial position and related notes to the financial statements for the year
ended 30 June 2012 along with comparative figures. Ignore taxation
(16)
{Autumn 2012, Q # 2}
Question 3
On 1 July 2015, ABC acquired a machine on lease on following terms:
(i) Basic contract period is 5 years, however, ABC has an option to extend it by 2 more years.
(ii) Rental of Rs. 240,000 payable at end of every year in 1st 5 years. During extension period, lease rental will reduce to
Rs. 180,000 per year.
Implicit rate was not readily determined, therefore, incremental borrowing rate of 8% was used at commencement to
account for lease. Initially ABC was uncertain about exercise of extension option.
On June 30, 2018 due to change in circumstances, ABC reassessed the possibility of exercise of extension option and
concluded it to be reasonably certain to be exercised. On that date the incremental borrowing rate was 10%.
Required:
Journal entries for the years ending June 30, 2018 and 2019.
Question 4
On 1 July 2016, XYZ acquired a machine on lease on following terms:
(i) Lease term 8 years.
(ii) Lease rental payable in advance on 1st July every year. It will be revised every two years on the basis of the increase
in CPI for the preceding 24 months. Rental applicable for first two years is Rs. 50,000 per year.
(iii) XYZ is also required to make a variable payment for each year of lease equal to 1% of sales generated from the
machine.
NASIR ABBAS FCA
475
LEASES (IFRS-16) [Lessee] – QUESTIONS
Implicit rate was not readily determined, therefore, incremental borrowing rate of 8% was used at commencement to
account for lease. Initial direct cost paid by XYZ was Rs. 4,000. CPI on the date of commencement was 125.
On July 1, 2018 i.e. start of third year of lease, CPI moved to 135. On that date the incremental borrowing rate was 10%.
XYZ made annual sales of Rs. 1,250,000 in 2018 and 2019.
Required:
Journal entries for the years ending June 30, 2018 and 2019 (excluding sales entry).
Question 5
On 1 July 2017, DEF acquired a property on lease on following terms:
(i) Basic contract period is 5 years.
(ii) Rental of Rs. 250,000 payable at end of every year.
Implicit rate was not readily determined, therefore, incremental borrowing rate of 9% was used at commencement to
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend the original lease by increasing the contractual lease period by
four years. Lease rentals were also revised to Rs. 290,000 payable at end of every year over remaining lease term. On that
date the incremental borrowing rate was 10%.
Required:
Journal entries for the years ending June 30, 2019 and 2020.
Question 6
On 1 July 2014, MNO acquired a 5,000 square metres of office space on lease on following terms:
(i) Contract period is 10 years.
(ii) Rental of Rs. 200,000 payable at end of every year.
Implicit rate was not readily determined, therefore, incremental borrowing rate of 9% was used at commencement to
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend the original lease to reduce the office space by 2,500 square
metres only (i.e. 50% reduction) w.e.f. July 1, 2019. Lease payments were reduced to Rs. 120,000 per year. On that date
the incremental borrowing rate was 7%.
Required:
Journal entries for the years ending June 30, 2019 and 2020.
Question 7
On 1 July 2014, PQR acquired a 2,000 square metres of office space on lease on following terms:
(i) Contract period is 10 years.
(ii) Rental of Rs. 100,000 payable at end of every year.
Implicit rate was not readily determined, therefore, incremental borrowing rate of 6% was used at commencement to
account for lease.
On July 1, 2019 lessee and lessor both agreed to amend (w.e.f. July 1, 2019) the original lease to:
(a) include an additional 1,500 square metres of space in the same building
(b) reduce the lease term from 10 years to 8 years.
The annual rental for 3,500 square metres was revised to Rs. 150,000 per year. Since this increase in rental is not
consistent with the stand-alone price of additional office space, therefore, it can not be accounted for as a separate lease.
On that date the incremental borrowing rate was 7%.
Required:
Journal entries for the years ending June 30, 2019 and 2020.
NASIR ABBAS FCA
476
LEASES (IFRS-16) [Lessee] – SOLUTIONS
SOLUTIONS
Solution No. 1
Books of CCL
--------- Rs. million -------01-03-19
01-04-19
ROU asset (W-2)
Lease liability
[Initial recognition of lease]
74.70
ROU asset
4.00
74.70
Cash
[Installation cost]
31-05-19
31-08-19
30-11-19
30-11-19
31-12-19
4.00
Interest expense (W-2)
Lease liability
[Interest expense for Q-1]
2.99
Interest expense (W-2)
Lease liability
[Interest expense for Q-2]
3.11
Interest expense (W-2)
Lease liability
[Interest expense for Q-3]
3.23
Lease liability
Cash
[1st rental paid]
12.00
Interest expense [2.88(W-2) x 1/3]
Lease liability
0.96
2.99
3.11
3.23
12.00
0.96
[Interest accrual at year end]
31-12-19
Depreciation [74.70/30 x 10 + 4/29 x 9]
Accumulated depreciation
[Depreciation for 2019]
26.14
26.14
W-2
Rs. million
PV of lease payments [12 x 8 qtr-annuity factor x 2 qtr-discount factor at 4%]
74.70
W-3 Lease schedule
Date
31-05-19
31-08-19
30-11-19
29-02-20
Open.
Bal
74.70
77.69
80.79
72.02
NASIR ABBAS FCA
Interest
2.99
3.11
3.23
2.88
Lease
payment
(12.00)
(12.00)
Clos. Bal
77.69
80.79
72.02
62.91
477
LEASES (IFRS-16) [Lessee] – SOLUTIONS
Solution 2
Miracle Textile Limited
Balance sheet – Extracts
Non-Current assets
Right of use [Note - 1]
Non-Current liabilities
Lease liability [Note - 2]
Current liabilities
Lease liability [Note - 2]
Miracle Textile Limited
Notes - Extracts
1 - Property, plant and equipment
2012
2011
-------------- Rs.'000’ ---------16,000
18,000
6,505
10,633
5,800
5,800
Cost
As at July 1
Additions
Disposal
As at June 30
20,000
20,000
20,000
20,000
Depreciation
As at July 1
For the year
Disposal
2,000
2,000
-
2,000
-
As at June 30
4,000
2,000
NBV as at June 30
16,000
18,000
2 - Lease Liability
The Company has entered into a finance lease agreement with a bank in respect of a machine. The finance lease liability
bears interest at the rate of 15.725879% per annum. The company has the option to purchase the machine by paying
an amount of Rs. 2 million at the end of the lease term. The lease rentals are payable annually in advance
2012
2011
For the year:
---------- Rs.'000’ ---------Depreciation
Finance charge
Total cash outflow for leases
2,000
1,672
5,800
2,000
2,233
5,800
16,000
-
18,000
20,000
Lease assets:
Carrying amount
Addition to right of use
Maturity analysis:
Undiscounted lease payments are as follows:
1 year
2 years
3 years
NASIR ABBAS FCA
2012
2011
---------- Rs.'000’ ---------5,800
7,800
-
5,800
5,800
7,800
13,600
19,400
478
LEASES (IFRS-16) [Lessee] – SOLUTIONS
W-1
Lease schedule
Date
01-Jul-10
01-Jul-11
01-Jul-12
01-Jul-13
30-Jun-14
Open. Bal.
20,000
14,200
10,633
6,505
1,728
Payment
5,800
5,800
5,800
5,800
2,000
Interest
2,233
1,672
1,023
272
Principal
5,800
3,567
4,128
4,777
1,728
Clos. Bal.
14,200
10,633
6,505
1,728
0
Solution 3
------------ Rs. ----------30-06-18
30-06-18
30-06-18
30-06-18
Depreciation [958,250(W-1)/5]
Acc. depreciation
[Depreciation for 2018]
191,650
Finance cost (W-2)
Lease liability
[Interest expense for 2018]
49,480
Lease liability
Cash
[Lease rental paid]
240,000
ROU asset
246,724
191,650
49,480
240,000
Lease liability (W-3)
[Re-assessment adjustment]
30-06-19
30-06-19
30-06-19
246,724
Depreciation (W-4)
Acc. depreciation
[Depreciation for 2019]
157,506
Finance cost (W-5)
Lease liability
[Interest expense for 2019]
67,471
Lease liability
Cash
240,000
157,506
67,471
240,000
[Lease rental paid]
W-1 Initial recognition
Rs.
958,250
PV of lease payments [240,000 x 5-year annuity factor at 8%]
W-2 Lease schedule before re-assessment
Date
30-06-16
30-06-17
30-06-18
NASIR ABBAS FCA
Open. Bal
958,250
794,910
618,503
Interest
76,660
63,593
49,480
Lease
payment
(240,000)
(240,000)
(240,000)
Clos. Bal
794,910
618,503
427,984
479
LEASES (IFRS-16) [Lessee] – SOLUTIONS
Rs.
674,708
W-3 Re-assessment adjustment
PV of lease payments
[240,000 x 2-year AF at 10% + 180,000 x 2-year AF at 10% x 2-year DF at 10%]
Lease liability balance
Re-assessment adjustment
427,984
246,724
W-4 Depreciation revised
NBV of ROU on 30-06-18 [958,250 x 2/5]
Re-assessment adjustment
Rs.
383,300
246,724
630,025
157,506
Depreciation [630,025/4]
W-5 Lease schedule after re-assessment
Date
Open. Bal
30-06-19
30-06-20
30-06-21
30-06-22
674,708
502,179
312,397
163,636
Lease
Interest
67,471
50,218
31,240
16,364
payment
(240,000)
(240,000)
(180,000)
(180,000)
Clos. Bal
502,179
312,397
163,636
0
Solution 4
------------ Rs. ----------30-06-18
30-06-18
30-06-18
01-07-18
01-07-18
Depreciation [314,319(W-1)/8]
Acc. depreciation
[Depreciation for 2018]
39,290
Finance cost (W-2)
Lease liability
[Interest expense for 2018]
18,492
P&L [1,250,000 x 1%]
Cash
[Payment of 1% of sales]
12,500
Lease liability [50,000 x 135/125]
Cash
[Lease rental paid]
54,000
ROU asset
19,971
39,290
18,492
12,500
54,000
Lease liability (W-3)
[Re-assessment adjustment]
30-06-19
Depreciation (W-4)
Acc. depreciation
19,971
42,618
42,618
[Depreciation for 2019]
NASIR ABBAS FCA
480
LEASES (IFRS-16) [Lessee] – SOLUTIONS
30-06-19
30-06-19
Finance cost (W-5)
Lease liability
[Interest expense for 2019]
17,249
P&L [1,250,000 x 1%]
Cash
[Payment of 1% of sales]
12,500
17,249
12,500
W-1 Initial recognition
PV of lease payments [50,000 x 7-year annuity factor at 8%]
Rs.
260,319
ROU asset [260,319 + 50,000 + 4,000]
314,319
W-2 Lease schedule before re-assessment
Date
Open. Bal
01-07-17
30-06-18
260,319
231,144
Interest
20,825
18,492
Lease
payment
(50,000)
-
Clos. Bal
231,144
249,636
Rs.
269,606
249,636
19,971
W-3 Re-assessment adjustment
PV of lease payments [54,000 + 54,000 x 5-year AF at 8%]
Lease liability balance
Re-assessment adjustment
W-4 Depreciation revised
NBV of ROU on 30-06-18 [314,319 x 6/8]
Re-assessment adjustment
Rs.
235,739
19,971
255,710
42,618
Depreciation [255,710/6]
W-5 Lease schedule after re-assessment
Date
Open. Bal
01-07-18
01-07-19
01-07-20
01-07-21
01-07-22
01-07-23
269,606
215,606
178,855
139,163
96,296
50,000
Interest
17,249
14,308
11,133
7,704
4,000
Lease
payment
(54,000)
(54,000)
(54,000)
(54,000)
(54,000)
(54,000)
Clos. Bal
215,606
178,855
139,163
96,296
50,000
0
Solution 5
------------ Rs. ----------30-06-19
Depreciation [972,413(W-1)/5]
Acc. depreciation
194,483
194,483
[Depreciation for 2019]
NASIR ABBAS FCA
481
LEASES (IFRS-16) [Lessee] – SOLUTIONS
30-06-19
30-06-19
01-07-19
30-06-20
30-06-20
30-06-20
Finance cost (W-2)
Lease liability
[Interest expense for 2019]
72,894
Lease liability
Cash
[Lease rental paid]
250,000
ROU asset
Lease liability (W-3)
[Modification adjustment]
779,018
Depreciation (W-4)
Acc. depreciation
[Depreciation for 2020]
194,638
Finance cost (W-5)
Lease liability
[Interest expense for 2020]
141,184
Lease liability
Cash
290,000
72,894
250,000
779,018
194,638
141,184
290,000
[Lease rental paid]
W-1 Initial recognition
Rs.
972,413
PV of lease payments [250,000 x 5-year annuity factor at 9%]
W-2 Lease schedule before modification
Date
30-06-18
30-06-19
Open. Bal
972,413
809,930
Interest
87,517
72,894
Lease
payment
(250,000)
(250,000)
W-3 Modification adjustment
PV of revised lease payments [290,000 x 7-year AF at 10%]
Lease liability balance
Modification adjustment
W-4 Depreciation revised
NBV of ROU on 30-06-19 [972,413 x 3/5]
Modification adjustment
Depreciation [1,362,465/7]
NASIR ABBAS FCA
Clos. Bal
809,930
632,824
Rs.
1,411,841
632,824
779,018
Rs.
583,448
779,018
1,362,465
194,638
482
LEASES (IFRS-16) [Lessee] – SOLUTIONS
W-5 Lease schedule after modification
Date
Open. Bal
30-06-20
30-06-21
30-06-22
30-06-23
30-06-24
30-06-25
30-06-26
Lease
Interest
1,411,841
1,263,026
1,099,328
919,261
721,187
503,306
263,636
141,184
126,303
109,933
91,926
72,119
50,331
26,364
payment
(290,000)
(290,000)
(290,000)
(290,000)
(290,000)
(290,000)
(290,000)
Clos. Bal
1,263,026
1,099,328
919,261
721,187
503,306
263,636
0
Solution 6
------------ Rs. ----------30-06-19
30-06-19
30-06-19
01-07-19
01-07-19
Depreciation [1,283,532(W-1)/10]
Acc. depreciation
[Depreciation for 2019]
128,353
Finance cost (W-2)
Lease liability
[Interest expense for 2019]
80,747
Lease liability
Cash
[Lease rental paid]
200,000
Lease liability (W-3)
Acc. dep. [641,766 – 320,883(W-4)]
Loss on modification
ROU asset [1,283,532 x 50%]
[Scope reduction adjustment]
311,172
320,883
9,711
ROU asset
25,266
128,353
80,747
200,000
641,766
Lease liability (W-3)
[Modification adjustment]
30-06-20
30-06-20
30-06-20
25,266
Depreciation (W-4)
Acc. depreciation
[Depreciation for 2020]
69,230
Finance cost (W-5)
Lease liability
[Interest expense for 2020]
34,442
Lease liability
Cash
120,000
69,230
34,442
120,000
[Lease rental paid]
NASIR ABBAS FCA
483
LEASES (IFRS-16) [Lessee] – SOLUTIONS
W-1 Initial recognition
Rs.
1,283,532
PV of lease payments [200,000 x 10-year annuity factor at 9%]
W-2 Lease schedule before modification
Date
Open. Bal
30-06-15
30-06-16
30-06-17
30-06-18
30-06-19
1,283,532
1,199,049
1,106,964
1,006,591
897,184
Interest
115,518
107,914
99,627
90,593
80,747
Lease
payment
(200,000)
(200,000)
(200,000)
(200,000)
(200,000)
Clos. Bal
1,199,049
1,106,964
1,006,591
897,184
777,930
PV of revised lease payments for scope reduction [120,000 x 5-year AF at 9%]
Scope reduction adjustment
Rs.
777,930
466,758
311,172
Liability revised for scope reduction at original rate
PV of revised lease payments for rate change [120,000 x 5-year AF at 7%]
Modification adjustment
466,758
492,024
25,266
W-4 Depreciation revised
NBV of ROU on 30-06-19 [1,283,532 x 5/10]
Scope reduction [641,766 x 50%]
Rs.
641,766
(320,883)
320,883
25,266
346,148
69,230
W-3 Modification adjustment
Lease liability carrying amount
Modification adjustment
Depreciation [346,148/5]
W-5 Lease schedule after modification
Date
Open. Bal
30-06-20
30-06-21
30-06-22
30-06-23
30-06-24
492,024
406,465
314,918
216,962
112,150
Interest
34,442
28,453
22,044
15,187
7,850
Lease
payment
(120,000)
(120,000)
(120,000)
(120,000)
(120,000)
Clos. Bal
406,465
314,918
216,962
112,150
-
Solution 7
------------ Rs. ----------30-06-19
Depreciation [736,009(W-1)/10]
Acc. depreciation
73,601
73,601
[Depreciation for 2019]
NASIR ABBAS FCA
484
LEASES (IFRS-16) [Lessee] – SOLUTIONS
30-06-19
30-06-19
01-07-19
01-07-19
Finance cost (W-2)
Lease liability
[Interest expense for 2019]
29,504
Lease liability
Cash
[Lease rental paid]
100,000
Lease liability (W-3)
Acc. dep [294,403 - 147,202(W-4)]
ROU asset [736,009 x 2/5]
Gain on modification
[Scope reduction adjustment]
153,935
147,202
ROU asset
126,346
29,504
100,000
294,403
6,733
Lease liability (W-3)
[Modification adjustment]
30-06-20
30-06-20
30-06-20
126,346
Depreciation (W-4)
Acc. depreciation
[Depreciation for 2020]
115,716
Finance cost (W-5)
Lease liability
[Interest expense for 2020]
27,555
Lease liability
Cash
150,000
115,716
27,555
150,000
[Lease rental paid]
W-1 Initial recognition
Rs.
736,009
PV of lease payments [100,000 x 10-year annuity factor at 6%]
W-2 Lease schedule before modification
Date
30-06-15
30-06-16
30-06-17
30-06-18
30-06-19
Open. Bal
736,009
680,169
620,979
558,238
491,732
Interest
44,161
40,810
37,259
33,494
29,504
Lease
payment
(100,000)
(100,000)
(100,000)
(100,000)
(100,000)
Clos. Bal
680,169
620,979
558,238
491,732
421,236
W-3 Modification adjustment
Lease liability carrying amount
PV of revised lease payments for scope reduction [100,000 x 3-year AF at 6%]
Scope reduction adjustment
NASIR ABBAS FCA
Rs.
421,236
267,301
153,935
485
LEASES (IFRS-16) [Lessee] – SOLUTIONS
Liability revised for scope reduction at original rate
PV of revised lease payments for rate change [150,000 x 3-year AF at 7%]
Modification adjustment
267,301
393,647
126,346
W-4 Depreciation revised
NBV of ROU on 30-06-19 [736,009 x 5/10]
Scope reduction [368,004 x 2/5]
Rs.
368,004
(147,202)
220,803
126,346
347,149
115,716
Modification adjustment
Depreciation [347,149/3]
W-5 Lease schedule after modification
Date
30-06-20
30-06-21
30-06-22
NASIR ABBAS FCA
Open. Bal
393,647
271,203
140,187
Interest
27,555
18,984
9,813
Lease
payment
(150,000)
(150,000)
(150,000)
Clos. Bal
271,203
140,187
0
486
Q-4 [Dec-18] SOLUTION
Lease liability
01-01-15 Initital recognition (W-1)
01-01-15 Lease payment
31-12-15
Interest [483.51 x 8%]
01-01-16
Lease payment
01-01-16
Re-assessment adjustment (W-2)
31-12-16
Interest [311.17 x 9%]
01-01-17
Lease payment
01-01-17
01-01-17
Scope reduction (W-3)
Modification adjustment (W-3)
31-12-17
Interest [138.84 x 10%]
Right-of-use asset
01-01-15 Initital recognition [563.51(W-1) + 15]
31-12-15 Depreciation [578.51/12]
01-01-16
Re-assessment adjustment (W-2)
31-12-16
Depreciation [399.28/6]
01-01-17
01-01-17
Scope reduction [332.73 x 2/5]
Modification adjustment (W-3)
31-12-17
Depreciation [197.76/3]
Rs. million
563.51
(80.00)
483.51
38.68
522.19
(80.00)
442.19
(131.02)
311.17
28.01
339.18
(80.00)
259.18
(118.45)
(1.89)
138.84
13.88
152.73
Rs. million
578.51
(48.21)
530.30
(131.02)
399.28
(66.55)
332.73
(133.09)
(1.89)
197.76
(65.92)
131.84
487
W-1 Initial recognition
PV of lease payments
[80 + 80 x 6-year AF at 8% + 70 x 3-year AF at 8% x 6-year DF at 8%]
W-2 Re-assessment adjustment
PV of revised lease payments [80 x 5-year AF at 9%]
Lease liability balance
Re-assessment adjustment
Rs. million
563.51
Rs. million
311.17
442.19
(131.02)
Carrying amount of lease liability
PV of revised lease payments at original rate [80 x 2-year AF at 9%]
Scope reduction
Rs. million
259.18
140.73
118.45
PV of revised lease payments [80 x 2-year AF at 10%]
PV of revised lease payments at original rate [80 x 2-year AF at 9%]
Modification adjustment in ROU
138.84
140.73
(1.89)
W-3 Modification adjustment
488
IFRS 16 [Sale and leaseback] – Class notes
If an entity (seller-lessee) transfers an asset to another entity (buyer-lessor) and leases that asset back,
this whole transaction (i.e. transfer and leaseback) is called sale and leaseback.
Case 1 – Transfer of the asset is a sale as per IFRS 15
Exam tip
If the lease is an operating lease from lessor’s perspective, then the transfer of asset is a sale
1) Terms are fair
[Sale value is equal to the fair value of the asset and lease payments are at market rates]
Books of Seller-Lessee
De-recognition of transferred asset and recognition of lease:
Dr. Cash [Consideration received]
Dr. Right-of-use asset (W-1)
Cr. Lease liability [PV of lease payments]
Cr. Asset derecognized [NBV]
Dr./Cr. Loss or Profit on transaction (balancing figure)
W-1
ROU asset = PV of lease payments x
NBV of transferred asset
Fair value of transferred asset
Subsequent measurement of lease:
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
Books of Buyer-Lessor
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
Nasir Abbas FCA
489
IFRS 16 [Sale and leaseback] – Class notes
2) Above market terms
[Sale value > fair value of the asset or PV of lease payments > PV of lease payments at market rate]
Books of Seller-Lessee
De-recognition of transferred asset and recognition of lease:
Dr. Cash [Consideration received]
Dr. Right-of-use asset (W-1)
Cr. Lease liability [PV of cashflows – Above market terms(W-1.1)]
Cr. Financial liability [Above market terms(W-1.1]
Cr. Asset derecognized [NBV]
Dr./Cr. Loss or Profit on transaction (balancing figure)
W-1
ROU asset = [PV of cashflows – Above market terms(W-1.1)] x
NBV of transferred asset
Fair value of transferred asset
W-1.1
“Above market terms” shall be accounted for as additional financing. It is calculated as:
= Sale value – fair value of asset
OR
= PV of cashflows – PV of cashflows at market rate
whichever is available
Subsequent measurement of lease:
-
ROU asset and lease liability shall be measured subsequently using same guidance as already studied
in books of lessee.
Financial liability shall be measured subsequently as per IFRS 9
Contractual cashflows will be split in ratio of “lease liability” and “financial liability” initially recognized
and applied against these separate liabilities accordingly.
Books of Buyer-Lessor
-
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16).
Lease shall be accounted as already studied in books of lessor.
Above market terms (W-1.1) shall be recognized as financial asset as per IFRS 9
Split of cashflows (as done above for lessee) shall be accounted for “lease payments” and “contractual
cashflow of financial asset” accordingly.
Nasir Abbas FCA
490
IFRS 16 [Sale and leaseback] – Class notes
3) Below market terms
[Sale value < fair value of the asset or PV of lease payments < PV of lease payments at market rate]
Books of Seller-Lessee
De-recognition of transferred asset and recognition of lease:
Dr. Cash [Consideration received]
Dr. Right-of-use asset (W-1)
Cr. Lease liability [PV of cashflows]
Cr. Asset derecognized [NBV]
Dr./Cr. Loss or Profit on transaction (balancing figure)
W-1
ROU asset = [PV of cashflows + Below market terms(W-1.1)] x
NBV of transferred asset
Fair value of transferred asset
W-1.1
“Below market terms” shall be accounted for as a prepayment of lease payments. It is calculated as:
= Fair value of asset – Sale value
OR
= PV of cashflows at market rate – PV of cashflows
whichever is available
Subsequent measurement of lease:
ROU asset and lease liability shall be measured subsequently using same guidance as already studied in
books of lessee.
Books of Buyer-Lessor
The buyer-lessor shall account for the purchase of the asset as per applicable standard (e.g. IAS 16). Lease
shall be accounted as already studied in books of lessor.
Nasir Abbas FCA
491
IFRS 16 [Sale and leaseback] – Class notes
Case 2 – Transfer of the asset is not a sale as per IFRS 15
Exam tip
If the lease is a finance lease from lessor’s perspective, then the transfer of asset is not a sale.
Books of Seller-Lessee
-
It shall continue to recognize the transferred asset as per relevant standard (e.g. IAS 16)
It shall recognize a financial liability equal to the transfer proceeds as per IFRS 9.
Books of Buyer-Lessor
-
It shall not recognize the transferred asset.
It shall recognize a financial asset equal to the transfer proceeds as per IFRS 9.
Nasir Abbas FCA
492
LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS
PRACTICE QUESTIONS
Question 1
Shoaib Limited (SL) were facing financial difficulties for some period. Finance director decided to use sale and lease
back as a source of finance. SL entered into following transactions during the year:
On July 1, 2012, SL sold an equipment, having net book value of Rs. 2.25 million, to ABC Finance for Rs. 2.5 million and
leased it back for remaining life of equipment i.e. 5 years. Lease rental of Rs. 693,524 is payable on every June 30th.
Implicit rate is 12%.
SL had a machine in use having book value of Rs. 1.5 million on December 31, 2012. On that date it sold the machine
for Rs. 1.675 million (equal to the fair value) and leased it back for 3 years. This sale can be assumed to meet criteria of
sale under IFRS 15. Agreed lease payments are as follows:
- December 31, 2013 : Rs. 150,000
- December 31, 2014 : Rs. 160,000
- December 31, 2015 : Rs. 200,000
Implicit rate is 10%.
Required:
(a) Journal entries for the year ending June 30, 2013
(b) Show the relevant extracts of Income statement and Balance sheet for the year ending June 30, 2013
(Disclosures in notes are not required)
Question 2
On July 1, 2019, Ess Limited sold an equipment, having net book value of Rs. 1.5 million, to XYZ Traders and leased it
back for 3 years. The fair market value at that date was Rs. 1,600,000. Implicit rate in lease was 10%.
Following are the terms of sale and lease back agreement:
Sale price
Annual rent (arrears)
------------ Rs.-----------Scenario I
Scenario II
Scenario III
1,600,000
1,700,000
1,400,000
130,000
140,000
120,000
XYZ Traders classified this lease as operating lease and estimated the useful life to be 20 years.
Required:
Journal entries for the year ending June 30, 2020 for each scenario in books of both companies.
Question 3
On 1 January 2016 Maisum Limited (ML) entered into a sale and lease back agreement with Bachat Bank in respect of a
machine. The details of machine sold and leased back are as under:
Rs. in million
Carrying value
85
Sale price to the lessor
95
Fair market value
120
The terms of lease agreement are as follows:
Lease term
Annual rentals (payable in advance)
Implicit interest rate
NASIR ABBAS FCA
4 years
Rs. 21 million
9%
493
LEASES (IFRS-16) [Sale and leaseback] – QUESTIONS
The transfer of machine by the seller-lessee satisfies the requirements of IFRS 15 to be accounted for as a sale.
Required:
(a) Prepare journal entry in the books of ML to record the above transaction on 1 January 2016.
(07)
(b) Prepare relevant extracts from the statements of financial position and comprehensive income and related notes for
inclusion in ML’s financial statements, for the year ended 31 December 2016.
(10)
{Spring 2017, Q # 4}
NASIR ABBAS FCA
494
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
SOLUTIONS
Solution No. 1
(a)
Date
01-Jul-12
31-Dec-12
30-Jun-13
30-Jun-13
30-Jun-13
30-Jun-13
W-1
Particulars
Bank
Financial liability
[Sale proceeds]
Dr.
2,500,000
Bank
Right of use (W-2)
Machine
Lease liability (W-2)
Profit on disposal (balancing)
[Sale and recognition of lease]
1,675,000
374,964
Cr.
2,500,000
1,500,000
418,710
131,254
Depreciation [2,250 / 5]
Accumulated depreciation
[Depreciation charge on equipment for the year]
450,000
Finance cost [418,710 x 10% x 6/12]
Lease liability
[Interest expense for the year]
20,936
Depreciation [374,964/3 x 6/12]
Accumulated depreciation
[Depreciation charge on right of use for the year]
62,494
Financial liability
Interest expense
Bank
[Payment of 1st rental]
393,524
300,000
450,000
20,936
(W-1)
62,494
693,524
Financial liability
Date
30-Jun-13
30-Jun-14
Open. Bal.
2,500,000
2,106,476
Payment
693,524
693,524
W - 2 PV of LP
Rental
Discount factor
150,000
0.909
160,000
0.826
200,000
0.751
Interest
300,000
252,777
Principal
393,524
440,747
Clos. Bal.
2,106,476
1,665,729
Principal
108,129
Clos. Bal.
310,581
Present value
136,350
132,160
150,200
418,710
Right of use = 1,500,000 x 418,710 / 1,675,000
=
374,964
W - 3 Lease liability
Date
31-Dec-13
NASIR ABBAS FCA
Open. Bal.
418,710
Payment
150,000
Interest
41,871
495
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
(b)
INCOME STATEMENT - Extracts
Rs.
20,936
300,000
512,494
131,254
Finance charge on lease
Interest expense
Depreciation [450,000 + 62,494]
Profit on disposal
BALANC SHEET – Extracts
Rs.
Non-Current assets
Machine [2,250,000 - 450,000]
Right of use [374,964 - 62,494]
1,800,000
312,470
Non-current liabilities
Lease liability
Financial liability
310,581
1,665,729
Current liabilities
Lease liability
Financial liability
129,065
440,747
Solution No. 2
BOOKS OF LESSEE
Scenario I
------------ Rs. ----------01-07-19
30-06-20
30-06-20
30-06-20
Bank
Right-of-use (W-1)
Equipment
Lease liability (W-1)
Profit on disposal
[Initial recognition of lease]
1,600,000
303,085
Depreciation [303,085/3]
Acc. depreciation
[Depreciation for 2020]
101,028
Finance cost [323,291 x 10%]
Lease liability
[Interest expense for 2020]
32,329
Lease liability
Cash
130,000
1,500,000
323,291
79,794
101,028
32,329
130,000
[Lease rental paid]
NASIR ABBAS FCA
496
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
W-1 Initial recognition
Rs.
PV of lease payments [130,000 x 3-year annuity factor at 10%]
323,291
ROU asset [323,291 x 1,500,000/1,600,000]
303,085
Scenario II
------------ Rs. -----------
01-07-19
30-06-20
30-06-20
30-06-20
30-06-20
Bank
Right-of-use (W-1)
Equipment
Lease liability (W-1)
Financial liability (W-1)
Profit on disposal
[Initial recognition of lease]
1,700,000
232,649
1,500,000
248,159
100,000
84,490
Depreciation [232,649/3]
Acc. depreciation
[Depreciation for 2020]
77,550
Finance cost [248,159 x 10%]
Lease liability
[Interest expense for 2020]
24,816
Finance cost [100,000 x 10%]
Financial liability
[Interest expense for 2020]
10,000
Lease liability [140,000 x 248,159/348,159]
Financial liability [140,000 x 100,000/348,159]
Cash
99,789
40,211
77,550
24,816
10,000
140,000
[Lease rental paid]
W-1 Initial recognition
PV of lease payments [130,000 x 3-year annuity factor at 10%]
Above market terms [1,700,000 - 1,600,000]
Rs.
348,159
100,000
Lease liability
248,159
ROU asset [248,159 x 1,500,000/1,600,000]
232,649
NASIR ABBAS FCA
497
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
Scenario III
------------ Rs. ----------01-07-19
30-06-20
30-06-20
30-06-20
Bank
Right-of-use (W-1)
Equipment
Lease liability (W-1)
Profit on disposal
[Initial recognition of lease]
1,400,000
467,271
Depreciation [467,271/3]
Acc. depreciation
[Depreciation for 2020]
155,757
Finance cost [298,422 x 10%]
Lease liability
[Interest expense for 2020]
29,842
Lease liability
Cash
120,000
1,500,000
298,422
68,849
155,757
29,842
120,000
[Lease rental paid]
W-1 Initial recognition
Rs.
298,422
200,000
PV of lease payments [120,000 x 3-year annuity factor at 10%]
Below market terms [1,600,000 - 1,400,000]
498,422
ROU asset [498,422 x 1,500,000/1,600,000]
467,271
BOOKS OF LESSOR
Scenario I
------------ Rs. ----------01-07-19
Equipment
1,600,000
Cash
[Purchase of equipment]
30-06-20
30-06-20
1,600,000
Depreciation [1,600,000/20]
Acc. depreciation
[Depreciation for 2020]
80,000
Cash
130,000
Lease income
[Lease income for 2020]
NASIR ABBAS FCA
80,000
130,000
498
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
Scenario II
------------ Rs. ----------01-07-19
30-06-20
Equipment
Financial asset
Cash
[Purchase of equipment]
1,600,000
100,000
1,700,000
Depreciation [1,600,000/20]
Acc. depreciation
80,000
80,000
[Depreciation for 2020]
30-06-20
Financial asset
10,000
Interest income [100,000 x 10%]
[Interest income for 2020]
30-06-20
10,000
Cash
140,000
Financial asset
Lease income
[Lease income for 2020]
40,211
99,789
Scenario III
01-07-19
------------ Rs. ----------1,600,000
Equipment
Lease income
Cash
[Purchase of equipment]
30-06-20
30-06-20
200,000
1,400,000
Depreciation [1,600,000/20]
Acc. depreciation
[Depreciation for 2020]
80,000
Cash
Lease income [200,000 - 186,667(W-1)]
Advance rent
120,000
13,333
80,000
133,333
[Lease income for 2020]
W-1
Rs.
Lease income [(200,000 + 120,000 x 3)/3]
Solution No. 3
(a)
Journal entry
01-01-16
NASIR ABBAS FCA
186,667
Dr.
Cr.
-------- Rs. in million -------Right-of-use asset
Bank
Machine
Lease liability
70.24
95.00
85.00
74.16
499
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
Profit on disposal (balancing)
[Recognition of sale and lease back]
01-01-16
6.08
Lease liability
Bank
[Payment of 1st rental]
21.00
21.00
W-1
Present value of lease payments [21 + 21 x annuity factor]
Excess of fair value over sale value [120 - 95]
Rs. (million)
74.16
25.00
99.16
Right of use asset [99.16 x 85/120]
70.24
(b)
Extracts of statement of financial position
as at December 31, 2016
Rs. (million)
Non current assets
PPE [70.24 x 3/4]
52.68
Non current liabilities
Lease liability
36.94
Current liabilities
Lease liability
21.00
W-2
Date
Rental
01-01-16
21.00
01-01-17
21.00
Extracts of statement of comprehensive income
for the year ended December 31, 2016
Interest
Principal
4.78
21.00
16.22
Balance
74.16
53.16
36.94
Rs. (million)
Depreciation [70.24 / 4]
Finance cost
Profit on disposal
17.56
4.78
6.08
Extracts of Notes
for the year ended December 31, 2016
2 - Property, plant and equipment
Cost
Balance as at 01-01-16
Addition
Disposal
Balance as at 31-12-16
NASIR ABBAS FCA
Rs. (million)
70.24
70.24
500
LEASES (IFRS-16) [Sale and leaseback] – SOLUTIONS
Depreciation
Balance as at 01-01-16
Charge for the year
Disposal
Balance as at 31-12-16
17.56
17.56
Net book value as 31-12-16
52.68
8 - Lease liability
ML has entered into a lease agreement of a machine. Lease term is 4 years. Implicit rate is 9%.
The lease rentals are payable annually advance.
For the year:
Depreciation
Finance charge
Profit on sale and lease back
Total cash outflow for leases
Rs. (million)
17.56
4.78
6.08
21.00
Lease asset:
Carrying amount
Addition to right of use
Maturity analysis:
Undiscounted lease payments are as follows
1 year
2 years
3 years
NASIR ABBAS FCA
52.68
70.24
21.00
21.00
21.00
63.00
501
Q-6(a) Dec-17
Patel Limited
Extracts of SOFP
as at June 30, 2017
Rs. million
Non-current assets
Net investment in lease [W-3]
Right-of-use asset [W-7]
51.32
98.11
Current assets
Net investment in lease [65.15 - 51.32] (W-3)
13.83
Non-current liabilities
Lease liability [32.51(W-2) + 86.78(W-8)]
119.28
Current liabilities
Lease liability [(46.34 - 32.51)(W-2) + (124.34 - 86.78) (W-8)]
51.40
Patel Limited
Extracts of SOCI
for the year ending June 30, 2017
Rs. million
Depreciation (W-7)
Interest expense [5.31(W-2) + 15.85(W-8)]
Interest income (W-3)
Loss on scope reduction [62.10(W-7) - 53.70(W-6)]
Gain on sub-lease (W-3)
32.70
21.16
8.54
8.39
18.73
Workings for Lease (i)
W-1 Initial recognition [Head lease]
Rs. million
70.66
PV of lease payments [18 x 5-year AF at 9% + 1 x 5-year DF at 9%]
W-2 Lease schedule [Head lease]
Date
30-06-16
30-06-17
30-06-18
Open. Bal
70.66
59.02
46.34
Interest
6.36
5.31
4.17
W-3 Sub-lease recognition
Net investment in lease [21 x 5-year AF at 11%]
ROU derecognized [70.66 x 5/6]
Profit
Lease
payment
(18.00)
(18.00)
(18.00)
Clos. Bal
59.02
46.34
32.51
Rs. million
77.61
58.89
18.73
502
W-3.1 NIL
Date
Open. Bal
30-06-17
30-06-18
Interest
77.61
65.15
8.54
7.17
Lease
payment
(21.00)
(21.00)
Clos. Bal
65.15
51.32
Workings for Lease (ii)
W-4 Initial recognition
Rs. million
248.38
PV of lease payments [50 x 8-year annuity factor at 12%]
W-5 Lease schedule before modification
Date
30-06-15
30-06-16
Open. Bal
248.38
228.19
Interest
29.81
27.38
Lease
payment
(50.00)
(50.00)
Clos. Bal
228.19
205.57
W-6 Modification adjustment
Lease liability carrying amount
PV of revised lease payments for scope reduction [50 x 4-year AF at 12%]
Scope reduction adjustment
Liability revised for scope reduction at original rate
PV of revised lease payments for rate change [50 x 4-year AF at 10%]
Modification adjustment
W-7 Depreciation revised
NBV of ROU on 30-06-16 [248.38 x 6/8]
Scope reduction [186.29 x 2/6]
Rs. million
205.57
151.87
53.70
151.87
158.49
6.63
Rs. million
186.29
(62.10)
124.19
6.63
130.82
32.70
98.11
Modification adjustment
Depreciation [130.82/4]
W-8 Lease schedule after modification
Date
30-06-17
30-06-18
30-06-19
30-06-20
Open. Bal
158.49
124.34
86.78
45.45
Interest
15.85
12.43
8.68
4.55
Lease
payment
(50.00)
(50.00)
(50.00)
(50.00)
Clos. Bal
124.34
86.78
45.45
0.00
503
IFRS 15 – Class notes
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue
Income arising in the course of an entity’s ordinary activities
Contract
An agreement between two or more parties that creates enforceable rights and obligations.
Customer
A party that has contracted with an entity to obtain goods or services that are an output of the entity’s
ordinary activities in exchange for consideration.
RECOGNITION AND MEASUREMENT
Five Steps model
1. Identify the contract(s) with the customer
2. Identify the separate performance obligations
3. Determine the transaction price
4. Allocate transaction price
5. Recognize revenue when performance obligation is satisfied
1) Identify the contract(s) with customer
1. An entity shall account for a contract with a customer only when all of the following criteria are met:
(a) the parties to the contract have approved the contract (in writing, orally or in accordance with
other customary business practices) and are committed to perform their respective obligations;
(b) the entity can identify each party’s rights regarding the goods or services to be transferred;
(c) the entity can identify the payment terms for the goods or services to be transferred;
(d) the contract has commercial substance (i.e. the risk, timing or amount of the entity’s future cash
flows is expected to change as a result of the contract); and
(e) it is probable that the entity will collect the consideration to which it will be entitled in exchange
for the goods or services that will be transferred to the customer. (i.e. this assessment is based
on customer’s ability and intention to pay that amount of consideration when it is due).
2. A contract does not exist if each party to the contract has the unilateral enforceable right to terminate
a wholly underperformed contract without compensating the other party.
Wholly underperformed contract
A contract is wholly underperformed if:
- the entity has not yet transferred any promised goods or services to the customer; and
- the entity has not yet received and is not yet entitled to receive any consideration.
3. If identification criteria as mentioned in point 1 above is not met, then any consideration received
from the customer shall be recognized as revenue only when either of the following events has
occurred:
(a) the entity has no remaining obligations to transfer goods or services to the customer and all, or
substantially all, of the consideration promised by the customer has been received by the entity
and is nonrefundable; or
(b) the contract has been terminated and the consideration received from the customer is nonrefundable.
Nasir Abbas FCA
504
IFRS 15 – Class notes
Combination of contracts
An entity shall combine two or more contracts entered into at or near the same time with the same
customer (or related parties of the customer) and account for the contracts as a single contract if one
or more of the following criteria are met:
(a) the contracts are negotiated as a package with a single commercial objective;
(b) the amount of consideration to be paid in one contract depends on the price or performance of the
other contract; or
(c) the goods or services promised in the contracts (or some goods or services promised in each of the
contracts) are a single performance obligation.
Contract modification
A contract modification is a change in the scope or price (or both) of a contract that is approved by the
parties to the contract.
Case 1 – Modification is a separate contract
An entity shall account for a contract modification as a separate contract if both of the following
conditions are present:
(a) the scope of the contract increases because of the addition of promised goods or services that are
distinct; and
(b) the price of the contract increases by an amount of consideration that reflects the entity’s stand-alone
selling prices of the additional promised goods or services.
Case 2 – Modification is NOT a separate contract
If the remaining goods - An entity shall account for the modification as if it were a termination of
or services are distinct
existing contract and the creation of a new contracts.
from those already - Total amount of consideration to be allocated to remaining performance
transferred:
obligation(s) = consideration promised by the customer that had not
been recognized as revenue plus consideration promised for
modification.
If the remaining goods - An entity shall account for the modification as if it were a part of the
or services are not
existing contract.
distinct
- The effect of modification on transaction price and progress
measurement is recognized as an adjustment to revenue at modification
date.
2) Identify the separate performance obligations
1. Performance obligation is a promise in a contract with a customer to transfer to the customer either:
(a) a good or service (or a bundle of goods or services) that is distinct; or
(b) a series of distinct goods or services that are substantially the same and that have the same
pattern of transfer to the customer (e.g. gym services, bookkeeping services).
Nasir Abbas FCA
505
IFRS 15 – Class notes
2. A contract with a customer generally explicitly states the goods or services that an entity promises to
transfer to a customer. However, a contract with a customer may also include promises that are
implied by an entity’s customary business practices, published policies or specific statements if, at the
time of entering into the contract, those promises create a valid expectation of the customer that the
entity will transfer a good or service to the customer.
3. A good or service that is promised to a customer is distinct if both of the following criteria are met:
(a) the customer can benefit from the good or service either on its own or together with other
resources that are readily available to the customer (ie the good or service is capable of being
distinct).
Example – where customer can benefit from the good
The and fact that the entity regularly sells a good or service separately would indicate that a
customer can benefit from the good or service on its own or with other readily available
resources
(b) the entity’s promise to transfer the good or service to the customer is separately identifiable from
other promises in the contract (ie the promise to transfer the good or service is distinct within the
context of the contract).
Examples – where two or more promises are NOT separately identifiable
o The entity is using the goods or services as inputs to produce or deliver the combined
output or outputs specified by the customer.
o One or more of the goods or services significantly modifies or customizes one or more of
the other goods or services promised in the contract.
o The goods or services are highly interdependent or highly interrelated.
3) Determine the transaction price
1. Transaction price is the amount of consideration to which an entity expects to be entitled in exchange
for transferring promised goods or services to a customer, excluding amounts collected on behalf of
third parties (e.g. sales tax).
2. When determining the transaction price, an entity shall consider the effects of the following:
(a) Variable consideration
An amount of consideration can vary because of discounts, rebates, refunds, credits, price
concessions, incentives, performance bonuses, penalties or other similar items. An entity shall
estimate an amount of variable using either:
- Expected value (Ʃpx) of a range of possible consideration amounts (it is used when there are
large number of possible outcomes or large number of similar contracts).
- Mostly likely amount in a range of possible consideration amounts (it is used when a contract
has only two possible outcomes).
Transaction price shall include the amount of variable consideration only to the extent that it is
highly probable that a significant reversal in recognized revenue will not occur. Following are the
examples of factors to be considered for this assessment:
- Amount of consideration is highly susceptible to factors outside entity’s influence
- Uncertainty is not expected to be resolved for a long period of time
- Entity’s experience with similar types of contracts is limited
- Entity has a practice of offering a broad range of price concessions
- Contract has a large number and broad range of possible consideration amounts
Nasir Abbas FCA
506
IFRS 15 – Class notes
At end of every year, an entity shall update the estimated transaction price and any necessary
adjustment in the amount of revenue, already recognized, shall be recognized in the period of
change.
(b) Existence of a significant financing component in the contract
An entity shall adjust the promised amount of consideration for the effects of time value of money
(excluding for reasons other than financing e.g. retention money). Significant financing
component may exist in following two ways:
Cash is received in advance:
-
Cash received is recognized as a liability.
Transaction price will be the future
compounded value of cash received.
Interest expense is recognized over the
period on liability.
Cash receipt is deferred:
-
Transaction price will be the present
discounted value of cash consideration.
A receivable is recognized on recognition
of revenue.
Interest income is recognized over the
period on receivable.
For above compounding/discounting calculations, an entity shall use the discount rate that would
be reflected in a separate financing transaction between the entity and its customer at contract
inception. Such discount rate shall not be updated subsequently.
(c) Non-cash consideration
An entity shall measure the non-cash consideration (or promise of non-cash consideration) at fair
value. If a customer contributes goods or services (for example, materials, equipment or labour)
to facilitate an entity’s fulfilment of the contract, the entity shall assess whether it obtains control
of those contributed goods or services. If so, the entity shall account for the contributed goods or
services as non-cash consideration received from the customer.
(d) Consideration payable to a customer
An entity shall account for consideration payable to a customer as a reduction of the transaction
price and, therefore, of revenue unless the payment to the customer is in exchange for a distinct
good or service that the customer transfers to the entity.
If consideration payable to a customer is a payment for a distinct good or service from the
customer, then an entity shall account for the purchase of the good or service in the same way
that it accounts for other purchases from suppliers. If the amount of consideration payable to the
customer exceeds the fair value of the distinct good or service that the entity receives from the
customer, then the entity shall account for such an excess as a reduction of the transaction price.
4) Allocate transaction price
1. If there are more than one performance obligations in the contract, the transaction price shall be
allocated to each performance obligation on the basis of relative stand-alone selling prices.
2. The best evidence of a stand-alone selling price is the observable price. If stand-alone selling price is
not directly observable, then following are some suitable methods for estimating the stand-alone
selling prices:
- Adjusted market assessment approach
- Expected cost plus a margin approach
Nasir Abbas FCA
507
IFRS 15 – Class notes
-
Residual approach [This approach can be used for a good or service only when the entity sells the
same good or service for a broad range of prices OR the entity has not yet established a price for
that good or service]
3. If a discount is allowed to customer for purchasing a bundle of goods or services, the entity shall
allocate discount proportionately to all performance obligations unless there is an observable
evidence that entire discount relates to only one or more performance obligations.
4. An entity shall allocate to the performance obligations in the contract any subsequent changes in the
transaction price (e.g. change in variable consideration) on the same basis as at contract inception.
Consequently, an entity shall not reallocate the transaction price to reflect changes in stand-alone
selling prices after contract inception. Amounts allocated to a satisfied performance obligation shall
be recognized as revenue, or as a reduction of revenue, in the period in which the transaction price
changes.
5) Recognize revenue when performance obligation is satisfied
1. An entity shall recognize revenue when (or as) the entity satisfies a performance obligation by
transferring a promised good or service (ie an asset) to a customer. An asset is transferred when (or
as) the customer obtains control of that asset.
2. Following are the indicators of the transfer of control to customer:
- the entity has a present right to payment for the asset
- the customer has legal title to the asset
- the entity has transferred physical possession of the asset
- the customer has the significant risks and rewards of ownership of the asset
- the customer has accepted the asset
3. Performance obligation is satisfied as follows:
Performance obligation satisfied over
time:
Performance obligation satisfied at a point in
time:
An entity transfers control of a good or If a performance obligation is not satisfied over time
service over time and thus recognizes then it is satisfied at a point in time (e.g. supply of
revenue over time if any one of the goods).
following criteria is met:
- Customer simultaneously receives and
consumes the benefits provided by the
entity’s performance (e.g. cleaning
services)
- The customer controls the asset as it is
created or enhanced (e.g. building under
construction for customer)
- The entity’s performance does not
create an asset with an alternative use
to entity and the entity has an
enforceable right to payment for
performance completed to date.
Nasir Abbas FCA
508
IFRS 15 – Class notes
Revenue shall be recognized over time by
measuring the progress. Following methods,
provided the selected method faithfully
depicts the entity’s performance, may be
used for measuring progress:
- Output methods (e.g. survey of
performance, milestones achieved, time
elapsed and units produced/delivered)
- Input methods (e.g. cost incurred,
machine/labor hours used) [Example 19
is an exception]
At end of every year, an entity shall
remeasure its progress using updated
estimates.
If progress cannot be measured reliably (i.e.
in early stages of a contract), the entity shall
recognize revenue only to the extent of
recoverable costs incurred.
CONTRACT COSTS
Costs of obtaining the
contract:
- An entity shall recognize as an asset [i.e. “contract cost”] the incremental
costs (e.g. sales commission) of obtaining a contract if it expects to
recover those costs. [Entity may recognized these incremental costs as
expense when incurred if amortization period, as discussed below in
point 1, is one year or less].
- Costs to obtain a contract that would have been incurred regardless of
whether the contract was obtained or not shall be recognized as expense
when incurred unless those costs are explicitly chargeable to customer.
Costs to fulfill the
contract:
- Costs incurred in fulfilling the contract (except for those covered under
IAS 2, IAS 16 and IAS 38 which are accounted for as per aforementioned
standards accordingly) shall be recognized as an asset [i.e. “contract
cost”] only if those costs are directly related to the contract (e.g. direct
material, direct labor, directly attributable overheads).
- General and administrative costs, costs of wasted resources and costs
related to past satisfied performance shall be recognized as expense
when incurred.
1. The “Contract cost” asset shall be amortized on a systematic basis that is consistent with the transfer
of the goods or services to the customer (i.e. consistent with revenue recognition).
Nasir Abbas FCA
509
IFRS 15 – Class notes
2. An entity shall recognize an impairment loss in P&L to the extent the carrying amount of the asset
exceeds “remaining consideration entity expects to receive for goods or services to which the asset
relates less directly related costs not yet recognized as expense”.
PRESENTATION
Receivable
If an entity has unconditional to an amount of consideration, it is presented as a “receivable”. A right to
consideration is unconditional if only the passage of time is required before payment of that consideration
is due even though that amount may be subject to refund in future. Such receivable is measured as per
IFRS 9.
Contract asset
If an entity has transferred goods or services before the customer pays consideration or before the
payment is due, it shall present as a “contract asset”. This asset shall be assessed for impairment in
accordance with IFRS 9.
Contract liability
If a customer pays consideration, or an entity has a right to an amount of consideration that is
unconditional (i.e. a receivable), before the entity transfers a good or service to the customer, the entity
shall present the contract as a “contract liability” when the payment is made or the payment is due
(whichever is earlier). A contract liability is an entity’s obligation to transfer goods or services to a
customer for which the entity has received consideration (or an amount of consideration is due) from the
customer.
Nasir Abbas FCA
510
REVENUE (IFRS-15) - QUESTIONS
PRACTICE QUESTIONS
QUESTION NO. 1
Financial statements of Trich Mir Limited (TML) for the year ended 31 December 2019 are under preparation. While
reviewing revenues from contract with customers, following matters have been identified:
(i) On 1 October 2019, TML sold Machine C to Chan Limited for Rs. 25 million. As per the contract, payment would be
made after 2 years. The accountant recognised sales revenue of Rs. 25 million upon delivery on 1 October 2019.
Further, commission paid to sales employees for winning the contract of Rs. 1.6 million was capitalised and is being
amortised over 2 years period. Applicable discount rate is 10% per annum.
(ii) TML entered into a contract to manufacture a specialised machine for Dhan Limited at a price of Rs. 30 million. The
contract meets the criteria of recognition of revenue over time. At the year end, the machine was 60% complete and
it was estimated that a further cost of Rs. 10 million would be incurred. Cost of Rs. 15 million incurred till year end
has been included in closing inventory and receipts of Rs. 11 million have been credited to revenues.
(iii) TML entered into a contract to sell one unit of Machine A and Machine B for a total price of Rs. 16 million. Machine
A was delivered in December 2019 to the customer while Machine B was delivered in January 2020. The consideration
of Rs. 16 million is due only after TML transfers both the machines to the customer. TML sells machines A and B at
standalone prices of Rs. 12 million and Rs. 8 million respectively. The accountant recognised receivable and revenue
of Rs. 12 million upon delivery of Machine A.
Required:
Prepare correcting entries for the year ended 31 December 2019 in accordance with IFRS 15.
(14)
{Spring 2020, Q # 7}
QUESTION NO. 2
Thursday Enterprise (TE) is a supplier of product Zee and has provided you the following
information:
(a) On 1 August 2018, TE entered into a six months contract with customer Alpha for sale of Zee for Rs. 250 per unit,
under the following terms and conditions:
if Alpha purchases more than 5,000 units during the contract period, the price per unit would be retrospectively
reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon:
completion of quality control procedures by Alpha for the first order. The procedure would take a week after
receiving the goods.
placement of order by Alpha for subsequent orders.
At the inception of the contract, TE concludes that Alpha’s purchases will not exceed the 5,000 units threshold for
the discount. Alpha placed the following orders:
Order date
Units
10-08-2018
25-12-2018
3,000
4,000
Delivery date
[Transfer of control]
28-08-2018
15-01-2019
Payment date
12-09-2018
10-01-2019
(b) On 1 February 2019, TE entered into a six months contract with another customer Beta for sale of Zee for Rs. 250 per
unit, under the following terms and conditions:
if the Beta purchases more than 15,000 units during the contract period, the price per unit would be
retrospectively reduced to Rs. 215 per unit.
TE’s unconditional right to receive consideration would be established upon delivery of goods to Beta.
At the inception of the contract, TE concludes that Beta will meet 15,000 units threshold for the discount. Beta placed
the following orders:
Order date
Units
Payment date
Delivery date
[Transfer of control]
14-02-2019
10,000
25-02-2019
20-03-2019
01-06-2019
8,000
15-07-2019
18-07-2019
Required:
In respect of the above contracts, prepare journal entries to be recorded in the books of TE for the years ended 31
December 2018 and 2019. (Entries without date will not be awarded any marks)
(15)
{Autumn 2019, Q # 8}
NASIR ABBAS FCA
511
REVENUE (IFRS-15) - QUESTIONS
QUESTION NO. 3
Guitar World (GW) normally sells Machine A13 for Rs. 1.7 million. Maintenance services for such type of machines are
provided separately at Rs. 25,000 per month. Details of two contracts for sale of Machine A13 are as follows:
(i) On 1 July 2018, GW signed a contract with Energene Limited to sell Machine A13 with one year free maintenance
services at a lumpsum payment of Rs. 1.8 million. The amount was received upon delivery of machine on 1 August
2018.
(ii) On 1 October 2018, GW sold Machine A13 to Vitalene Limited for Rs. 1.95 million. As per the contract, payment would
be made after 2 years. Maintenance services would also be provided for Rs. 25,000 per month for two years which
would be paid at the end of each month.
Required:
With reference to IFRS-15 ‘Revenue from Contracts with Customers’, explain how the above contracts should be recorded
in GW’s books for year ended 31 December 2018. (Show supporting calculations but entries are not required).
(11)
{Spring 2019, Q # 4(b)}
QUESTION NO. 4
On 1 June 2018 Ravi Limited (RL) delivered 500 units of one of its products to Bravo Limited (BL) at Rs. 200 per unit. BL
immediately paid the amount and obtained control upon delivery. BL is allowed to return unused units within 30 days and
receive a full refund. RL’s cost of the product is Rs. 150 per unit and it uses perpetual system for recording inventory
transactions.
On 30 June 2018, BL returned 20 units.
Required:
Prepare necessary journal entries in the books of RL on 1 June 2018 and 30 June 2018 under each of the following
independent situations:
(i) Based upon historical data, RL estimates that 5% units will be returned on expiry of 30 days. (05)
(ii) The product is new and RL has no relevant historical evidence of product returns or other available market evidence.
(04)
{Autumn 2018, Q # 3}
QUESTION NO. 5
On 1 October 2017, Galaxy Telecommunications (GT) entered into a contract with a bank for supplying 20 smart phones
to the bank staff with unlimited use of mobile network for one year. The contract price per smart phone is Rs. 34,650 and
the price is payable in full within 10 days from the date of contract. At the end of the contract, the phones will not be
returned to GT.
The entire amount received as per contract was credited by GT to advance from customers account. The smart phones
were delivered on 1 November 2017.
If sold separately, GT charges Rs. 18,000 for a smart phone and a monthly fee of Rs. 1,800 for unlimited use of mobile
network.
Required:
Prepare adjusting entry for the year ended 31 December 2017 in accordance with IFRS 15 ‘Revenue from Contracts with
Customers’.
(04)
{Spring 2018, Q # 2 (b)}
QUESTION NO. 6
(a)
Jupiter Limited (JL) entered into a two year contract on 1 January 2017, with a customer for the maintenance of
computer network. JL has offered the following payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
Required:
Prepare journal entries to be recorded in the books of JL under each option over the period of contract.
(05)
(b)
Pluto Limited (PL) sells industrial chemicals at following standalone prices:
Products
C-1
C-2
C-3
NASIR ABBAS FCA
Rupees
(per carton)
100,000
90,000
110,000
512
REVENUE (IFRS-15) - QUESTIONS
PL regularly sells a carton each of C-2 and C-3 together for Rs. 170,000.
Required:
Calculate the selling price to be allocated to each product, in case PL offers to sell one carton of each product for
a total price of Rs. 260,000.
(05)
{Autumn 2017, Q # 6}
QUESTION NO. 7
Decent Constructions (DC) enters into a contract with a customer to build an asset for Rs. 20 million with a performance
bonus of Rs. 2 million that will be paid based on the timing of completion. The amount of the performance bonus
decreases by 10% per week for every week beyond the agreed-upon completion date. The contract requirements are
similar to contracts DC has performed previously, and management believes that such experience is predictive for this
contract. DC concludes that the expected value method is most predictive in this case.
DC estimates that there is a 60% probability that the contract will be completed by the agreed-upon completion date, a
30% probability that it will be completed one week late, and a 10% probability that it will be completed two weeks late.
Required
How should DC determine the transaction price?
QUESTION NO. 8
United Constructions (UC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 250 million plus a Rs. 25 million bonus only if the facility is completed by a specified date. The contract
is expected to take three years to complete. UC has a long history of constructing similar facilities. UC will receive no
bonus if the facility is not completed by the specified date. UC believes, based on its experience, that it is 95% likely that
the contract will be completed successfully and in advance of the target date.
Required:
How should UC determine the transaction price?
QUESTION NO. 9
Newage Constructions (NC) enters into a contract to construct a manufacturing facility for a customer. The contract price
was agreed at Rs. 100 million and a stipulated time period of 2 years was also agreed. To ensure timely completion, a
penalty of Rs. 10 million was agreed which would be deducted from contract price if work is not completed within 2 years.
NC believes, based on its experience, that it is 80% likely that the contract will be completed successfully and in advance
of the target date.
Required:
How should NC determine the transaction price?
QUESTION NO. 10
Alpha Consultants (AC) entered into a 1-year contract for book keeping services with a customer. Total contract price was
agreed at Rs. 5 million. It was also agreed that AC will be entitled to an extra Rs. 500,000 if number of mistakes found in
audit are less than 10. AC has experience of providing such services and it is highly probable that mistakes will not exceed
the acceptable limit.
Required:
How should AC determine the transaction price?
QUESTION NO. 11
Beta Traders (BT) enters into 100 contracts with customers on January 1, 2018. Each contract includes the sale of one
product for Rs. 500. The cost to BT of each product is Rs. 300. Cash is received upfront and control of the product transfers
on delivery. Customers can return the product within 30 days to receive a full refund. BT can sell the returned products
at a profit.
BT has significant experience in estimating returns for this product. It estimates that 92 products will not be returned.
Required:
How the above transactions should be accounted for if after 30 days:
(a) no refunds are claimed
(b) 5 products are refunded
(c) 10 products are refunded
NASIR ABBAS FCA
513
REVENUE (IFRS-15) - QUESTIONS
QUESTION NO. 12
Gamma Traders (GT) enters into a 1-year contract with a customer to supply standard capacity UPS for office use. The
contract states that price per UPS will be adjusted retroactively once customer reaches certain sale volume as follows:
Cumulative annual sales (UPS)
0 – 500
501 – 800
801 and above
Price (Rs.)
5,000
4,000
3,500
Based on past experience and knowledge of customer, GT estimates that sales volume for the year will be 610 UPS. At
the end of first month, customer purchased 130 UPS at a price of Rs. 5,000 per UPS.
Required:
Journal entry to record first month sale.
QUESTION NO. 13
Using the same situation as in Question 12, at the end of 2nd month customer purchased 300 units at a price of Rs. 5,000
per UPS. Now GT estimates that cumulative sale volume for the year will be 850 UPS.
Required:
Journal entry to record 2nd month sale.
QUESTION NO. 14
On January 1, 2018 Gallant Limited (GL) sold a machine to a customer. Control was transferred at the time of delivery.
However customer requested for a special credit of 2 years. Therefore a special price of Rs. 950,000 was charged.
Prevailing market interest rate on that date was 10%. Financial year of GL ends every December 31 st. Cost of machine to
GL was Rs. 400,000. Cash equivalent price of machine was Rs. 750,000.
Required:
All journal entries for above transaction.
QUESTION NO. 15
On January 1, 2018 Prudent Limited (PL) agreed to sell an equipment to a customer. The customer demanded its delivery
after 2 years. PL will manufacture the equipment at the time of delivery. PL gave two options to customer:
Option I – 100% advance payment of Rs. 800,000 at the time of agreement
Option II – Payment of Rs. 1,000,000 at the time of delivery
Prevailing market interest rate at the date of agreement was 9%.
Required:
All journal entries for above transaction if customer opts for:
(a)
Option I
(b)
Option II
(c)
QUESTION NO. 16
Honest Traders (HT) entered into a contract with a customer to deliver Product A and Product B for Rs. 150,000 payable
up-front. Product A will be delivered in two years and Product B will be delivered in five years.
HT has determined that contract contains two performance obligations; Product A and Product B. Total price of Rs.
150,000 has been allocated, on the basis of stand-alone prices, to Product A and B at Rs. 37,500 and Rs. 112,500
respectively. HT also concludes that transaction contains significant financing component and interest rate of 6% is
appropriate.
Required:
Calculate annual interest expense till final delivery and amount of revenue recognized for each product.
QUESTION NO. 17
Finance House (FH) sold an equipment, costing Rs. 60,000, to a customer on installment sale basis on January 1, 2018.
Each installment of Rs. 40,000 will be received on every December 31st for 3 years. Controlled was transferred on delivery.
Applicable market interest rate is 12%. FH prepares its financial statements on 31st December every year.
Required:
All journal entries for above transaction.
NASIR ABBAS FCA
514
REVENUE (IFRS-15) - QUESTIONS
QUESTION NO. 18
Modern Engineering (ME) entered into a contract for 3-year maintenance services with a manufacturing concern. Same
service will be rendered over 3-year period. Contract required 100% upfront fees of Rs. 300,000 payable at the time of
agreement on January 1, 2018. Prevailing market interest rate for ME is 12%. ME prepares its financial statements on 31st
December every year.
Required:
All journal entries for above transaction.
QUESTION NO. 19
Manufacture Co enters into a contract with Technology Co to build a machine. Technology Co pays Manufacture Co Rs. 1
million and contributes materials to be used in the development of the machine. The materials have a fair value of Rs.
500,000. Technology Co will deliver the materials to Manufacture Co approximately three months after development of
the machine begins. Manufacture Co concludes that it obtains control of the materials upon delivery by Technology Co
and could elect to use the materials for other projects.
Required:
How should Manufacture Co determine the transaction price?
QUESTION NO. 20
Golden Gate enters into a contract with a major chain of retail stores. The customer commits to buy at least Rs. 20m of
products over the next 12 months. The terms of the contract require Golden Gate to make a payment of Rs. 1m to
compensate the customer for changes that it will need to make to its retail stores to accommodate the products. By the
31 December 2018, Golden Gate has transferred products with a sales value of Rs. 4m to the customer.
Required
How much revenue should be recognised by Golden Gate in the year ended 31 December 2018?
QUESTION NO. 21
Mobile Co sells 1,000 phones to Retailer for Rs. 100,000. The contract includes an advertising arrangement that requires
Mobile Co to pay Rs. 10,000 toward a specific advertising promotion that Retailer will provide. Retailer will provide the
advertising on strategically located billboards and in local advertisements. Mobile Co could have elected to engage a third
party to provide similar advertising services at a cost of Rs. 10,000.
Required:
How should Mobile Co determine the transaction price?
QUESTION NO. 22
Marine sells boats and provides mooring facilities for its customers. Marine sells the boats for Rs. 300,000 each and
provides anchorage facilities for Rs. 50,000 per year. Marine concludes that the goods and services are distinct and
accounts for them as separate performance obligations. Marine enters into a contract to sell a boat and one year of
anchorage services to a customer for Rs. 325,000.
Required:
How should Marine allocate the transaction price of Rs. 325,000 to the performance obligations?
QUESTION NO. 23
Alpha Traders (AT) sells industrial boilers and also provides maintenance services. On January 1, 2018 AT sold a boiler
along with one year maintenance service at a package price of Rs. 400,000 to a customer. The contract involves two
performance obligations. Boilers are normally sold at a price of Rs. 360,000 and maintenance services are sold at cost plus
20%. Estimated cost of services in this contract will be Rs. 50,000.
Required:
Allocate transaction price to the performance obligations.
QUESTION NO. 24
Seller enters into a contract with a customer to sell Products A, B, and C for a total transaction price of Rs. 100,000. Seller
regularly sells Product A for Rs. 25,000 and Product B for Rs. 45,000 on a standalone basis. Product C is a new product
that has not been sold previously, has no established price, and is not sold by competitors in the market. Products A and
B are not regularly sold together at a discounted price. Product C is delivered on March 1, and Products A and B are
delivered on April 1.
Required:
How should Seller determine the standalone selling price of Product C?
NASIR ABBAS FCA
515
REVENUE (IFRS-15) - QUESTIONS
QUESTION NO. 25
A seller sold four products A, B, C and D (all qualify for separate performance obligation) to a customer at a package price
of Rs. 500,000. It also sells such products on individual basis at following prices:
Stand-alone price
Products
(Rs.)
A
120,000
B
140,000
C
130,000
D
150,000
Some customers also normally purchase products A and B at a package price of Rs. 250,000.
Required:
Allocate transaction price of Rs. 500,000 to four performance obligations.
QUESTION NO. 26
Telecom sells wireless mobile phone and other telecom service plans from a retail store. Sales agents employed at the
store signed 120 customers to two-year service contracts in a particular month. Telecom pays its sales agents commissions
for the sale of service contracts in addition to their salaries. Salaries paid to sales agents during the month were Rs.
120,000, and commissions paid were Rs. 24,000. The retail store also incurred Rs. 20,000 in advertising costs during the
month.
Required:
How should Telecom account for the costs?
QUESTION NO. 27
TechCo enters into a contract with a customer to track and monitor payment activities for a five-year period. A
prepayment is required from the customer at contract inception. TechCo incurs costs at the outset of the contract
consisting of uploading data and payment information from existing systems. The ongoing tracking and monitoring is
automated after customer set up. There are no refund rights in the contract.
Required:
How should TechCo account for the set-up costs?
QUESTION NO. 28
On 1 January 2018, Angelo enters into a twelve-month ‘pay monthly’ contract for a mobile phone. The contract is with
TeleSouth, and terms of the plan are:
(a)
Angelo receives a free handset on 1 January 2018
(b)
Angelo pays a monthly fee of Rs. 200, which includes unlimited free minutes. Angelo is billed on the last day of
the month
Customers may purchase the same handset from TeleSouth for Rs. 500 without the payment plan. They may also enter
into the payment plan without the handset, in which case the plan costs them Rs. 175 per month.
Required:
Show how TeleSouth should recognise revenue from this plan in accordance with IFRS 15 Revenue from contracts with
customers. Your answer should also give journal entries:
(a)
On 1 January 2018
(b)
On 31 January 2018
QUESTION NO. 29
Hassan Builders (HB) entered into a construction contract for construction of a building on January 1, 2017. Total contract
price was agreed at Rs. 500 million. Following information relates to the year ending December 31, 2017:
Rs. million
Contract cost incurred to date
80
Estimated further cost to complete the contract
320
Invoice issued on December 1, 2017
75
(HB has an unconditional right to receive payment against this invoice)
It has been determined that construction of building is single performance obligation and it will be satisfied over time. It
is HB’s policy to measure progress using proportion of cost incurred to date method.
Required:
Prepare extracts of statement of financial position and statement of comprehensive income for the year ending December
31, 2017.
NASIR ABBAS FCA
516
REVENUE (IFRS-15) - SOLUTIONS
SOLUTIONS
SOLUTION TO QUESTION NO. 1
Trich Mir Limited
Correcting entries for the year ended 31 December 2019
S.No.
(i)
Description
Revenues
Receivable
Receivable
Interest income
Commission expense
Amortization expense
Contract cost
(ii)
20.66×10%×(3÷12)
0.52
0.52
1.60
1.6÷2×3÷12
Cost of goods sold
Inventories
Receivable
Construction revenues
(iii)
25–20.66{25×(1.1)–2}
Debit
Credit
---- Rs. in million ---4.34
4.34
0.20
1.40
15.00
15.00
(30×60%)–11
7.00
7.00
Revenues
Receivable
12–12×16÷(12+8)
Contract asset
Receivable
(12–2.4)
2.40
2.40
9.60
9.60
SOLUTION TO QUESTION NO. 2
NASIR ABBAS FCA
517
REVENUE (IFRS-15) - SOLUTIONS
SOLUTION TO QUESTION NO. 3
(i)
The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
services as:
the customer can separately benefit from the machine without the maintenance services from GW (or GW
sells maintenance services separately) and
the machine and maintenance services are separately identifiable in the contract.
Thus GW will allocate the transaction price between the two performance obligations as follows:
Revenue related to sale of machine would be recognized at a point in time i.e. upon delivery on 1 August 2018.
While revenue related to maintenance service would be recognized over time i.e. as the services are rendered.
Till 31 December 2018, revenue would be recognized in respect of:
Sale of machine Rs. 1,530,000
Maintenance service Rs. 112,500 (i.e Rs. 22,500 for 5 months)
Remaining amount of Rs. 157,500 would appear in liabilities as deferred revenue.
NASIR ABBAS FCA
518
REVENUE (IFRS-15) - SOLUTIONS
(ii)
The contract contains two distinct performance obligations i.e. selling the machine and providing the maintenance
services.
The contract includes a significant financing component in respect of sale of machine which is evident from the
difference between the amount of promised consideration of Rs. 1.95 million and the cash selling price of Rs. 1.7
million.
Revenue related to machine would be recognized upon delivery on 1 October 2018. Revenue related to
maintenance service would be recognized as the services are rendered each month. The difference between
promised consideration and cash selling price of Rs. 250,000 would be recognized as interest revenue over two
years using the implicit rate of 7.1% [(1.95÷1.7) ½ –1].
Till 31 December 2018, revenue would be recognized in respect of:
- Sale of machine Rs. 1,700,000
- Maintenance service Rs. 75,000 i.e Rs. 25,000 for 3 months
- Interest revenue Rs. 30,175 (Rs. 1.7 million × 7.1% × 3/12)
SOLUTION TO QUESTION NO. 4
(i)
1/6/18
1/6/18
30/6/18
30/6/18
(ii)
1/6/18
Cash [500 x Rs. 200]
Sales [100,000 x 95%]
Refund liability [100,000 x 5%]
(To record sale of 500 units with 5% refund liability)
Dr.
Rs.
100,000
95,000
5,000
Cost of sale
Asset for right to recover products [75,000 x 5%]
Inventory [500 x Rs. 150]
(To record cost of sale and expected return)
71,250
3,750
Refund liability
Cash [Rs. 200 x 20]
Sales [Rs. 200 x 5]
(To record refund of units returned and sales)
5,000
Cost of sales [5 x Rs. 150]
Inventory [20 x Rs. 150]
Asset for right to recover products
(To record return of units and cost of sale)
750
3,000
Cash
Cr.
Rs.
75,000
4,000
1,000
3,750
Dr.
Rs.
100,000
Refund liability
(To record upfront cash received for goods delivered)
Dr.
Rs.
100,000
1/6/18
Asset for right to recover products
Inventory
(To record asset for right to recover products)
NASIR ABBAS FCA
75,000
75,000
519
REVENUE (IFRS-15) - SOLUTIONS
30/6/18
30/6/18
Refund liability
Sales [480 x Rs. 200]
Cash [Rs. 200 x 20]
(To record refund of units returned and sales)
100,000
Cost of sales [480 x Rs. 150]
Inventory [20 x Rs. 150]
Asset for right to recover products
(To record cost of sale 7 return of units and cost of sale)
72,000
3,000
96,000
4,000
75,000
SOLUTION TO QUESTION NO. 5
Dr.
31-12-17
Advance from customer
Revenue - mobile [15,750 (W-1) x 20]
Revenue - network usage [18,900 (W-1) x 20 x 2/12]
[To record revenue at year end]
W -1 Allocation of transaction price
Standalone prices
Cr.
----- Rs. ----378,000
315,000
63,000
Rs.
Smart phone
Network usage for 1 year [1,800 x 12]
18,000
21,600
39,600
Allocation of transaction price:
Smart phone (34,650 x 18,000/39,600)
Net work usage (34,650 x 21,600/39,600)
15,750
18,900
34,650
SOLUTION TO QUESTION NO. 6
(a)
Journal entries - Option 1 (Lump sum payment)
Date
Description
01-Jan-17
Cash
31-Dec-17
Contract liability
[Cash received]
Interest expense (W-2)
31-Dec-17
Contract liability (200,000 x 6.596%)
[Interest expense for 2017]
Contract liability (W-1)
31-Dec-18
Maintenance service revenue
[Revenue for 2017]
Interest expense (W-2)
31-Dec-18
Contract liability
[Interest expense for 2017]
Contract liability
Maintenance service revenue
[Revenue for 2018]
NASIR ABBAS FCA
Debit
Rs.
200,000
Credit
Rs.
200,000
13,192
13,192
110,000
110,000
6,808
6,808
110,000
110,000
520
REVENUE (IFRS-15) - SOLUTIONS
W-1 Annual service revenue
200,000
= 110,000
=
—2
[1—(1+6.596%)
6.596%
]
W-2
Revenue
Date
31-Dec-17
31-Dec-18
Interest
Principal
-------------------- Rs. ----------------------
110,000
110,000
13,192
6,808
96,808
103,192
Balance
200,000
103,192
-
Journal entries - Option 2 (Payment at end of each year )
Date
Description
31-Dec-17
Cash
31-Dec-18
Maintenance service revenue
[Cash received for 1st year service]
Cash
Debit
Rs.
110,000
Credit
Rs.
110,000
110,000
110,000
Maintenance service revenue
[Cash received for 2nd year service]
(b) Calculation of Selling price to be allocated to each product
Rs.
100,000
Standalone price of product C - 1
Adjusted Standalone prices of:
C - 2 [170,000/200 x 90]
C - 3 [170,000/200 x 110]
76,500
93,500
270,000
Allocation of transaction price:
C - 1 [260,000/270 x 100]
C - 2 [260,000/270 x 76.5]
C - 3 [260,000/270 x 93.5]
96,296
73,667
90,037
260,000
SOLUTION TO QUESTION NO. 7
The transaction price should include management’s estimate of the amount of consideration to which the entity will be
entitled for the work performed.
Probability weighted average consideration
Rs. million
Contract price
Bonus:
20.00
[2m x 0.6]
1.20
[2m x 90% x 0.3]
[2m x 80% x 0.1]
0.54
0.16
1.90
21.90
The total transaction price is Rs. 21.90 million based on the probability-weighted estimate. DC will update its estimate at
each reporting date.
SOLUTION TO QUESTION NO. 8
It is appropriate for UC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for bonus. The contract’s transaction price is therefore Rs. 275 million [Rs. 250 million + Rs. 25 million] because
it is more likely that UC will receive the bonus. This estimate should be updated each reporting date.
NASIR ABBAS FCA
521
REVENUE (IFRS-15) - SOLUTIONS
SOLUTION TO QUESTION NO. 9
It is appropriate for NC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for penalty. The contract’s transaction price is therefore Rs. 100 million (i.e. ignoring penalty of Rs 10 million)
because it is more likely that penalty will not be deducted. This estimate should be updated each reporting date.
SOLUTION TO QUESTION NO. 10
It is appropriate for AC to use the most likely amount method to estimate the variable consideration as there is a binary
condition for bonus. The contract’s transaction price is therefore Rs. 5.5 million [Rs. 5 million + Rs. 0.5 million] because it
is highly likely that AC will receive the bonus.
SOLUTION TO QUESTION NO. 11
Dr.
Cr.
--------- Rs. -------01-01-18
01-01-18
Cash [100 x Rs. 500]
50,000
Sales [92 x Rs. 500]
46,000
Refund liability [8 x Rs. 500]
[Cash received against sale]
4,000
Cost of sales [92 x Rs. 300]
27,600
Asset for right to recover product [8 x Rs. 300]
2,400
Inventory [100 x Rs. 300]
[Goods delivered to customers]
(a)
30,000
Dr.
Cr.
--------- Rs. -------30-01-18
Refund liability
4,000
Sales
[Refund liability expires and revenue recognized]
30-01-18
Cost of sales
4,000
2,400
Asset for right to recover product
[Cost of goods recognized]
2,400
(b)
30-01-18
Refund liability
4,000
Cash [5 x Rs. 500]
2,500
Sales [3 x Rs. 500]
[Refund made and remaining recognized as revenue]
30-01-18
1,500
Cost of sales [3 x Rs. 300]
900
Inventory [5 x Rs. 300]
1,500
Asset for right to recover product
[Goods returned and remained recognized as cost]
2,400
(c)
30-01-18
Refund liability
Sale return [2 x Rs. 500]
Cash [10 x Rs. 500]
4,000
1,000
5,000
[Refund actually made]
NASIR ABBAS FCA
522
REVENUE (IFRS-15) - SOLUTIONS
30-01-18
Inventory [10 x Rs. 300]
3,000
Cost of sales [2 x Rs. 300]
600
Asset for right to recover product
[Goods returned by customers]
2,400
SOLUTION TO QUESTION NO. 12
Dr.
Cr.
--------- Rs. -------Cash [130 x Rs. 5,000]
650,000
Sales [130 x Rs. 4,000]
520,000
Refund liability [130 x Rs. 1,000]
[Cash received against sale]
130,000
SOLUTION TO QUESTION NO. 13
Dr.
Cr.
--------- Rs. -------Cash [300 x Rs. 5,000]
1,500,000
Sales [300 x Rs. 3,500 – 130 x Rs. 500]
985,000
Refund liability (balancing)
[Cash received against sale]
515,000
SOLUTION TO QUESTION NO. 14
Dr.
Cr.
--------- Rs. -------01-01-18
Receivable
785,124
Sales [W-1]
[Machine sold]
01-01-18
Cost of sales
785,124
400,000
Inventory
400,000
[Cost of machine recognized]
31-12-18
Receivable
78,512
Interest income [785,124 x 10%]
78,512
[Interest income for 2018]
31-12-19
Receivable
86,364
Interest income [785,124 x 1.1 x 10%]
[Interest income for 2019]
31-12-19
Cash
86,364
950,000
Receivable
950,000
[Cash received]
W-1
950,000
Present value of sale price = (1+10%)2 = Rs. 785,124
NASIR ABBAS FCA
523
REVENUE (IFRS-15) - SOLUTIONS
SOLUTION TO QUESTION NO. 15
(a) Option I
01-01-18
Dr.
Cr.
--------- Rs. -------800,000
800,000
Cash
Contract liability
[100% advance received]
31-12-18
31-12-19
31-12-19
(a) Option II
31-12-19
Interest expense [800,000 x 9%]
Contract liability
[Interest expense for 2018]
72,000
Interest expense [800,000 x 1.09 x 9%]
Contract liability
[Interest expense for 2019]
78,480
Contract liability
Sales
[Equipment delivered and sale recognized]
950,480
72,000
78,480
950,480
Cash
1,000,000
Sales
[Equipment delivered and sale recognized]
1,000,000
SOLUTION TO QUESTION NO. 16
Product A
Year 1
Up-front price
Interest expense [37,500 x 6%]
Rs.
37,500
2,250
39,750
Year 2
Year 2
Interest expense [39,750 x 6%]
Revenue for Product A
2,385
42,135
Product B
Up-front price
Year 1
Interest expense [112,500 x 6%]
112,500
6,750
119,250
Year 2
Interest expense [119,250 x 6%]
Year 3
Interest expense [126,405 x 6%]
7,155
126,405
7,584
133,989
Year 4
Interest expense [133,989 x 6%]
8,039
142,029
Year 5
Year 5
Interest expense [142,029 x 6%]
Revenue for Product B
NASIR ABBAS FCA
8,522
150,550
524
REVENUE (IFRS-15) - SOLUTIONS
SOLUTION TO QUESTION NO. 17
Dr.
Cr.
--------- Rs. -------96,073
96,073
01-01-18
Receivable
Sales [W-1]
[Equipment sold and revenue recognized]
01-01-18
Cost of sales
Inventory
[Cost of equipment recognized]
60,000
Cash
40,000
31-12-18
60,000
Receivable [W-2]
Interest income [W-2]
[1st installment received]
31-12-19
28,471
11,529
Cash
40,000
Receivable [W-2]
Interest income [W-2]
[2nd installment received]
31-12-20
31,888
8,112
Cash
40,000
Receivable [W-2]
Interest income [W-2]
[3rd installment received]
W-1
Present value of installments = 40,000 x
35,714
4,286
[1–(1+12%)—3]
12%
W-2
Installment
Date
Interest
Principal
Balance
-------------------- Rs. ---------------------96,073
31-Dec-18
40,000
11,529
28,471
67,602
31-Dec-19
40,000
8,112
31,888
35,714
31-Dec-20
40,000
4,286
35,714
0
SOLUTION TO QUESTION NO. 18
Dr.
Cr.
--------- Rs. -------01-01-18
Cash
300,000
Contract liability
300,000
[100% upfront fees received]
31-12-18
Interest expense [W-2]
36,000
Contract liability
36,000
[Interest expense for 2018]
31-12-18
Contract liability
Maintenance service income [W-1]
[Revenue recognized for maintenance service]
NASIR ABBAS FCA
124,905
124,905
525
REVENUE (IFRS-15) - SOLUTIONS
31-12-19
Interest expense [W-2]
25,331
Contract liability
[Interest expense for 2019]
31-12-19
25,331
Contract liability
124,905
124,905
Maintenance service income [W-1]
[Revenue recognized for maintenance service]
31-12-20
Interest expense [W-2]
13,383
Contract liability
[Interest expense for 2020]
31-12-20
13,383
Contract liability
Maintenance service income [W-1]
124,905
124,905
[Revenue recognized for maintenance service]
W-1 Annual service revenue
300,000
= 124,905
=
—3
[1—(1+12%)
12%
]
W-2
Revenue
Date
Interest
Principal
Balance
-------------------- Rs. ---------------------300,000
31-Dec-18
124,905
36,000
88,905
211,095
31-Dec-19
124,905
25,331
99,573
111,522
31-Dec-20
124,905
13,383
111,522
0
SOLUTION TO QUESTION NO. 19
Manufacture Co should include the fair value of the materials in the transaction price because it obtains control of them.
The transaction price of the arrangement is therefore Rs. 1.5 million.
SOLUTION TO QUESTION NO. 20
The payment made to the customer is not in exchange for a distinct good or service. Therefore, the Rs. 1m paid to the
customer must be treated as a reduction in the transaction price. The total transaction price is essentially being reduced
by 5% (Rs. 1m/ Rs. 20m). Therefore, Golden Gate reduces the price allocated to each good by 5% as it is transferred. By
31 December 2018, Golden Gate should have recognised revenue of Rs. 3.8m (Rs. 4m × 95%).
SOLUTION TO QUESTION NO. 21
Mobile Co should account for the payment to Retailer consistent with other purchases of advertising services. The
payment from Mobile Co to Retailer is consideration for a distinct service provided by Retailer and reflects fair value. The
advertising is distinct because Mobile Co could have engaged a third party who is not its customer to perform similar
services. The transaction price for the sale of the phones is Rs. 100,000 and is not affected by the payment made by
Retailer.
NASIR ABBAS FCA
526
REVENUE (IFRS-15) - SOLUTIONS
SOLUTION TO QUESTION NO. 22
Rs.
Stand-alone prices
Boat
300,000
Anchorage
50,000
350,000
Transaction price
325,000
Allocation of price:
Boat [325 x 300/350]
Anchorage [325 x 50/350]
278,571
46,429
325,000
SOLUTION TO QUESTION NO. 23
Rs.
Stand-alone prices
Boiler
Services [50,000 x 1.2]
Transaction price
Allocation of price:
Boiler [400 x 360/420]
Services [400 x 60/420]
360,000
60,000
420,000
400,000
342,857
57,143
400,000
SOLUTION TO QUESTION NO. 24
Seller can use the residual approach to estimate the standalone selling price of Product C because Seller has not previously
sold or established a price for Product C. Seller has observable evidence that Products A and B sell for Rs. 25,000 and Rs.
45,000, respectively, for a total of Rs. 70,000. The residual approach results in an estimated standalone selling price of Rs.
30,000 for Product C (Rs. 100,000 total transaction price less Rs. 70,000).
SOLUTION TO QUESTION NO. 25
Rs.
Adjusted Standalone prices of:
A
B
[250 x 120/260]
[250 x 140/260]
115,385
134,615
250,000
Revised stand-alone prices
A
B
C
D
115,385
134,615
130,000
150,000
530,000
Transaction price
500,000
Allocation of price
NASIR ABBAS FCA
527
REVENUE (IFRS-15) - SOLUTIONS
A
B
C
D
[500 x 115.385/530]
[500 x 134.615/530]
[500 x 130/530]
[500 x 150/530]
108,853
126,996
122,642
141,509
500,000
SOLUTION TO QUESTION NO. 26
The only costs that qualify as incremental costs of obtaining a contract are the commissions paid to the sales agents. The
commissions are costs to obtain a contract that Telecom would not have incurred if it had not obtained the contracts.
Telecom should record an asset for the costs, assuming they are recoverable.
All other costs are expensed as incurred. The sales agents’ salaries and the advertising expenses are expenses Telecom
would have incurred whether or not it obtained the customer contracts.
SOLUTION TO QUESTION NO. 27
TechCo should recognize the set-up costs incurred at the outset of the contract as an asset since they (1) relate directly
to the contract, (2) enhance the resources of the company to perform under the contract, and relate to future
performance, and (3) are expected to be recovered.
An asset is recognized and amortized on a systematic basis consistent with the pattern of transfer of the tracking and
monitoring services to the customer.
SOLUTION TO QUESTION NO. 28
Application of the five-step process to TeleSouth
(i)
Identify the contract with a customer. This is clear. TeleSouth has a twelve-month contract with Angelo.
(ii)
Identify the separate performance obligations in the contract. In this case there are two distinct performance
obligations:
(1)
The obligation to deliver a handset
(2)
The obligation to provide network services for twelve months (The obligation to deliver a handset would
not be a distinct performance obligation if the handset could not be sold separately, but it is in this case
because the handsets are sold separately.)
(iii)
Determine the transaction price. The transaction price is straightforward i.e. Rs. 2,400 [12 x Rs. 200]
(iv)
Allocate the transaction price to the separate performance obligations in the contract. The transaction price is
allocated to each separate performance obligation in proportion to the standalone selling price at contract
inception of each performance obligation, that is the stand-alone price of the handset (Rs. 500 and the standalone price of the network services (Rs. 175 × 12 = Rs. 2,100)
Rs.
Stand-alone prices
Handset
500
Services
2,100
2,600
Transaction price
2,400
Allocation of price:
Handset [2,400 x 500/2,600]
462
Services [2,400 x 2,100/2,600]
1,938
2,400
NASIR ABBAS FCA
528
REVENUE (IFRS-15) - SOLUTIONS
(v)
Recognise revenue when (or as) the entity satisfies a performance obligation, that is when the entity transfers
a promised good or service to a customer. This applies to each of the performance obligations:
(1)
When TeleSouth gives a handset to Angelo, it needs to recognize the revenue of Rs. 462.
(2)
When TeleSouth provides network services to Angelo, it needs to recognize the total revenue of
Rs. 1,938. It would be reasonable to recognized service revenue on monthly basis.
Journal entries
Dr.
Cr.
--------- Rs. -------01-01-18
Receivable
462
Revenue
[Revenue from sale of handset recognized]
31-01-18
Cash
462
200
Revenue (1,938/12)
162
Receivable (462/12)
[Monthly bill received and service revenue recognized]
38
SOLUTION TO QUESTION NO. 29
Extracts – SOCI
Revenue [500 x 80/400]
Costs
2 marks
1 mark
Rs. million
100
80
Extracts – SOFP
Current assets
Contract asset [100 – 75]
Receivable
2 marks
1 mark
25
75
NASIR ABBAS FCA
529
IFRS 15 [Illustrative examples 1 – 40] – Class notes
IFRS 15 Revenue from Contracts with Customers
Illustrative Examples – Summarized
Identifying the contract
Example 1—Collectability of the consideration
An entity, a real estate developer, enters into a contract with a customer for the sale of a building for Rs. 1 million.
The customer intends to open a restaurant in the building. The building is located in an area where new restaurants
ace high levels of competition and the customer has little experience in the restaurant industry. The customer pays
a non-refundable deposit of Rs. 50,000 at inception of the contract and enters into a long-term financing agreement
with the entity for the remaining 95 per cent of the promised consideration.
The financing arrangement is provided on a non-recourse basis, which means that if the customer defaults, the entity
can repossess the building, but cannot seek further compensation from the customer, even if the collateral does not
cover the full value of the amount owed. The entity’s cost of the building is Rs. 600,000. The customer obtains control
of the building at contract inception.
The entity concludes that it is not probable that the entity will collect the consideration to which it is entitled in
exchange for the transfer of the building. Hence the contract is not identified. The entity has not received
substantially all of the consideration and it has not terminated the contract. Consequently, the entity accounts for
the non-refundable Rs. 50,000 payment as a deposit liability.
Example 2—Consideration is not the stated price—implicit price concession
An entity sells 1,000 units of a prescription drug to a customer for promised consideration of Rs. 1 million. This is the
entity’s first sale to a customer in a new region, which is experiencing significant economic difficulty. Thus, the entity
expects that it will not be able to collect from the customer the full amount of the promised consideration. Based
on the assessment of the facts and circumstances, the entity determines that it expects to provide a price concession
and accept a lower amount of consideration from the customer. Accordingly, the entity concludes that the
transaction price is not Rs. 1 million and, therefore, the promised consideration is variable. The entity estimates the
variable consideration and determines that it expects to be entitled to Rs. 400,000.
The entity considers the customer’s ability and intention to pay the consideration and concludes that even though
the region is experiencing economic difficulty, it is probable that it will collect Rs. 400,000 from the customer.
Consequently, the entity accounts for the contract with the customer in accordance with IFRS 15.
Example 3—Implicit price concession
An entity, a hospital, provides medical services to an uninsured patient in the emergency room. The entity has not
previously provided medical services to this patient but is required by law to provide medical services to all
emergency room patients. Because of the patient’s condition upon arrival at the hospital, the entity provides the
services immediately and, therefore, before the entity can determine whether the patient is committed to perform
its obligations under the contract in exchange for the medical services provided.
After providing services, the entity obtains additional information about the patient including a review of the services
provided, standard rates for such services and the patient’s ability and intention to pay the entity for the services
provided. During the review, the entity notes its standard rate for the services provided in the emergency room is
Rs. 10,000. The entity also reviews the patient’s information and to be consistent with its policies designates the
patient to a customer class based on the entity’s assessment of the patient’s ability and intention to pay.
The entity reviews its historical cash collections from this customer class and other relevant information about the
patient. The entity estimates the variable consideration and determines that it expects to be entitled to Rs. 1,000.
On the basis of its collection history from patients in this customer class, the entity concludes it is probable that the
entity will collect Rs. 1,000 (which is the estimate of variable consideration). Consequently, the entity accounts for
the contract with the patient in accordance with IFRS 15.
Nasir Abbas FCA
530
IFRS 15 [Illustrative examples 1 – 40] – Class notes
Example 4—Reassessing the criteria for identifying a contract
An entity licenses a patent to a customer in exchange for a usage-based royalty. At contract inception, the contract
meets all the criteria and the entity accounts for the contract with the customer in accordance with the requirements
in IFRS 15. Throughout the first year of the contract, the customer provides quarterly reports of usage and pays
within the agreed-upon period.
During the second year of the contract, the customer continues to use the entity’s patent, but the customer’s
financial condition declines. The customer’s current access to credit and available cash on hand are limited. The
entity continues to recognize revenue on the basis of the customer’s usage throughout the second year. The
customer pays the first quarter’s royalties but makes nominal payments for the usage of the patent in Quarters 2–
4. The entity accounts for any impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
During the third year of the contract, the customer continues to use the entity’s patent. However, the entity learns
that the customer has lost access to credit and its major customers and thus the customer’s ability to pay significantly
deteriorates. The entity therefore concludes that it is unlikely that the customer will be able to make any further
royalty payments for ongoing usage of the entity’s patent. As a result of this significant change in facts and
circumstances, the entity reassesses the criteria and determines that they are not met because it is no longer
probable that the entity will collect the consideration to which it will be entitled. Accordingly, the entity does not
recognize any further revenue associated with the customer’s future usage of its patent. The entity accounts for any
impairment of the existing receivable in accordance with IFRS 9 Financial Instruments.
Contract modification
Example 5—Modification of a contract for goods
An entity promises to sell 120 products to a customer for Rs. 12,000 (Rs. 100 per product). The products are
transferred to the customer over a six-month period. The entity transfers control of each product at a point in time.
After the entity has transferred control of 60 products to the customer, the contract is modified to require the
delivery of an additional 30 products (a total of 150 identical products) to the customer. The additional 30 products
were not included in the initial contract.
Case A—Additional products for a price that reflects the stand-alone selling price
When the contract is modified, the price of the contract modification for the additional 30 products is an additional
Rs. 2,850 or Rs. 95 per product. The pricing for the additional products reflects the stand-alone selling price of the
products at the time of the contract modification and the additional products are distinct from the original products.
The contract modification for the additional 30 products is, in effect, a new and separate contract for future products
that does not affect the accounting for the existing contract. The entity recognizes revenue of Rs. 100 per product
for the 120 products in the original contract and Rs. 95 per product for the 30 products in the new contract.
Case B—Additional products for a price that does not reflect the stand-alone selling price
During the process of negotiating the purchase of an additional 30 products, the parties initially agree on a price of
Rs. 80 per product. However, the customer discovers that the initial 60 products transferred to the customer
contained minor defects that were unique to those delivered products. The entity promises a partial credit of Rs. 15
per product to compensate the customer for the poor quality of those products. The entity and the customer agree
to incorporate the credit of Rs. 900 (Rs. 15 credit × 60 products) into the price that the entity charges for the
additional 30 products. Consequently, the contract modification specifies that the price of the additional 30 products
is Rs. 1,500 or Rs. 50 per product. That price comprises the agreed-upon price for the additional 30 products of Rs.
2,400, or Rs. 80 per product, less the credit of Rs. 900.
At the time of modification, the entity recognizes the Rs. 900 as a reduction of the transaction price and, therefore,
as a reduction of revenue for the initial 60 products transferred. In accounting for the sale of the additional 30
products, the entity determines that the negotiated price of RS. 80 per product does not reflect the stand-alone
selling price of the additional products.
Nasir Abbas FCA
531
IFRS 15 [Illustrative examples 1 – 40] – Class notes
Consequently, the contract modification does not meet the conditions to be accounted for as a separate contract.
Because the remaining products to be delivered are distinct from those already transferred, the entity accounts for
the modification as a termination of the original contract and the creation of a new contract.
Consequently, the amount recognized as revenue for each of the remaining products is a blended price of Rs. 93.33
{[(Rs. 100 × 60 products not yet transferred under the original contract) + (Rs. 80 × 30 products to be transferred
under the contract modification)] ÷ 90 remaining products}.
Example 6—Change in the transaction price after a contract modification
On 1 July 20X0, an entity promises to transfer two distinct products to a customer. Product X transfers to the
customer at contract inception and Product Y transfers on 31 March 20X1. The consideration promised by the
customer includes fixed consideration of Rs. 1,000 and variable consideration that is estimated to be Rs. 200. The
entity includes its estimate of variable consideration in the transaction price because it concludes that it is highly
probable that a significant reversal in cumulative revenue recognized will not occur when the uncertainty is resolved.
The transaction price of Rs. 1,200 is allocated equally to the performance obligation for Product X and the
performance obligation for Product Y (because both have same stand-alone price). When Product X transfers to the
customer at contract inception, the entity recognizes revenue of Rs. 600.
On 30 November 20X0, the scope of the contract is modified to include the promise to transfer Product Z (in addition
to the undelivered Product Y) to the customer on 30 June 20X1 and the price of the contract is increased by Rs. 300
(fixed consideration), which does not represent the stand-alone selling price of Product Z. The stand-alone selling
price of Product Z is the same as the stand-alone selling prices of Products X and Y.
The entity accounts for the modification as if it were the termination of the existing contract and the creation of a
new contract. This is because the remaining Products Y and Z are distinct from Product X, which had transferred to
the customer before the modification. Consequently, the consideration to be allocated to the remaining
performance obligations comprises the consideration that had been allocated to the performance obligation for
Product Y and the consideration promised in the modification. The transaction price for the modified contract is Rs.
900 and that amount is allocated equally to the performance obligation for Product Y and the performance obligation
for Product Z (i.e. Rs. 450 is allocated to each performance obligation).
After the modification but before the delivery of Products Y and Z, the entity revises its estimate of the amount of
variable consideration to which it expects to be entitled to Rs. 240. The entity concludes that the change in estimate
of the variable consideration can be included in the transaction price, because it is highly probable that a significant
reversal in cumulative revenue recognized will not occur when the uncertainty is resolved. Therefore, the change in
the transaction price is allocated to the performance obligations for Product X and Product Y on the same basis as
at contract inception. Consequently, the entity recognizes revenue of Rs. 20 for Product X in the period in which the
change in the transaction price occurs. Because Product Y had not transferred to the customer before the contract
modification, the change in the transaction price that is attributable to Product Y is allocated to the remaining
performance obligations at the time of the contract modification. Thus, the entity allocates the Rs. 20 increase in
the transaction price for the modified contract equally to the performance obligations for Product Y and Product Z.
Consequently, the amount of the transaction price allocated to the performance obligations for Product Y and
Product Z increases by Rs. 10 to Rs. 460 each.
On 31 March 20X1, Product Y is transferred to the customer and the entity recognizes revenue of Rs. 460. On 30
June 20X1, Product Z is transferred to the customer and the entity recognizes revenue of Rs. 460.
Example 7—Modification of a services contract
An entity enters into a three-year contract to clean a customer’s offices on a weekly basis. The customer promises
to pay Rs. 100,000 per year. The stand-alone selling price of the services at contract inception is Rs. 100,000 per
year. The entity recognizes revenue of Rs. 100,000 per year during the first two years of providing services. At the
end of the second year, the contract is modified and the fee for the third year is reduced to Rs. 80,000. In addition,
the customer agrees to extend the contract for three additional years for consideration of Rs. 200,000 payable in
three equal annual instalments of Rs. 66,667 at the beginning of years 4, 5 and 6. After the modification, the contract
has four years remaining in exchange for total consideration of Rs. 280,000. The stand-alone selling price of the
Nasir Abbas FCA
532
IFRS 15 [Illustrative examples 1 – 40] – Class notes
services at the beginning of the third year is Rs. 80,000 per year, therefore, total stand-alone price of remaining
services should be Rs. 320,000 (i.e. 4 years × Rs. 80,000 per year).
At contract inception, the entity accounts for the cleaning contract as a single performance obligation because the
weekly cleaning services are a series of distinct services that are substantially the same and have the same pattern
of transfer to the customer. At the date of the modification, the entity assesses the remaining services to be provided
and concludes that they are distinct. However, the amount of remaining consideration to be paid (Rs. 280,000) does
not reflect the stand-alone selling price of the services to be provided (Rs. 320,000).
Consequently, the entity accounts for the modification as a termination of the original contract and the creation of
a new contract with consideration of Rs. 280,000 for four years of cleaning service and recognizes revenue of Rs.
70,000 per year (Rs. 280,000 ÷ 4 years) as the services are provided over the remaining four years.
Example 8—Modification resulting in a cumulative catch-up adjustment to revenue
An entity, a construction company, enters into a contract to construct a commercial building for a customer on
customer-owned land for promised consideration of Rs. 1 million and a bonus of Rs. 200,000 if the building is
completed within 24 months. The entity accounts for the promised bundle of goods and services as a single
performance obligation satisfied over time. At the inception of the contract, the entity expects the following:
Rs.
Transaction price
1,000,000
Expected costs
700,000
Expected profit (30%)
300,000
At contract inception, the entity excludes the Rs. 200,000 bonus from the transaction price because it cannot
conclude that it is highly probable that a significant reversal in the amount of cumulative revenue recognized will
not occur.
By the end of the first year, the entity has satisfied 60% of its performance obligation on the basis of costs incurred
to date (Rs. 420,000) relative to total expected costs (Rs. 700,000). The entity reassesses the variable consideration
and concludes that the amount is still constrained. Consequently, the cumulative revenue and costs recognized for
the first year are as follows:
Rs.
Revenue
600,000
Costs
420,000
Gross profit
180,000
In the first quarter of the second year, the parties to the contract agree to modify the contract by changing the floor
plan of the building. As a result, the fixed consideration and expected costs increase by Rs. 150,000 and Rs. 120,000,
respectively. Total potential consideration after the modification is Rs. 1,350,000 (Rs. 1,150,000 fixed consideration
+ Rs. 200,000 completion bonus). In addition, the allowable time for achieving the Rs. 200,000 bonus is extended by
6 months to 30 months from the original contract inception date. At the date of the modification, on the basis of its
experience and the remaining work to be performed, which is primarily inside the building and not subject to
weather conditions, the entity concludes that it is highly probable that including the bonus in the transaction price
will not result in a significant reversal in the amount of cumulative revenue recognized and includes the Rs. 200,000
in the transaction price. In assessing the contract modification, the entity evaluates that the remaining goods and
services to be provided using the modified contract are not distinct from the goods and services transferred on or
before the date of contract modification; that is, the contract remains a single performance obligation.
Consequently, the entity accounts for the contract modification as if it were part of the original contract and updates
its measure of progress and estimates that it has satisfied 51.2 % of its performance obligation (Rs. 420,000 actual
costs incurred ÷ CU820,000 total expected costs). The entity recognizes additional revenue of Rs. 91,200 [(51.2 %
complete × CU1,350,000 modified transaction price) – Rs. 600,000 revenue recognized to date] at the date of the
modification as a cumulative catch-up adjustment.
Nasir Abbas FCA
533
IFRS 15 [Illustrative examples 1 – 40] – Class notes
Example 9—Unapproved change in scope and price
An entity enters into a contract with a customer to construct a building on customer-owned land. The contract states
that the customer will provide the entity with access to the land within 30 days of contract inception. However, the
entity was not provided access until 120 days after contract inception because of storm damage to the site that
occurred after contract inception. The contract specifically identifies any delay (including force majeure) in the
entity’s access to customer-owned land as an event that entitles the entity to compensation that is equal to actual
costs incurred as a direct result of the delay. The entity is able to demonstrate that the specific direct costs were
incurred as a result of the delay in accordance with the terms of the contract and prepares a claim. The customer
initially disagreed with the entity’s claim.
The entity assesses the legal basis of the claim and determines, on the basis of the underlying contractual terms,
that it has enforceable rights. Consequently, it accounts for the claim as a contract modification. The modification
does not result in any additional goods and services being provided to the customer. In addition, all of the remaining
goods and services after the modification are not distinct and form part of a single performance obligation.
Consequently, the entity accounts for the modification by updating the transaction price and the measure of
progress towards complete satisfaction of the performance obligation.
Identifying performance obligations
Example 10—Goods and services are not distinct
Anentity, acontractor, enters intoacontracttobuildahospitalfora customer. The entity is responsible for the overall
management of the project and identifies various goods and services to be provided, including engineering, site clearance,
foundation, procurement, construction of the structure, piping and wiring, installation of equipment and finishing.
The promised goods and services are capable of being distinct because the customer can benefit from the goodsand
services either on their own or together with other readily available resources. This is evidenced by the fact that the
entity, or competitors of the entity, regularly sells many of these goods and services separately to other customers.
However, the goods and services are not distinct within the context of the contract because the entity’s promise to
transfer individual goods and services in the contract are not separately identifiable from other promises in the contract.
This is evidenced by the fact that the entity provides a significant service of integrating the goods and services (the inputs)
into the hospital (the combined output) for which the customer has contracted. Hence the goods and services are not
distinct. The entity accounts for all of the goods and services in the contract as a single performance obligation.
Example 11—Determining whether goods or services are distinct
Case A—Distinct goods or services
An entity, a software developer, enters into a contract with a customer to transfer a software licence, perform an
installation service and provide unspecified software updates and technical support (online and telephone) for a two-year
period. The entity sells the licence, installation service and technical support separately. The installation service is
routinely performed by other entities and does not significantly modify the software. The software remains functional
without the updates and the technical support.
The entity observes that the software is delivered before the other goods and services and remains functional without the
updates andthetechnicalsupport. Thus,the customercan benefitfromeachofthegoodsandserviceseitherontheirown
or together with the other goods and services that are readily available. In particular, the entity observes that the
installation service does not significantly modify or customise the software itself and, as such, the software and the
installation service are separate outputs promisedbytheentityinsteadofinputsusedtoproduceacombinedoutput. On
the basis of this assessment, the entity identifies four performance obligations in the contract for the following
goods or services:
(a)
the software licence;
(b)
an installation service;
(c)
software updates; and
(d)
technical support.
Nasir Abbas FCA
534
IFRS 15 [Illustrative examples 1 – 40] – Class notes
Case B—Significant customisation
The promised goods and services are the same as in Case A, except that the contract specifies that, as part of the
installation service, the software is to be substantially customised to add significant new functionality to enable the
software to interface with other customised software applications used by the customer. Thecustomisedinstallationservice
can be provided byother entities.
The entity is using the licence and the customised installation service as inputs to produce the combined output. In
addition, the software is significantly modified and customised by the service. Thus, the software licence and the
customised installation service are not distinct.
On the basis of this assessment, the entity identifies three performance obligations in the contract for the following
goods or services:
(a)
customised installation service (that includes the software licence);
(b)
software updates; and
(c)
technical support.
Case C—Promises are separately identifiable (installation)
An entity contracts with a customer to sell a piece of equipment and installation services. The equipment is
operational without any customization or modification. The installation required is not complex and is capable of
being performed by several alternative service providers.
The entity identifies two promised goods and services in the contract:
(a) equipment; and (b) installation.
The customer can benefit from the equipment on its own, by using it or reselling it for an amount greater than scrap
value, or together with other readily available resources (for example, installation services available from alternative
providers). The customer also can benefit from the installation services together with other resources that the
customer will already have obtained from the entity (ie the equipment).
The entity has not promised to combine the equipment and the installation services in a way that would transform
them into a combined output. The entity’s installation services will not significantly customize or significantly modify
the equipment. The equipment and the installation services do not each significantly affect the other, they are not
highly interdependent or highly interrelated.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(i) the equipment; and
(ii) installation services.
Case D—Promises are separately identifiable (contractual restrictions)
Assume the same facts as in Case C, except that the customer is contractually required to use the entity’s installation
services.
The contractual requirement to use the entity’s installation services does not change the evaluation of whether the
promised goods and services are distinct in this case. This is because the contractual requirement to use the entity’s
installation services does not change the characteristics of the goods or services themselves, nor does it change the
entity’s promises to the customer. Although the customer is required to use the entity’s installation services, the
equipment and the installation services are capable of being distinct and the entity’s promises to provide the
equipment and to provide the installation services are each separately identifiable. The entity’s analysis in this regard
is consistent with that in Case C.
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
Case E—Promises are separately identifiable (consumables)
An entity enters into a contract with a customer to provide a piece of off-the-shelf equipment (i.e. the equipment is
operational without any significant customization or modification) and to provide specialized consumables for use
in the equipment at predetermined intervals over the next three years. The consumables are produced only by the
entity, but are sold separately by the entity.
The entity determines that the customer can benefit from the equipment together with the readily available
consumables. The consumables are readily available, because they are regularly sold separately by the entity (i.e.
through refill orders to customers that previously purchased the equipment). Therefore, the equipment and the
consumables are each capable of being distinct.
The entity determines that the equipment and the consumables are not inputs to a combined output. In addition,
neither the equipment nor the consumables are significantly customized or modified by the other. Lastly, the entity
concludes that the equipment and the consumables are not highly interdependent or highly interrelated because
they do not significantly affect each other.
On the basis of this assessment, the entity identifies two performance obligations in the contract for the following
goods or services:
(a) the equipment; and
(b) the consumables.
Example 12—Explicit and implicit promises in a contract
An entity, a manufacturer, sells a product to a distributor (i.e. its customer) who will then resell it to an end customer.
Case A—Explicit promise of service
In the contract with the distributor, the entity promises to provide maintenance services for no additional
consideration (i.e. ‘free’) to any party (i.e. the end customer) that purchases the product from the distributor. The
entity outsources the performance of the maintenance services to the distributor and pays the distributor an agreedupon amount for providing those services on the entity’s behalf. If the end customer does not use the maintenance
services, the entity is not obliged to pay the distributor.
The contract with the customer includes two promised goods or services—(a) the product and (b) the maintenance
services. The product and the maintenance services are not inputs to a combined item in the contract. The entity is
not providing a significant integration service because the presence of the product and the services together in this
contract do not result in any additional or combined functionality. In addition, neither the product nor the services
modify or customize the other. Lastly, the product and the maintenance services are not highly interdependent or
highly interrelated because the entity would be able to fulfil each of the promises in the contract independently of
its efforts to fulfil the other. Consequently, the entity allocates a portion of the transaction price to each of the two
performance obligations (i.e. the product and the maintenance services) in the contract.
Case B—Implicit promise of service
The entity has historically provided maintenance services for no additional consideration (i.e. ‘free’) to end
customers that purchase the entity’s product from the distributor. The entity does not explicitly promise
maintenance services during negotiations with the distributor and the final contract between the entity and the
distributor does not specify terms or conditions for those services. However, on the basis of its customary business
practice, the entity determines at contract inception that it has made an implicit promise to provide maintenance
services as part of the negotiated exchange with the distributor. That is, the entity’s past practices of providing these
services create valid expectations of the entity’s customers (i.e. the distributor and end customers). Consequently,
the entity assesses whether the promise of maintenance services is a performance obligation. For the same reasons
as in Case A, the entity determines that the product and maintenance services are separate performance obligations.
Case C—Services are not a promised service
In the contract with the distributor, the entity does not promise to provide any maintenance services. In addition,
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
the entity typically does not provide maintenance services and, therefore, the entity’s customary business practices,
published policies and specific statements at the time of entering into the contract have not created an implicit
promise to provide goods or services to its customers. The entity transfers control of the product to the distributor
and, therefore, the contract is completed. However, before the sale to the end customer, the entity makes an offer
to provide maintenance services to any party that purchases the product from the distributor for no additional
promised consideration. The promise of maintenance is not included in the contract between the entity and the
distributor at contract inception. Consequently, the entity does not identify the promise to provide maintenance
services as a performance obligation. Instead, the obligation to provide maintenance services is accounted for in
accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Although the maintenance services
are not a promised service in the current contract, in future contracts with customers the entity would assess
whether it has created a business practice resulting in an implied promise to provide maintenance services.
Performance obligations satisfied over time
Example 13—Customer simultaneously receives and consumes the benefits
An entity enters into a contract to provide monthly payroll processing services to a customer for one year. The
promised payroll processing services are accounted for as a single performance obligation. The performance
obligation is satisfied over time because the customer simultaneously receives and consumes the benefits of the entity’s
performance in processing each payroll transaction as and when each transaction is processed. The fact that another entity
would not need to re-perform payroll processing services for the service that the entity has provided to date also
demonstrates that the customer simultaneously receives and consumes the benefits of the entity’s performance as the
entity performs. The entity recognizes revenue over time by measuring its progress towards complete satisfaction of
that performance obligationin.
Example 14—Assessing alternative use and right to payment
An entity enters into a contract with a customer to provide a consulting service that results in the entity providing a
professional opinion to the customer. The professional opinion relates to facts and circumstances that are specific
to the customer. If the customer were to terminate the consulting contract for reasons other than the entity’s failure
to perform as promised, the contract requires the customer to compensate the entity for its costs incurred plus a
15% margin. The 15% margin approximates the profit margin that the entity earns from similar contracts.
If the entity were to be unable to satisfy its obligation and the customer hired another consulting firm to provide the
opinion, the other consulting firm would need to substantially re-perform the work that the entity had completed
to date, because the other consulting firm would not have the benefit of any work in progress performed by the
entity. However, the entity’s performance obligation is a performance obligation satisfied over time because of both
of the following factors:
(a) the development of the professional opinion does not create an asset with alternative use to the entity because
the professional opinion relates to facts and circumstances that are specific to the customer; and
(b) the entity has an enforceable right to payment for its performance completed to date for its costs plus a
reasonable margin, which approximates the profit margin in other contracts.
Example 15—Asset has no alternative use to the entity
An entity enters into a contract with a customer, a government agency, to build a specialized satellite. The entity
builds satellites for various customers, such as governments and commercial entities. The design and construction
of each satellite differ substantially, on the basis of each customer’s needs and the type of technology that is
incorporated into the satellite.
Although the contract does not preclude the entity from directing the completed satellite to another customer, the
entity would incur significant costs to rework the design and function of the satellite to direct that asset to another
customer. Consequently, the asset has no alternative use to the entity because the customer-specific design of the
satellite limits the entity’s practical ability to readily direct the satellite to another customer.
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
For the entity’s performance obligation to be satisfied over time when building the satellite, IFRS 15 also requires
the entity to have an enforceable right to payment for performance completed to date. This condition is not
illustrated in this example.
Example 16—Enforceable right to payment for performance completed to date
An entity enters into a contract with a customer to build an item of equipment. The payment schedule in the contract
specifies that the customer must make an advance payment at contract inception of 10% of the contract price,
regular payments throughout the construction period (amounting to 50% of the contract price) and a final payment
of 40% of the contract price after construction is completed and the equipment has passed the prescribed
performance tests. The payments are non-refundable unless the entity fails to perform as promised. If the customer
terminates the contract, the entity is entitled only to retain any progress payments received from the customer. The
entity has no further rights to compensation from the customer.
Even though the payments made by the customer are non-refundable, the cumulative amount of those payments is
not expected, at all times throughout the contract, to at least correspond to the amount that would be necessary to
compensate the entity for performance completed to date. This is because at various times during construction the
cumulative amount of consideration paid by the customer might be less than the selling price of the partially
completed item of equipment at that time. Consequently, the entity does not have a right to payment for
performance completed to date. Thus, the entity accounts for the construction of the equipment as a performance
obligation satisfied at a point in time.
Example 17—Assessing whether a performance obligation is satisfied at a point in time or over time
Anentityisdevelopingamulti-unitresidentialcomplex. Acustomerentersinto a binding sales contract with the entity
for a specified unit that is under construction. Each unit has a similar floor plan and is of a similar size, but other
attributesoftheunitsaredifferent(forexample, thelocationoftheunit within the complex).
Case A—Entity does not have an enforceable right to payment for performance completed to date
The customer pays a deposit upon entering into the contract and the deposit is refundable only if the entity fails to
complete construction of the unit in accordance with the contract. The remainder of the contract price is payable on
completionofthecontractwhenthecustomer obtainsphysicalpossessionofthe unit. If the customer defaults on the contract
before completion of the unit, the entity only has the right to retain the deposit.
Theentitydoes not havean enforceableright to payment for performancecompleted to date because, until construction
of the unit is complete, the entity only has a right to the deposit paid by the customer. Because the entity does not have a
right to payment for work completed to date, the entity’s performance obligation is not a performance obligation satisfied
over time. Instead, the entity accounts for the sale of the unit as a performance obligation satisfied at a point in time.
Case B—Entity has an enforceable right to payment for performance completed to date
The customer pays a non-refundable deposit upon entering into the contract and will make progress payments during
construction of the unit. The contract has substantiveterms thatpreclude the entity frombeingabletodirecttheunitto
another customer. In addition, the customer does not have the right to terminate the contract unless the entity fails
to perform as promised. If the customerdefaultsonitsobligationsbyfailingtomakethepromisedprogress paymentsas
andwhentheyaredue, theentitywouldhavearighttoallofthe considerationpromisedinthecontractifitcompletesthe
constructionofthe unit. The courts have previously upheld similar rights that entitle developers to requirethe customer to
perform, subject to theentity meeting its obligations under the contract.
The entity also has a right to payment for performance completed to date. This is because if the customer were to
default on its obligations, the entity would have an enforceable right to all of the consideration promised under the
contract if it continues to perform as promised. Therefore, the terms of the contract and the practices in the legal
jurisdiction indicate that there is a right to payment for performance completed to date. Consequently, the entity has a
performance obligation that it satisfies over time.
Case C—Entity has an enforceable right to payment for performance completed to date
The same facts as in Case B apply to Case C, except that in the event of a default by the customer, either the entity can
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
require the customer to perform as required under the contract or the entity can cancel the contract in exchange for the
asset under construction and an entitlement to a penalty of a proportion of the contract price.
Notwithstanding that the entity could cancel the contract (in which case the customer’sobligationtotheentitywould
be limited to transferring control of the partially completed asset to the entity and paying the penalty prescribed), the
entity has a right to payment for performance completed to date because the entity could also choose to enforce its rights to
full payment under the contract. The fact that the entity may choose to cancel the contract in the event the customer
defaults on its obligations would not affect that assessment, provided that the entity’s rights to require the customer
to continue to perform as required under the contract (ie pay the promised consideration) are enforceable.
Measuring progress towards complete satisfaction of a performance obligation
Example 18—Measuring progress when making goods or services available
An entity, an owner and manager of health clubs, enters into a contract with a customer for one year of access to any of
its health clubs. The customer has unlimited use of the health clubs and promises to pay Rs. 100 per month.
Theentity determinesthatits promisetothecustomeristoprovideaserviceof making the health clubs available for the
customer to use as and when the customer wishes. This is because the extent to which the customer uses the health
clubs does not affect the amount of the remaining goods and services to which the customer is entitled. The entity
concludes that the customer simultaneously receives and consumes the benefits of the entity’s performance as it performs
by making the health clubs available. Consequently, the entity’s performanceobligationissatisfiedovertime.
The entity also determines that the customer benefits from the entity’s service of making the health clubs available
evenly throughout the year. Consequently, theentityconcludes thatthebest measure of progress towards complete
satisfaction of the performance obligation over time is a time-based measure and it recognizes revenue on a straightline basis throughout the year at Rs. 100 per month.
Example 19—Uninstalled materials
In November 20X2, an entity contracts with a customer to refurbish a 3-storey building and install new elevators for
total consideration of Rs. 5 million. The promised refurbishment service, including the installation of elevators, is a
single performance obligation satisfied over time. Total expected costs are Rs. 4 million, including Rs. 1.5 million for
the elevators. A summary of the transaction price and expected costs is as follows:
Rs.
Transaction price
5,000,000
Expected costs:
Elevators
1,500,000
Other costs
2,500,000
Total expected costs
4,000,000
The entity uses an input method based on costs incurred to measure its progress towards complete satisfaction of
the performance obligation. The customer obtains control of the elevators when they are delivered to the site in
December 20X2, although the elevators will not be installed until June 20X3. The costs to procure the elevators (Rs.
1.5 million) are significant relative to the total expected costs to completely satisfy the performance obligation (Rs.
4 million). The entity is not involved in designing or manufacturing the elevators.
The entity concludes that including the costs to procure the elevators in the measure of progress would overstate
the extent of the entity’s performance. Consequently, the entity adjusts its measure of progress to exclude the costs
to procure the elevators from the measure of costs incurred and from the transaction price. The entity recognizes
revenue for the transfer of the elevators in an amount equal to the costs to procure the elevators (i.e. at a zero
margin).
As of 31 December 20X2 the entity observes that:
(a) other costs incurred (excluding elevators) are Rs. 500,000; and
(b) performance is 20% complete (i.e. Rs. 500,000 ÷ Rs. 2,500,000).
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
Consequently, at 31 December 20X2, the entity recognizes the following:
(a) Revenue of Rs. 2,200,000
[20% × Rs. 3,500,000 (i.e. Transaction price excluding cost of elevators) + Rs. 1,500,000]
(b) Cost of goods sold of Rs. 2,000,000
[Rs. 500,000 + Rs. 1,500,000]
Variable consideration
Example 20—Penalty gives rise to variable consideration
An entity enters into a contract with a customer to build an asset for Rs. 1 million. In addition, the terms of the
contract include a penalty of Rs. 100,000iftheconstructionisnotcompletedwithinthreemonthsofadate specified in
the contract. Theentityconcludesthattheconsiderationpromisedinthecontractincludesa fixed amount of Rs. 900,000
and a variable amount of Rs. 100,000 (arising from the penalty).
Example 21—Estimating variable consideration
An entity enters into a contract with a customer to build a customized asset. The promise to transfer the asset is a
performanceobligationthatissatisfiedover time. The promised consideration is Rs. 2.5 million, but that amount will be
reduced or increased depending on the timing of completion of the asset. Specifically, for each day after 31 March 20X7
that the asset is incomplete, the promised consideration is reduced by Rs. 10,000. For each day before 31 March 20X7 that
the asset is complete, the promised consideration increases by Rs. 10,000. Inaddition,uponcompletionoftheasset,a
thirdpartywillinspecttheassetand assign a rating based on metrics that are defined in the contract. If the asset receives
a specified rating, the entity will be entitled to an incentive bonus of Rs. 150,000.
Indeterminingthetransactionprice,theentitypreparesaseparateestimatefor each element of variable consideration as
follows:
(a)
the entity decides to use the expected value method to estimate the variable consideration associated with the
daily penalty or incentive (i.e. Rs. 2.5 million, plus or minus Rs. 10,000 per day). This is because it is the method that
the entity expects to better predict the amount of consideration to which it will be entitled.
(b)
the entity decides to use the most likely amount to estimate the variable consideration associated with the incentive
bonus. This is because there are only two possible outcomes (Rs. 150,000 or Rs. 0) and it is the method thattheentity
expectstobetterpredicttheamountofconsiderationto which it will be entitled.
Constraining estimates of variable consideration
Example 22—Right of return
Anentity enters into 100 contractswithcustomers. Eachcontractincludesthe sale of one product for Rs. 100 (100 total
products ×Rs. 100 =Rs. 10,000 total consideration). Cash is received when control of a product transfers. The entity’s
customary business practice is to allow a customer to return any unused product within 30 days and receive a full refund.
The entity’s cost of each product is Rs. 60. Because thecontract allows acustomer toreturn the products, theconsideration
received from the customer is variable. To estimate the variable consideration, entity applies expected value method and
estimates that 97 products will not be returned.
Upon transfer of control of the 100 products, the entity does notrecognize revenue for the three products that it expects
to be returned. Consequently, the entity recognizes the following:
(a)
revenue of Rs. 9,700 (Rs. 100 × 97 products not expected to be returned);
(b)
arefundliability of Rs. 300 (Rs. 100 refund× 3 products expectedtobe returned); and
(c)
anassetof Rs. 180 (Rs. 60 × 3 products for its right torecoverproducts from customers on settling the refund).
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
Example 23—Price concessions
An entity enters into a contract with a customer, a distributor, on 1 December 20X7. The entity transfers 1,000
products at contract inception for a price stated in the contract of Rs. 100 per product (total consideration is Rs.
100,000). Payment from the customer is due when the customer sells the products to the end customers. The
entity’s customer generally sells the products within 90 days of obtaining them. Control of the products transfers to
the customer on 1 December 20X7.
On the basis of its past practices and to maintain its relationship with the customer, the entity anticipates granting
a price concession to its customer because this will enable the customer to discount the product and thereby move
the product through the distribution chain. Consequently, the consideration in the contract is variable.
Case A—Estimate of variable consideration is not constrained
The entity has significant experience selling this and similar products. The observable data indicate that historically
the entity grants a price concession of approximately 20% of the sales price for these products. Current market
information suggests that a 20% reduction in price will be sufficient to move the products through the distribution
chain. The entity has not granted a price concession significantly greater than 20% in many years. Using the expected
value method, the entity estimates the transaction price to be Rs. 80,000 (Rs. 80 × 1,000 products).
Despite some uncertainty resulting from factors outside its influence, based on its current market estimates, the
entity expects the price to be resolved within a short time frame. Thus, the entity concludes that it is highly probable
that a significant reversal in the cumulative amount of revenue recognized (i.e. Rs. 80,000) will not occur when the
uncertainty is resolved (i.e. when the total amount of price concessions is determined). Consequently, the entity
recognizes Rs. 80,000 as revenue when the products are transferred on 1 December 20X7.
Case B—Estimate of variable consideration is constrained
The entity has experience selling similar products. However, the entity’s products have a high risk of obsolescence
and the entity is experiencing high volatility in the pricing of its products. The observable data indicate that
historically the entity grants a broad range of price concessions ranging from 20%–60% of the sales price for similar
products. Current market information also suggests that a 15%–50% reduction in price may be necessary to move
the products through the distribution chain. Using the expected value method, the entity estimates that a discount
of 40% will be provided and, therefore, the estimate of the variable consideration is Rs. 60,000 (Rs. 60 × 1,000
products).
The entity observes that the amount of consideration is highly susceptible to factors outside the entity’s influence
(i.e. risk of obsolescence) and it is likely that the entity may be required to provide a broad range of price concessions
to move the products through the distribution chain. Consequently, the entity cannot include its estimate of Rs.
60,000 (i.e. a discount of 40%) in the transaction price because it cannot conclude that it is highly probable that a
significant reversal in the amount of cumulative revenue recognized will not occur. Although the entity’s historical
price concessions have ranged from 20%–60%, market information currently suggests that a price concession of
15%–50% will be necessary. Consequently, the entity concludes that it is highly probable that a significant reversal
in the cumulative amount of revenue recognized will not occur if the entity includes Rs. 50,000 in the transaction
price (Rs. 100 sales price and a 50% price concession) and therefore, recognizes revenue at that amount and
reassesses the estimates of the transaction price at each reporting date until the uncertainty is resolved.
Example 24—Volume discount incentive
An entity enters into a contract with a customer on 1 January 20X8 to sell Product A for Rs. 100 per unit. If the customer
purchases more than 1,000 units of Product A in a calendar year, the contract specifies that the price per unit is
retrospectively reduced to Rs. 90 per unit. Consequently, the consideration in the contract is variable.
Forthefirstquarterended 31 March20X8, theentitysells75 unitsofProductA to thecustomer. The entity estimates that
the customer’s purchases will not exceed the 1,000-unit threshold required for the volume discount in the calendar
year. The entity concludes that it is highly probable that a significant reversal in the cumulative amount of revenue
recognized (i.e. Rs. 100 per unit) will not occur when the uncertainty is resolved (i.e. when the total amount of
purchases is known). Consequently, the entity recognizes revenue of Rs. 7,500 (75 units × Rs. 100 per unit) for the quarter
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IFRS 15 [Illustrative examples 1 – 40] – Class notes
ended 31 March 20X8. Inthesecond quarter ended 30 June 20X8 the entity sells an additional 500 units of Product A to the
customer. In the light of the new fact, the entity estimates that the customer’s purchases will exceed the 1,000-unit
threshold for the calendar year and therefore it will be required to retrospectively reduce the price per unit to Rs. 90.
Consequently, the entity recognizes revenueof Rs. 44,250 for thequarter ended 30 June 20X8. That amountis calculated
from Rs. 45,000 forthesaleof 500 units (500 units × Rs. 90 per unit) less the change in transaction price of Rs. 750 (75
units × Rs. 10 price reduction) for the reduction of revenue relating to units sold forthequarterended 31 March 20X8.
Example 25—Management fees subject to the constraint
On 1 January 20X8, an entity enters into a contract with a client to provide asset management services for five years.
The entity receives a 2% quarterly management fee based on the client’s assets under management at the end of
each quarter. In addition, the entity receives a performance-based incentive fee of 20% of the fund’s return in excess
of the return of an observable market index over the five-year period. Consequently, both the management fee and
the performance fee in the contract are variable consideration.
The entity accounts for the services as a single performance obligation, because it is providing a series of distinct
services that are substantially the same and have the same pattern of transfer. The entity observes that the promised
consideration is dependent on the market and thus is highly susceptible to factors outside the entity’s influence. In
addition, the incentive fee has a large number and a broad range of possible consideration amounts. The entity also
observes that although it has experience with similar contracts, that experience is of little predictive value in
determining the future performance of the market. Therefore, at contract inception, the entity cannot conclude that
it is highly probable that a significant reversal in the cumulative amount of revenue recognized would not occur if
the entity included its estimate of the management fee or the incentive fee in the transaction price.
At each reporting date, the entity updates its estimate of the transaction price. Consequently, at the end of each
quarter, the entity concludes that it can include in the transaction price the actual amount of the quarterly
management fee because the uncertainty is resolved. At 31 March 20X8, the client’s assets under management are
Rs. 100 million. Therefore, the resulting quarterly management fee and the transaction price is Rs. 2 million. At the
end of each quarter, the entity allocates the quarterly management fee to the distinct services provided during the
quarter. This is because the fee relates specifically to the entity’s efforts to transfer the services for that quarter,
which are distinct from the services provided in other quarters. Consequently, the entity recognizes Rs. 2 million as
revenue for the quarter ended 31 March 20X8.
The existence of a significant financing component in the contract
Example 26—Significant financing component and right of return
AnentitysellsaproducttoacustomerforRs. 121thatispayable24monthsafter delivery. The customer obtains control of
theproductatcontractinception. The contract permits the customer to return the product within 90 days. The product
is new and the entity has no relevant historical evidence of product returns or other available market evidence. The
cash selling price of the product is Rs. 100 and entity’s cost of the product isRs. 80.
Theentity doesnotrecognizerevenuewhencontroloftheproducttransfers to thecustomer. This is because the existence
of the right of return and the lack of relevant historical evidence means that the entity cannot conclude that it is highly
probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Consequently, revenue
is recognized after three months when the right of return lapses.
The contract includes a significant financing component which is evident from the difference between the amount of
promised consideration of Rs. 121 and the cash selling price of Rs. 100 at the date that the goods are transferred to the
customer. The following journal entries illustrate how the entity accounts for this contract:
(a)
When the product is transferred to the customer:
Dr. Asset for right to recover product to be returned
Cr. Inventory
(b)
Rs. 80
Rs. 80
During the three-month right of return period, no interest is recognised because no contract asset or receivable has
been recognized.
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(c)
When the right of return lapses (the product is not returned):
Dr. Receivable
Rs. 100
Cr. Revenue
Dr. Cost of sales
Rs. 100
Rs. 80
Cr. Asset for product to be returned
Rs. 80
Untiltheentityreceivesthecashpaymentfromthecustomer, interestrevenue would be recognized.
Example 27—Withheld payments on a long-term contract
An entity enters into a contract for the construction of a building that includes scheduled milestone payments for
the performance by the entity throughout the contract term of three years. The performance obligation will be
satisfied over time and the milestone payments are scheduled to coincide with the entity’s expected performance.
The contract provides that a specified percentage of each milestone payment is to be withheld (i.e. retained) by the
customer throughout the arrangement and paid to the entity only when the building is complete. The entity
concludes that the contract does not include a significant financing component. The milestone payments coincide
with the entity’s performance and the contract requires amounts to be retained for reasons other than the provision
of finance. The withholding of a specified percentage of each milestone payment is intended to protect the customer
from the contractor failing to adequately complete its obligations under the contract.
Example 28—Determining the discount rate
An entity enters into a contract with a customer to sell equipment. Control of the equipment transfers to the
customer when the contract is signed. The price stated in the contract is Rs. 1 million plus a 5% contractual rate of
interest, payable in 60 monthly instalments of Rs. 18,871.
Case A—Contractual discount rate reflects the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest reflects the rate that would be used in a separate financing transaction
between the entity and its customer at contract inception (i.e. the contractual rate of interest of 5% reflects the
credit characteristics of the customer).The market terms of the financing mean that the cash selling price of the
equipment is Rs. 1 million. This amount is recognized as revenue and as a loan receivable when control of the
equipment transfers to the customer. The entity accounts for the receivable in accordance with IFRS 9.
Case B—Contractual discount rate does not reflect the rate in a separate financing transaction
In evaluating the discount rate in the contract that contains a significant financing component, the entity observes
that the 5% contractual rate of interest is significantly lower than the 12% interest rate that would be used in a
separate financing transaction between the entity and its customer at contract inception (i.e. the contractual rate
of interest of 5% does not reflect the credit characteristics of the customer). This suggests that the cash selling price
is less than Rs. 1 million.
Thus, the entity determines the transaction price by adjusting the promised amount of consideration to reflect the
contractual payments using the 12% interest rate that reflects the credit characteristics of the customer.
Consequently, the entity determines that the transaction price is Rs. 848,357 (60 monthly payments of CU18,871
discounted at 12%). The entity recognizes revenue and a loan receivable for that amount. The entity accounts for
the loan receivable in accordance with IFRS 9.
Example 29—Advance payment and assessment of discount rate
An entity enters into a contract with a customer to sell an asset. Control of the asset will transfer to the customer in two
years (i.e. the performance obligation will be satisfied at a point in time). The contract includes two alternative
payment options: payment of Rs. 5,000 in two years when the customer obtains control of the asset or payment of Rs. 4,000
when the contract is signed. The customer elects to pay Rs. 4,000 when the contract is signed. The entity concludes
that the contract contains a significant financing componentbecauseofthelengthoftimebetweenwhenthecustomer
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paysfor the asset and when the entity transfers the asset to the customer.
Theinterestrateimplicitinthetransactionis 11.8%. However, the entity determines that the rate that should be used in
adjusting the promised consideration is 6%, which is the entity’s incremental borrowing rate as well as the prevailing market
interest rate. The following journal entries illustrate how the entity would account for the significant financing
component:
(a)
recognize a contract liability for the Rs. 4,000 payment received at contract inception:
Dr. Cash
Rs. 4,000
Cr. Contract liability
(b)
Rs. 4,000
during the two years from contract inception until the transfer of the asset, the entity adjusts the promised
amount of consideration and accretes the contract liability by recognizing interest on Rs. 4,000 at 6%for two years:
Dr. Interest expense
Rs. 494(*)
Cr. Contract liability
Rs. 494
* Rs. 494 = Rs. 4,000 x 1.062 – Rs. 4,000.
(c)
recognize revenue for the transfer of the asset:
Dr. Contract liability
Cr. Revenue
Rs. 4,494
Rs. 4,494
Example 30—Advance payment
An entity, a technology product manufacturer, enters into a contract with a customer to provide global telephone
technology support and repair coverage for three years along with its technology product. The customer purchases
this support service at the time of buying the product. Consideration for the service is an additional Rs. 300.
Customers electing to buy this service must pay for it upfront (i.e. a monthly payment option is not available). The
entity charges a single upfront amount, not with the primary purpose of obtaining financing from the customer but,
instead, to maximize profitability, taking into consideration the risks associated with providing the service.
Specifically, if customers could pay monthly, they would be less likely to renew and the population of customers that
continue to use the support service in the later years may become smaller and less diverse over time (i.e. customers
that choose to renew historically are those that make greater use of the service, thereby increasing the entity’s
costs). In addition, customers tend to use services more if they pay monthly rather than making an upfront payment.
Finally, the entity would incur higher administration costs such as the costs related to administering renewals and
collection of monthly payments.
Thus, the entity determines that the payment terms were structured primarily for reasons other than the provision
of finance to the entity and concludes that there is not a significant financing component.
Non-cash consideration
Example 31—Entitlement to non-cash consideration
An entity enters intoa contractwith a customer to provide a weekly service for one year. In exchange for the service, the
customer promises 100 shares of its common stockperweekofservice(atotalof5,200sharesforthecontract). Theterms
in the contract require that the shares must be paid upon the successful completion of each week ofservice. The
entity measures its progress towards complete satisfaction of the performanceobligation aseach week of service is
complete. Todeterminethe transaction price (and the amount of revenue to be recognized), the entity measures the
fair value of 100 shares that are received upon completion of each weekly service. The entity does not reflect any
subsequentchangesinthefair value of the shares received (or receivable) in revenue.
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Consideration payable to a customer
Example 32—Consideration payable to a customer
Anentitythatmanufacturesconsumergoodsentersintoaone-yearcontractto sell goods to a customer that is a large
global chain of retail stores. The customer commits to buy at least Rs. 15 million of products during the year. The contract
also requires the entity to make a non-refundable payment of Rs. 1.5 million to the customer at the inception of the
contract. The Rs. 1.5 million payment will compensate the customer for the changes it needs to make to its shelving to
accommodate the entity’s products.
The entity concludes that the payment to the customer is not in exchange for a distinct goodorservicethattransfersto
the entity. This is becausethe entitydoes not obtain control of any rights to the customer’s shelves. The entity concludes
that the consideration payable is accounted for as a reduction in the transaction price when the entity recognizes revenue
for the transfer of the goods. Consequently, as the entity transfers goods to the customer, the entity reduces the
transaction price for each good by 10% (Rs. 1.5 million ÷ Rs. 15 million). Therefore, in the first month in which the entity
transfers goods to the customer, the entity recognizes revenue of Rs. 1.8 million (Rs. 2.0 million invoiced amount less Rs. 0.2
million of consideration payable to the customer).
Allocating the transaction price to performance obligations
Example 33—Allocation methodology
An entity enters into acontract with a customer to sell Products A, B and C in exchange for Rs. 100. Theentitywillsatisfy the
performance obligations for each oftheproductsatdifferentpointsintime. Theentityregularlysells Product A separately
and therefore the stand-alone selling price is directly observable. The stand-alone selling prices of Products B and C are not
directlyobservable. Because the stand-alone selling prices for Products B and C are not directly observable, the entity
must estimate them. To estimate the stand-alone selling prices, the entity uses the adjusted market assessment approach for
Product B andtheexpectedcostplusamarginapproachfor Product C. Inmakingthose estimates, the entity maximizes the
useofobservableinputs. The entity estimates the stand-alone selling prices as follows:
Product
A
B
C
Stand-alone selling price (Rs.)
50
25
75
150
Method
Directly observable
Adjusted market assessment approach
Expected cost plus margin approach
The customer receives a discount for purchasing thebundle of goods because the sum of the stand-alone selling prices
(Rs. 150) exceeds the promised consideration (Rs. 100). Theentityconsiderswhetherithasobservable evidence about the
performance obligation to which the entire discount belongs and concludes that it does not. Consequently, the
discount is allocated proportionately across Products A, B and C. The discount, and therefore the transaction price, is
allocated as follows:
Product
Allocated transaction price
Rs.
A
B
C
Total
33 (Rs. 50 ÷ Rs. 150 × Rs. 100)
17 (Rs. 25 ÷ Rs. 150 × Rs. 100)
50 (Rs. 75 ÷ Rs. 150 × Rs. 100)
100
Example 34—Allocating a discount
An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone sellingprices:
A – Rs.40
B – Rs. 55
C – Rs. 45
In addition, the entity regularly sells Products B and C together for Rs. 60.
Case A — Allocating a discount to one or more performance obligations
The entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100. The entity will satisfy
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theperformance obligations for each of the products at different points in time.
The contract includes a discount of Rs. 40 on the overall transaction, which would be allocated proportionately to all
three performance obligations when allocating the transaction price using the relative stand-alone selling price
method. However, becausethe entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it
has evidence that the entire discount should be allocated to the promises to transfer Products B and C.
If the entity transfers control of Products B and C at the same point in time, then the entity could, as a practical matter,
account for the transfer of those products as a single performance obligation. That is, the entity could allocate Rs. 60 of the
transaction price to the single performance obligation and recognize revenue of Rs. 60 when Products B and C
simultaneously transfer to thecustomer.
If the contract requires the entity to transfer control of Products B and C at different points in time, then the allocated
amount of Rs. 60 is individually allocated to the promises to transfer Product B (stand-alone selling price of Rs. 55)
and Product C (stand-alone selling price of Rs. 45) as follows:
Product
B
C
Total
Allocated transaction price
Rs.
33 [Rs. 55 x Rs. 60/Rs. 100]
27 [Rs. 45 x Rs. 60/Rs. 100]
60
Case B — Residual approach is appropriate
Theentity entersintoacontractwithacustomertosell Products A, Band Cas described in Case A. Thecontractalso includes
a promise to transfer Product D. Total consideration in the contract is Rs. 130. The stand-alone selling price for Product D is
highly variable because the entity sells Product D to different customers for a broad range of amounts (Rs. 15 – Rs. 45).
Consequently, the entity decides to estimate the stand-alone selling price of Product D using the residual approach.
Before estimating the stand-alone selling price of Product D using the residual approach, the entity determines whether
any discount should be allocated to the other performance obligations.
As in Case A, because the entity regularly sells Products B and C together for Rs. 60 and Product A for Rs. 40, it has
observable evidence that Rs. 100 should be allocated to those three products and a Rs. 40 discount should be allocated to the
promises to transfer Products B and C. Using the residual approach, the entity estimates the stand-alone selling price
of Product D to be Rs. 30 as follows:
Product
Stand-alone selling price (Rs.)
Method
A
40
Directly observable
B and C
60
Directly observable with discount
D
30
Residual approach
130
Case C — Residual approach is inappropriate
The same facts as in Case B apply to Case C except the transaction price is Rs. 105 instead of Rs. 130. Consequently, the
application of the residual approach would result in a stand-alone selling price of Rs. 5 for Product D (Rs. 105 transaction
priceless Rs. 100 allocatedto Products A, Band C). Theentityconcludesthat Rs. 5 would not faithfully depict the amount of
consideration for Product D. Consequently, the entity reviews its observable data, including sales and margin reports, to
estimate the stand-alonesellingpriceof Product Dusing anothersuitable method. The entity allocates the transaction price
of Rs. 105 to Products A, B, C and D using the relative stand-alone selling prices of those products.
Example 35—Allocation of variable consideration
An entity enters into a contract with a customer for two intellectual property licences (Licences X and Y), which the
entity determines to represent two performance obligations each satisfied at a point in time. The stand-alone selling
prices of Licences X and Y are Rs. 800 and Rs. 1,000, respectively.
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Case A—Variable consideration allocated entirely to one performance obligation
The price stated in the contract for Licence X is a fixed amount of Rs. 800 and for Licence Y the consideration is 3%
of the customer’s future sales of products that use Licence Y. For purposes of allocation, the entity estimates its
sales-based royalties (i.e. the variable consideration) to be Rs. 1,000. To allocate the transaction price, the entity
concludes that the variable consideration (i.e. the sales-based royalties) should be allocated entirely to Licence Y.
The entity transfers Licence Y at inception of the contract and transfers Licence X one month later. Upon the transfer
of Licence Y, the entity does not recognize revenue because the consideration allocated to Licence Y is in the form
of a sales-based royalty. Therefore, the entity recognizes revenue for the sales-based royalty when those subsequent
sales occur. When Licence X is transferred, the entity recognizes as revenue the Rs. 800 allocated to Licence X.
Case B—Variable consideration allocated on the basis of stand-alone selling prices
The price stated in the contract for Licence X is a fixed amount of Rs. 300 and for Licence Y the consideration is 5%
of the customer’s future sales of products that use Licence Y. The entity’s estimate of the sales-based royalties (i.e.
the variable consideration) is Rs. 1,500.
To allocate the transaction price, the entity concludes that even though the variable payments relate specifically to
an outcome from the performance obligation to transfer Licence Y (i.e. the customer’s subsequent sales of products
that use Licence Y), allocating the variable consideration entirely to Licence Y would be inconsistent with the principle
for allocating the transaction price. Allocating Rs. 300 to Licence X and Rs. 1,500 to Licence Y does not reflect a
reasonable allocation of the transaction price on the basis of the stand-alone selling prices of Licences X and Y of Rs.
800 and Rs. 1,000, respectively.
The entity allocates the transaction price of Rs. 300 to Licences X and Y on the basis of relative stand-alone selling
prices of Rs. 800 and Rs. 1,000, respectively. The entity also allocates the consideration related to the sales-based
royalty on a relative stand-alone selling price basis. However, when an entity licenses intellectual property in which
the consideration is in the form of a sales-based royalty, the entity cannot recognize revenue until the later of the
following events:
-
the subsequent sales occur; or
the performance obligation is satisfied (or partially satisfied).
Licence Y is transferred to the customer at the inception of the contract and Licence X is transferred three months
later. When Licence Y is transferred, the entity recognizes as revenue the Rs.167 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 300)
allocated to Licence Y. When Licence X is transferred, the entity recognizes as revenue the Rs. 133 (Rs. 800 ÷ Rs.
1,800 × Rs. 300) allocated to Licence X.
In the first month, the royalty due from the customer’s first month of sales is Rs. 200. Consequently, the entity
recognizes as revenue Rs. 111 (Rs. 1,000 ÷ Rs. 1,800 × Rs. 200) allocated to Licence Y (which has been transferred to
the customer and is therefore a satisfied performance obligation). The entity recognizes a contract liability for the
Rs. 89 (Rs. 800 ÷ Rs. 1,800 × Rs. 200) allocated to Licence X. This is because although the subsequent sale by the
entity’s customer has occurred, the performance obligation to which the royalty has been allocated has not been
satisfied.
Contract costs
Example 36—Incremental costs of obtaining a contract
An entity, a provider of consulting services, wins a competitive bid to provide consulting services to a new customer. The
entity incurred the following costs to obtain the contract:
Rs.
External legal fees for due diligence
15,000
Travel costs to deliver proposal
25,000
Commissions to sales employees
10,000
Total costs incurred
50,000
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The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract arising from the
commissions to sales employees because the entity expects to recover those costs through future fees for the consulting
services. The entity also pays discretionary annual bonuses to sales supervisors based on annual sales targets, overall
profitability of the entity and individual performance evaluations. However, the entity does not recognize an asset for the
bonuses paid to sales supervisors because the bonuses are not incremental to obtaining acontract. The amounts are
discretionary and are based on other factors, including the profitability of the entity and the individuals’
performance. The bonuses are not directly attributable to identifiable contracts. Alsotheexternallegalfeesandtravel
costswouldhavebeen incurred regardless of whether the contract was obtained. Therefore, thosecostsarerecognized
asexpenses when incurred.
Example 37—Costs that give rise to an asset
An entity enters into a service contract to manage a customer’s information technology data centre for five years.
The contract is renewable for subsequent one-year periods. The average customer term is seven years. The entity
pays an employee a Rs. 10,000 sales commission upon the customer signing the contract. Before providing the
services, the entity designs and builds a technology platform for the entity’s internal use that interfaces with the
customer’s systems. That platform is not transferred to the customer, but will be used to deliver services to the
customer.
Incremental costs of obtaining a contract
The entity recognizes an asset for the Rs. 10,000 incremental costs of obtaining the contract for the sales commission
because the entity expects to recover those costs through future fees for the services to be provided. The entity
amortizes the asset over seven years, because the asset relates to the services transferred to the customer during
the contract term of five years and the entity anticipates that the contract will be renewed for two subsequent oneyear periods.
Costs to fulfill a contract
The initial costs incurred to set up the technology platform are as follows:
Rs.
Design services
40,000
Hardware
120,000
90,000
Software
Migration and testing of data centre
100,000
Total costs
350,000
The initial setup costs relate primarily to activities to fulfil the contract but do not transfer goods or services to the
customer. The entity accounts for the initial setup costs as follows:
(a) hardware costs—accounted for in accordance with IAS 16 Property, Plant and Equipment.
(b) software costs—accounted for in accordance with IAS 38 Intangible Assets.
(c) costs of the design, migration and testing of the data centre—assessed to determine whether an asset can be
recognized for the costs to fulfil the contract. Any resulting asset would be amortized on a systematic basis over
the seven-year period that the entity expects to provide services related to the data centre.
In addition to the initial costs to set up the technology platform, the entity also assigns two employees who are
primarily responsible for providing the service to the customer. Although the costs for these two employees are
incurred as part of providing the service to the customer, the entity concludes that the costs cannot be recognized
as an asset rather the entity recognizes the payroll expense for these two employees when incurred.
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Presentation
Example 38—Contract liability and receivable
Case A — Cancellable contract
On 1 January 20X9, an entity enters into a cancellable contract to transfer a product to acustomer on 31 March 20X9. The
contract requires the customer to pay consideration of Rs. 1,000 in advance on 31 January 20X9. The customer pays the
considerationon 1 March 20X9. Theentity transfers theproducton 31 March 20X9. The following journal entries illustrate
how the entity accounts for the contract:
(a)
The entity receives cash of Rs. 1,000 on 1 March 20X9 (cash is received in advance of performance):
Dr. Cash
Rs. 1,000
Cr. Contract liability
(b)
Rs. 1,000
The entity satisfies the performance obligation on 31 March 20X9:
Dr. Contract liability
Rs. 1,000
Cr. Revenue
Rs. 1,000
Case B — Non-cancellable contract
The same facts as in Case A apply to Case B except that the contract is non-cancellable. The followingjournalentries
illustrate howtheentityaccounts for the contract:
(a)
The amount of consideration is due on 31 January 20X9 (which is when the entity recognizes a receivable because it
has an unconditional right to consideration):
Dr. Receivable
Rs. 1,000
Cr. Contract liability
(b)
The entity receives the cash on 1 March 20X9:
Dr. Cash
Rs. 1,000
Cr. Receivable
(c)
Rs. 1,000
Rs. 1,000
The entity satisfies the performance obligation on 31 March 20X9:
Dr. Contract liability
Cr. Revenue
Rs. 1,000
Rs. 1,000
If the entity issued the invoice before 31 January 20X9 (the due date of the consideration), the entity would not
present the receivable and the contract liability on a gross basis in the statement of financial position because the entity
does not yet have a right to consideration that is unconditional.
Example 39—Contract asset recognized for the entity’s performance
On1January20X8,anentityentersintoacontracttotransferProductsAandB toacustomerinexchangefor Rs. 1,000. The
contractrequires Product Atobe delivered first and states that payment for the delivery of Product A is conditional
on the delivery of Product B. In other words, the consideration of Rs. 1,000 is due only after the entity has transferred both
Products A and B to the customer.
The entity identifies the promises to transfer Products A and B as performance obligations and allocates Rs. 400 to the
performance obligation to transfer Product A and Rs. 600 to the performance obligation to transfer Product B on the basis
of their relative stand-alone selling prices. The entity recognizes revenue for each respective performance obligation
when control of the product transfers to the customer. The entity satisfies the performance obligation to transfer
Product A:
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Dr. Contract asset
Rs. 400
Cr. Revenue
Rs. 400
The entity satisfies the performance obligation to transfer Product B and to recognize the unconditional right to
consideration:
Dr. Receivable Rs. 1,000
Cr. Contract asset
Rs. 400
Cr. Revenue
Rs. 600
Example 40—Receivable recognized for the entity’s performance
An entity enters into a contract with a customer on 1 January 20X9 to transfer products to the customer for Rs. 150 per
product. If thecustomerpurchases more than 1 million products in a calendar year, the contract indicates that the price per
unit is retrospectively reduced to Rs. 125 per product. Consideration is due when control of the products transfer to
the customer. Therefore, theentityhasanunconditionalrightto consideration (i.e. areceivable) forRs. 150perproductuntil
theretrospectivepricereductionapplies(i.e. after 1 million products areshipped).
Indeterminingthetransactionprice, theentityconcludesatcontractinception that the customer will meet the 1 million
products threshold and therefore estimates that the transaction price is Rs. 125 per product. Consequently, upon the first
shipment to the customer of 100 products the entity recognises the following:
Dr. Receivable Rs. 15,000*
Cr. Revenue Rs. 12,500**
Cr. Refund liability (contract liability)
Rs. 2,500
* Rs. 150 per product × 100 products.
** Rs. 125 transaction price per product × 100 products.
The refund liability represents a refund of Rs. 25 per product, which is expected to be provided to the customer for the
volume-based rebate.
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IFRS 15 Revenue from Contracts with Customers
Illustrative Examples – Summarized
Warranties
Warranty provides a
customer with assurance
that the product will
function as intended:
It is generally the case when a customer does not have an option to purchase
a warranty separately.
It is not a separate performance obligation rather it is accounted for in
accordance with IAS 37.
Warranty provides the
service to the customer in
addition to the assurance
of compliance as
intended:
It is the case when a customer has an option to purchase a warranty
separately.
It is considered as a separate performance obligation and a portion of
transaction price is allocated to that performance obligation.
Factors to be considered:
o If the entity is required by law to provide a warranty, then it is not a separate performance obligation.
o Longer warranty coverage period is more likely to be a separate performance obligation.
Example 44—Warranties
An entity, a manufacturer, provides its customer with a warranty with the purchase of a product. The warranty
provides assurance that the product complies with agreed-upon specifications and will operate as promised for one
year from the date of purchase. The contract also provides the customer with the right to receive up to 20 hours of
training services on how to operate the product at no additional cost.
The product and training services are each capable of being distinct because the customer can benefit from the
product on its own without the training services and can benefit from the training services together with the product
that already has been transferred by the entity. The entity regularly sells the product separately without the training
services.
The training services and product do not significantly modify or customize each other. The product and the training
services are not highly interdependent or highly interrelated. Consequently, the entity concludes that its promise to
transfer the product and its promise to provide training services are not inputs to a combined item, and, therefore,
give rise to two separate performance obligations.
Finally, the entity assesses the promise to provide a warranty and observes that the warranty provides the customer
with the assurance that the product will function as intended for one year. The entity, therefore, does not account
for it as a performance obligation rather it accounts for the assurance-type warranty in accordance with the
requirements in IAS 37. As a result, the entity allocates the transaction price to the two performance obligations
(the product and the training services) and recognizes revenue when (or as) those performance obligations are
satisfied.
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Principal versus agent considerations
Principal:
An entity is a principal if it controls the specified good or service before that
good or service is transferred to a customer.
When principal satisfies a performance obligation, then it recognizes revenue
in the gross amount of consideration.
Agent:
An entity is an agent if its performance obligation is to arrange for the
provision of the specified good or service by another party. It does not control
the specified good or service before that good or service is transferred to a
customer.
When agent satisfies a performance obligation, then it recognizes revenue in
the amount of any fees or commission.
Factors to be considered (for Principal):
o The entity is primarily responsible for fulfilling the promise to provide the specified good or service.
o The entity has inventory risk before the specified good or service has been transferred to a customer.
o The entity has discretion in establishing the price for the specified good or service.
Example 45—Arranging for the provision of goods or services (entity is an agent)
An entity operates a website that enables customers to purchase goods from a range of suppliers who deliver the
goods directly to the customers. Under the terms of the entity’s contracts with suppliers, when a good is purchased
via the website, the entity is entitled to a commission that is equal to 10% of the sales price. The entity’s website
facilitates payment between the supplier and the customer at prices that are set by the supplier. The entity requires
payment from customers before orders are processed and all orders are non-refundable. The entity has no further
obligations to the customer after arranging for the products to be provided to the customer.
The website operated by the entity is a marketplace in which suppliers offer their goods and customers purchase
the goods that are offered by the suppliers. Accordingly, the entity observes that the specified goods to be provided
to customers that use the website are the goods provided by the suppliers, and no other goods or services are
promised to customers by the entity. The entity does not control the suppliers’ inventory of goods used to fulfil the
orders placed by customers using the website.
Consequently, the entity concludes that it is an agent and its performance obligation is to arrange for the provision
of goods by the supplier. When the entity satisfies its promise to arrange for the goods to be provided by the supplier
to the customer (which, in this example, is when goods are purchased by the customer), the entity recognizes
revenue in the amount of the commission to which it is entitled.
Example 46—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer for equipment with unique specifications. The entity and the
customer develop the specifications for the equipment, which the entity communicates to a supplier that the entity
contracts with to manufacture the equipment. The entity also arranges to have the supplier deliver the equipment
directly to the customer. Upon delivery of the equipment to the customer, the terms of the contract require the
entity to pay the supplier the price agreed to by the entity and the supplier for manufacturing the equipment. The
entity and the customer negotiate the selling price and the entity invoices the customer for the agreed-upon price
with 30-day payment terms. The entity’s profit is based on the difference between the sales price negotiated with
the customer and the price charged by the supplier. The contract between the entity and the customer requires the
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customer to seek remedies for defects in the equipment from the supplier under the supplier’s warranty. However,
the entity is responsible for any corrections to the equipment required resulting from errors in specifications.
The entity concludes that it has promised to provide the customer with specialized equipment designed by the entity.
Although the entity has subcontracted the manufacturing of the equipment to the supplier, the entity concludes
that the design and manufacturing of the equipment are not distinct, because they are not separately identifiable
(i.e. there is a single performance obligation). The entity is responsible for the overall management of the contract
(for example, by ensuring that the manufacturing service conforms to the specifications) and, thus, provides a
significant service of integrating those items into the combined output—the specialized equipment—for which the
customer has contracted. In addition, those activities are highly interrelated. If necessary, modifications to the
specifications are identified as the equipment is manufactured, the entity is responsible for developing and
communicating revisions to the supplier and for ensuring that any associated rework required conforms with the
revised specifications.
Thus, the entity concludes that it is a principal in the transaction. The entity recognizes revenue in the gross amount
of consideration to which it is entitled from the customer in exchange for the specialized equipment.
Example 46A—Promise to provide goods or services (entity is a principal)
An entity enters into a contract with a customer to provide office maintenance services. The entity and the customer
define and agree on the scope of the services and negotiate the price. The entity is responsible for ensuring that the
services are performed in accordance with the terms and conditions in the contract. The entity invoices the customer
for the agreed-upon price on a monthly basis with 10-day payment terms. The entity regularly engages third-party
service providers to provide office maintenance services to its customers. When the entity obtains a contract from
a customer, the entity enters into a contract with one of those service providers, directing the service provider to
perform office maintenance services for the customer. The payment terms in the contracts with the service providers
are generally aligned with the payment terms in the entity’s contracts with customers. However, the entity is obliged
to pay the service provider even if the customer fails to pay.
The customer does not have a right to direct the service provider to perform services that the entity has not agreed
to provide. Therefore, the right to office maintenance services obtained by the entity from the service provider is
not the specified good or service in its contract with the customer. The entity concludes that it controls the specified
services before they are provided to the customer. The entity obtains control of a right to office maintenance services
after entering into the contract with the customer but before those services are provided to the customer.
Thus, the entity is a principal in the transaction and recognizes revenue in the amount of consideration to which it
is entitled from the customer in exchange for the office maintenance services.
Example 47—Promise to provide goods or services (entity is a principal)
An entity negotiates with major airlines to purchase tickets at reduced rates compared with the price of tickets sold
directly by the airlines to the public. The entity agrees to buy a specific number of tickets and must pay for those
tickets regardless of whether it is able to resell them. The reduced rate paid by the entity for each ticket purchased
is negotiated and agreed in advance. The entity determines the prices at which the airline tickets will be sold to its
customers. The entity sells the tickets and collects the consideration from customers when the tickets are purchased.
The entity also assists the customers in resolving complaints with the service provided by the airlines. However, each
airline is responsible for fulfilling obligations associated with the ticket, including remedies to a customer for
dissatisfaction with the service.
The entity concludes that, with each ticket that it commits itself to purchase from the airline, it obtains control of a
right to fly on a specified flight (in the form of a ticket) that the entity then transfers to one of its customers.
The entity has inventory risk with respect to the ticket because the entity committed itself to obtain the ticket from
the airline before obtaining a contract with a customer to purchase the ticket. This is because the entity is obliged
to pay the airline for that right regardless of whether it is able to obtain a customer to resell the ticket to or whether
it can obtain a favourable price for the ticket. The entity also establishes the price that the customer will pay for the
specified ticket.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Thus, the entity concludes that it is a principal in the transactions with customers. The entity recognizes revenue in
the gross amount of consideration to which it is entitled in exchange for the tickets transferred to the customers.
Example 48—Arranging for the provision of goods or services (entity is an agent)
An entity sells vouchers that entitle customers to future meals at specified restaurants. The sales price of the voucher
provides the customer with a significant discount when compared with the normal selling prices of the meals (for
example, a customer pays Rs. 100 for a voucher that entitles the customer to a meal at a restaurant that would
otherwise cost Rs. 200). The entity does not purchase or commit itself to purchase vouchers in advance of the sale
of a voucher to a customer; instead, it purchases vouchers only as they are requested by the customers. The entity
sells the vouchers through its website and the vouchers are non-refundable. The entity and the restaurants jointly
determine the prices at which the vouchers will be sold to customers. Under the terms of its contracts with the
restaurants, the entity is entitled to 30% of the voucher price when it sells the voucher. The entity also assists the
customers in resolving complaints about the meals and has a buyer satisfaction programme. However, the
restaurant is responsible for fulfilling obligations associated with the voucher, including remedies to a customer for
dissatisfaction with the service.
A customer obtains a voucher for the restaurant that it selects. The entity does not engage the restaurants to provide
meals to customers on the entity’s behalf. The entity concludes that it does not control the voucher (right to a meal)
at any time.
Thus, the entity concludes that it is an agent with respect to the vouchers. The entity recognizes revenue in the net
amount of consideration to which the entity will be entitled in exchange for arranging for the restaurants to provide
vouchers to customers for the restaurants’ meals, which is the 30% commission it is entitled to upon the sale of each
voucher.
Example 48A—Entity is a principal and an agent in the same contract
An entity sells services to assist its customers in more effectively targeting potential recruits for open job positions.
The entity performs several services itself, such as interviewing candidates and performing background checks. As
part of the contract with a customer, the customer agrees to obtain a License to access a third party’s database of
information on potential recruits. The entity arranges for this License with the third party, but the customer contracts
directly with the database provider for the License. The entity collects payment on behalf of the third-party database
provider as part of the entity’s overall invoicing to the customer. The database provider sets the price charged to
the customer for the License, and is responsible for providing technical support and credits to which the customer
may be entitled for service down time or other technical issues.
For the purpose of this example, it is assumed that the entity concludes that its recruitment services and the
database access License are each distinct. Accordingly, there are two specified goods or services to be provided to
the customer—access to the third party’s database and recruitment services. The entity concludes that it does not
control the access to the database before it is provided to the customer. The entity does not at any time have the
ability to direct the use of the License because the customer contracts for the License directly with the database
provider. The entity does not control access to the provider’s database—it cannot, for example, grant access to the
database to a party other than the customer, or prevent the database provider from providing access to the
customer.
Thus, the entity concludes that it is an agent in relation to the third party’s database service. In contrast, the entity
concludes that it is the principal in relation to the recruitment services because the entity performs those services
itself and no other party is involved in providing those services to the customer.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Customer options for additional goods or services
If an entity grants a customer the option to acquire additional goods or services, that option gives rise to a
performance obligation in the contract only if the option provides a material right to the customer that it would
not receive without entering into that contract.
Example 49—Option that provides the customer with a material right (discount voucher)
An entity enters into a contract for the sale of Product A for Rs. 100. As part of thecontract, theentity givesthecustomer
a 40 percentdiscountvoucherfor any futurepurchases up to Rs. 100 in the next 30 days. The entity intends to offer a 10
per cent discount on all sales during the next 30 days as part of a seasonal promotion. The 10 per cent discount cannot be
used in addition to the 40 per cent discountvoucher.
Because all customers will receive a 10 per cent discount on purchases during the next 30 days, the only discount that
provides the customer with a material right is the discount that is incremental to that 10 per cent (i.e. the additional 30
per cent discount). The entity accounts for the promise to provide the incremental discount as a performance obligation
in the contract for the sale of Product A. To estimate the stand-alone selling price of the discount voucher, the entity
estimatesan 80percentlikelihood thatacustomerwillredeemthevoucherandthatacustomerwill,onaverage, purchase
Rs. 50 of additional products. Consequently, the entity’s estimated stand-alone selling price of the discount voucher is
Rs. 12 (Rs. 50 average purchase price of additional products × 30 per cent incremental discount × 80 per cent likelihood
of exercising the option). The stand-alone selling prices of Product A and the discount voucher and the resulting allocation of
the Rs. 100 transaction price are as follows:
Performance obligation
Product A
Discount voucher
Stand-alone selling price (Rs.)
100
12
112
Performance obligation
Product A
Discount voucher
Allocated transaction price (Rs.)
89
11
100
[100 x 100/112]
[100 x 12/112]
The entity allocates Rs. 89 to Product A and recognizes revenue for Product A when control transfers. The entity allocates
Rs. 11 to the discount voucher and recognizesrevenueforthevoucherwhenthecustomerredeemsitforgoodsor services
or when it expires.
Example 50—Option that does not provide the customer with a material right (additional goods or services)
An entity in the telecommunications industry enters into a contract with a customer to provide a handset and
monthly network service for two years. The network service includes up to 1,000 call minutes and 1,500 text
messages each month for a fixed monthly fee. The contract specifies the price for any additional call minutes or texts
that the customer may choose to purchase in any month. The prices for those services are equal to their stand-alone
selling prices. The entity determines that the promises to provide the handset and network service are each separate
performance obligations.
The prices of the additional call minutes and texts reflect the stand-alone selling prices for those services. Because
the option for additional call minutes and texts does not grant the customer a material right, the entity concludes it
is not a performance obligation in the contract. Consequently, the entity does not allocate any of the transaction
price to the option for additional call minutes or texts. The entity will recognize revenue for the additional call
minutes or texts if and when the entity provides those services.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Example 51—Option that provides the customer with a material right (renewal option)
An entity enters into 100 separate contracts with customers to provide one year of maintenance services for Rs.
1,000 per contract. The terms of the contracts specify that at the end of the year, each customer has the option to
renew the maintenance contract for a second year by paying an additional Rs. 1,000. Customers who renew for a
second year are also granted the option to renew for a third year for Rs. 1,000. The entity charges significantly higher
prices for maintenance services to customers that do not sign up for the maintenance services initially (i.e. when the
products are new). That is, the entity charges Rs. 3,000 in Year 2 and Rs. 5,000 in Year 3 for annual maintenance
services if a customer does not initially purchase the service or allows the service to lapse.
The entity concludes that the renewal option provides a material right to the customer that it would not receive
without entering into the contract, because the price for maintenance services are significantly higher if the
customer elects to purchase the services only in Year 2 or 3. Consequently, the entity concludes that the promise to
provide the option is a performance obligation. The renewal option is for a continuation of maintenance services
and those services are provided in accordance with the terms of the existing contract. Instead of determining the
stand-alone selling prices for the renewal options directly, the entity allocates the transaction price by determining
the consideration that it expects to receive in exchange for all the services that it expects to provide.
The entity expects 90 customers to renew at the end of Year 1 (90 per cent of contracts sold) and 81 customers to
renew at the end of Year 2 (90 per cent of the 90 customers that renewed at the end of Year 1 will also renew at the
end of Year 2, that is 81 per cent of contracts sold).
At contract inception, the entity determines the expected consideration for each contract is Rs. 2,710 [Rs. 1,000 +
(90 per cent × Rs. 1,000) + (81 per cent × Rs. 1,000)]. The entity also determines that recognizing maintenance service
revenue on the basis of costs incurred relative to the total expected costs depicts the transfer of services to the
customer. Estimated costs for a three-year contract are as follows:
Rs.
Year 1
600
Year 2
750
Year 3
1,000
Accordingly, the pattern of revenue recognition expected at contract inception for each contract is as follows:
Allocation of consideration expected
Rs.
Expected costs adjusted for likelihood of contract renewal
Rs.
Year 1
600
(Rs. 600 × 100%)
780
[(Rs. 600 ÷ Rs. 2,085) x Rs. 2,710]
Year 2
675
(Rs. 750 × 90%)
877
[(Rs. 675 ÷ Rs. 2,085) x Rs. 2,710]
Year 3
810 (Rs. 1,000 × 81%)
1,053
[(Rs. 810 ÷ Rs. 2,085) x Rs. 2,710]
Total
2,085
2,710
Consequently, at contract inception, the entity allocates to the option to renew at the end of Year 1 Rs. 22,000 of
the consideration received to date [cash of Rs. 100,000 – maintenance service revenue to be recognized in Year 1 of
Rs. 78,000 (Rs. 780 × 100)].
Assuming there is no change in the entity’s expectations and the 90 customers renew as expected, at the end of the
first year, the entity has collected cash of Rs. 190,000 [(100 × Rs. 1,000) + (90 × Rs. 1,000)], has recognized revenue
of Rs. 78,000 (Rs. 780 × 100) and has recognized a contract liability of Rs. 112,000.
Consequently, upon renewal at the end of the first year, the entity allocates Rs. 24,300 to the option to renew at the
end of Year 2 [cumulative cash of Rs. 190,000 less cumulative revenue recognized in Year 1 and to be recognized in
Year 2 of Rs. 165,700 (Rs. 78,000 + Rs. 877 × 100)].
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
If the actual number of contract renewals was different than what the entity expected, the entity would update the
transaction price and the revenue recognized accordingly.
Example 52—Customer loyalty programme
An entity has a customer loyalty programme that rewards a customer with one customer loyalty point for every Rs. 10 of
purchases. Each point is redeemable for a Rs. 1 discount on any future purchases of the entity’s products. During a
reporting period, customers purchase products for Rs. 100,000 and earn 10,000 points that are redeemable for future
purchases. The consideration is fixed and the stand-alone selling price of the purchased products is Rs. 100,000. The entity
expects 9,500 points to be redeemed. The entity estimates a stand-alone selling price of Rs. 0.95 per point (totalling Rs.
9,500).
The points provide a material right to customers that they would not receive without entering into a contract.
Consequently, the entity concludes that the promise to provide points to the customer is a performance obligation. The
entity allocates the transaction price (Rs. 100,000) to the product and the points on a relative stand-alone selling price basis
as follows:
Rs.
Product
91,324 [Rs. 100,000 × (Rs. 100,000 stand-alone selling price ÷ Rs. 109,500)]
Points
8,676 [Rs. 100,000 × (Rs. 9,500 stand-alone selling price ÷ Rs. 109,500)]
Non-refundable upfront fee
An entity may charge a customer a non-refundable upfront fee at or near inception (e.g. joining fees in health
club). It does not result in the transfer of a promised good or service to the customer. Instead the upfront fee is
an advance payment for future goods or services and therefore would be recognized as revenue when those when
those future goods or services are provided.
An entity may charge a non-refundable fee in part as compensation for costs incurred in setting up a contract (or
other administrative tasks). If those setup activities do not satisfy a performance obligation, the entity shall
disregard those activities (and related costs) when measuring progress. That is because the costs of setup
activities do not depict the transfer of services to the customer.
Example 53—Non-refundable upfront fee
An entity enters into a contract with a customer for one year of transaction processing services. The entity’s
contracts have standard terms that are the same for all customers. The contract requires the customer to pay an
upfront fee to set up the customer on the entity’s systems and processes. The fee is a nominal amount and is nonrefundable. The customer can renew the contract each year without paying an additional fee.
The entity’s setup activities do not transfer a good or service to the customer and, therefore, do not give rise to a
performance obligation. The entity concludes that the renewal option does not provide a material right to the
customer that it would not receive without entering into that contract. The upfront fee is, in effect, an advance
payment for the future transaction processing services. Consequently, the entity determines the transaction price,
which includes the non-refundable upfront fee, and recognizes revenue for the transaction processing services as
those services are provided.
Licensing
A License establishes a customer’s rights to the intellectual property of an entity. Following are some examples
of such intellectual properties:
(a) software and technology;
(b) motion pictures, music and other forms of media and entertainment;
(c) franchises; and
(d) patents, trademarks and copyrights.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
In addition to a promise to grant a License to a customer, an entity may also promise to transfer other goods or
services to the customer:
If the promise to grant a
License is NOT distinct
from other promised
goods or services:
An entity shall account for the License and other services as a single performance
obligation. Examples of such Licenses are:
a License that forms a component of a tangible good and that is integral to the
functionality of the good; and
a License that the customer can benefit from only in conjunction with a related
service (such as an online service provided by the entity that enables, by
granting a License, the customer to access content)
Determination of whether the performance obligation is satisfied over time or at
a point in time is made as per guidance studied in IFRS 15.
If the promise to grant a
License is distinct from
other promised goods or
services:
An entity shall account for the License as a separate performance obligation.
Determination of whether the performance obligation is satisfied over time or at
a point in time is made as follows:
(a) performance obligation is satisfied over time:
If grant of License is a right to access the intellectual property as it exists
throughout the License period. It happens when all of the following criteria is
met:
entity will undertake the activities that significantly affect the intellectual
property.
the rights granted by the License directly expose the customer to any +/effects of aforementioned activities (e.g. the benefit derived from a brand is
often dependent the entity’s ongoing activities that support or maintain the
value of property).
these activities do not result in the transfer of a good or service to customer as
those activities occur.
(b) performance obligation is satisfied at a point in time
If grant of License is a right to access the intellectual property as it exists at the
point in time at which the License is granted. It happens when the intellectual
property, to which the customer has rights, has significant stand-alone
functionality and a substantial portion of the benefit of that intellectual property
is derived from that functionality. Consequently, the ability of the customer to
obtain benefit from that intellectual property would not be significantly affected
by the entity’s activities unless those activities significantly change its form or
functionality. Types of intellectual property that often have significant standalone functionality include software, biological compounds or drug formulas, and
completed media content (for example, films, television shows and music
recordings).
However, revenue cannot be recognized before the beginning of the period
during which the customer is able to use and benefit from the License. For
example, if a software License period begins before an entity provides (or
otherwise makes available) to the customer a code that enables the customer to
immediately use the software, the entity would not recognize revenue before
that code has been provided (or otherwise made available).
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Sale-based or usage-based royalties
An entity shall recognize revenue from a sale-based or usage-based royalty promised in exchange for a License of
intellectual property only when (or as) the later of the following events occurs:
(a) the subsequent sale or usage occurs; and
(b) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated
has been satisfied (or partially satisfied).
Example 54—Right to use intellectual property
Using the same facts as in Case A in Example 11, the entity identifies four performance obligations in a contract:
(a)
(b)
(c)
(d)
the software License;
installation services;
software updates; and
technical support.
The entity observes that it does not have any contractual or implied obligations (independent of the updates and
technical support) to undertake activities that will change the functionality of the software during the License period.
The entity also observes that the software remains functional without the updates and the technical support. The
entity concludes that the software to which the License relates has significant stand-alone functionality. The entity
further concludes that the nature of the entity’s promise in transferring the License is to provide a right to use the
entity’s intellectual property as it exists at a point in time. Consequently, the entity accounts for the License as a
performance obligation satisfied at a point in time.
Example 55—License of intellectual property
An entity enters into a contract with a customer to License (for a period of three years) intellectual property related
to the design and production processes for a good. The contract also specifies that the customer will obtain any
updates to that intellectual property for new designs or production processes that may be developed by the entity.
The updates are integral to the customer’s ability to derive benefit from the License during the License period,
because the intellectual property is used in an industry in which technologies change rapidly. Although the benefit
the customer can derive from the License on its own (i.e. without the updates) is limited because the updates are
integral to the customer’s ability to continue to use the intellectual property in an industry in which technologies
change rapidly, the License can be used in a way that generates some economic benefits. The entity determines that
the customer can benefit from (a) the License on its own without the updates; and (b) the updates together with
the initial License.
Because the benefit that the customer could obtain from the License over the three-year term without the updates
would be significantly limited, the entity’s promises to grant the License and to provide the expected updates are,
in effect, inputs that together fulfil a single promise to deliver a combined item to the customer. The promises within
that combined item (i.e. to grant the License and to provide when-and-if-available updates) are, therefore, not
separately identifiable and are a single performance obligation. The entity concludes that because the customer
simultaneously receives and consumes the benefits of the entity’s performance as it occurs, the performance
obligation is satisfied over time.
Example 56—Identifying a distinct License
An entity, a pharmaceutical company, licenses to a customer its patent rights to an approved drug compound for 10
years and also promises to manufacture the drug for the customer. The drug is a mature product; therefore the
entity will not undertake any activities to support the drug, which is consistent with its customary business practices.
Case A—License is not distinct
In this case, no other entity can manufacture this drug because of the highly specialized nature of the manufacturing
process. As a result, the License cannot be purchased separately from the manufacturing services. The entity
determines that the customer cannot benefit from the License without the manufacturing service; therefore, the
License and the manufacturing service are not distinct and the entity accounts for the License and the manufacturing
service as a single performance obligation.
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Case B—License is distinct
In this case, the manufacturing process used to produce the drug is not unique or specialized and several other
entities can also manufacture the drug for the customer. The entity concludes that its promises to grant the License
and to provide the manufacturing service are separately identifiable. In reaching this conclusion, the entity considers
that the customer could separately purchase the License without significantly affecting its ability to benefit from the
License. Neither the License, nor the manufacturing service, is significantly modified or customized by the other and
the entity is not providing a significant service of integrating those items into a combined output. Thus, although the
manufacturing service necessarily depends on the License in this contract (i.e. the entity would not provide the
manufacturing service without the customer having obtained the License), the License and the manufacturing
service do not significantly affect each other. Consequently, the entity concludes that its promises to grant the
License and to provide the manufacturing service are distinct and that there are two performance obligations.
The drug is a mature product (i.e. it has been approved, is currently being manufactured and has been sold
commercially for the last several years). For these types of mature products, the entity’s customary business
practices are not to undertake any activities to support the drug. The drug compound has significant stand-alone
functionality (i.e. its ability to produce a drug that treats a disease or condition). Consequently, the customer obtains
a substantial portion of the benefits of the drug compound from that functionality, rather than from the entity’s
ongoing activities. The nature of the entity’s promise in transferring the License is to provide a right to use the
entity’s intellectual property in the form and the functionality with which it exists at the point in time that it is
granted to the customer. Consequently, the entity accounts for the License as a performance obligation satisfied at
a point in time.
Example 57—Franchise rights
An entity enters into a contract with a customer and promises to grant a franchise License that provides the customer
with the right to use the entity’s trade name and sell the entity’s products for 10 years. In addition to the License,
the entity also promises to provide the equipment necessary to operate a franchise store. In exchange for granting
the License, the entity receives a sales-based royalty of 5% of the customer’s monthly sales. The fixed consideration
for the equipment is Rs. 150,000 payable when the equipment is delivered.
Identifying performance obligations
The entity observes that the entity, as a franchisor, has developed a customary business practice to undertake
activities such as analyzing consumers’ changing preferences and implementing product improvements, pricing
strategies, marketing campaigns and operational efficiencies to support the franchise name. However, the entity
concludes that these activities do not directly transfer goods or services to the customer because they are part of
the entity’s promise to grant a License.
The entity determines that it has two promises to transfer goods or services: a promise to grant a License and a
promise to transfer equipment. In addition, the entity concludes that the promise to grant the License and the
promise to transfer the equipment are each distinct. The customer can benefit from the License together with the
equipment that is delivered before the opening of the franchise and the equipment can be used in the franchise or
sold for an amount other than scrap value. The entity concludes that the License and the equipment are not inputs
to a combined item (i.e. they are not fulfilling what is, in effect, a single promise to the customer). In addition, the
License and the equipment are not highly interdependent or highly interrelated because the entity would be able to
fulfil each promise (i.e. to license the franchise or to transfer the equipment) independently of the other.
Consequently, the entity has two performance obligations; the franchise license and the equipment.
Allocating the transaction price
The entity determines that the transaction price includes fixed consideration of Rs. 150,000 and variable
consideration (5% of customer sales). The stand-alone selling price of the equipment is Rs. 150,000 and the entity
regularly licenses franchises in exchange for 5% of customer sales. In addition, the entity observes that allocating Rs.
150,000 to the equipment and the sales-based royalty to the franchise License would be consistent with an allocation
based on the entity’s relative stand-alone selling prices in similar contracts. Consequently, the entity concludes that
the variable consideration should be allocated entirely to the performance obligation to grant the franchise License.
Nasir Abbas FCA
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
Application guidance: licensing
The entity assesses the nature of the entity’s promise to grant the franchise License and concludes that it is to
provide access to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. In addition, the entity observes
that because part of its compensation is dependent on the success of the franchisee (as evidenced through the
sales-based royalty), the entity has a shared economic interest with the customer that indicates that the customer
will expect the entity to undertake those activities to maximize earnings.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.
these activities do not result in the transfer of a good or service to customer as those activities occur.
The entity concludes that the promise to transfer the License is a performance obligation satisfied over time. After
the transfer of the franchise License, the entity recognizes revenue as and when the customer’s sales occur because
the entity concludes that this reasonably depicts the entity’s progress towards complete satisfaction of the franchise
License performance obligation.
Example 58—Access to intellectual property
An entity, a creator of comic strips, licenses the use of the images and names of its comic strip characters in three of
its comic strips to a customer for a four-year term. There are main characters involved in each of the comic strips.
However, newly created characters appear regularly and the images of the characters evolve over time. The
customer, an operator of cruise ships, can use the entity’s characters in various ways, such as in shows or parades,
within reasonable guidelines. The contract requires the customer to use the latest images of the characters. In
exchange for granting the License, the entity receives a fixed payment of Rs. 1 million in each year of the four-year
term. The entity concludes that it has no other performance obligations other than the promise to grant a License.
That is, the additional activities associated with the License do not directly transfer a good or service to the customer
because they are part of the entity’s promise to grant a License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. development of the characters) change the form of the intellectual property.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities
because the contract requires the customer to use the latest characters.
these activities do not result in the transfer of a good or service to customer as those activities occur.
Consequently, the entity concludes that the nature of the entity’s promise to transfer the License is to provide the
customer with access to the entity’s intellectual property as it exists throughout the License period. The entity
accounts for the promised License as a performance obligation satisfied over time. Because the contract provides
the customer with unlimited use of the licensed characters for a fixed term, the entity determines that a time-based
method would be the most appropriate measure of progress towards complete satisfaction of the performance
obligation.
Example 59—Right to use intellectual property
An entity, a music record label, licenses to a customer a 1975 recording of a classical symphony by a noted orchestra.
The customer, a consumer products company, has the right to use the recorded symphony in all commercials,
including television, radio and online advertisements for two years in Country A. In exchange for providing the
License, the entity receives fixed consideration of Rs. 10,000 per month. The contract does not include any other
goods or services to be provided by the entity. The contract is non-cancellable. The entity concludes that its only
performance obligation is to grant the License. The entity determines that the term of the License (two years), its
geographical scope (the customer’s right to use the recording only in Country A), and the defined permitted use for
the recording (in commercials) are all attributes of the promised License in the contract. The entity does not have
any contractual or implied obligations to change the licensed recording. The licensed recording has significant standalone functionality (i.e. the ability to be played) and, therefore, the ability of the customer to obtain the benefits of
the recording is not substantially derived from the entity’s ongoing activities. Consequently, the entity concludes
Nasir Abbas FCA
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IFRS 15 [Illustrative examples 44 – 63] – Class notes
that the nature of its promise in transferring the License is to provide the customer with a right to use the entity’s
intellectual property as it exists at the point in time that it is granted. The entity recognizes all of the revenue at the
point in time when the customer can direct the use of, and obtain substantially all of the remaining benefits from,
the licensed intellectual property. Because of the length of time between the entity’s performance (i.e. at the
beginning of the period) and the customer’s monthly payments over two years (which are non-cancellable), the
entity must determine whether a significant financing component exists.
Example 60—Sales-based royalty for a License of intellectual property
An entity, a movie distribution company, licenses Movie XYZ to a customer. The customer, an operator of cinemas,
has the right to show the movie in its cinemas for six weeks. Additionally, the entity has agreed to (a) provide
memorabilia from the filming to the customer for display at the customer’s cinemas before the beginning of the sixweek screening period; and (b) sponsor radio advertisements for Movie XYZ on popular radio stations in the
customer’s geographical area throughout the six-week screening period. In exchange for providing the License and
the additional promotional goods and services, the entity will receive a portion of the operator’s ticket sales for
Movie XYZ (i.e. variable consideration in the form of a sales-based royalty). The entity concludes that the License to
show Movie XYZ is the predominant item to which the sales-based royalty relates because the entity has a
reasonable expectation that the customer would ascribe significantly more value to the License than to the related
promotional goods or services. If the License, the memorabilia and the advertising activities are separate
performance obligations, the entity would allocate the sales-based royalty to each performance obligation.
Example 61—Access to intellectual property
An entity, a well-known sports team, licenses the use of its name and logo to a customer. The customer, an apparel
designer, has the right to use the sports team’s name and logo on items including t-shirts, caps, mugs and towels for
one year. In exchange for providing the License, the entity will receive fixed consideration of Rs. 2 million and a
royalty of 5% of the sales price of any items using the team name or logo. The customer expects that the entity will
continue to play games and provide a competitive team. The entity concludes that its only performance obligation
is to transfer the License. The additional activities associated with the License (i.e. continuing to play games and
provide a competitive team) do not directly transfer a good or service to the customer because they are part of the
entity’s promise to grant the License.
The entity assesses the nature of the entity’s promise to grant the license and concludes that it is to provide access
to the entity’s intellectual property in its current form throughout the license period because:
entity will undertake the activities that significantly affect the intellectual property. This is because the entity’s
activities (i.e. continuing to play) support and maintain the value of the name and logo. In addition, the entity
observes that because part of its compensation is dependent on the success of the customer (as evidenced
through the sales-based royalty), the entity has a shared economic interest with the customer that indicates that
the customer will expect the entity to undertake those activities to maximize earnings.
the rights granted by the License directly expose the customer to any +/- effects of aforementioned activities.
these activities do not result in the transfer of a good or service to customer as those activities occur.
The entity concludes that the entity’s promise to grant the License is to provide the customer with access to the
entity’s intellectual property as it exists throughout the License period. Consequently, the entity accounts for the
promised License as a performance obligation satisfied over time. The entity concludes that recognition of the Rs. 2
million fixed consideration as revenue rateably over time plus recognition of the royalty as revenue as and when the
customer’s sales of items using the team name or logo occur reasonably depicts the entity’s progress towards
complete satisfaction of the License performance obligation
Nasir Abbas FCA
562
IFRS 15 [Illustrative examples 44 – 63] – Class notes
Repurchase agreements
A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either
in the same contract or in another contract) to repurchase the asset. The repurchased asset may be the asset that
was originally sold to the customer, an asset that is substantially the same as that asset, or another asset of which
the asset that was originally sold is a component. Repurchase agreements generally come in following forms:
A forward or a call
option:
If an entity an obligation to repurchase (i.e. forward) or a right to repurchase (i.e.
call option) the asset, a customer does not obtain control of the asset.
Consequently the entity shall account for the contract as either of the following:
a lease in accordance with IFRS 16 if the entity can or must repurchase the
asset for an amount that is less than the original selling price of the asset.; OR
a financial liability for consideration received if the entity can or must
repurchase the asset for an amount equal to or more than the original selling
price of the asset. The difference between the consideration received for sale
and consideration to be paid for repurchase shall be recognized as interest. If
option lapses unexercised, an entity shall derecognize the liability and
recognize revenue.
A put option:
If an entity has an obligation to repurchase the asset at customer’s demand at
a price lower than the original selling of the asset as well as than expected
market value of the asset at the date of repurchase, the entity shall account for
the agreement as a lease in accordance with IFRS 16.
If an entity has an obligation to repurchase the asset at customer’s demand at
a price lower than the original selling of the asset but more than expected
market value of the asset at the date of repurchase, the entity shall account for
the agreement as a sale of a product with a right of return.
If an entity has an obligation to repurchase the asset at customer’s demand at
a price equal to or more than the original selling of the asset and more than
expected market value of the asset at the date of repurchase, the entity shall
account for the agreement as a financial liability as studied above for call
option.
If an entity has an obligation to repurchase the asset at customer’s demand at
a price equal to or more than the original selling of the asset but equal to or
less than expected market value of the asset at the date of repurchase, the
entity shall account for the agreement as a sale of a product with a right of
return.
When comparing repurchase price with the selling price, time value of money is to be considered.
Example 62—Repurchase agreements
An entity enters into a contract with a customer for thesaleof a tangible asset on 1 January 20X7 for Rs. 1 million.
Case A—Call option: financing
The contract includes a call option that gives the entity the right to repurchase the asset for Rs. 1.1 million on or before
31 December 20X7. Control of the asset does not transfer to the customer on 1 January 20X7 because the entity has a right
to repurchase the asset and therefore the customer is limited in its ability to direct the use of, and obtain substantially
all of the remaining benefits from, the asset. Consequently, the entity accounts for the transaction as a financing
arrangement, because the exercise price is more than the original selling price. Hence, the entity does not derecognize
theassetandinsteadrecognizesthecashreceivedasafinancial liability. The entity also recognizes interest expense for the
Nasir Abbas FCA
563
IFRS 15 [Illustrative examples 44 – 63] – Class notes
difference between the exerciseprice(Rs. 1.1 million) and the cash received (Rs. 1 million), which increases the liability.
On 31 December 20X7, the option lapses unexercised; therefore, the entity derecognizes the liability and recognizes
revenue of Rs. 1.1 million.
Case B—Put option: lease
Instead of having a call option, the contract includes a put option that obliges the entity to repurchase the asset at
the customer’s request for Rs. 900,000 on or before 31 December 20X7. The market value is expected to be Rs.
750,000 on 31 December 20X7. The entity concludes that the customer has a significant economic incentive to
exercise the put option because the repurchase price significantly exceeds the expected market value of the asset
at the date of repurchase. Consequently, the entity concludes that control of the asset does not transfer to the
customer, because the customer is limited in its ability to direct the use of, and obtain substantially all of the
remaining benefits from, the asset. The entity accounts for the transaction as a lease in accordance with IFRS 16
Leases.
Bill-and-hold arrangements
A bill-and-hold arrangement is a contract under which an entity bills a customer for a product but the entity
retains physical possession of the product (i.e. entity provides custodial service) until it is transferred to the
customer at a point in time in the future.
The entity has satisfied its performance obligation to transfer a product when a customer obtains control of that
product. For a customer to have obtained control of a product in a bill-and-hold arrangement, all of the following
criteria must be met:
(a) the reason for the bill-and-hold arrangement must be substantive (for example, the customer has requested
the arrangement);
(b) the product must be identified separately as belonging to the customer;
(c) the product currently must be ready for physical transfer to the customer; and
(d) the entity cannot have the ability to use the product or to direct it to another customer.
Example 63—Bill-and-hold arrangement
An entity enters into a contract with a customer on 1 January 20X8 for the sale of a machine and spare parts. The
manufacturinglead time for the machine and spare parts is twoyears.
Upon completion of manufacturing, theentity demonstrates that the machine and spare parts meet the agreed-upon
specifications in the contract. The promises to transfer the machine and spare parts are distinct and result in two
performance obligations that each will be satisfied at a point in time. On 31 December 20X9, the customer pays for the
machine and spare parts, butonly takes physical possession of the machine. Although the customer inspects and accepts the
spare parts, the customer requests that the spare parts be stored at the entity’s warehouse because of its close proximity to
the customer’s factory. The customer has legal title to the spare parts and the parts can be identified as belonging to the
customer. Furthermore,theentitystoresthesparepartsina separate section of its warehouse and the parts are ready
for immediate shipment at the customer’s request. The entity expects to hold the spare parts for two to four years and the
entity does not have the ability to use the spare parts or direct them to another customer.
The entity identifies thepromisetoprovide custodialservices asaperformance obligation because it is a service provided
to the customer and it is distinct from the machine and spare parts. Consequently, the entity accounts for three
performance obligations in the contract (the promises to provide the machine, the spare parts and the custodial services).
The transaction price is allocated to the three performance obligations and revenue is recognized when (or as) control
transfers to thecustomer.
Control of the machine transfers to the customer on 31 December 20X9 when the customer takes physical possession.
The entity recognizes revenue for the spare parts on 31 December 20X9 when control transfers to the customer. The
performanceobligationtoprovidecustodialservicesissatisfiedovertimeas the services are provided.
Nasir Abbas FCA
564
Solution [Q-4 Jun-17]
Note
In absence of information and to avoid complexity of calculations, it is assumed that service
revenue of Rs. 7.8m remains same every year and is not affected by inflation
Builders and Developers
Extracts - SOCI
Revenue from sale of building (W-1)
Revenue from services [7.80 x 6/12]
Contract cost - sale of building [50 + 80.20 + 32.60 + 5.80]
Contract cost - maintenance service
2016
2015
------- Rs. million ------282.61
3.90
(168.60)
(3.00)
Interest expense [2016: 13.49 + 1.38][2015: 24.75] (W-2)
(14.87)
Builders and Developers
Extracts - SOFP
Non-current assets
Land
(24.75)
2016
2015
------- Rs. million -------
50.00
-
79.07
Non-current liabilities
Contract liability (W-2)
26.80
32.01
Current liabilities
Contract liability (W-2) [2016: 32.01 - 26.80] [2015: 299.75 - 32.01]
5.21
267.74
Current assets
Contract cost [(168.60 - 50) x 1/1.5]
WORKINGS
W-1 Transaction price allocation
Advance received
Cash for maintenance [6m x 1.3 x 5-year AF at 9% x 1.5-year DF at 9%]
Cash for sale of building (i.e. residual value basis)
Transaction price for sale of building [248.34 x 1.091.5]
Transaction price for annual maintenance [6m x 1.3]
W-2 Interest expense
31-12-15
30-06-16
31-12-16
30-06-17
31-12-17
Interest [275 x 9%]
Interest [299.75 x 9% x 6/12] / Sale
Interest [30.63 x 9% x 6/12]
Interest [32.01 x 9% x 6/12]
Interest [30.63 x 9% x 6/12]
Rs. million
275.00
(26.66)
248.34
282.61
7.80
Interest
PO satisfied
Balance
------------ Rs. million ----------275.00
24.75
299.75
13.49
(282.61)
30.63
1.38
32.01
1.44
(7.80)
25.65
1.15
26.80
565
Solution [Q-3 Dec-14]
QWL
Extracts - SOCI
Revenue [2014: 3,000 x 80% - 1,350] [2013: 3,000 x 45%]
Contract cost (W-1) [2014: 2,320 - 1,170]
Indirect cost of obtaining the contract
2014
2013
------- Rs. million ------1,050.00
1,350.00
(1,150.00)
(1,170.00)
(7.00)
* It is assumed that work certified method faithfully depicts entity's performance
QWL
Extracts - SOFP
Non-current assets
Retention money receivable
[2014: 3,000 x 80% x 5%][2013: 3,000 x 45% x 5%]
2016
2015
------- Rs. million ------120.00
67.50
Current assets
Contract cost (W-1)
Receivable [2014: 100 x 85%][2013: 75 x 85%]
233.00
85.00
323.00
63.75
Current liabilities
Contract liability [2014: 3,000 x 20% x 10%][2013: 3,000 x 55% x 10%]
60.00
165.00
* In absence of detailed information, it is assumed that warranty is not a performance obligation,
therefore, it shall be accounted for as per IAS 37 once warranty period starts.
WORKINGS
W-1 Contract cost [i.e. Contract WIP]
Cost incurred to date [2,560 - 7] [1,500 - 7]
Amortized [2014: 2,900 x 80%][2013: 2,600 x 45%]
c/d balance
2014
2013
------- Rs. million ------2,553.00
1,493.00
(2,320.00)
(1,170.00)
233.00
323.00
566
IAS 33 [Diluted EPS] – QUESTIONS
PRACTICE QUESTIONS
Question No. 1
Profit after tax for the year
Weighted average number of ordinary shares outstanding during the year
Average market price per share for the year
Weighted average number of shares under option
Exercise price for shares under option
Required:
Calculate basic EPS and diluted EPS for the year.
Question No. 2
Profit after tax for the year
Weighted average number of ordinary shares outstanding during the year
Average market price per share for the year
Weighted average number of unvested share options as per IFRS 2
Cash exercise price for shares under option
Estimated amount of expense to be recognized over vesting period as per IFRS 2
Required:
Calculate basic EPS and diluted EPS for the year.
Rs. 1,200,000
500,000 shares
Rs. 20
100,000 shares
Rs. 15
Rs. 1,200,000
500,000 shares
Rs. 20
100,000 shares
Rs. 15
Rs. 200,000
Question No. 3
The following information pertains to the financial statements of HDL, a listed company, for the year ended 31 December
2020:
(i)
Profit for the year:
Rs.
Profit before tax
30,000,000
Tax [40%]
(12,000,000)
Profit after tax
18,000,000
(ii)
HDL has a share capital of Rs. 80 million (Rs. 10 each) and Rs. 20 million 5% convertible bonds (Rs. 100 each) in
issue. Carrying amount on December 31, 2020 of the liability component of these bonds amounted to Rs. 17.28
million with an effective interest rate of 8%. These bonds can be converted as follows:
Each bond is convertible into 8 shares on December 31, 2024; OR
Each bond is convertible into 6 shares on December 31, 2025
Required:
Calculate basic EPS and diluted EPS for the year ended 31 December 2020.
Question No. 4
A company has an issued ordinary share capital of Rs. 100 million (Rs. 10 each) and Rs. 20 million (Rs. 100 each) 6%
convertible bonds at start of year.
These bonds are convertible into ordinary shares in a ratio of 5 shares for every Rs. 100 bond at any time till December
31, 2021. Tax rate is 30%. On April 1, 2020 50% of these bonds were converted into ordinary shares. Ignore any difference
between nominal amount and liability component for ease of calculations. Net profit for the year ended December 31,
2020 amounts to Rs. 25.5 million.
Required:
Calculate basic EPS and diluted EPS for the year ending December 31, 2020.
Question No. 5
Ordinary shares outstanding during 2020:
1,000,000 (there were no options, warrants or convertible instruments outstanding during the period)
An agreement related to a recent business combination provides for the issue of additional ordinary shares based on the
following conditions:
5,000 additional ordinary shares for each new retail site opened during 2020
1,000 additional ordinary shares for each Rs. 1,000 of consolidated profit in excess of Rs. 2,000,000 for the year ended
31 December 2020
Retail sites opened during the year:
One on 1 May 2020
One on 1 September 2020
Consolidated year-to-date profit attributable to ordinary equity holders of the parent entity:
NASIR ABBAS FCA
567
IAS 33 [Diluted EPS] – QUESTIONS
Rs. 1,100,000 as of 31 March 2020
Rs. 2,300,000 as of 30 June 2020
Rs. 1,900,000 as of 30 September 2020
Rs. 2,900,000 as of 31 December 2020
Required:
Calculate Basic EPS and Diluted EPS for each quarter as well as for the full year.
Question No. 6
Rs.
16,400,000
(6,400,000)
10,000,000
(4,000,000)
6,000,000
Profit from continuing operations attributable to parent
Dividends on preference shares
Profit from continuing operations attributable to ordinary shareholders of parent
Loss from discontinued operations attributable to the parent
Profit attributable to ordinary shareholders of parent
Ordinary shares outstanding during the year
Average market price of ordinary share during the year
2,000,000
Rs. 75
Potential ordinary shares:
Options
100,000 with exercise price of Rs. 60
Convertible preference shares
800,000 shares with a par value of Rs. 100 entitled to a cumulative dividend of Rs. 8 per share. Each preference share is
convertible to two ordinary shares.
5% convertible bonds
Nominal amount Rs. 100,000,000. Each Rs. 1,000 bond is convertible to 20 ordinary shares. There is no amortization of
premium or discount affecting the determination of interest expense.
Tax rate 40%
Required:
Calculate basic EPS and diluted EPS
Question No. 7
Parent:
Profit attributable to ordinary equity holders of the parent entity
Ordinary shares outstanding
Instruments of subsidiary owned by the parent:
- 800 ordinary shares
- 30 warrants exercisable to purchase ordinary shares of subsidiary
- 300 convertible preference shares
Subsidiary:
Profit
Ordinary shares outstanding
Rs. 12,000 (unconsolidated)
10,000
Rs. 5,400
1,000
Warrants:
150, exercisable to purchase ordinary shares of the subsidiary at an exercise price Rs. 10
Average market price of one ordinary share Rs. 20
Convertible preference shares:
400, each convertible into one ordinary share
Dividends on preference shares Rs. 1 per share
Required:
Calculate basic EPS and diluted EPS for Subsidiary’s F/S as well as for consolidated F/S.
(Ignore taxation)
NASIR ABBAS FCA
568
IAS 33 [Basic EPS] – SOLUTIONS
SOLUTIONS
SOLUTIONS TO PRACTICE QUESTIONS
Solution No. 1
Profit after tax [A]
Number of shares [B]
(W-1)
Earnings per share [A/B]
Rs.
420,000
3,680
114.13
W-1
Date
01-01-16
01-04-16
01-07-16
01-11-16
Particular
Balance
New issue
Bonus
Right
Shares
1,000
600
1,200
Balance
Time
factor
Bonus
factor
Right
factor
W. Avg
shares
[1]
[2]
[3]
[1x2x3x4]
2,000
3,000
3,600
4,800
3/12
3/12
4/12
2/12
6/5
6/5
-
[4]
(W-2)
24/22.5
24/22.5
24/22.5
-
2016
2015
640
960
1,280
800
3,680
W-2
TERP = (3 x Rs. 24 + 1 x Rs. 18) / (3 + 1)
=
22.50
Right factor = 24 / 22.5
Solution No. 2
Profit before tax
Current tax
Deferred tax
Profit after tax
Dividend on irredeemable preference shares
Profit attributable to ordinary equity holders [A]
Number of shares [B]
(W-1)
Earning per share [A/B]
2015
(restated)
------------------- Rs. ---------------175,000
120,000
120,000
(20,000)
(29,000)
(29,000)
(12,000)
11,000
11,000
143,000
102,000
102,000
(9,600)
(9,600)
(9,600)
133,400
92,400
92,400
14,118
8,000
10,589
9.45
11.55
8.73
W-1
Date
2015
01-01-15
01-07-15
Particular
Balance
New issue
NASIR ABBAS FCA
Shares
4,000
Time
Bonus
Right
[1]
factor
[2]
factor
[3]
6,000
10,000
6/12
6/12
-
factor
[4]
(W-2)
-
Balance
W. Avg
shares
[1x2x3x4]
3,000
5,000
569
IAS 33 [Basic EPS] – SOLUTIONS
8,000
2015 (restated)
01-01-15 Balance
01-07-15 New issue
4,000
6,000
10,000
6/12
6/12
1.25/1
1.25/1
30/28.33
30/28.33
3,971
6,618
10,589
2016
01-01-16
01-07-16
01-12-16
2,000
3,000
10,000
12,000
15,000
6/12
5/12
1/12
1.25/1
1.25/1
-
30/28.33
-
6,618
6,250
1,250
14,118
Split
factor
[3]
2/1
2/1
-
Bonus
factor
[4]
5/4
5/4
5/4
-
Balance
Right
Bonus
W-2
TERP = (5 x Rs. 30 + 1 x Rs. 20) / (5 + 1)
=
28.33
Right factor = 30 / 28.33
Solution No. 3
Rs.
250,000
Profit after tax [A]
Number of shares [B]
(W-1)
Earning per share [A/B]
17.39
W-1
Date
01-01-16
01-04-16
30-04-16
01-11-16
Particular
Balance
New
Split
Bonus
14,375
Shares
Balance
1,000
6,000
3,000
[1]
5,000
6,000
12,000
15,000
Time
factor
[2]
3/12
1/12
6/12
2/12
W. Avg
shares
[1x2x3x4]
3,125
1,250
7,500
2,500
14,375
Solution No. 4
2015
(restated)
-------- Rs. -------100,000
64,000
2016
Profit after tax [A]
Number of shares [B]
Earning per share [A/B]
NASIR ABBAS FCA
(W-1)
1,729
1,351
57.85
47.36
[4000 x 16]
570
IAS 33 [Basic EPS] – SOLUTIONS
W-1
Date
Particular
[1]
Cons.
Factor
[3]
-
4,000
12/12
2,000
(4,000)
500
4,000
6,000
2,000
2,500
6/12
3/12
2/12
1/12
2015 (restated)
01-01-15 Balance
2016
01-01-16
01-07-16
30-09-16
01-12-16
Balance
New
Cons.
Right
Time
factor
[2]
Shares
Balance
W. Avg
shares
[1x2x3x4]
1/3
Right
factor
[4]
(W-2)
45/44.4
1/3
1/3
-
45/44.4
45/44.4
45/44.4
-
676
507
338
208
1,729
1,351
1,351
W-2
TERP = (4 x Rs. 45 + 1 x Rs. 42) / (4 + 1)
=
44.40
Right factor = 45 / 44.4
Solution No. 5
Profit after tax [A]
Number of shares [B]
(W-1)
(W-2)
Earning per share [A/B]
Rs.
366,000
6,466
56.61
W-1
Group profit [240 + 180]
Profit attributable to NCI [180 x 30%]
Profit attributable to equity holders of parent
Rs.
420,000
(54,000)
366,000
W-2
Shares
7,500
(1,500)
(2,000)
4,000
Closing balance
Right issue [7500 x 1/5]
New issue
Opening balance
Date
01-01-16
01-07-16
01-11-16
Particular
Balance
New issue
Right
NASIR ABBAS FCA
Shares
2,000
1,500
[1]
Time
factor
[2]
Bonus
factor
[3]
4,000
6,000
7,500
6/12
4/12
2/12
6/5
6/5
6/5
Balance
Right
factor
[4]
(W-3)
30/29
30/29
-
W. Avg
shares
[1x2x3x4]
2,483
2,483
1,500
6,466
571
IAS 33 [Basic EPS] – SOLUTIONS
Note - As per IAS 10, bonus issue after year end is adjusted in EPS of current year
W-3
TERP = (4 x Rs. 30 + 1 x Rs. 25) / (4 + 1)
=
29.00
Right factor = 30 / 29
Solution No. 6
Profit attributable [A]
Number of shares [B]
(W-1)
(W-2)
Earning per share [A/B]
Continuing Discontinued
operations
operations
---------- Rs. --------70,000
20,000
4,466
4,466
15.67
W-1
Profit after tax
Preference dividend
Profit attributable to equity holders
4.48
Rs.
100,000
(30,000)
70,000
W-2
Shares
6,000
(1,000)
(1,500)
3,500
(500)
3,000
Closing balance
Right issue [6000 x 1/6]
New issue
Bonus [3,500 x 1/7]
Opening balance
Date
01-01-16
01-03-16
01-07-16
30-11-16
Particular
Balance
Bonus
New issue
Right
Shares
500
1,500
1,000
Balance
Time factor
Bonus factor
[1]
[2]
[3]
3,000
3,500
5,000
6,000
2/12
4/12
5/12
1/12
7/6
-
Right
factor
[4]
(W-3)
30/29
30/29
30/29
-
W. Avg
shares
[1x2x3x4]
604
1,207
2,155
500
4,466
W-3
TERP = (5 x Rs. 30 + 1 x Rs. 24) / (5 + 1)
=
29.00
Right factor = 30 / 29
NASIR ABBAS FCA
572
IAS 33 [Basic EPS] – SOLUTIONS
Solution No. 7
Profit attributable [A] (Rs. in million)
Number of shares [B] (million)
(W-1)
(W-2)
Earnings per share [A/B] (Rs.)
Continuing
operations
Discontinued
operations
761.00
16.65
155.00
16.65
45.71
9.31
W-1
Profit after tax from continuing operations
Preference dividend [4m x 10 x 10%]
Profit attributable to equity holders
Rs. in million
765.00
(4.00)
761.00
W-2
Date
01-01-16
31-05-16
31-08-16
Particulars
Shares
Balance
Right
Bonus
Balance
4.00
2.80
Time
Bonus factor
[1]
factor
[2]
10.00
14.00
16.80
5/12
3/12
4/12
1.2/1 x 1.1/1
1.2/1 x 1.1/1
1.1/1
2017
660.25
291.86
2016
(restated)
331.67
255.01
2.26
1.30
2017
650.00
10.25
660.25
2016
318.00
13.67
331.67
[3]
Right
factor
[4]
(W-3)
32/30
-
W. Avg
shares
[1x2x3x4]
5.87
4.62
6.16
16.65
W-3
TERP = (10 x Rs. 32 + 4 x Rs. 25) / (10 + 4)
=
30.00
Right factor = 32 / 30
Solution No. 8
(a)
Profit after tax [Rs. in million]
Number of shares [million]
Earnings per share [Rs.]
(W-1)
(W-2)
Workings (All figures in Rs. million)
W-1
Given
Excess depreciation (W-1.1)
NASIR ABBAS FCA
573
IAS 33 [Basic EPS] – SOLUTIONS
W -1 .1
Cost
Dep 2014 [700/4 x 6/12] [700/4 x 11/12]
Wrong
700.00
(87.50)
612.50
(153.13)
459.37
(114.84)
344.53
(86.13)
258.40
Dep 2015 [612.5 x 25%] [539.58 x 25%]
Dep 2016 [459.37 x 25%] [ 404.68 x 25%]
Dep 2017 [344.53 x 25%] [303.51 x 25%]
Correct
700.00
(160.42)
539.58
(134.90)
404.68
(101.17)
303.51
(75.88)
227.63
Adjustment
(72.92)
18.23
13.67
10.25
W-2
Date
Particulars
Shares
Time
Bonus
Right
W. Avg
[1]
factor
[2]
factor
[3]
shares
[1x2x3x4]
Balance
01-01-16
01-05-16
Balance
Right
40.00
160.00
200.00
4/12
8/12
1.1 x 1.15
1.1 x 1.15
factor
[4]
(W-3)
25/23.15
25/23.15
01-01-17
01-04-17
01-07-17
01-09-17
Balance
Bonus (10%)
Right
Bonus (15%)
20.00
50.00
40.50
200.00
220.00
270.00
310.50
3/12
3/12
2/12
4/12
1.1 x 1.15
1.15
1.15
-
25/23.15
25/23.15
-
72.86
182.15
255.01
68.30
68.30
51.75
103.50
291.86
W-3
Right issue of May 1
Since right issue was made at full market price, no adjustment was needed
Right issue of July 1
TERP = (220 x Rs. 25 + 50 x Rs. 15) / (220 + 50)
=
23.15
Right factor = 25 / 23.15
(b)
Dividend on redeemable preference shares
Preference dividend on redeemable preference shares is recognized as a finance cost. Hence it is already
charged to profit for the year, therefore, no separate treatment is required for calculation of basic EPS.
Dividend on Irredeemable preference shares
Preference dividend on irredeemable preference shares is considered as a distribution of retained earnings.
Since it is not already charged to profit for the year and such dividend is preferred over distribution to ordinary
shareholders, therefore, it is deducted from profit for the year to arrive at "profit attributable to ordinary
shareholders".
NASIR ABBAS FCA
574
IAS 33 [Basic EPS] – SOLUTIONS
Solution No. 9
2018
2019
2020
-------------------- Rs. -------------------Profit after tax
Imputed dividend (W-1)
Profit attributable to ordinary shareholders
540,000
(22,856)
517,144
600,000
(24,456)
575,544
720,000
(26,167)
693,833
W-1 Amortized cost schedule
Opening
balance
Imputed
dividend at 7%
Dividend
payment
Closing
balance
-------------------- Rs. -------------------31-12-18
31-12-19
31-12-20
326,520
349,376
373,833
22,856
24,456
26,167
-
349,376
373,833
400,000
Solution No. 10
Rs.
100,000
(33,000)
(21,000)
46,000
Profit after tax
Preference dividend [600,000 x 5.5%]
Ordinary dividend [10,000 x 2.10]
Undistributed earnings
Allocation:
Ordinary
Preference
Shares
10000
6000
Weight
8
2
Product
80000
12000
92000
Undistributed earnings attributable to preference shares
[46,000 x 12/92]
Basic EPS
Profit after tax
Preference dividend
Share attributable to preference shares
Basic EPS [61,000 / 10,000]
NASIR ABBAS FCA
Rs.
6,000
Rs.
100,000
(33,000)
(6,000)
61,000
6.10
575
IAS 33 [Basic EPS] – Class notes
SCOPE
1. This standard shall apply to the separate or individual financial statements of an entity (and
consolidated financial statements of a parent) which is a listed company or in the process of listing.
2. If a parent presents both consolidated financial statements and separate financial statements, then
disclosures required by this IAS need to be presented only in one of the statements (by default
consolidated statements).
BASIC EARNINGS PER SHARE
MEASUREMENT
Exam note
All paragraphs refer to parent entity, however, all this discussion is also relevant for a listed entity in its
separate financial statements
An entity shall calculate basic earnings per share amounts for profit or loss attributable to ordinary equity
holders of the parent entity and, if presented, profit or loss from continuing operations attributable to
those equity holders [Basic EPS for discontinued operations shall be disclosed separately].
Basic EPS =
Profit or loss attributable to ordinary shareholders of the parent entity (𝒊.𝒆. 𝒏𝒖𝒎𝒆𝒓𝒂𝒕𝒐𝒓)
weighted avera
number of ordinary share outstanding during the period (𝒊.𝒆.𝒅𝒆𝒏𝒐𝒎𝒊𝒏𝒂𝒕𝒐𝒓)
Numerator
= PAT from continuing operations attributable to parent – dividends or other adjustments on settlements
on preference shares classified as equity (net of tax)
Exam note:
Deduct dividends on preference shares classified as equity (net of tax):
- In respect of non-cumulative preference shares, it shall be the amount of dividend declared for the
period.
- In respect of cumulative preference shares, it shall be the amount of dividend for the period
whether or not declared.
Other adjustments on settlement of preference shares:
o Preference shares that provide for a low initial dividend to compensate an entity for selling the
preference shares at a discount, on an above-market dividend in later periods to compensate
investors for purchasing preference shares at a premium, are sometimes referred to as increasing
rate preference shares. Any original issue discount or premium on increasing rate preference
shares is amortized to retained earnings using effective interest method and treated as a preference
dividend for the purpose of calculating EPS.
o Preference shares may be repurchased under an entity’s tender offer to the holders. The excess of
the fair value of the consideration paid to the preference shareholders over the carrying amount of
the preference shares represents a return to the holders of the preference shares and a charge to
retained earnings for the entity. This amount is deducted in calculating profit or loss attributable to
ordinary equity holders of the parent entity.
o Early conversion of convertible preference shares may be induced by an entity through favourable
changes to the original conversion terms or the payment of additional consideration. The excess of
Nasir Abbas FCA
576
IAS 33 [Basic EPS] – Class notes
o
the fair value of the ordinary shares or other consideration paid over the fair value of the ordinary
shares issuable under the original conversion terms is a return to the preference shareholders, and
is deducted in calculating profit or loss attributable to ordinary equity holders of the parent entity.
Any excess of the carrying amount of preference shares over the fair value of the consideration paid
to settle them is added in calculating profit or loss attributable to ordinary equity holders of the
parent entity.
Denominator
1. The weighted average number of ordinary shares outstanding during the period is the number of
ordinary shares outstanding at the beginning of the period, adjusted by the number of ordinary shares
bought back or issued during the period multiplied by a time‑weighting factor. The time‑weighting
factor is the number of days that the shares are outstanding as a proportion of the total number of
days in the period; a reasonable approximation of the weighted average is adequate in many
circumstances.
2. Shares are usually included in the weighted average number of shares from the date consideration is
receivable (which is generally the date of their issue), for example:
(a) ordinary shares issued in exchange for cash are included when cash is receivable;
(b) ordinary shares issued on the voluntary reinvestment of dividends on ordinary or preference
shares are included when dividends are reinvested;
(c) ordinary shares issued as a result of the conversion of a debt instrument to ordinary shares are
included from the date that interest ceases to accrue;
(d) ordinary shares issued in place of interest or principal on other financial instruments are included
from the date that interest ceases to accrue;
(e) ordinary shares issued in exchange for the settlement of a liability of the entity are included from
the settlement date;
(f) ordinary shares issued as consideration for the acquisition of an asset other than cash are included
as of the date on which the acquisition is recognized; and
(g) ordinary shares issued for the rendering of services to the entity are included as the services are
rendered.
Ordinary shares issued as part of the consideration transferred in a business combination are included
in the weighted average number of shares from the acquisition date.
3. The weighted average number of shares shall be adjusted in the tabular working as follows:
Items
Adjustment
A capitalization or All “Total shares” prior to the line of bonus issue shall be multiplied by a bonus
bonus issue (e.g.
factor which is calculated as follows using bonus ratio:
existing+bonus
bonus dividend)
Bonus factor =
[e.g. 2 for 5 bonus issue factor = 7/5]
existing
A bonus element
in any other issue
e.g. right issue
Nasir Abbas FCA
All “Total shares” prior to the line of right issue shall be multiplied by a bonus
element which is calculated as follows:
Bonus element =
fair value of share immediately be the exercise of right
theoretcial ex right price [i.e.TERP]
577
IAS 33 [Basic EPS] – Class notes
Here TERP =
Aggregate fair value of shares immediately before exercise of right + right proceeds
number of shares outstanding after the exercise of rights
Stock split or
Consolidation
All “Total shares” prior to the line of stock split or consolidation shall be multiplied
by a stock split factor/consolidation factor which is calculated as follows:
new
Split/consolidation factor =
[e.g. 1 into 2 share split factor = 2/1]
old
Retrospective adjustments
Bonus issue, stock split and stock consolidation, issued in IAS 10 phase, shall be treated as an adjusting
event only for EPS calculation.
Partly paid shares
Where ordinary shares are issued but not fully paid, they are treated in the calculation of basic earnings
per share as a fraction of an ordinary share to the extent that they were entitled to participate in dividends
during the period relative to a fully paid ordinary share.
Participa