Conceptual Framework

The Conceptual Framework for Financial Reporting states that an entity controls an economic resource if it has the
present ability to direct the use of the economic resource and obtain the economic benefits that may flow from it.
An entity has the ability to direct the use of an economic resource if it has the right to deploy that economic
resource in its activities. Although control of an economic resource usually arises from legal rights, it can also arise if
an entity has the present ability to prevent all other parties from directing the use of it and obtaining the
benefits from the economic resource. For an entity to control a resource, the economic benefits from the resource
must flow to the entity instead of another party.
Although the Conceptual Framework gives some guidance on the definition of control, existing IFRSs also provide
help in determining whether Fill controls the mine and therefore should account for it as a business combination:
IFRS 10 Consolidated Financial Statements states that an investor controls an investee when it is exposed, or has
rights, to variable returns from its involvement with the investee and has the ability to affect those returns through
its power over the investee.
IFRS 15 Revenue from Contracts with Customers lists indicators of the transfer of control of an asset to a customer.
One of the indicators is that the customer has the significant risks and rewards of ownership of the asset which is
basically exposure to significant variations in the amount of economic benefits.

Different accounting standards use different levels of probabilities to discuss when assets and liabilities should be
recognised in the financial statements.
For example:
Economic benefits from property, plant and equipment and intangible assets need to be probable to be
recognised; but to be classified as held for sale, the sale has to be highly probable.
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, a provision should be probable to be
recognised, but uncertain assets on the other hand would have to be virtually certain to be disclosed. This could
lead to a situation where two sides of the same court case have two different accounting treatments despite the
likelihood of payout being identical for both parties.
Contingent consideration is recognised in the financial statements regardless of the level of probability. Rather
the fair value is adjusted to reflect the level of uncertainty of the contingent consideration.
The 2018 Conceptual Framework requires an item to be recognised in the financial statements if:
(a) The item meets the definition of an element (asset, liability, income, expense or equity); and
(b) Recognition of that element provides users of the financial statements with information
that is useful, ie with:
Relevant information about the element
A faithful representation of the element

The Conceptual Framework defines an asset as a present economic resource controlled by the entity as a result of
past events. An economic resource is a right that has the potential to produce economic benefits

The Conceptual Framework defines a liability as a present obligation to transfer an economic

resource as a result of past events.

The Conceptual Framework states the objective of financial statements is to provide financial information about
an entity's assets, liabilities, equity, income and expenses which is useful to users of financial statements in
assessing the prospects for future net cash inflows to the entity and in assessing management's stewardship of
the entity's economic resources. It acknowledges that it would be impossible to meet the information needs of all
users of financial statements and limits the range of addressees to the primary users (existing or potential
investors, lenders and other creditors).
IFRS Practice Statement 2 further clarifies that financial statements cannot provide all the information primary
users need. Instead the entity should aim to meet the common information needs of its primary users. It further
states that if information is given that is not required by an IFRS, that information must not obscure information
that is material according to IFRS.

Primary users are defined by the Conceptual Framework as existing and potential investors, lenders and other
creditors.
The need for a conceptual framework
The financial reporting process is concerned with providing information that is useful in the business and economic
decision-making process. Therefore, a conceptual framework will form the theoretical basis for determining which
transactions should be accounted for, how they should be measured and how they should be communicated to the
user.
Although it is theoretical in nature, a conceptual framework for financial reporting has highly practical final aims.
The danger of not having a conceptual framework is demonstrated in the way some countries' standards have
developed over recent years; standards tend to be produced in a haphazard and fire-fighting approach. Where an
agreed framework exists, the standard-setting body builds the accounting rules on the foundation of sound, agreed
basic principles.
The lack of a conceptual framework also means that fundamental principles are tackled more than once in different
standards, which can produce contradictions and inconsistencies in accounting standards. This leads to ambiguity
and it affects the true and fair concept of financial reporting.
Without a conceptual framework, there is a risk that a financial reporting environment becomes governed by
specific rules rather than general principles. A rules-based approach is much more open to manipulation than a
principles-based one. For example, a rule requiring an accounting treatment based on a transaction reaching a
percentage threshold, might encourage unscrupulous directors to set up a transaction in such a
way to deliberately to achieve a certain accounting effect (eg keep finance off the statement of financial position).
A conceptual framework can also bolster standard setters against political pressure from various 'lobby groups' and
interested parties. Such pressure would only prevail if it was acceptable under the conceptual framework.
Can it resolve practical accounting issues?
A framework cannot provide all the answers for standard setters. It can provide principles which can be used when
deciding between alternatives, and can narrow the range of alternatives that can be considered. The IASB intends to
use the principles laid out in the Conceptual Framework as the basis for all future IFRSs, which should help to
eliminate inconsistences between standards going forward.
However, a conceptual framework is unlikely, on past form, to provide all the answers to practical accounting
problems. There are a number of reasons for this:
(i) Financial statements are intended for a variety of users, and it is not certain that a single
conceptual framework can be devised which will suit all users.
(ii) Given the diversity of user requirements, there may be a need for a variety of
accounting standards, each produced for a different purpose (and with different
concepts as a basis).
(iii) It is not clear that a conceptual framework makes the task of preparing and then
implementing standards any easier than without a framework.

According to the Conceptual Framework derecognition normally occurs when control of all or part of an asset is lost.
The requirements for derecognition should aim to faithfully represent both:
(a) Any assets and liabilities retained after derecognition; and
(b) The change in the entity's assets and liabilities as a result of derecognition.
Because of the difficulties in practice in meeting these two aims, the Conceptual Framework does not advocate using
a control approach or the risks-and-rewards approach to derecognition in every circumstance. Instead, it describes
the options available and discusses what factors the IASB would need to consider when developing Standards.

The Conceptual Framework emphasises that for financial information to be useful, it must be relevant and faithfully
represent what it purports to represent. Faithful representation requires accounting policies chosen to be neutral
and objective. It could be argued that by deliberately inflating the mark-up, the directors are presenting financial
statements which are not neutral or free from bias.

two fundamental qualitative characteristics prescribed in the IASB's Conceptual Framework for Financial
Reporting, namely:
(i) Relevance. The information should be disclosed separately as it is relevant to users.
(ii) Faithful representation. Information must be complete, neutral and free from error.
The treatment is also in breach of the Conceptual Framework's key enhancing qualitative characteristics:
(i) Understandability. If the loan is shown in cash, it hides the true nature of the practices of the company, making
the financial statements less understandable to users.
(ii) Verifiability. Verifiability helps assure users that information faithfully represents the economic phenomena it
purports to represent. It means that different knowledgeable and independent observers could reach consensus that
a particular depiction is a faithful representation. The treatment does not meet this benchmark as it reflects the
subjective bias of the directors.
(iii) Comparability. For financial statements to be comparable year-on-year and with other
companies, transactions must be correctly classified, which is not the case here. If the cash
balance one year includes a loan to a director and the next year it does not, then you are notcomparing like with like.

The Conceptual Framework states that the users need information to allow them to assess the amount, timing and
uncertainty of the prospects for future net cash inflows. Separately highlighting the results of discontinued
operations provides users with information that is relevant to this assessment as the discontinued operation will not
contribute to cash flows in the future.
If an entity has made a firm decision to sell the subsidiary, it could be argued that the
subsidiary should be classified as discontinued, even if the criteria to classify it as 'held for
sale' per IFRS 5 have not been met, because this information would be more useful to users.
However, the IASB decided against this when developing IFRS 5. This decision could be
argued to be in conflict with the Conceptual Framework.

The conceptual basis for what should be classified as OCI is not clear. This has led to
an inconsistent use of OCI in IFRS.
Opinions vary but there is a feeling that OCI has become a home for anything
controversial because of a lack of clear definition of what should be included in the
statement.
Many users are thought to ignore OCI, as the changes reported are not caused by the
operating flows used for predictive purposes. It is also difficult for users to understand
the concept of OCI as opposed to profit or loss which, although subject to accounting
standards, is an easier notion to grasp.
The definitions of profit and loss and OCI in IAS 1 are not particularly helpful in
understanding the conceptual basis:
• Profit or loss is the total of all items of income and expenses except those items of
income or expense which are recognised in OCI
• OCI comprises items of income and expense that are not recognised in profit or
loss as required or permitted by other IFRSs
The revised Conceptual Framework identifies the SPL as the primary source of
information about an entity's performance and states that in principle, therefore, all
income and expenses are included in it.
However, it goes on to say that in developing IFRSs the IASB may include income or
expenses arising from a change in the current value of an asset or liability
as OCI when they determine it provides more relevant information or a more faithful
representation.
So although there is more guidance on what constitutes OCI, the conceptual basis for it
is still not clear.

The Conceptual Framework defines an asset as a present economic resource controlled by the
entity as a result of past events. It goes on to say that control links the economic resource to the
entity and that assessing control helps to identify what economic resource the entity should
account for. For example, if an entity has a proportionate share in a property without
controlling the entire property, the entity's asset is its share in the property, which it controls,
not the property itself, which it does not. An entity controls an economic resource if it has the
present ability to direct the use of the economic resource and obtain the economic benefits
which may flow from it. However, risks and rewards can be a helpful factor to consider when
determining the transfer of control.
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IAS 1 Presentation of Financial Statements states that a liability should be presented as current if the entity:
Settles it as part of its operating cycle;
Is due to settle the liability within 12 months of the reporting date; or
Does not have an unconditional right to defer settlement for at least 12 months after the
reporting date.
Practice Statement 1 Management Commentary
The purpose of the management commentary is to provide a context for interpreting a
company's financial position, performance and cash flows. According to IFRS
Practice Statement 1 Management Commentary, the principles and objectives of a
Management Commentary (MC) are as follows:
(i) To provide management's view of the entity's performance, position and progress
(ii) To supplement and complement information presented in the financial statements
To align with these principles, an MC should include forward-looking information, and
all information provided should possess the qualitative characteristics described in the
Conceptual Framework.
Practice Statement 1 says that to meet the objective of management commentary, an entity
should include information that is essential to an understanding of:
(i) The nature of the business
(ii) Management's objectives and its strategies for meeting those objectives
(iii) The entity's most significant resources, risks and relationships
(iv) The results of operations and prospects
(v) The critical performance measures and indicators that management uses to
evaluate the entity's performance against stated objectives

The IFRS Practice Statement Management Commentary provides a broad, non-binding

framework for the presentation of management commentary. The Practice Statement is
not an IFRS. Consequently, entities applying IFRSs are not required to comply with the
Practice Statement, unless specifically required by their jurisdiction. Furthermore, noncompliance
with the Practice Statement will not prevent an entity's financial statements
from complying with IFRSs.
It can be argued that the International Accounting Standards Board's objectives of
enhancing consistency and comparability may not be achieved if the framework is not
mandatory. A standard is more likely to guarantee a consistent application of the
principles and practices behind the management commentary (MC).
However, it is difficult to create a standard on the MC which is sufficiently detailed to
cover the business models of every entity or be consistent with all IFRSs. Some
jurisdictions take little notice of non-mandatory guidance but the Practice Statement
provides regulators with a framework to develop more authoritative requirements.
The Practice Statement allows companies to adapt the information provided to particular
aspects of their business. This flexible approach could help generate more meaningful
disclosures about resources, risks and relationships which can affect an entity's value
and how these resources are managed. It provides management with an opportunity to
add context to the published financial information, and to explain their future strategy
and objectives without being restricted by the constraints of a standard.
If the MC were a full IFRS, the integration of management commentaries and the
information produced in accordance with IFRSs could be challenged on technical
grounds, as well as its practical merits. In addition, there could be jurisdictional
concerns that any form of integration might not be accepted by local regulators.

IFRS 1 First-time Adoption of International Financial

Reporting Standards
IFRS 1 First-time Adoption of International Financial Reporting Standards states that an entity
may elect to measure an item of property, plant and equipment at the date of transition to
IFRS at fair value and use that fair value as its deemed cost at that date. Fair value
is defined in IFRS 1 as amended by IFRS 13 Fair Value Measurement as:
'The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.' (IFRS 13; para 9)
An entity adopting IFRS for the first time may, under IFRS 1 as amended by IFRS 13, elect to
use a previous GAAP revaluation of an item of property, plant and equipment at or
before the date of transition to IFRS as deemed cost at the date of the revaluation under the
following conditions. (i) The revaluation was broadly comparable to fair value.
(ii) The revaluation was broadly comparable to cost or depreciated cost in accordance with
IFRS, adjusted to reflect, for example, changes in a general or specific price index.
In addition, IFRS 1 does not give detailed rules about determining fair value, and first-time
adopters who use fair value as deemed cost must only provide limited disclosures, not
a full description of the methods and assumptions used. IFRS 1 allows more latitude than IAS 16. Lockfine is
not in breach of IFRS 1 which does
not specify detailed rules for this particular case, and allows fair value as
determined on the basis of selling agents' estimates. This is a cost effective approach for
entities that do not perform a full retrospective application of the requirements of IAS 16.

IFRS 1 requires that if an entity which is in the process of adopting IFRS decides to apply
IFRS 3 retrospectively to a business combination, it cannot do so selectively, but must
apply IFRS 3 consistently to all business combinations that occur between the date on
which it decides to adopt IFRS 3 and the date of transition. An entity must have regard to
similar transactions in the period. When allocating values to the assets and liabilities of
the acquired company, the entity needs to have documentation to support its purchase price
allocation. Without this, use of other methods of price allocation is not permitted unless the
methods are strictly in accordance with IFRS.
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IAS 1 Presentation of Financial Statements

IAS 1 Presentation of Financial Statements requires all IFRSs to be applied if fair presentation is to be
obtained.
under IAS 1 Presentation of Financial Statements, entities must disclose accounting policies that are relevant
for an understanding of their financial statements.

Under IAS 1 Presentation of Financial Statements, a long-term financial liability

due to be settled within 12 months of the year end date should be classified as a
current liability. Furthermore, a long-term financial liability that is payable on
demand because the entity breached a condition of its loan agreement should be
classified as current at the year end even if the lender has agreed after the year
end, and before the financial statements are authorised for issue, not to
demand payment as a consequence of the breach.

However, if the lender has agreed by the year end to provide a period of grace
ending at least 12 months after the year end within which the entity can rectify
the breach and during that time the lender cannot demand immediate repayment, the
liability is classified as non-current.

IAS 1 requires an entity to disclose information which enables users to

evaluate the entity's objectives, policies and processes for managing capital. This
objective is obtained by disclosing qualitative and quantitative data. The former should
include narrative information such as what the company manages as capital, whether there are any external
capital requirements and how those requirements are
incorporated into the management of capital. The IASB decided that there should be
disclosure of whether the entity has complied with any external capital requirements
and, if not, the consequences of non-compliance.
Besides the requirements of IAS 1, the IFRS Practice Statement, Management
Commentary suggests that management should include forward-looking information in
the commentary when it is aware of trends, uncertainties or other factors which could
affect the entity's capital resources. Additionally, some jurisdictions refer to capital
disclosures as part of their legal requirements.
IAS 1 requires the presentation of either one combined statement of profit or loss and
other comprehensive income (SPLOCI) or two separate statements, the statement of
profit or loss (SPL) and the statement of comprehensive income.
Separate disclosure is required of those items of other comprehensive income (OCI)
which would be reclassified to profit or loss and those items of OCI which would never
be reclassified to profit or loss, along with the related tax effects of each category.

IFRS 2 Share-based Payment states that cash settled share-based payment

transactions occur
where goods or services are paid for at amounts which are based on the price of the
company's equity instruments. The expense for cash settled transactions is the cash paid by the
company and any amounts accrued should be shown as liabilities and not equity.

Under IFRS 2 Share-based Payment the company recognises an expense for the
employee services received in return for the share options granted over the vesting
period. The related tax deduction does not arise until the share options are
exercised. Therefore, a deferred tax asset arises, based on the difference
between the intrinsic value of the options and their carrying amount (normally zero).

Under IFRS 2, the fair value used is that at the grant date, rather than when the shares vest.
The market value of each share at that date is $2. (Three million shares are valued at $6m.)
So the total value of the compensation is 5 5,000 $2 = $50,000.
The $50,000 is charged to profit or loss with a corresponding increase in equity.

Under IFRS 2, the purchase of property, plant and equipment would be treated as a sharebased
payment in which the counterparty has a choice of settlement, in shares or in cash.
Such transactions are treated as cash-settled to the extent that the entity has incurred a
liability. It is treated as the issue of a compound financial instrument, with a debt and an
equity element.
Similar to IAS 32 Financial Instruments: Presentation, IFRS 2 requires the determination of
the liability element and the equity element. The fair value of the equity element is
the fair value of the goods or services (in this case the property) less the fair value of the debt
element of the instrument.

IFRS 3 Business Combinations

In accordance with IFRS 3 Business Combinations, an entity should determine whether a transaction is a
business combination by applying the definition of a business in IFRS 3. A business is an integrated set of
activities and assets which are capable of being conducted and managed for the purpose of providing a return
in the form of dividends,
lower costs or other economic benefits directly to investors or other owners, members or participants. A
business will typically have inputs and processes applied to the ability to create outputs. Outputs are the result
of inputs and processes and are usually present within a business but are not a necessary requirement for a
set of integrated activities and assets to be defined as a business at acquisition Requires goodwill to be
recognised in a business combination.
A business combination takes place when one entity, the acquirer, obtains control of another entity, the
acquiree. IFRS 3 requires goodwill to be calculated and recorded as a non-current asset at the acquisition
date.
Goodwill is calculated at the acquisition date as the fair value of the consideration transferred by the acquirer
plus the amount of any non-controlling interest less the fair value of the net assets of the acquiree. When the
business combination is achieved in stages, as is the case for Zinc, the consideration transferred by the acquirer
will include any previously held interest in the new subsidiary which must be remeasured to its fair value at
the date control is obtained.
Goodwill is not amortised, but instead is tested for impairment at each year end.
Contingent liability
The contingent liability disclosed in Hail's financial statements is recognised as a liability on acquisition in
accordance with IFRS 3, provided that its fair value can be reliably measured and it is a present obligation. This
is contrary to the normal rules in IAS 37 Provisions, Contingent Liabilities and Contingent Assets where
contingent liabilities are not recognised but only disclosed.
IFRS 3 permits adjustments to goodwill for adjustments to the fair value of assets and liabilities acquired,
provided this adjustment is made within one year of the date of acquisition (the measurement period).

The equity method is a method of accounting whereby the investment is initially

recognised at cost and adjusted thereafter for the post-acquisition change in the
investor's share of the investee's net assets. The investor's profit or loss includes its share
of the investee's profit or loss and the investor's other comprehensive income includes its
share of the investee's other comprehensive income.

Under IFRS 3 Business Combinations, acquired intangible assets must be recognised

and measured at fair value if they are separable or arise from other contractual rights,
irrespective of whether the acquiree had recognised the assets prior to the business
combination occurring. This is because there should always be sufficient information to
reliably measure the fair value of these assets. IFRS 3 requires all intangible assets
acquired in a business combination to be treated in the same way in line with the
requirements of IAS 38. IAS 38 requires intangible assets with finite lives to be
amortised over their useful lives and intangible assets with indefinite lives to be subject
to an annual impairment review in accordance with IAS 36.disclosed and the fair value has been measured at
the acquisition date.

IFRS 3 Business Combinations states that an acquirer should recognise, separately from
goodwill, the identifiable intangible assets acquired in a business combination. An asset is
identifiable if it meets either the separability or contractual-legal criteria in IAS 38 Intangible
Assets.
Customer relationship intangible assets may be either contractual or non-contractual:
(i) Contractual customer relationships are normally recognised separately from goodwill as
they meet the contractual-legal criterion.
(ii) However, non-contractual customer relationships are recognised separately from
goodwill only if they meet the separable criterion.
Consequently, determining whether a relationship is contractual is critical to identifying and
measuring both separately recognised customer relationship intangible assets and goodwill,
and different conclusions could lead to substantially different accounting outcomes.

During the measurement period IFRS 3 states that adjustments should be made
retrospectively if new information is determined about the value of consideration
transferred, the subsidiary's identifiable net assets, or the non-controlling interest. The
measurement period ends no later than 12 months after the acquisition date.

IFRS 5 Assets Held for Sale and Discontinued Operations

A disposal group is a group of assets and associated liabilities which are to be disposed of together in a single
transaction.
IFRS 5 classifies a disposal group as held for sale when its carrying amount will be
recovered principally through sale rather than use. The held for sale criteria in IFRS 5 are very
strict, and often the decision to sell an asset or disposal group is made well before the criteria
are met.
IFRS 5 requires an asset or disposal group to be classified as held for sale where it is
available for immediate sale in its present condition subject only to terms that are
usual and customary and the sale is highly probable.
For a sale to be highly probable:
Management must be committed to the sale.
 An active programme to locate a buyer must have been initiated.
The asset must be marketed at a price that is reasonable in relation to its
own fair value.
The sale must be expected to be completed within one year from the date of
classification.
It is unlikely that significant changes will be made to the plan or the plan
withdrawn.
Assets held for sale are valued at the lower of carrying amount and fair value less

The disposal group as a whole is measured on the basis required for

non-current assets held for sale. Any impairment loss reduces the carrying
amount of the non-current assets in the disposal group, the loss being allocated in the
order required by IAS 36 Impairment of Assets. Before the manufacturing units are
classified as held for sale, impairment is tested for on an individual cash-generating unit
basis. Once classified as held for sale, the impairment testing is done on a disposal
group basis.
A disposal group that is held for sale should be measured at the lower of its
carrying amount and fair value less costs to sell. Any impairment loss is
generally recognised in profit or loss, but if the asset has been measured at a revalued
amount under IAS 16 Property, Plant and Equipment or IAS 38 Intangible Assets, the
impairment will be treated as a revaluation decrease.
A subsequent increase in fair value less costs to sell may be recognised in profit
or loss only to the extent of any impairment previously recognised. To
summarise: costs to sell.

In accordance with IFRS 5, an asset held for sale should be measured at the lower of its
carrying amount and fair value less costs to sell. Immediately before classification of
the asset as held for sale, the entity must recognise impairment in accordance with applicable
IFRS. Any impairment loss is generally recognised in profit or loss, but if the asset has been
measured at a revalued amount under IAS 16 or IAS 38 the impairment will be treated as a
revaluation decrease. Once the asset has been classified as held for sale, any
impairment loss will be based on the difference between the adjusted carrying
amounts and the fair value less cost to sell. The impairment loss (if any) will be
recognised in profit or loss.
A subsequent increase in fair value less costs to sell may be recognised in profit or loss
only to the extent of any impairment previously recognised.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations defines a discontinued
operation as a component of an entity which either has been disposed of or is classified as
held for sale, and:
(i) Represents a separate major line of business or geographical area of operations;
(ii) Is a single co-ordinated plan to dispose of a separate major line or area of operations;
and
(iii) Is a subsidiary acquired exclusively for resale.

IAS 7 Statement of Cash Flows

In accordance with IAS 7 Statement of Cash Flows, the net cash flows arising from losing control of a subsidiary,
that is the proceeds on disposal less any cash held in the subsidiary, must be presented separately and
classified as investing activities.
In accordance with IAS 7, Weston must disclose each of the following:
(i) The total consideration received $85.4m (W1);
(ii) The portion of the consideration consisting of cash and cash equivalents $85.4m;
(iii) The amount of cash and cash equivalents held by Northern when control is lost
$(2)m; and
(iv) The amount of the assets and liabilities other than cash or cash equivalents in Northern when control is
lost, summarised by each major category (see W2below).
In accordance with IAS 7 Statement of Cash Flows, when accounting for an investment
in an associate, the statement of cash flows should show the cash flows between the
investor and associate, for example, dividends and advances.

IAS 7 Statement of Cash Flows defines cash equivalents

as short-term, highly liquid investments that are readily convertible to known amounts of cash and
which are subject to an insignificant risk of changes in value.

Statements of cash flows provide valuable information to stakeholders on the entity's liquidity
(its ability to pay its short-term obligations), solvency (its ability to meet its long-term financial
commitments) and financial adaptability (its ability to take effective action to alter the
amount and timing of its cash flows to respond to unexpected needs or opportunities).
Information about cash flows helps stakeholders to understand the entity's operations and
evaluate its investing and financing activities.

IFRS 7 requirements
The objective of IFRS 7 is to require entities to provide disclosures in their financial
statements that enable users to evaluate:
(1) The significance of financial instruments for the entity's financial position and
performance
(2) The nature and extent of risks arising from financial instruments to which the entity
is exposed during the period and at the reporting date, and how the entity
manages those risks
The key requirement of IFRS 7 is to show the extent to which an entity is
exposed to different types of risk, relating to both recognised and unrecognised
financial instruments. The risk disclosures required by IFRS 7 are given from the
perspective of management which should allow the users of financial statements to
better understand how management perceives, measures and manages the risks
associated with financial instruments.
Credit risk is one such risk. Credit risk is the risk of loss to one party to a financial
instrument by failure to pay by the other party to the instrument.
Clearly disclosures about credit risk are important to debt-holders. Such disclosures are
qualitative (exposure to risk and objectives, policies and processes for managing risk)
and quantitative, based on the information provided internally to management,
enhanced if this is insufficient.
More important in this context is market risk. Market risk is the risk of fluctuations in
either fair value or cash flows because of changes in market prices. It comprises
currency risk, interest rate risk and other price risk. The debt-holders are exposed to the
risk of the underlying investments whose value could go up or down depending on
market value.
Disclosures required in connection with market risk are:
(1) Sensitivity analysis, showing the effects on profit or loss of changes in each
market risk
(2) If the sensitivity analysis reflects interdependencies between risk variables, such
as interest rates and exchange rates the method, assumptions and
limitations must be disclosed

IAS 8 Accounting Policies, Changes in Accounting Estimates

and Errors
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors only permits a change in
accounting policy if the change is: (i) required by an IFRS or (ii) results in the financial statements
providing reliable and more relevant information about the effects of transactions, other events or
conditions on the entity's financial position, financial performance or cash flows. A retrospective
adjustment is required unless the change arises from a new accounting policy with transitional
arrangements to account for the change. It is possible to depart from the requirements of IFRS but
only in the extremely rare circumstances where compliance would be so misleading that it would
conflict with the overall objectives of the financial statements.

IFRS 8 Operating Segments describes an operating segment as a component of an

entity:
(1) Which engages in business activities from which it may earn revenues and incur
expenses;
(2) Whose operating results are regularly reviewed by the entity's chief operating
decision-maker to make decisions about resources to be allocated to the segment
and assess its performance;
(3) For which discrete financial information is available.

The amounts reported under IFRS 8 may differ from those reported in the
financial statements because IFRS 8 requires the information to be presented on the same
basis as it is reported internally, even if the accounting policies are not the same as those of
the consolidated financial statements. For example, segment information may be reported on a
cash basis rather than an accruals basis or different accounting policies may be adopted in
the segment report when allocating centrally incurred costs if necessary for a better
understanding of the reported segment information.
IFRS 8 requires reconciliations between the segments' reported amounts and those in the
consolidated financial statements. Entities must disclose the nature of such differences, and of
the basis of accounting for transactions between reportable segments

IFRS 8 Operating Segments requires operating segments to be reported separately if they

exceed at least one of certain qualitative thresholds. Two or more operating segments below
the thresholds may be aggregated to produce a reportable segment if the segments have
similar economic characteristics, and the segments are similar in a majority of the
following aggregation criteria:
(i) The nature of the products and services
(ii) The nature of the production process
(iii) The type or class of customer for their products or services
(iv) The methods used to distribute their products or provide their services
(v) If applicable, the nature of the regulatory environment

IAS 8 Accounting Policies, Changes

in Accounting Estimates and Errors states that a change in accounting estimate is an
adjustment of the carrying amount of an asset or liability, or related expense, resulting
from reassessing the expected future benefits and obligations associated with that asset
or liability.
IFRS 8 requires information to be disclosed that is not readily available elsewhere in
the financial statements, therefore it provides additional information which aids an investor's
understanding of how the business operates and is managed.

IFRS 8 Operating Segments states that an operating segment is a component of an

entity which engages in business activities from which it may earn revenues and incur
costs. In addition, discrete financial information should be available for the segment
and these results should be regularly reviewed by the entity's chief operating decision
maker (CODM) when making decisions about resource allocation to the segment and
assessing its performance.
Other factors should be taken into account, including the nature of the business activities
of each component, the existence of managers responsible for them, and information
presented to the board of directors.
According to IFRS 8, an operating segment is one which meets any of the following
quantitative thresholds:
(i) Its reported revenue is 10% or more of the combined revenue of all operating
segments.
(ii) The absolute amount of its reported profit or loss is 10% or more of the greater,
in absolute amount, of (1) the combined reported profit of all operating segments
which did not report a loss and (2) the combined reported loss of all operating
segments which reported a loss.
(iii) Its assets are 10% or more of the combined assets of all operating segments.

According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,

financial statements do not comply with International Financial Reporting Standards if
they contain material errors, or errors made intentionally in order to present the entity's
financial performance and position in a particular way.

IFRS 9 Financial Instruments

Classification of financial assets

Per IFRS 9, an entity should derecognise a financial asset when:

(1) The contractual rights to the cash flows from the financial asset expire; or
(2) The entity transfers the financial asset or substantially all the risks and rewards of ownership of the
financial asset to another party.

Trade receivable
The impairment model in IFRS 9 Financial Instruments is based on providing for expected credit losses. The
financial statements should reflect the general pattern of deterioration or improvement in the credit quality
of financial instruments within the scope of IFRS 9. Expected credit losses are the expected shortfall in
contractual cash flows;
For trade receivables that do not have an IFRS 15 Revenue from Contracts with Customers financing element,
the loss allowance is measured at the lifetime expected credit losses. For trade receivables that do have an
IFRS 15
financing element, the entity can choose to apply the general approach in IFRS 9(On initial recognition, the
loss allowance recognised should be equal to the 12-month expected credit losses. This is calculated by
multiplying the probability of default in the next 12 months by the lifetime expected credit losses that would
result from the default:
At each subsequent year end, Intasha should re-assess the loss allowance) or the simplified approach available
for trade receivables(Under the simplified approach, Intasha should measure the loss allowance at lifetime
expected losses from initial recognition).

The loan is a financial asset held at amortised cost under IFRS 9 Financial Instruments. Traveler wishes to value
the loan at fair value. However, IFRS 9 states that the classification of an instrument is determined on initial
recognition and that reclassifications, which are not expected to occur frequently, are permitted only if the
entity's business model changes.
Financial assets are subsequently measured at amortised cost if both of the following apply:
(i) The asset is held within a business model whose objective is to hold the
assets to collect the 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 outstanding.
All other financial assets are measured at fair value.

IFRS 9 Financial Instruments requires Diamond to consider the commercial substance rather
than the legal form of the debt factoring arrangements. IFRS 9 suggests that the trade
receivables should be derecognised from the financial statements of Diamond when the
following conditions are met:
(i) When Diamond has no further rights to receive cash from the factor
(ii) When the risks and rewards of ownership relating to the receivables have substantially been
transferred to the factor
(iii) When Diamond has no further control over the trade receivables

Per IFRS 9, an entity should derecognise a financial asset when:

(1) The contractual rights to the cash flows from the financial asset expire; or
(2) The entity transfers the financial asset or substantially all the risks and
rewards of ownership of the financial asset to another party.

IFRS 9 Financial Instruments requires that a financial asset only qualifies for derecognition once the entity has
transferred the contractual rights to receive the cash flows from the asset or where the entity has retained
the contractual rights but has an unavoidable obligation to pass on the cash flows to a third party.

According to IFRS 9 Financial Instruments, financial assets are classified as measured at either amortised cost
or fair value.
A financial asset is measured at amortised cost where:
(i) The asset is held within a business model where the 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.
All other financial assets are measured at fair value. IFRS 9 states that the classification of an instrument is
determined on initial recognition and that reclassifications, which are not expected to occur frequently, are
permitted only if the entity's business model changes.

As the borrower is in financial difficulties, the loan is in Stage 2, meaning that the credit quality of this financial
asset has deteriorated significantly since initial recognition, so lifetime expected credit losses must be
recognised and the increase charged to profit or loss.

IFRS 9 requires the cash flows to be consistent with a basic lending arrangement, where the time value of
money
and credit risk are typically the most significant elements of interest. Contractual terms that introduce
exposure to risk or volatility in the contractual cash flows that is unrelated to a basic lending arrangement,
such as exposure to changes in exchange rates, do not give rise to contractual cash flows that are solely
payments of
principal and interest.
The additional 3% interest Bed will receive if the exchange rate target is reached, exposes Bed to risk in cash
flows that are unrelated to a basic lending arrangement (movement in exchange rates). Therefore, the
contract with Em Bank does not give rise to contractual cash flows that are purely payments of principal and
interest and as a
result, it should not be measured at amortised cost. This type of contract is referred to as a
'hybrid contract'. This additional 3% dependent on exchange rates is an embedded derivative. Derivatives
embedded within a host which is a financial asset within the scope of IFRS 9 are not separated out for
accounting purposes. Instead the usual IFRS 9 measurement requirements should be applied to the entire
hybrid contract.
Since the contract with Em Bank does not meet the criteria to be measured at amortised cost, the entire
contract (including the term entitling Bed to an additional 3% if the exchange rate target is met) should be
measured at fair value through profit or loss.

IFRS 9 Financial Instruments provides three examples of when an entity has transferred
substantially all the risks and rewards of ownership, these are: an unconditional sale of a
financial asset, sale of a financial asset with an option to repurchase the financial asset at its
fair value and sale of a financial asset which is deeply 'out of the money'.

IFRS 9 Financial Instruments requires an entity to value its financial liabilities at

amortised cost with an option to designate them as measured at fair value
through profit or loss if it reduces or eliminates an accounting mismatch or because
a group of liabilities is managed and its performance evaluated on a fair value basis.
IFRS 9 Financial Instruments allows hedge accounting but only if all of the following
conditions are met.
(i) The hedging relationship consists only of eligible hedging instruments
and eligible hedged items.
(ii) There must be formal documentation (including identification of the hedged
item, the hedging instrument, the nature of the risk that is to be hedged and how
the entity will assess the hedging instrument's effectiveness in offsetting the
exposure to changes in the hedged item's fair value or cash flows attributable to
the hedged risk).
(iii) The hedging relationship meets all of the IFRS 9 hedge effectiveness criteria.
IFRS 9 defines hedge effectiveness as the degree to which changes in the fair value
or cash flows of the hedged item attributable to a hedged risk are offset by changes in
the fair value or cash flows of the hedging instrument. The directors of Complexity have
asked whether hedge effectiveness can be calculated. IFRS 9 uses an objectivebased
assessment for hedge effectiveness, under which the following criteria must
be met.
(i) There is an economic relationship between the hedged item and the hedging
instrument, ie the hedging instrument and the hedged item have values that
generally move in the opposite direction because of the same risk, which is the
hedged risk;
(ii) The effect of credit risk does not dominate the value changes that result
from that economic relationship, ie the gain or loss from credit risk does not
frustrate the effect of changes in the underlying item on the value of the hedging
instrument or the hedged item, even if those changes were significant; and
(iii) The hedge ratio of the hedging relationship (quantity of hedging
instrument vs quantity of hedged item) is the same as that resulting from the
quantity of the hedged item that the entity actually hedges and the quantity of
the hedging instrument that the entity actually uses to hedge that quantity of
hedged item.

For financial assets which are debt instruments measured at fair value through other
comprehensive income (FVOCI), both amortised cost and fair value information are relevant
because debt instruments in this measurement category are held for both the collection of
contractual cash flows and the realisation of fair values. Therefore, debt instruments measured
at FVOCI are measured at fair value in the statement of financial position. In profit
or loss, interest revenue is calculated using the effective interest rate method. The fair
value gains and losses on these financial assets are recognised in other comprehensive income
(OCI). As a result, the difference between the total change in fair value and the amounts
recognised in profit or loss are shown in OCI. When these financial assets are derecognised,
the cumulative gains and losses previously recognised in OCI are reclassified from equity to
profit or loss.
Expected credit losses (ECLs) do not reduce the carrying amount of the financial
assets, which remains at fair value. Instead, an amount equal to the ECL allowance which
would arise if the asset were measured at amortised cost is recognised in OCI.
The fair value of the debt instrument therefore needs to be ascertained at 28 February 20X7.
IFRS 13 Fair Value Measurement states that Level 1 inputs are unadjusted quoted prices in
active markets for identical assets or liabilities which the entity can access at the measurement
date. In-house models are alternative pricing methods which do not rely exclusively on quoted
prices. It would seem that a Level 1 input is available, based upon activity in the market
and further that, because of the active market, there is no reason to use the in-house model to
value the debt.

IFRS 9 Financial Instruments applies to contracts to buy or sell a non-financial item which are settled
net in cash. Such contracts are usually accounted for as derivatives. However, contracts which are
for an entity's 'own use' of a non-financial asset are exempt from the requirements of IFRS 9. The
contract will qualify as 'own use' because Gustoso always takes delivery of the wheat. This means
that it falls outside IFRS 9 and so the recognition of a derivative is incorrect.
The contract is an executory contract. Executory contracts are not initially recognised in the financial
statements unless they are onerous, in which case a provision is required. This particular contract is
unlikely to be onerous because wheat prices may rise again. Moreover, the finished goods which the
wheat forms a part of will be sold at a profit. As such, no provision is required. The contract will
therefore remain unrecognised until Gustoso takes delivery of the wheat.

IFRS 10 Consolidated Financial Statements

IFRS 10 states that an investor controls an investee if and only if it has all of the following.
(1) Power over the investee;
(2) Exposure, or rights, to variable returns from its involvement with the investee; and
(3) The ability to use its power over the investee to affect the amount of the investor's
returns.
Power is defined as existing rights that give the current ability to direct the relevant activities of the investee.
There is no requirement for that power to have been exercised.
Relevant activities may include:
Selling and purchasing goods or services
Managing financial assets
Selecting, acquiring and disposing of assets
Researching and developing new products and processes
Determining a funding structure or obtaining funding
In some cases assessing power is straightforward, for example, where power is obtained directly and solely
from having the majority of voting rights or potential voting rights, and as a result the ability to direct relevant
activities.

IFRS 10 Consolidated Financial Statements views the partial disposal of a subsidiary, in which control is
retained by the parent company, as an equity transaction accounted for directly in equity. The accounting
treatment is driven by the concept of substance over form. In substance, there has been no disposal because
the entity is still a subsidiary, so no profit on disposal should be recognised and there is no effect on the
consolidated statement of profit or loss and other comprehensive income. The transaction is, in effect, a
transfer between the owners

IAS 10 Events After the Reporting Period

a non-adjusting event as an event which is indicative of a condition which arose after the end of the reporting
period.

The actual breach of the loan covenants at 31 March 20X3 was a material event after the reporting period.
The breach, after the date of the financial statements but before those statements were authorised,
represents a material non-adjusting event, which should have given rise to further disclosures under IAS
10.

IFRS 11 Joint Arrangements

Under IFRS 11 Joint Arrangements, a joint arrangement is one in which two or more parties are bound by a
contractual arrangement which gives them joint control over the arrangement.
Joint arrangements can either be joint ventures or joint operations. The classification as a joint venture or joint
operation depends on the rights and obligations of the parties to the arrangement. It is important to correctly
classify the arrangement as the accounting requirements for joint ventures are different to those for joint
operations.
IFRS 11 states that a joint arrangement that is not structured through a separate vehicle is a joint operation.
The classification of a joint arrangement as a joint operation or a joint venture depends upon
the rights and obligations of the parties to the arrangement (IFRS 11 Joint Arrangements). A
joint arrangement occurs where two or more parties have joint control. The contractually
agreed sharing of control of an arrangement exists only when decisions about the relevant
activities require the unanimous consent of the parties sharing control. The structure and form
of the arrangement determines the nature of the relationship. However, regardless of the
purpose, structure or form of the arrangement, the classification of joint arrangements depends
upon the parties' rights and obligations arising from the arrangement. A joint arrangement
which is not structured through a separate vehicle is a joint operation. In such cases, the
contractual arrangement establishes the parties' rights and obligations. A joint operator
accounts for the assets, liabilities, revenues and expenses relating to its involvement in a joint
operation in accordance with the relevant IFRSs. The arrangement with Gogas is a joint
operation as there is no separate vehicle involved and they have agreed to share services and
costs with decisions regarding the platform requiring unanimous agreement of the parties.
Gasnature should recognise its share of the asset as property, plant and equipment.

IAS 12 Income Taxes requires that deferred tax liabilities must be recognised for all
taxable temporary differences. Deferred tax assets should be recognised for deductible
temporary differences but only to the extent that taxable profits will be available against
which the deductible temporary differences may be utilised.
The differences between the carrying amounts and the tax base represent temporary
differences. These temporary differences are revised in the light of the
revaluation for tax purposes to market value permitted by the government.

The conceptual basis for accounting for deferred tax is questionable. On one hand, deferred tax is
focused on the statement of financial position, which is in keeping with the Conceptual
Framework. It may, however, be argued that deferred tax assets and liabilities do not meet
the definition of assets and liabilities under the Conceptual Framework. An asset is
defined as a present economic resource controlled by an entity as a result of past events
and a liability is a present obligation to transfer economic benefits, again as a result of
past events. It is not clear whether deferred tax assets and obligations can be considered
present resource or obligations.
IAS 12 Income Taxes is based on the idea that all changes in assets and liabilities
have unavoidable tax consequences. Where the recognition criteria in IFRS are different
from those in tax law, the carrying amount of an asset or liability in the financial
statements is different from its tax base (the amount at which it is stated for tax
purposes). These differences are known as temporary differences. The practical effect of
these differences is that a transaction or event occurs in a different accounting period from its
tax consequences. For example, depreciation is recognised in the financial statements in
different accounting periods from capital allowances.
IAS 12 requires a company to make full provision for the tax effects of temporary
differences. Both deferred tax assets, and deferred tax liabilities can arise in this
way. The Conceptual Framework states that if the probability of an inflow or outflow of
economic benefits is low, the notes to the financial statements would be the most appropriate
place for information about the magnitude and possible timing of such flows (Conceptual
Framework: para 5.16). It could be argued that IAS 12 requires deferred tax to be provided
even when the possibility of an inflow or outflow is low, such as in the requirement to provide
for deferred tax on fair value adjustments when there is no intention to sell the revalued asset.
Under IAS 12, the tax effect of transactions are recognised in the same period as the
transactions themselves, but in practice, tax is paid in accordance with tax legislation when it
becomes a legal liability. This is considered another conceptual weakness or
inconsistency, in that only one liability, that is tax, is being provided for, and not other costs,
such as overhead costs.

The impairment loss in the financial statements of Nails reduces the carrying
amount of property, plant and equipment, but is not allowable for tax. Therefore,
the tax base of the property, plant and equipment is different from its carrying
amount and there is a temporary difference. IAS 12 states that no deferred tax should be recognised on
goodwill and
therefore only the impairment loss relating to the property, plant and
equipment affects the deferred tax position.

According to IAS 12 Income Taxes, an entity should recognise a deferred tax asset in respect
of the carry-forward of unused tax losses to the extent that it is probable that future taxable
profit will be available against which the losses can be utilised. IAS 12 stresses that the
existence of unused losses is strong evidence that future taxable profit may not be available.
For this reason, convincing evidence is required about the existence of future taxable profits.
IAS 12 says that entities should consider whether the tax losses result from identifiable causes
which are unlikely to recur.
******************************

IFRS 13 defines fair value as 'the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market
participants at the measurement date'. The price which would be received to sell the
asset or paid to transfer (not settle) the liability is described as the 'exit price'.
Examples of use of fair values in IFRS
Examples include:
(i) IAS 16 Property, Plant and Equipment allows revaluation through other
comprehensive income, provided it is carried out regularly.
(ii) While IAS 40 Investment Property allows the option of measuring investment properties
at fair value with corresponding changes in profit or loss, and this arguably reflects
the business model of some property companies, many companies still use
historical cost.
(iii) IAS 38 Intangible Assets permits the measurement of intangible assets at
fair value with corresponding changes in equity, but only if the assets can be
measured reliably through the existence of an active market for them.
(iv) IFRS 9 Financial Instruments requires some financial assets and liabilities to be
measured at amortised cost and others at fair value. The measurement basis is
largely determined by the business model for that financial instrument. For financial
instruments measured at fair value, depending on the category and the circumstances,
gains or losses are recognised either in profit or loss or in other comprehensive income.

IFRS 13 says that fair value is an exit price in the principal market, which is the market with
the highest volume and level of activity. It is not determined based on the volume or level of
activity of the reporting entity's transactions in a particular market. Once the accessible
markets are identified, market-based volume and activity determines the principal market.
There is a presumption that the principal market is the one in which the entity would normally
enter into a transaction to sell the asset or transfer the liability, unless there is evidence to the
contrary. In practice, an entity would first consider the markets it can access. In the absence of
a principal market, it is assumed that the transaction would occur in the most advantageous
market. This is the market which would maximise the amount which would be received to sell
an asset or minimise the amount which would be paid to transfer a liability, taking into
consideration transport and transaction costs. In either case, the entity must have access to the
market on the measurement date. Although an entity must be able to access the market at the
measurement date, IFRS 13 does not require an entity to be able to sell the particular asset or
transfer the particular liability on that date. If there is a principal market for the asset or
liability, the fair value measurement represents the price in that market at the measurement
date regardless of whether that price is directly observable or estimated using another
valuation technique and even if the price in a different market is potentially more
advantageous.
The principal (or most advantageous) market price for the same asset or liability might be
different for different entities and therefore, the principal (or most advantageous) market is
considered from the entity's perspective which may result in different prices for the same asset.
In Yanong's case, Asia would be the principal market as this is the market in which the
majority of transactions for the vehicles occur. As such, the fair value of the 150 vehicles
would be $5,595,000 ($38,000 – $700 = $37,300 150). Actual sales of the vehicles in
either Europe or Africa would result in a gain or loss to Yanong when compared with the fair
value, ie $37,300. The most advantageous market would be Europe where a net price of
$39,100 (after all costs) would be gained by selling there and the number of vehicles sold in
this market by Yanong is at its highest. Yanong would therefore utilise the fair value calculated
by reference to the Asian market as this is the principal market.
IFRS 13 makes it clear that the price used to measure fair value must not be adjusted for
transaction costs, but should consider transportation costs. Yanong has currently deducted
transaction costs in its valuation of the vehicles. Transaction costs are not deemed to be a
characteristic of an asset or a liability but they are specific to a transaction and will differ
depending on how an entity enters into a transaction. While not deducted from fair value, an
entity considers transaction costs in the context of determining the most advantageous market
because the entity is seeking to determine the market which would maximise the net amount
which would be received for the asset.

A fair value measurement of a non-financial asset takes into account a market participant's
ability to generate economic benefits by using the asset in its highest and best use or by selling
it to another market participant who would use the asset in its highest and best use. The
maximum value of a non-financial asset may arise from its use in combination with other assets
or by itself. IFRS 13 requires the entity to consider uses which are physically possible, legally
permissible and financially feasible.

The fair value of an asset 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 (IFRS 13 Fair Value Measurement). IFRS 13 states that valuation techniques must be those
which are appropriate and for which sufficient data are available. Entities should maximise
the use of relevant observable inputs and minimise the use of unobservable inputs.
The standard establishes a three-level hierarchy for the inputs that valuation techniques use to
measure fair value.
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities that
the reporting entity can access at the measurement date
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, eg quoted prices for similar assets in
active markets or for identical or similar assets in non-active markets or use of
quoted interest rates for valuation purposes
Level 3 Unobservable inputs for the asset or liability, ie using the entity's own
assumptions about market exit value

IFRS 15
According to IFRS 15, an entity should only account for revenue from a contract with a
customer when it meets the following criteria:
The contract has been approved;
Rights regarding goods and services can be identified;
Payment terms can be identified;
It is probable the seller will collect the consideration it is entitled to.
Under IFRS 15, an entity must adjust the promised amount of consideration for the
effects of the time value of money if the contract contains a significant financing
component.

IFRS 15 Revenue from Contracts with Customers defines revenue as income arising from
an entity's ordinary activities.

The core principle of IFRS 15 is that the amount of revenue recognised reflects the
amount of consideration an entity expects to receive in exchange for the delivery of promised
goods or services. IFRS 15 has a five-step process that can be used for all types of revenue
transaction and all industries, which gives preparers of financial information a process to
undertake in order to achieve this core principle.
Five-step process
(i) Identify the contract with the customer
(ii) Identify the separate performance obligations – this helps the preparer to identify the
promised goods or services
(iii) Determine the transaction price – this helps the preparer to determine the amount of
consideration receivable
(iv) Allocate the transaction price to the performance obligations
(v) Recognise revenue when (or as) a performance obligation is satisfied

At contract inception, IFRS 15 requires entities to assess the goods or services promised in a
contract with a customer to identify as a performance obligation each promise to transfer to
the customer either:
(1) A good or service that is distinct; or
(2) A series of distinct goods or services that are substantially the same and
have the same pattern of transfer to the customer.
A series of distinct goods or services have the same pattern of transfer to the customer if both
of the following criteria are met:
(1) Each distinct good or service in the series that the entity promises to transfer to the
customer would meet the criteria to be a performance obligation satisfied
over time; and
(2) The same method would be used to measure the entity's progress towards
complete satisfaction of the performance obligation to transfer each distinct
good or service in the series to the customer.
According to IFRS 15, a performance obligation is satisfied over time when the customer
simultaneously receives and consumes the benefits provided by the entity'sperformance as the entity
performs.

A contract exists when an agreement between two or more parties

creates enforceable rights and obligations between those parties. The agreement
does not need to be in writing to be a contract but the decision as to whether a
contractual right or obligation is enforceable is considered within the context of the
relevant legal framework of a jurisdiction. Thus, whether a contract is enforceable
will vary across jurisdictions. The performance obligation could include promises
which result in a valid expectation that the entity will transfer goods or services to
the customer even though those promises are not legally enforceable.
An entity should only apply the revenue recognition model in IFRS 15 to a contract with
a customer when all of the following five criteria have been met.
(i) Contract approved and committed to perform obligations
The first criterion set out in IFRS 15 is that the parties should have approved
the contract and are committed to perform their respective
obligations. It would be questionable whether that contract is enforceable if this
were not the case. In the case of oral or implied contracts, this may be
difficult but all relevant facts and circumstances should be
considered in assessing the parties' commitment.
The parties need not always be committed to fulfilling all of the
obligations under a contract. IFRS 15 gives the example where a customer is
required to purchase a minimum quantity of goods but past experience shows
that the customer does not always do this and the other party does not enforce
their contract rights. The IFRS 15 criterion could still be satisfied in this example if
there is evidence that the parties are substantially committed to the contract.
(2) Entity can identify each party's rights
It is essential that each party's rights can be identified regarding the goods or
services to be transferred. Without this criterion, an entity would not be able to
assess the transfer of goods or services and therefore the point at which revenue
should be recognised.
(3) Entity can identify each party's payment terms
It is essential that each party's payment terms can be identified regarding
the goods or services to be transferred. This requirement is the key to determining
the transaction price.
(4) Contract has commercial substance
The contract must have commercial substance before revenue can be
recognised, as without this requirement, entities might artificially inflate their
revenue and it would be questionable whether the transaction has economic
consequences.
The contract is deemed to have commercial substance when the risk, timing or
amount of the entity's future cash flows is expected to change as a
result of the contract.
(5) Probable consideration
It should be probable that the entity will collect the consideration due
under the contract. An assessment of a customer's credit risk is an
important element in deciding whether a contract has validity but
customer credit risk does not affect the measurement or presentation of
revenue.
The consideration may be different to the contract price because of
discounts and bonus offerings. The entity should assess the ability of the
customer to pay and the customer's intention to pay the consideration.
Reassessment
If a contract with a customer does not meet these criteria, the entity can
continually re-assess the contract to determine whether it subsequently meets
the criteria.

Combination of contracts
Two or more contracts which are entered into around the same time with
the same customer may be combined and accounted for as a single
contract, if they meet the specified criteria.
Contract modifications
The Standard provides detailed requirements for contract modifications. A
modification may be accounted for as a separate contract or a
modification of the original contract, depending upon the circumstances
of the case.

IFRS 16 requires an initial assessment to be made regarding

whether or not the transfer constitutes a sale. This is done by determining when
the performance obligation is satisfied in accordance with IFRS 15 Revenue from
Contracts with Customers.
In this case, we are told in the question that the IFRS 15 criteria have been met.
IFRS 16 therefore requires that Havanna should derecognise the carrying amount
of the asset ($4.2m) and recognise a right-of-use asset at the proportion of the
previous carrying amount that relates to the right-of-use asset retained. A gain or loss
should then be recognised in relation to the rights transferred to the buyer-lessor.
Although there is a gain to be recognised in profit or loss, this will not be the
$0.8 million (being sales price of $5m – carrying amount of $4.2m) the CEO has
calculated. Havanna should also recognise a lease liability at the present value of
lease payments of $3.85m

IAS 16 Property, Plant and Equipment states that the cost of an item of PPE comprises
any cost directly attributable to bringing the asset to the condition necessary for it to be
capable of operating in the manner intended by management.

IAS 16 states that property, plant and equipment are tangible items which:
(i) Are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
(ii) Are expected to be used during more than one period.

IAS 19 Employee Benefits classifies this type of holiday pay as a short-term

accumulating paid absence as any unused entitlement may be carried forward and utilised in the following
year. The 2018 amendments to IAS 19 require that, when a plan amendment, curtailment or settlement takes
place, the updated actuarial assumptions used to remeasure the net defined benefit/asset should also be used
to determine current service cost and net interest for the remainder of the reporting period. Prior to the
amendments, the current service cost and net interest would have been calculated using the assumptions in
place at the beginning of the reporting period.

IAS 19 Employee Benefits requires all gains and losses on a defined benefit pension scheme to be recognised
in profit or loss except for the remeasurement component relating to the assets and liabilities of the plan,
which must be recognised in other comprehensive income. So, current service cost, past service cost and the
net interest cost on the net defined benefit liability must all be recognised in profit or loss.

The reduction in the net pension liability as a result of the employees being made
redundant and no longer accruing pension benefits is a curtailment under IAS 19
Employee Benefits.
IAS 19 defines a curtailment as occurring when an entity significantly reduces the
number of employees covered by a plan. It is treated as a type of past service
costs. The past service cost may be negative (as is the case here) when the benefits are
withdrawn so that the present value of the defined benefit obligation decreases. IAS 19
requires the past service cost to be recognised in profit or loss at the earlier of:
When the plan curtailment occurs; and
When the entity recognises the related restructuring costs.

IAS 16 Property, Plant and Equipment

IAS 16 states that the cost of an item of property, plant and equipment should be
recognised when two conditions have been fulfilled:
It is probable that future economic benefits associated with the item will flow to the
entity.
The cost of the item can be measured reliably.

IAS 16 defines residual value as: 'The estimated amount that an entity would currently obtain from disposal
of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and
in the condition expected at the end of its useful life.' (para. 6)
IAS 16 requires that property, plant and equipment must be depreciated so that its
depreciable amount is allocated on a systematic basis over its useful life. Depreciable amount
is the cost of an asset less its residual value. IAS 16 stipulates that the residual value must
be reviewed at least each financial year-end and, if expectations differ from previous
estimates, any change is accounted for prospectively as a change in estimate under IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors.
Following IAS 16, if the residual value is greater than an asset's carrying amount, the
depreciation charge is zero until such time as the residual value subsequently decreases to an
amount below the asset's carrying amount. The residual value should be the value at the
reporting date as if the vessel were already of the age and condition expected at the end of its
useful life. Depreciable amount is affected by an increase in the residual value of an asset
because of past events, but not by expectation of changes in future events, other than the
expected effects of wear and tear. Generally however the depreciation of the original amount capitalised in
respect of the engine will be calculated to have a carrying amount of nil when the overhaul is undertaken

IFRS 16
The arrangement meets the IFRS 16 criteria for a lease in that there is an identifiable asset and
the contract conveys the right to control the use of that asset for a period of time in exchange
for consideration.
Columbus must recognise a right-of-use asset representing its right to use the property and a
lease liability representing its obligation to make lease payments. At the commencement date,
Columbus should recognise the right-of-use asset at cost. This will include:
(a) The amount of the initial measurement of the lease liability;
(b) Any lease payments made or incentives received before the start date;
(c) Any initial direct costs; and
(d) Any costs to be incurred for dismantling or removing the underlying asset or restoring
the site at the end of the lease term.

Sale and leaseback

The form of this transaction is a sale and leaseback. IFRS 16 Leases requires an initial
assessment to be made regarding whether or not the transfer constitutes a sale. This is done by
determining when the performance obligation is satisfied in accordance with IFRS 15 Revenue
from Contracts with Customers. In this case, we are told in the question that the IFRS 15
criteria have been met. IFRS 16 therefore requires that, at the start of the lease, Willow should
measure the right-of-use asset arising from the leaseback of the building at the proportion of
the previous carrying amount of the building that relates to the right-of-use retained. This is
calculated as carrying amount × discounted lease payments/fair value.

IAS 20: Government grant

The principle behind IAS 20 is that of accruals or matching: the grant received must be
matched with the related costs on a systematic basis. Grants receivable as compensation for costs already
incurred, or for immediate financial support with no future related costs, should be recognised as income in
the period in which they are receivable.
Government grants are assistance by government in the form of transfers of resources to an
entity in return for past or future compliance with certain conditions relating to the operating
activities of the entity.
There are two main types of grants:
(i) Grants related to assets: grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term assets.
(ii) Grants related to income: These are government grants other than grants related to
assets.

IAS 20 would two possible approaches for the capital-based portion of the grant.
(i) Match against the depreciation of the building using a deferred income approach.
(ii) Deduct from the carrying amount of the building, resulting in a reduced depreciation
charge.

IAS 21 The Effects of Changes in Foreign Exchange Rates

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. This would include foreign
bank accounts, receivables, payables and loans. Non-monetary items are other items
which are in the statement of financial position. For example, non-current assets, inventories
and investments.
Monetary items are retranslated using the closing exchange rate (the year end rate).
The exchange differences on retranslation of monetary assets must be recorded in profit or
loss. IAS 21 The Effects of Changes in Foreign Exchange Rates, is not specific under which
heading the exchange gains and losses should be classified.
Non-monetary items which are measured in terms of historical cost in a foreign currency
are translated using the exchange rate at the date of the transaction; and nonmonetary
items which are measured at fair value in a foreign currency are translated using the exchange rates at the
date when the fair value was measured.
Exchange differences on such items are recorded consistently with the recognition of
the movement in fair values. For When translating a foreign subsidiary, the exchange differences on all the
net assets, including goodwill, are recorded within other comprehensive income. The
proportion belonging to the shareholders of the parent will usually be held in a separate
translation reserve. The proportion belonging to the non-controlling interest is
not shown separately but subsumed within the non-controlling interest figure in the
consolidated financial statements. If Bubble were to sell all of its equity shares in
Tyslar, the translation reserve will be reclassified from equity to profit or loss. In addition,
the cumulative exchange differences attributable to the non-controlling interest would be
derecognised but would not be reclassified to profit or loss.
When a monetary item relating to a foreign operation is not intended to be
settled, the item is treated as part of the entity's net investment in its subsidiary.
There will be no difference in the accounting treatment in the individual accounts of
Tyslar and hence exchange differences on the loan would remain in profit or loss.
However, in the consolidated financial statements such differences should initially be
recorded in other comprehensive income. These will be reclassified from equity to
profit or loss on subsequent disposal of the subsidiary. This can cause practical issues in
terms of monitoring all of the individual exchange differences to ensure that they are all
correctly classified in the consolidated financial statements.

IAS 21 The Effects of Changes in Foreign Exchange Rates defines functional currency as 'the
currency of the primary economic environment in which the entity operates'. Each entity,
whether an individual company, a parent of a group, or an operation within a group, should
determine its functional currency and measure its results and financial position in
that currency. If it is not obvious what the functional currency is, management will need to
use its judgement in determining the currency which most faithfully represents the economic
effects of the underlying transactions, events and conditions.
An entity should generally consider the following factors:
(i) What is the currency 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)?
(ii) What is the currency of the country whose competitive forces and regulations
mainly determine the sales prices of its goods and services?
(iii) What is 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.)
Other factors may also provide evidence of an entity's functional currency:
(i) It is the currency in which funds from financing activities are generated.
(ii) It is the currency in which receipts from operating activities are usually retained.

IAS 23 Borrowing Costs requires borrowing costs incurred on acquiring or constructing an

asset to be capitalised if the asset takes a substantial period of time to be prepared for its
intended use or sale. Borrowing costs should be capitalised during construction and include
the costs of general borrowings which would have been avoided if the expenditure on the
asset had not occurred. The general borrowing costs are determined by applying the weighted
average of the borrowing costs applicable to the general pool

IAS 24 Related Party Disclosures

A person or a close member of that person's family is a related party of a reporting entity if that person:
(i) Has control or joint control over 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.
When assessing whether an ethical issue has arisen from the choice of mark-up, consideration of IAS 24
Related Party Disclosures is relevant. Traveler and Captive are related parties and the transfer of goods is a
related party transaction. Information must be disclosed on related party transactions and balances necessary
for users to understand the potential effect of the relationship on the financial statements. This is required
since related party transactions are often not carried out on an arm's length basis. Indeed, related party
transactions includetransfers of resources, services or obligations regardless of whether a price is charged.
Provided that the full effects of the transaction were properly disclosed, no ethical issue would
arise from selling the goods at an unusually high margin.

IAS 24 Related Party Disclosures requires that entities should disclose key management
personnel compensation not only in total but also for each of the following
categories:
Short-term employee benefits
Post-employment benefits
Other long-term benefits
Termination benefits
Share-based payment

IAS 24 defines key management personnel as 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.

Some of the employees are considered key management personnel and therefore
IAS 24 Related Party Disclosures should be applied. IAS 24 requires disclosure of the related
party relationship, the transaction and any outstanding balances at the year end date. Such
disclosures are required in order to provide sufficient information to the users of the financial
statements about the potential impact of related party transactions on an entity's profit or loss
and financial position.
IAS 24 requires that an entity discloses key management personnel compensation in total and
for several categories, of which share-based payments is one. IFRS Practice Statement 2
Making Materiality Judgements confirms that disclosures required in IFRSs need only be made
if the information provided by the disclosure is material. Some related party transactions
may be assessed as immaterial and therefore not disclosed. That said, the remuneration of key
management personnel is of great interest to investors and it would be difficult to see how it
could be considered immaterial.

The objective of IAS 24 Related Party Disclosures is to ensure that an entity's financial statements
contain the disclosures necessary to draw attention to the possibility that its financial position and
profit or loss may have been affected by the existence of related parties and by transactions and
outstanding balances with such parties.
If there have been transactions between related parties, there should be disclosure of the nature of
the related party relationship as well as information about the transactions and outstanding balances
necessary for an understanding of the potential effect of the relationship on the financial statements.
The finance director is a member of the key management personnel of the reporting entity and the
entity from whom the goods were purchased is jointly controlled by that director. Therefore a related
party relationship exists.
Abby should assess whether the information provided by disclosure of the transaction is material – ie
could be reasonably expected to influence the decisions of primary users of Abby's financial
statements. If yes, then the relevant disclosures under IAS 24 should be made.

IAS 28 Investments in Associates and

Joint Ventures states that an associate is an entity over which an investor has significant
influence. Significant influence is presumed when the investor has a shareholding of
between 20 and 50%. Representation on the board of directors provides further
evidence that significant influence exists.

IAS 32
A financial liability under IAS 32 is a contractual obligation to deliver cash or
another financial asset to another entity. The contractual obligation may arise
from a requirement to make payments of principal, interest or dividends. The contractual
obligation may be explicit, but it may be implied indirectly in the terms of the contract.
IAS 32 states further that where a derivative contract has settlement options, all of the
settlement alternatives must result in it being classified as an equity
instrument, otherwise it is a financial asset or liability.

IAS 32 requires the classification to be based on principles rather than driven by

perceptions of users.
IAS 32 defines an equity instrument as: 'any contract that evidences a residual
interest in the assets of an entity after deducting all of its liabilities' (para. 11). It must
first be established that an instrument is not a financial liability, before it
can be classified as equity.
A key feature of the IAS 32 definition of a financial liability is that it is a
contractual obligation to deliver cash or another financial asset to
another entity. The contractual obligation may arise from a requirement to make
payments of principal, interest or dividends. The contractual obligation may be explicit,
but it may be implied indirectly in the terms of the contract. An example of a debt
instrument is a bond which requires the issuer to make interest payments and redeem
the bond for cash. An instrument may be classified as an equity instrument if it contains a contingent
settlement provision requiring settlement in cash or a variable number of the entity's
own shares only on the occurrence of an event which is very unlikely to occur – such a provision is not
considered to be genuine. If the contingent payment condition is beyond the control of both the entity and
the holder of the instrument, then the instrument is classified as a financial liability.

A contract resulting in the receipt or delivery of an entity's own shares is not automatically an equity
instrument. The classification depends on the socalled
'fixed test' in IAS 32. A contract which will be settled by the entity receiving or
delivering a fixed number of its own equity instruments in exchange for a
fixed amount of cash is an equity instrument. In contrast, if the amount of
cash or own equity shares to be delivered or received is variable, then the
contract is a financial liability or asset.
There are other factors which might result in an instrument being classified as
debt.
(1) Dividends are non-discretionary.
(2) Redemption is at the option of the instrument holder.
(3) The instrument has a limited life.
(4) Redemption is triggered by a future uncertain event which is beyond the control
of both the issuer and the holder of the instrument.
Other factors which might result in an instrument being classified as equity
include the following.
(1) Dividends are discretionary.
(2) The shares are non-redeemable.(3) There is no liquidation date.

The fundamental principle of IAS 32 Financial Instruments: Presentation is that a

financial instrument should be classified as either a financial liability or an equity instrument
according to the substance of the contract, not its legal form, and the definitions of financial
liability and equity instrument. IAS 32 states that a contract which contains an entity's
obligation to purchase its own equity instruments gives rise to a financial liability, which
should be recognised at the present value of its redemption amount. IAS 32 also states that a
contractual obligation for an entity to purchase its own equity instruments gives rise to a
financial liability for the present value of the redemption amount even if the obligation is
conditional on the counterparty exercising a right to redeem

IAS 32 Financial Instruments: Presentation establishes

principles for presenting financial instruments as liabilities or equity. IAS 32 does not classify a
financial instrument as equity or financial liability on the basis of its legal form but on the
substance of the transaction. The key feature of a financial liability is that the issuer is obliged
to deliver either cash or another financial asset to the holder. An obligation may arise from a
requirement to repay principal or interest or dividends.

In contrast, equity has a residual interest in the entity's assets after deducting all of its
liabilities. An equity instrument includes no obligation to deliver cash or another financial asset
to another entity. A contract which will be settled by the entity receiving or delivering a fixed
number of its own equity instruments in exchange for a fixed amount of cash or another
financial asset is an equity instrument. However, if there is any variability in the amount of
cash or own equity instruments which will be delivered or received, then such a contract is a
financial asset or liability as applicable.

Convertible bond
Hill has issued a compound instrument because the bond has characteristics of both a
financial liability (an obligation to repay cash) and equity (an obligation to issue a fixed
number of Hill's own shares). IAS 32 Financial Instruments: Presentation specifies that
compound instruments must be split into:
A liability component (the obligation to repay cash); and
An equity component (the obligation to issue a fixed number of shares).
The split of the liability component and the equity component at the issue date is
calculated as follows:
The liability component is the present value of the cash repayments, discounted
using the market rate on non-convertible bonds;
The equity component is the difference between the cash received and the
liability component at the issue date.

IAS 34 Interim Financial Reporting

In accordance with IAS 34 Interim Financial Reporting, an entity must apply the same
accounting policies in its interim financial statements as in its annual financial statements.
Measurements should be made on a 'year to date' basis
***************************************
IAS 36 requires that no asset should be carried at more than its recoverable amount. At
each reporting date, Tufnell must review all assets for indications of
impairment, that is, indications that the carrying amount may be higher than the
recoverable amount. Such indications include fall in the market value of an asset or
adverse changes in the technological, economic or legal environment of the business.
(IAS 36 has an extensive list of criteria.) If impairment is indicated, then the asset's
recoverable amount must be calculated. The manufacturer has reduced the selling
price, but this does not automatically mean that the asset is impaired.
The recoverable amount is defined as the higher of the asset's fair value
less costs of disposal and its value in use. If the recoverable amount is less than
the carrying amount, then the resulting impairment loss should be charged to profit or
loss as an expense (unless the asset was previously revalued).
Value in use is the discounted present value of estimated future cash flows expected
to arise from the continuing use of an asset and from its disposal at the end of its useful
life.
The basic principle of IAS 36 is that an asset should be carried at no more than its
recoverable amount, that is, the greater of amount to be recovered through use or sale of the
asset. If an asset's carrying amount is higher than its recoverable amount, an
impairment loss has occurred. The impairment loss should be written off against profit or
loss for the year.
An asset's recoverable amount is defined as the higher of:
(1) The asset's fair value less costs of disposal. This is the price that would be
received to sell the asset in an orderly transaction between market participants at the
measurement date under current market conditions, net of costs of disposal.
(2) The asset's value in use. This is the present value of estimated future cash flows
(inflows minus outflows) generated by the asset, including its estimated net disposal
value (if any) at the end of its useful life. A number of factors must be reflected in the
calculation of value in use (variations, estimates of cash flows, uncertainty), but the most
important is the time value of money as value in use is based on present value
calculations.

Discount rate for impairment

While the cash flows used in testing for impairment are specific to the entity, the discount rate
is supposed to appropriately reflect the current market assessment of the time
value of money and the risks specific to the asset or cash-generating unit. When
a specific rate for an asset or cash-generating unit is not directly available from the market,
which is usually the case, an estimated discount rate may be used instead. An estimate should
be made of a pre-tax rate that reflects the current market assessment of the time
value of money and the risks specific to the asset that have not been adjusted for
in the estimate of future cash flows. According to IAS 36, this rate is the return that the investors
would require if they chose an investment that would generate cash flows of amounts, timing and
risk profile equivalent to those that the entity expects to derive from the assets.

With regard to the impairment loss recognised in respect of each cash-generating unit, IAS 36
requires disclosure of:
The amount of the loss
The events and circumstances that led to the loss
A description of the impairment loss by class of asset

Rates that should be considered are the entity's weighted average cost of capital
(WACC), the entity's incremental borrowing rate or other market rates. The
objective must be to obtain a rate which is sensible and justifiable.

IAS 36 requires that any cash flow projections are based upon reasonable and
supportable assumptions over a maximum period of five years unless it can be
proven that longer estimates are reliable. The assumptions should represent
management's best estimate of the range of economic conditions
expected to obtain over the remaining useful life of the asset.
Management must also assess the reasonableness of the assumptions by examining the
reasons for any differences between past forecasted cash flows and actual cash flows.
The assumptions that form the basis for current cash flow projections
must be consistent with past actual outcomes.

IAS 36 requires estimates of future cash flows to include:

(1) Projections of cash inflows from the continuing use of the asset
(2) Projections of cash outflows which are necessarily incurred to generate the cash
inflows from continuing use of the asset
(3) Net cash flows to be received (or paid) for the disposal of the asset at the end of
its useful life
Under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets
Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets a provision should be recognised for the
present value of the restoration costs

IAS 37 Provisions, Contingent Liabilities and Contingent Assets contains specific

requirements relating to restructuring provisions. The general recognition criteria
apply and IAS 37 also states that a provision should be recognised if an entity has a
constructive obligation to carry out a restructuring. A constructive obligation exists where
management has a detailed formal plan for the restructuring, identifying as a
minimum:
(i) The business or part of the business being restructured
(ii) The principal locations affected by the restructuring
(iii) The location, function and approximate number of employees who will be compensated
for the termination of their employment
(iv) The date of implementation of the plan
(v) The expenditure that will be undertaken
In addition, the plan must have raised a valid expectation in those affected that the entity
will carry out the restructuring. To give rise to such an expectation and, therefore, a
constructive obligation, the implementation must be planned to take place as soon
as possible, and the timeframe must be such as to make changes to the plan unlikely.

IAS 37 requires that provisions should be reviewed at the end of each accounting
period for any material changes to the best estimate previously made.

Under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, provisions must be
recognised in the following circumstances.
(i) There is a legal or constructive obligation to transfer benefits as a result of past
events.
(ii) It is probable that an outflow of economic resources will be required to settle
the obligation.
(iii) The obligation can be measured reliably.
IAS 37 considers an outflow to be probable if the event is more likely than not to occur.
If the company can avoid expenditure by its future action, no provision should be
recognised. A legal or constructive obligation is one created by an obligating event.
Constructive obligations arise when an entity is committed to certain expenditures because of a pattern of
behaviour which the public would expect to continue.
IAS 37 states that the amount recognised should be the best estimate of the
expenditure required to settle the obligation at the end of the reporting
period. The estimate should take the various possible outcomes into account and
should be the amount that an entity would rationally pay to settle the obligation at
the reporting date or to transfer it to a third party. Where there is a large population of
items, for example in the case of warranties, the provision will be made at a probability
weighted expected value, taking into account the risks and uncertainties surrounding the
underlying events. Where there is a single obligation, the individual most likely
outcome may be the best estimate of the liability.
The amount of the provision should be discounted to present value if the time value of
money is material using a risk adjusted rate. If some or all of the expenditure is expected
to be reimbursed by a third party, the reimbursement should be recognised as a
separate asset, but only if it is virtually certain that the reimbursement will be received.

Shortcomings of IAS 37
IAS 37 is generally consistent with the Conceptual Framework. However there are some issues
with IAS 37 that have led to it being criticised:
(i) IAS 37 requires recognition of a liability only if it is probable, that is more than 50%
likely, that the obligation will result in an outflow of resources from the entity. This is
inconsistent with other standards, for example IFRS 3 Business Combinations
and IFRS 9 Financial Instruments which do not apply the probability criterion to
liabilities. In addition, probability is not part of the Conceptual Framework definition of
a liability nor part of the Conceptual Framework's recognition criteria.
(ii) There is inconsistency with US GAAP as regards how they treat the cost of
restructuring a business. US GAAP requires entities to recognise a liability for
individual costs of restructuring only when the entity has incurred that particular cost,
while IAS 37 requires recognition of the total costs of restructuring when the entity
announces or starts to implement a restructuring plan.
(ii) The measurement rules in IAS 37 are vague and unclear. In particular, 'best
estimate' could mean a number of things: the most likely outcome, the weighted
average of all possible outcomes or even the minimum/maximum amount in a range of
possible outcomes. IAS 37 does not clarify which costs need to be included in the
measurement of a liability, and in practice different entities include different costs. It is
also unclear if 'settle' means 'cancel', 'transfer' or 'fulfil' the obligation. IAS 37 also
requires provisions to be discounted to present value but gives no guidance on
non-performance risk that is the entity's own credit risk. Non-performance risk can have
a lead to a significant reduction in non-current liabilities.

IAS 37 states that reimbursement should only be recognised when it is virtually certain to be
received. It is only possible that the company will receive compensation for the legal costs and
therefore this cannot be recognised. However, the compensation should be disclosed as a
contingent asset in the financial statements

IAS 37 Provisions, Contingent Liabilities and Contingent Assets states that a provision
for restructuring should be made only when a detailed formal plan is in place and the
entity has started to implement the plan, or announced its main features to those
affected.
IAS 38 Intangible Assets requires an entity to recognise an intangible asset, whether
purchased or self-created (at cost) if, and only if:
(i) It is probable that the future economic benefits which are attributable to the asset will flow to the entity;
and
(ii) The cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38
includes additional recognition criteria for internally generated intangible assets.
The probability of future economic benefits must be based on reasonable and supportable assumptions about
conditions which will exist over the life of the asset. The probability recognition criterion is always considered
to be satisfied for intangible assets that are acquired separately or in a business combination. If an intangible
item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires
the expenditure on this item to be recognised as an expense when it is incurred.

Under IAS 38, an intangible asset is an asset with the following characteristics.
(i) It meets the standard's identifiability criteria. This means it must be separable or
must arise from contractual or other legal rights.
(ii) It is probable that future economic benefits attributable to the asset will flow to the
entity. These could be in the form of increased revenues or cost savings.
(iii) The entity has control, that is, the power to obtain benefits from the asset.
(iv) Its cost can be measured reliably.
IAS 38 Intangible Assets defines an intangible asset as an identifiable non-monetary
asset without physical substance. IAS 38 retains the 2010 Conceptual Framework
definition of an asset which specifies that future economic benefits are expected to
flow to the entity. Furthermore IAS 38 requires an entity to recognise an intangible
asset, if, and only if:
(a) It is probable that the expected future economic benefits that are attributable to
the asset will flow to the entity; and
(b) The cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated
internally. The probability of future economic benefits must be based on reasonable and
supportable assumptions about conditions which will exist over the life of the asset. The
probability recognition criterion is always considered to be satisfied for intangible
assets which are acquired separately or in a business combination. If the recognition
criteria are not met, IAS 38 requires the expenditure to be expensed when it is incurred.
The Conceptual Framework does not prescribe a 'probability criterion', and thus does
not prohibit the recognition of assets or liabilities with a low probability of an inflow or
outflow of economic benefits. In terms of intangible assets, it is arguable that
recognising an intangible asset with a low probability of economic benefits would not
be useful to users given that the asset has no physical substance.
The recognition criteria and definition of an asset in IAS 38 are different

According to IAS 38, an intangible asset should be derecognised only on disposal or when no future economic
benefits are expected from its use or disposal.

IAS 38 requires an entity to choose either the cost model or the revaluation model for each class of intangible
asset. Under the cost model, after initial recognition intangible assets should be carried at cost less
accumulated amortisation and impairment losses.
Under the revaluation model, intangible assets may be carried at a revalued amount, based on fair value, less
any subsequent amortisation and impairment losses only if fair value can be determined by reference to an
active market

IAS 38 requires all research costs to be expensed with development costs being capitalised only after the
technical and commercial feasibility of the asset for sale or use has been established.

IAS 38 Intangible Assets allows internally developed intangibles to be capitalised provided certain criteria
(technological feasibility, probable future benefits, intent and ability to use or sell the software, resources to
complete the software, and ability to measure cost) are met. It is assumed, in the absence of information to
the contrary, that they have; accordingly Scramble's treatment is correct in this respect.
Scramble is also correct in expensing the maintenance costs. These should not be capitalised as they do not
enhance the value of the asset over and above the original benefits.
As regards subsequent measurement, IAS 38 requires that an entity must choose either the cost model or
the revaluation model for each class of intangible asset. Scramble has chosen cost, and this is acceptable as
an accounting policy.
Intangible assets may have a finite or an indefinite useful life. IAS 38 states that an entity may treat an
intangible asset as having an indefinite useful life, when, having regard to all relevant factors there is no
foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity.
'Indefinite' is not the same as 'infinite'. Computer software is mentioned in IAS 38 as an intangible that is prone
to technological obsolescence and whose life may therefore be short.
Its useful life should be reviewed each reporting period to determine whether events
and circumstances continue to support an indefinite useful life assessment for that asset. If they
do not, the change in the useful life assessment from indefinite to finite should be accounted for
as a change in an accounting estimate.
The asset should also be assessed for impairment in accordance with IAS 36
Impairment of Assets. Specifically, the entity must test the intangible asset for impairment
annually, and whenever there is an indication that the asset may be impaired. The asset is
tested by comparing its recoverable amount with its carrying amount.
The loan will be classified as current as the breach occurred prior to the end of the reporting period and X Ltd
did not have an unconditional right to defer settlement of the liability for at least twelve months after the
reporting period. The date the breach is reported is irrelevant for this analysis.
Development costs are capitalised only after technical and commercial feasibility of the
asset for sale or use have been established. This means that the entity must intend and
be able to complete the intangible asset and either use it or sell it and be able to
demonstrate how the asset will generate future economic benefits, in keeping with the
recognition criteria.
If an entity cannot distinguish the research phase from the development phase of an
internal project to create an intangible asset, the entity treats the expenditure for that
project as if it were incurred in the research phase only.
The price which an entity pays to acquire an intangible asset reflects its expectations
about the probability that the expected future economic benefits in the asset will flow to
the entity.

IAS 40 Investment Property

IAS 40 Investment Property applies to the accounting for property (land and/or buildings)
held to earn rentals or for capital appreciation or both. Examples of investment
property given in the standard include, but are not limited to:
(i) Land held for long-term capital appreciation
(ii) Land held for undetermined future use
Assets which IAS 40 states are not investment property, and which are therefore not
covered by the standard include:
(i) Property held for use in the production or supply of goods or services or for
administrative purposes
(ii) Property held for sale in the ordinary course of business or in the process of
construction of development for such sale
Owner-occupied property, property being constructed on behalf of third parties
and property leased to a third party under a finance lease are also specifically excluded
by the IAS 40 definition.

IAS 40 Investment Property allows two methods for valuing investment property: the fair value model and the
cost model. If the fair value method is adopted, then the investment property must be valued in accordance
with IFRS
Measurement. 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.
Fair value is a market-based measurement rather than specific to the entity, so a company is not allowed to
choose its own way of measuring fair value. Valuation
techniques must be those which are appropriate and for which sufficient data are available. Entities should
maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The standard
establishes a hierarchy for the inputs that valuation techniques use to measure fair value.
Level 1 Quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly
Level 3 Unobservable inputs for the asset or liability
Although the directors claim that 'new-build value less obsolescence' is accepted by the industry, it may not
be in accordance with IFRS 13. As investment property is often unique and not traded on a regular basis, fair
value measurements are likely to be categorised as Level 2 or Level 3 valuations.
IFRS 13 mentions three valuation techniques: the market approach, the income approach and the cost
approach. A market or income approach would usually be more appropriate for an investment property than
a cost approach. The 'new-build value less obsolescence' (cost approach) does not take account of the Level 2
inputs such as sales
value (market approach) and market rent (income approach). Nor does it take account
of reliable estimates of future discounted cash flows, or values of similar properties.

IAS 40 Investment Property states that the cost of an investment property comprises its
purchase price and any directly attributable expenditure, such as professional fees for legal
services.

IAS 40 Investment Property permits entities to choose between a fair value model and a cost
model. One method must be adopted for all of an entity's investment property. A change is
permitted only if this results in a more appropriate presentation. IAS 40 notes that this makes it
highly unlikely for a change from a fair value model to a cost model to occur. Transfers to or
from investment property should only be made when there is a change in use, which is
evidenced by the end of owner-occupation, which has occurred in this case. For a transfer
from owner-occupied property to investment property carried at fair value, IAS 16 Property,
Plant and Equipment (PPE) should be applied up to the date of reclassification. Any difference
arising between the carrying amount under IAS 16 at that date and the fair value is dealt with
as a revaluation under IAS 16.

The IFRS for SMEs has simplifications that reflect the needs of users of SMEs' financial
statements and cost-benefit considerations. It is designed to facilitate financial reporting by
small and medium-sized entities in a number of ways:
(i) It provides significantly less guidance than full IFRS. A great deal of the guidance in
full IFRS would not be relevant to the needs of smaller entities.
(ii) Many of the principles for recognising and measuring assets, liabilities, income and
expenses in full IFRSs are simplified. For example, goodwill and intangibles are
always amortised over their estimated useful life (or ten years if it cannot be estimated).
Research and development costs must be expensed. With defined benefit pension
plans, all actuarial gains and losses are to be recognised immediately in other
comprehensive income. All past service costs are to be recognised immediately in profit
or loss. To measure the defined benefit obligation, the projected unit credit method must
be used.
(iii) Where full IFRSs allow accounting policy choices, the IFRS for SMEs allows only the
easier option. Examples of alternatives not allowed in the IFRS for SMEs include:
revaluation model for intangible assets and property, plant and equipment,
proportionate consolidation for investments in jointly-controlled entities and choice
between cost and fair value models for investment property (measurement depends on
the circumstances).
(iv) Topics not relevant to SMEs are omitted: earnings per share, interim financial
reporting, segment reporting, insurance and assets held for sale.
(v) Significantly fewer disclosures are required.
(vi) The standard has been written in clear language that can easily be translated.
The above represents a considerable reduction in reporting requirements – perhaps as
much as 90% – compared with listed entities. Entities will naturally wish to use the IFRS
for SMEs if they can, but its use is restricted.
The restrictions are not related to size. There are several disadvantages of basing
the definition on size limits alone. Size limits are arbitrary and different limits are
likely to be appropriate in different countries. Most people believe that SMEs
are not simply smaller versions of listed entities, but differ from them in more
fundamental ways.
The most important way in which SMEs differ from other entities is that they are not
usually publicly accountable. Accordingly, there are no quantitative
thresholds for qualification as a SME; instead, the scope of the IFRS is determined by
a test of public accountability. The IFRS is suitable for all entities except those
whose securities are publicly traded and financial institutions such as banks and
insurance companies.
Another way in which the use of the IFRS for SMEs is restricted is that users cannot
cherry pick from this IFRS and full IFRS. If an entity adopts the IFRS for SMEs, it must
adopt it in its entirety.

IFRS 3 Business Combinations allows an entity to adopt the full or partial goodwill
method in its consolidated financial statements. The IFRS for SMEs only allows the
partial goodwill method. This avoids the need for SMEs to determine the fair value
of the non-controlling interests not purchased when undertaking a business combination.
In addition, IFRS 3 requires goodwill to be tested annually for impairment. The IFRS for
SMEs requires goodwill to be amortised instead. This is a much simpler
approach and the IFRS for SMEs specifies that if an entity is unable to make a reliable
estimate of the useful life, it is presumed to be ten years, simplifying things even further.

The IFRS for SMEs requires all internally generated research and development
expenditure to be expensed through profit or loss. This is simpler than full IFRS –
IAS 38 Intangible Assets requires internally generated assets to be capitalised if certain
criteria (proving future economic benefits) are met, and it is often difficult to determine
whether or not they have been met.

nvestment properties must be held at fair value through profit or loss under the IFRS for
SMEs where their fair value can be measured without undue cost or effort,

IAS 36 Impairment of Assets requires annual impairment tests for indefinite life
intangibles, intangibles not yet available for use and goodwill. This is a complex, timeconsuming
and expensive test.
The IFRS for SMEs only requires impairment tests where there are indicators of
impairment. In the case of Whitebirk's intangible, there are no indicators of impairment,
and so an impairment test is not required.
In addition, IAS 38 Intangible Assets does not require intangible assets with an
indefinite useful life to be amortised. In contrast, under the IFRS for SMEs, all intangible
assets must be amortised. If the useful life cannot be established reliably, it must not
exceed ten years.

IAS 41 Agriculture. IAS 41 states that a

biological asset should be measured at fair value less estimated point of sale costs unless
its fair value cannot be measured reliably. Gains and losses arising from a change in fair value
should be included in profit or loss for the period.
In this case, fair value is based on market price and point of sale costs are the costs of transporting
the cattle to the market. Cattle in the Ham and Shire regions is valued on this basis.
IAS 41 encourages companies to analyse the change in fair value between the movement due
to physical changes and the movement due to price changes (see the table below). It also
encourages companies to provide a quantified description of each group of biological assets.
Therefore the value of the cows and the value of the heifers should be disclosed separately in the
statement of financial position.
Valuing the dairy herd for the Dale Region is less straightforward as its fair value cannot be
measured reliably at the date of purchase. In this situation IAS 41 requires the herd to be
valued at cost less any impairment losses. The standard also requires companies to provide
an explanation of why fair value cannot be measured reliably and the range of estimates
within which fair value is likely to fall.

Alternative performance measures (APMs) report information that is not included on the face of
the financial statements. Companies often adjust reported financial information in order to
provide helpful additional information for the users of financial statements, telling a clearer
story of how the business has performed over the period. They allow the directors of a
company more freedom and flexibility to report performance measures that are important to
them.
Residual income is one type of APM. Residual income is an entity valuation method that
accounts for the cost of equity capital. Performance of the subsidiaries should be measured, in
the interests of the group's shareholders, in such a way as to indicate what sort of return each
subsidiary is making on the shareholder's investment. Shareholders themselves are likely to be
interested in the performance of the group as a whole, measured in terms of return on
shareholders' capital, earnings per share, dividend yield, and growth in earnings and
dividends. These performance ratios cannot be used for subsidiaries in the group, and so an
alternative measure has to be selected, which compares the return from the subsidiary with the
value of the investment in the subsidiary.
Residual income would provide a suitable indication of performance from the point of view of
the group's shareholders. This could be calculated as:
Profit after debt interest
Minus A notional interest charge on the value of assets financed by shareholders' capital
Equals Residual income
Alternatively, residual income might be measured as:
Profit before interest (controllable by the subsidiary's management)
Minus A notional interest charge on the controllable investments of the subsidiary
Equals Residual income
Each subsidiary would be able to increase its residual income if it earned an incremental profit
in excess of the notional interest charges on its incremental investments – ie in effect, if it
added to the value of the group's equity.
Integrated reporting is designed to convey a wider message on organisational
performance, covering all of an entity's resources and how it uses these 'capitals'
to create value over the short-, medium- and long-term, not only its financial resources.
Benefits of integrated reporting
Integrated reporting will provide stakeholders with valuable information which would
not be immediately accessible from an entity's financial statements.
Financial statements are based on historical information and may lack predictive
value. They are essential in corporate reporting, particularly for compliance purposes but do
not provide meaningful information regarding business value.
The primary purpose of an integrated report is to explain to providers of capital
how the organisation generates value over time. This is summarised through an
examination of the key activities and outputs of the organisation whether they be financial,
manufactured, intellectual, human, social or natural.
An integrated report seeks to examine the external environment which the entity
operates within and to provide an insight into the entity's resources and relationships to
generate value. It is principles based and should be driven by materiality, including
 how and to what extent the entity understands and responds to the needs of its stakeholders.
This would include an analysis of how the entity has performed within its business
environment, together with a description of prospects and challenges for the future.
It is this strategic direction which is lacking from a traditional set of financial statements and
will be invaluable to stakeholders to make a more informed assessment of the organisation
and its prospects.
Problems with integrated reporting
An integrated reporting system would increase disclosure as well as imposing additional
time and cost constraints on the reporting entity. It may require changes to IT systems in
order to capture the data, as well as the initial use of an external consultancy to design the
report.

The <IR> Framework establishes principles and concepts which govern the overall
content of an integrated report. This enables each company to set out its own integrated
report rather than adopting a checklist approach.
The integrated report aims to provide an insight into the company's resources and
relationships (known as capitals) and how the company interacts with the external
environment and the capitals to create value. These capitals can be financial,
manufactured, intellectual, human, social and relationship, and natural capital but
companies need not adopt these classifications.
Integrated reporting is built around the following key components:
(1) Organisational overview and the external environment under which it operates
(2) Governance structure and how this supports its ability to create value
(3) Business model
(4) Risks and opportunities and how they are dealing with them and how they affect
the company's ability to create value
(5) Strategy and resource allocation
(6) Performance and achievement of strategic objectives for the period and outcomes
(7) Outlook and challenges facing the company and their implications
(8) The basis of presentation needs to be determined including what matters are to
be included in the integrated report and how the elements are quantified or
evaluated
An integrated report should provide insight into the nature and quality of the
organisation's relationships with its key stakeholders, including how and to
what extent the organisation understands, takes into account and responds to their
needs and interests. The report should be consistent over time to enable comparison
with other entities.
Direct method
The direct method of preparing cash flow statements reports cash flows from operating
activities as major classes of gross cash receipts and gross cash payments. It
shows the items that affected cash flow and the size of those cash flows. Cash received from,
and cash paid to, specific sources such as customers, suppliers and employees are presented
separately. This contrasts with the indirect method, where accruals-basis net profit/(loss) before
tax is converted to cash flow information by means of add-backs and deductions.
An important advantage of the direct method is that it is easier for the users to understand
as they can see and understand the actual cash flows, and how they relate to items of
income or expense. For example, payments of expenses are shown as cash disbursements and
are deducted from cash receipts. In this way, the user is able to recognise the cash
receipts and payments for the period.
From the point of view of the user, the direct method is preferable because it discloses
information not available elsewhere in the financial statements, which could be of use in
estimating future cash flow.
However, where the user is an investor, the direct method may reduce shareholder returns
because preparation of the direct method is typically more time-consuming and
expensive than the indirect method due to the extra workings required to ascertain gross
cash receipts and payments relating to operating activities.
Indirect method
The indirect method involves adjusting the net profit or loss for the period for:
(1) Changes during the period in inventories, operating receivables and payables
(2) Non-cash items, eg depreciation, movements in provisions, deferred taxes and
unrealised foreign currency gains and losses
(3) Other items, the cash flows from which should be classified under investing or financing
activities, eg profits or losses on sales of assets, investment income
From the point of view of the preparer of accounts, the indirect method is easier to
use, and nearly all companies use it in practice. The main argument companies have
for using the indirect method is that the direct method is too costly. The indirect
method is cheaper for the company to prepare and will result in higher shareholder
returns.
The disadvantage of the indirect method is that users find it difficult to understand
and it is therefore more open to manipulation. This is particularly true with regard to
classification of cash flows. Companies may wish to classify cash inflows as operating cash
flows and cash outflows as non-operating cash flows.
Practice Statement 2 Making Materiality Judgements confirms that disclosure does not need to be
made, even when prescribed by an IFRS, if the resulting information presented is not material. However, as with
other disclosures, they only need to be made if the information provided is
material. Related party transactions may be of a relatively small size and therefore considered
not material from a quantitative perspective. However, Practice Statement 2 considers the
fact that the transaction is with a related party to be a qualitative factor. A qualitative
factor reduces the threshold for assessing whether something is material from a quantitative
perspective.

Key points
Financial statements are not intended to satisfy the information needs of all
users, but should provide financial information that is useful to primary users
(potential and existing investors, lenders and other creditors) in making decisions
about providing resources to the entity.
If the information provided by a disclosure is not material, the entity does
not need to make that disclosure.
Materiality should be assessed from a qualitative perspective as well as a
quantitative perspective. Practice Statement 2 recommends starting from the
quantitative perspective and then applying qualitative factors to further assess
immaterial items. The presence of a qualitative factor lowers the quantitative
threshold for assessing materiality.
Practice Statement 2 contains a four step process to help entities make materiality
judgements: identify, assess, organise and review.

Defined contribution plans and defined benefit plans

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, ie 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. Joydan, 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.
(ii) Accounting treatment: B scheme
No assets or liabilities will be recognised for this defined contribution scheme,
other than current liabilities to reflect amounts due to be paid to the pension scheme at
year end. The contributions paid by the company of $10 million will be charged to
profit or loss. The contributions paid by the employees will not be a cost to the
company but will be adjusted in calculating employee's net salary.

Reclassification adjustments
Reclassification adjustments are amounts reclassified to profit or loss in the
current period which were recognised in OCI in the current or previous
periods.
Items which may be reclassified include foreign currency gains on the disposal of a
foreign operation and realised gains or losses on cash flow hedges.
Items which may not be reclassified are changes in a revaluation surplus under IAS 16
Property, Plant and Equipment, and actuarial gains and losses on a defined benefit plan
under IAS 19 Employee Benefits.
However, the notion of reclassification and when or which OCI items should be
reclassified is not clear. The revised Conceptual Framework (2018) states that in
principle, OCI is recycled to profit or loss in a future period when doing so results in the
provision of more relevant information or a more faithful representation. While
providing more guidance than the previous Conceptual Framework, the conceptual
basis for when OCI should be reclassified is not clear.
Arguments for and against reclassification
It is argued that reclassification protects the integrity of profit or loss and provides
users with relevant information about a transaction which occurred in
the period. Additionally, it can improve comparability where IFRSs permits
similar items to be recognised in either profit or loss or OCI.
Those against reclassification argue that the recycled amounts add to the
complexity of financial reporting, may lead to earnings management and the
reclassification adjustments may not meet the definitions of income or expense in the
period as the change in the asset or liability may have occurred in a previous period.

Tax base
The tax base of an asset is the tax deduction which will be available in future
when the asset generates taxable economic benefits, which will flow to the
entity when the asset is recovered. If the future economic benefits will not be taxable,
the tax base of an asset is its carrying amount.
The tax base of a liability is its carrying amount, less the tax deduction which will be
available when the liability is settled in future periods. For revenue received in advance
(or deferred income), the tax base is its carrying amount, less any amount of
the revenue which will not be taxable in future periods.
(ii) Temporary differences
Temporary differences occur when items of revenue or expense are included in both
accounting profits and taxable profits, but not for the same accounting period.
A taxable temporary difference arises when the carrying amount of an asset
exceeds its tax base or the carrying amount of a liability is less than its tax base. All
taxable temporary differences give rise to a deferred tax liability.
A deductible temporary difference arises in the reverse circumstance (when the
carrying amount of an asset is less than its tax base or the carrying amount of a liability
is greater than its tax base). All deductible temporary differences give rise to a deferred
tax asset.

Intra-group sale
Pins has made a profit of $2 million on its sale to Panel. Tax is payable on the
profits of individual companies. Pins is liable for tax on this profit in the current
year and will have provided for the related tax in its individual financial statements.
However, from the viewpoint of the group the profit will not be realised
until the following year, when the goods are sold to a third party and must be
eliminated from the consolidated financial statements. Because the group pays tax
before the profit is realised there is a temporary difference of $2 million
and a deferred tax asset of $600,000 (30% $2 million).
 Translation of Tyslar's SOFP

In order to covert Tyslar's statement of financial position appropriately in preparation for

consolidation into Bubble's financial statements, the assets and liabilities shown in

the foreign operation's statement of financial position are translated at the closing

rate at the year end, being 9.5 dinars to the dollar as at 31 October 20X5, regardless

of the date on which those items originated. For consolidation purposes, a subsidiary's

share capital and any reserves balances at acquisition are translated at the

historic rate at the date of acquisition (being 8 dinars to the dollar on

1 November 20X4 when Bubble acquired its interest).

The post-acquisition movements in retained earnings are broken down into the

profit and dividend for each year post-acquisition (here just one year – the year ended

31 October 20X5). The profit for each post-acquisition year is translated at actual rate

or average rate for that year if it is a close approximation. Dividends are translated

at the actual rate. Tyslar did not pay a dividend in the current year.

The balancing figure on translating the statement of financial position represents the

exchange difference on translating the foreign subsidiary's net assets. A further

exchange difference arises on goodwill because it is treated as an asset of the

subsidiary and is therefore retranslated at the closing rate each year end. The exchange difference for the year is
reported in other comprehensive income

in the consolidated statement of profit or loss and other comprehensive income. The

group share of cumulative exchange differences are recorded in the

translation reserve and the non-controlling interests' (NCI) share is recorded in the

NCI working.
The translated assets and liabilities must then be aggregated with Tyslar's

assets and liabilities in the consolidated statement of financial position on a line by line

basis.