Summary Presentation on IFRS

Presentation on International Financial
Reporting Standards (IFRS)
By: Pradeep Neupane
Chartered Accountant, ICAI
Diploma in IFRS, ACCA
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2
S. No. PARTICULARS SLIDE No.
1 INTRODUCTION OF BASIC ELEMENTS OF FINANCIAL STATEMENTS 3
2 IFRS 13: FAIR VALUE MEASUREMENT 4
3 IAS 1: PRESENTATION OF FINANCIAL STATEMENTS 7
4 IAS 2: INVENTORIES 9
5 IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 11
6 IAS 10: EVENTS AFTER THE REPORTING PERIOD 13
7 IAS 12: INCOME TAXES 16
8 IAS 16: PROPERTY, PLANT AND EQUIPMENT 23
9 IAS 19: EMPLOYEE BENEFITS 25
10 IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF GOVERNMENT ASSISTANCE 28
11 IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES 30
12 IAS 23: BORROWING COSTS 31
13 IAS 24: RELATED PARTY DISCLOSURES 33
14 IAS 33: EARNINGS PER SHARE 36
15 IAS 36: IMPAIRMENT OF ASSETS 38
16 IAS 37: PROVISIONS, CONTINGENT LIABILITES & CONTINGENT ASSETS 40
17 IAS 38: INTANGIBLE ASSETS 43
18 IAS 40: INVESTMENT PROPERTY 46
19 IAS 41: AGRICULTURE 47
20 IFRS 1: FIRST TIME ADOPTION OF IFRS 48
21 IFRS 2: SHARE BASED PAYMENT 50
22 IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS 54
23 IFRS 6: EXPLORATION FOR & EVALUATION OF MINERAL RESOURCES 58
24 IFRS 8: OPERATING SEGMENTS 59
25 IFRS 9: FINANCIAL INSTRUMENTS 63
26 IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS 71
27 IFRS 16: LEASES 74
28 CONSOLIDATED FINANCIAL STATEMENTS 80
IndexofContents:

INTRODUCTION OF BASIC ELEMENTS OF FINANCIAL STATEMENTS
ASSETS LIABILITIES EQUITY INCOME EXPENSES
➢ A resource controlled
by the entity as a
result of past events
➢ from which future
economic benefits
are expected to flow.
➢ For Example:
Although a skilled
workforce is a
resource, an entity
will not have
sufficient control
over the future
economic benefits of
it to recognize it as
an asset.
➢ Present obligation of
the entity arising from
past events,
➢ settlement of which is
expected to result in
➢ an outflow of
resources embodying
economic benefits
➢ For Example:
Proposed dividend,
future repairs &
maintenance costs,
etc. are not the
liabilities as there is no
present obligation
➢ is the residual interest
in the assets after
deducting liabilities.
➢ Increase in economic
benefits during the
accounting period
➢ in the form of inflows
(or enhancements) of
assets or decrease in
liabilities
➢ that result in increase
in equity other than
those relating to
contributions from
equity participants.
➢ Decrease in economic
benefits during the
accounting period in
the form of
➢ outflows (or
depletions) of assets
or incurrences of
liabilities
➢ that result in decrease
in equity other than
those relating to
distributions to equity
participants.
3

IFRS 13: FAIR VALUE MEASUREMENT (1/3)
INTRODUCTION
➢ Since most of the accounting standards rely on the fair value of assets and liabilities, so, lets have a discussion on IFRS 13 on the top of all.
➢ Fair Value is the price that would be received on sale of an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date.
➢ Please note that the definition of fair value is based on an exit price (sell-side perspective) rather than an entry price (buy side perspective)
➢ When measuring fair value, all the characteristics of the asset or liability that a market participant would take into account should be reflected
in the valuation. This could include the condition or location of the asset and any restrictions on the use of the asset.
➢ Further, it is to be noted that the definition is market-based and is not entity specific
➢ Fair Value includes transport costs, but excludes transaction costs because transaction costs are not the characteristics of the specific asset or
liability.
➢ Hence transaction costs are ignored because they are a cost of entering into the transaction rather than a cost specific to the item being
measured. Any transaction costs are generally expensed as incurred.
➢ Transport costs are reflected in fair value because they change the characteristics of the item (i.e. location)
➢ Fair Value Measurement assumes that the transaction to sell the asset or transfer the liability takes place in the principal market for the asset
or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. Unless proven otherwise, the
principal market place will be presumed to be the one that the entity transacts it on a regular basis.
➢ Principal Market is the market with the greatest volume and level of activity.
➢ Most Advantageous Market is the market that maximizes the amount receivable (from selling the asset) or minimize the amount payable (to
settle the liability), after taking account of both transaction as well as transport cost (A point to be note here is that the transaction cost is to
be excluded in determining the fair value but to determine the most advantageous market, this is to be included)
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VALUATION TECHNIQUES
Three common techniques for estimating an exit price in an orderly transaction are considered below:
1. Market Approach: This approach uses prices and other information generated in a market place that involve identical or comparable assets or
liabilities
2. Cost Approach: This approach reflects the amount that would be required to replace the service capacity of the asset (current replacement
cost)
3. Income Approach: This approach considers future cash flows and discounts those cash flows to a present value. Mode that follow an income
approach include Present Value and Option Pricing Models such as Black Scholes Model
While measuring fair value, the entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs. Based
on it, IFRS 13 has categorized the fair value measurement into a three-level hierarchy, based on the type of inputs to the valuation techniques
(market, cost & income) used. So, the hierarchy (order) of inputs are:
1. Level 1 inputs: These are quoted prices in active markets for identical assets or liabilities at the measurement date. An example of this would
be prices quoted on a stock exchange. Active markets are the ones where transactions take place with sufficient frequency and volume for
pricing information to be provided.
2. Level 2 inputs: These are the inputs other than the quoted prices (as determined in level 1) that are directly or indirectly observable for that
asset or liability. These would include prices for similar, but not identical, assets or liabilities that will then be adjusted to reflect the factors
specific to the measured asset or liability. Adjustments may be needed to level 2 inputs and, if this adjustment is significant, then it may
require the fair value to be classified as level 3.
3. Level 3 inputs: These are unobservable inputs for the asset or liability. These inputs should only be used when it is not possible to use level 1
or 2 inputs. This situation may occur where relevant inputs are not observable and therefore the level 3 inputs must be developed to reflect
the assumptions that market participants would use when determining an appropriate price for the asset or liability. For example, cash flow
forecasts may be used to value an entity that is not listed.
Level 1 inputs should be used wherever possible; the use of level 3 inputs should be kept to a minimum
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FAIR VALUE MEASUREMENT FOR NON-FINANCIAL ASSETS
➢ For non-financial assets (e.g. investment property), fair value is determined based on the highest and best use of the asset as determined by a
market participant.
➢ Highest and best use is a valuation concept that considers how market participants would use a non-financial asset to maximize its benefit or
value.
➢ In determining the highest and best use of a non-financial asset, IFRS 13 indicates that all uses that are physically possible, legally permissible
and financially feasible should be considered.
➢ Further, if an entity uses the non-financial assets on its own, but the best use by market participants would be ‘combined with other assets’
then the valuation would be based on using the asset in combination with others.
DISCLOSURE REQUIREMENTS
➢ Reason for using fair value
➢ Level of hierarchy used
➢ Description of techniques used for level 2 or 3 inputs
➢ For non-financial assets, the highest and best use if different to the entity’s use, and
➢ For level 3 inputs, a reconciliation of the opening and closing balances and any amounts included in profit or loss for the period
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IAS 1: PRESENTATION OF FINANCIAL STATEMENTS (1/2)
A complete set of financial statements include:
➢ Statement of Financial Position
➢ Statement of Profit or loss and Other Comprehensive Income
➢ Statement of Cash Flows
➢ Statement of Changes in Equity
➢ Significant accounting policies and other explanatory notes
➢ Statement of financial position as at the beginning of the earliest comparative period when “IAS 8: Accounting Policies, Changes in Accounting
Estimates and Errors” applies
The financial statements must “present fairly” the financial position, financial performance and cash flows of an entity.
OFFSETTING
Assets and liabilities, also income and expenses, cannot be offset except when required or permitted by an IFRS. For Example:
➢ Deferred Tax Asset/ Liability can be offset as per IAS 12
➢ IAS 20 permits offsetting of a capital grant against an asset as an alternative to setting up a deferred credit
➢ Expenditure related to a recognized provision that is reimbursed under a contractual arrangement with a third party may be netted against the
reimbursement: like, where a warranty provision on goods sold will be reimbursed by the supplier then the warranty provision can be netted by
reimbursement.
KEY TAKE AWAYS
➢ If an entity doesn’t have an unconditional right to defer settlement for at least 12 months after the reporting period, then such liability is
current; otherwise it is non-current.
➢ In Statement of Profit or loss, classification as ‘Extraordinary’ is prohibited.
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IAS 1: PRESENTATION OF FINANCIAL STATEMENTS (2/2)
OTHER COMPREHENSIVE INCOME (OCI)
OCI items are grouped as:
➢ Those items that will not be reclassified to profit or loss subsequently
➢ Those items that will be reclassified to profit or loss at a future point of time
Please find below an illustrative example:
P.S. The income tax relating to each component of OCI must be disclosed in the notes.
Year Ended 31 December 2019 2018
Items that will not be reclassified in profit or loss: XXX XXX
Gains of property revaluation XXX XXX
Actuarial gains (losses) on defined benefit pension plans XXX XXX
Investment in Equity Instruments XXX XXX
Share of OCI of Associates XXX XXX
Income Tax relating to items that will not be reclassified to profit or loss XXX XXX
XXX XXX
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations XXX XXX
Cash Flow hedges XXX XXX
Income Tax relating to items that may be reclassified to profit or loss XXX XXX
Other Comprehensive Income for the year XXX XXX
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IAS 2: INVENTORIES (1/2)
DEFINITION
Inventories include:
➢ assets held for sale in the ordinary course of business (Finished Goods)
➢ assets in the production process for sale in the ordinary course of business (Work In Process)
➢ materials and supplies that are consumed in production (Raw materials)
EXCLUSION OF CERTAIN INVENTORIES FROM THE SCOPE OF IAS 2
The followings are outside the scope of IAS 2:
➢ Financial instruments (IFRS 9)
➢ Biological assets (IAS 41:Agriculture)
Furthermore, IAS 2 does not apply to measurement of inventories held by:
i. Producers of agricultural and forest products, agricultural produce after harvest, and minerals and mineral products, to the extent that they are
measured at Net Realisable Value (“NRV”) in accordance with well-established practices in those industries.
ii. Commodity brokers and dealers who measure their inventories at Fair value less costs to sell.
Changes in the above inventory values (i&ii) are recognised in Profit or Loss in the period of the change. Please note that these two are excluded
only from the measurement requirement of this standard.
FUNDAMENTAL PRINCIPAL OF IAS 2
Inventories are measured at the lower of:
➢ Cost
➢ Net Realisable Value (NRV) i.e. (estimated selling price less estimated costs of completion and the estimated costs necessary to make the sale)
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IAS 2: INVENTORIES (2/2)
COST OF INVENTORIES
Cost include all :
➢ costs of purchase (including taxes, transport, and handling) net of trade discounts received
➢ costs of conversion (including fixed and variable manufacturing overheads)
➢ other costs incurred in bringing the inventories to their present location and condition
Borrowing costs (interest) could also be included in cost of inventory if it meets the definition of a qualifying asset in accordance with IAS 23:
Borrowing Costs..
COST FORMULAE
➢ If specific cost is not determinable for a particular inventory item, use FIFO or weighted average method.
➢ Use of LIFO is prohibited
➢ The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For groups of
inventories that have different characteristics, different cost formulas may be justified.
RECOGNITION AS AN EXPENSE
➢ When inventories are sold, the carrying amount of those inventories should be recognised as an expense in the period in which the related
revenue is recognised.
➢ Any write-down to NRV and any inventory losses are recognised as an expense when they occur.
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ACCOUNTING POLICIES
Accounting Policies are ‘specific principles, bases, conventions, rules and practices’ adopted in ‘preparing and presenting financial statements’.
Changes in Accounting Policy: A change in accounting policy occurs if ‘principles, bases, conventions, rules and/or practices’ applied in a previous
period are changed. For Example:
➢ Changing the presentation of PL items from nature of expenses method to the function of expense method
➢ Changing the cost formula for measurement of inventory from weighted average to FIFO method
Note: Adopting the revaluation model of IAS 16: ‘Property, Plant and Equipment’ where the cost model has been followed previously is another
example of change in accounting policy. However, it is accounted for as a revaluation under IAS 16 and not as a change in accounting policy
under IAS 8
If a new IFRS doesn’t have transitional provisions (if there is transitional provision in newly introduced IFRS then that transactional provision
applies), or the change in accounting policy is voluntary (if such change is due to the reason that it would result in financial statements providing
more relevant and reliable information), the change is applied RETROSPECTIVELY.
Retrospective Application: Retrospective Application means applying a new accounting policy to transactions, events and conditions as though
that policy had always/already been applied. The opening balance of each affected component of equity is adjusted for the earliest prior period
presented and the comparative amounts disclosed as if the new policy had always been applied. If it is not practicable to apply the effects of a
change in policy to prior periods, IAS 8 allows the change to be made from the earliest period for which retrospective application is practicable.
Prior Period Adjustment: A prior period adjustment is an adjustment to the reported income in the financial statements of an earlier reporting
period.
Although retained earnings are affected, income in the current period is not affected by the prior period adjustment.
The most common reasons for making prior period adjustments are- changes to accounting policy and material errors.
Note: Although this term ‘prior period adjustment’ is not defined in IFRS, it is widely used accounting term.
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IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND
ERRORS (1/2)

IAS 8: ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND
ERRORS (2/2)
CHANGE IN ACCOUNTING ESTIMATES
The effect of a change in estimate is recognized prospectively. A change in estimate is not an error or a change in accounting policy and therefore
doesn’t affect prior period financial statements.
For Example: Suraj buys a machine for Rs. 100,000. It has an estimated useful life of 10 years and the residual value is Nil. The annual
depreciation is therefore Rs.10,000, calculated as (100000-0)/10= Rs. 10,000. After 2 years, the asset has a carrying amount of Rs. 80,000.
Suraj reassesses the useful life of the machine as only 4 years remaining (i.e. this is a change in estimate). The annual depreciation charge from
3rd year onwards will be Rs. 20,000, calculated as (80000-0)/4= Rs. 20,000.
Other Examples of estimates are:
➢ Inventory measured at lower of cost or Net Realizable Value (NRV) but must provide for obsolescence
➢ A provision under IAS 37: Provisions, Contingent Liabilities and Contingent Assets
➢ Expected pattern of consumption, useful life of Non-Current Assets, etc.
Note: Under IFRS, reversals of provisions for items of expenditure MUST be set off against the relevant expense line item and shouldn’t be
accounted for as Income
ERRORS
The correction of prior period errors is accounted for retrospectively (i.e. same treatment as that of change in accounting policy).
Prior period errors are omissions from, and misstatements in, the financial statements for one or more prior periods arising from the failure to
use or misuse of, reliable information that – was available and could reasonably be expected to have been obtained, when those prior period
financial statements were authorized for issue.
Examples include:
➢ Mathematical mistakes
➢ Mistakes in applying accounting policies
➢ Misinterpretation of Facts
➢ Fraud
➢ Oversights 12

IAS 10: EVENTS AFTER THE REPORTING PERIOD (1/3)
Stat
RECOGNITION AND MEASUREMENT
I. Adjusting Events
➢ Adjusting Events are those that provide evidence of conditions existed at the end of the reporting period.
➢ Financial Statements must be adjusted for “adjusting events” after the end of the reporting period.
For Example: a) The settlement after the end of the reporting period of a court case that confirms the existence of a present obligation at the end
of the reporting period (mere disclosure is not suitable as settlement provides additional evidence regarding the obligation)
b) Bankruptcy of a customer which occurs after the end of the reporting period and confirms that a loss already existed at the end
of the reporting period on a trade receivable account
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Start of
the
reporting
period
End of
the
reporting
period
Financial
Statements
authorized to issue
by Management
Information
made public
Shareholder
Meeting
Events after the reporting period
COVERED by IAS 10
Events after the reporting period
NOT COVERED by IAS 10

II. Non-Adjusting Events
➢ Non-Adjusting Events are those that are indicative of conditions that arose after the end of the reporting period.
➢ Financial statements must not be adjusted for non-adjusting events after the reporting period.
➢ Non-Adjusting Events do not change amounts in the Statement of Financial Position but if sufficiently important, they are disclosed (nature of
the event and an estimate of its financial effect (or a statement that such an estimate cannot be made) must be disclosed)
➢ The following events after the end of the reporting period are examples of non-adjusting events that may be of such importance that non-
disclosure would affect the ability of the users of the financial statements to make proper evaluations and decisions:
• A major business combination
• The destruction of a major production plan by a fire
• Abnormally large changes in asset prices or foreign exchange rates, etc.
III. Going Concern
➢ Financial statements should not be prepared on a going concern basis if management determines, after the reporting period, that:
• It intends to liquidate the entity or to cease trading
• It has no realistic alternative but to do so
➢ Deterioration in operating results and financial position after the reporting period may indicate a need to consider whether the going concern
assumption is still appropriate.
➢ If the going concern assumption is no longer appropriate, the standard requires a fundamental change in the basis of accounting, rather than
an adjustment to the amounts recognised within the original basis of accounting
➢ The following disclosures are required by IAS 1 if the accounts are not prepared on the basis of going concern assumption:
• A note saying that the financial statements are not prepared on a going concern basis;
• Management is aware of material uncertainties related to events or conditions, which may cast significant doubt on the entity’s ability to
continue as a going concern
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IV. Dividends
➢ Dividends declared after the reporting period should not be recognised as a liability at the end of the reporting period
➢ IAS 1 requires disclosure of the amount of dividend proposed or declared after the reporting period, but before the financial statements were
authorized for issue
➢ Please note that dividends are often thought as a distribution of profit and historically have been accounted for in the period to which they
relate. However, they do not meet the IAS 37 criteria of present obligation and hence such dividends declared after reporting period should not
be recognised as a liability at the end of the reporting period.
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IAS 12: INCOME TAXES (1/7)
CURRENT TAX
➢ In the Statement of Financial Position, current tax for current and prior periods should be recognised as under:
• Tax Payable = Liability
• Tax paid but recoverable = Asset
➢ In the Statement of Profit or Loss- recognised unless the current tax relates to item outside profit or loss (i.e. either in Other Comprehensive
Income or in equity)
➢ Other Comprehensive Income/ Equity- recognised if relates to item either in Other Comprehensive Income or in Equity
DEFERRED TAX
Lets understand the concept of Deferred Tax through the below illustration:
An entity bought non-current asset on 1/1/2018 for Rs. 9000. This asset is to be depreciated on a straight line basis over 3 years. For tax
purpose, allowable depreciation is 4000,3000 & 2000 respectively for 2018,2019 & 2020….continued…
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Income Tax
Current Tax
{It is the amount of income
tax payable (recoverable) in
respect of the taxable profit
(tax loss) for a period}
Deferred Tax
{It simply recognises the
difference between when an
item is taxable and when it
is accounted for}

Continued.. Illustration..
Then,
Treatment of the above calculation in Books would be as under:
Note: Tax Base of an asset or liability is defined as the amount attributed to that asset or liability for tax purpose.
Deferred Tax No Deferred Tax
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As of
Carrying Amount
(As per books)
Tax Base
(As per Tax laws)
Temporary Difference
Tax @ 30%
(DTA/DTL to be made)
31/12/2018 6000 5000 1000 300 DTL
31/12/2019 3000 2000 1000 300 DTL
31/12/2020 - - - -
Year Deferred Tax Liability Profit or Loss
2018 300 Dr. 300
2019 300 -
2020 - Cr. 300
Differences in IFRS Book Value/Carrying Amount Vs Tax Base
Temporary Permanent
Taxable Temporary Differences:
- These are those temporary differences which are subject to tax
in future and hence Deferred Tax Liability (DTL) to be
recognised
- Taxable Temporary Differences arise when carrying amount of:
Asset > Tax Base “or” Liability < Tax Base
Deductible Temporary Differences:
- These are those temporary differences which are subject to
deduction from taxation profit in future and hence Deferred Tax
Asset (DTA) to be recognised
- Deductible Temporary Differences arise when carrying amount of:
Asset < Tax Base “or” Liability > Tax Base

SITUATION WHERE TEMPORARY DIFFERENCES MAY ARISE:
➢ When income or expense is included in accounting profit in one period but included in the taxable profit in a different period.
Some of the examples include:
1. Depreciation: Accounting depreciation doesn’t equal to tax allowable depreciation
2. Accruals Vs Cash: Items accounted for on an accrual basis but taxed on a cash basis
3. Marketable Securities: Accounted for at Fair Value but tax authority may only accept at historical cost
4. Allowance for doubtful Accounts: Allowance for tax purpose, if permitted, is generally different from the financial statement allowance
5. Business Combination: Cost of a business combination where the net assets are recognised at their fair values but the tax authorities do not
allow adjustment
RECOGNITION OF DEFERRED TAX LIABILITY (DTL)
➢ DTL should be recognised for all taxable temporary differences.
➢ Exceptions are liabilities arising from initial recognition of:
• Goodwill
• An asset/liability in a transaction which is not a business combination and does not affect accounting or taxable profit (i.e. affecting only the
statement of financial position)
RECOGNITION OF DEFERRED TAX ASSET (DTA)
➢ DTA should be recognised for deductible temporary differences to the extent that it is probable that taxable profit will be available (in future)
against which they can be utilized.
➢ Its exception is the asset arising from initial recognition of an asset/liability in a transaction which is not a business combination and does not
affect accounting or taxable profit (i.e. affecting only the statement of financial position)
Note: Deferred Tax Assets and Liabilities are NOT discounted.
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TAX RATES
➢ The tax rate that should be used for DTL & DTA is the rate that is expected to apply to the period when the asset is realized or the liability is
settled, based on tax rates that have been enacted by the end of the reporting period.
➢ Please note that tax rate which the government is expected to increase/decrease cannot be considered merely based on the expectation unless
it has been enacted.
RECOGNITION OF DEFERRED TAX OUTSIDE PROFIT OR LOSS
➢ If the tax relates to items that are recognised outside profit or loss, in the same or difference period, Deferred Tax should be recognised
outside profit or loss (i.e. charged or credited to Other Comprehensive Income (OCI) or directly to equity).
➢ For Example: In revaluation of an asset, the revaluation will be credited to OCI and the related deferred tax will also be debited to OCI i.e. say,
carrying amount before revaluation was 900 & now it is revalued to 1250 then 30% of (1250-900)= 105 is transferred to OCI as a deferred
tax.
➢ More examples include:
Other Comprehensive Income (OCI)
• Revaluation gain/loss
• Fair Value through OCI (IFRS 9)
• Foreign Exchange Differences on the translation of a foreign entity (IAS 21)
• Cash Flow Hedge (IFRS 9)
Equity
• Compound Financial Instruments (IFRS 9)
• Adjustment to the opening balance of retained earnings (IAS 8/ IFRS 1)
• Share Based Payments (IFRS 2)
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SUMMARY OF APPROACH IN IAS 12
1. Set out the carrying amounts of every assets and liabilities
2. Calculate the tax base for each asset and liability
3. Calculate the temporary difference by deducting the tax base from the carrying amount using the following proforma:
4. Calculate the DTL and DTA:
• DTL: Sum all positive temporary differences and apply the tax rate
• DTA: Sum all negative temporary differences and apply the tax rate
5. Calculate Net DTL or DTA by summing the deferred tax liability and asset (This will be the asset or liability carried in the Statement of
Financial Position). If it is not appropriate to offset the asset & liability, they should be shown separately
6. Calculate any amount, if any, to be recognised outside profit or loss (either on OCI or directly to equity)
7. Deduct the Opening Deferred Tax Liability or Asset to give the profit or loss charge/ credit as:
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Asset/Liability Carrying Amount Tax Base Temporary Difference
xxx xxx xxx xxx
Particulars Amount
Deferred Tax as at 1/1/2019 (Opening DTL/DTA) xxx
Add: Other Comprehensive Income (Above Pointer No. 6) xxx
Add: Profit or Loss (balancing figure) xxx
Deferred Tax as at 31/12/2019 (Above Pointer No. 5) xxx

DEFERRED TAX IN CASE OF BUSINESS COMBINATIONS
➢ Deferred Tax will be recognised on any fair value differences identified, as temporary differences may arise on the cost of business combination
where the net assets are recognised at their fair values but the tax authorities do not allow its adjustment. An Illustration is presented below
for better clarity:
Illustration 1: A parent company paid 600 crores for 100% subsidiary on 1/1/2019. Subsidiary had not accounted for deferred taxation up-to the
date of its acquisition. The tax rate is 40%. The following information is relevant in respect of Subsidiary:
Now lets look its calculation in Parent’s books:
➢ Note: Goodwill itself is also a temporary difference but IAS 12 prohibits the recognition of deferred tax on goodwill.
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Particulars Fair Value at Acquisition date Tax Base Temporary Differences
Property, Plant & Equipment 270 155 115
Accounts Receivable 210 210 -
Inventory 174 124 50
Retirement Benefit Obligations (30) - (30)
Accounts Payable (120) (120) -
504 135
Particulars Amount (crores)
Cost of Investment 600
Less: Fair Value of Net Assets Acquired:
- As per Subsidiary’s Statement of Financial Position 504
- Deferred Tax Liability arising in the Fair Value Exercise {135*40%} (54) (450)
Goodwill 150

➢ Retained Earnings of subsidiaries (similarly, branches, associates, joint arrangements as well) are included in Consolidated Retained Earnings,
but income taxes will be payable if the profits are distributed to the reporting parent. Hence, this also result in temporary difference.
Intra-Group Transactions:
➢ IFRS 10: Consolidated Financial Statements requires the elimination of unrealized profits/losses resulting from intra-group transactions Such
adjustments may give rise to temporary differences.
➢ But as far as the tax authorities are concerned, the tax base of an asset purchased from another member of the group will be the cost that the
buying company has paid for it. Also, the selling company will be taxed on the sale of an asset even if it is still held within the group.
For more clarity below is an illustration:
Subsidiary (S Ltd.) has sold inventory to Parent (P Ltd.) for 700 crores. The inventory cost of Subsidiary Was 600 crores initially. It therefore
made a profit of 100 crores on the transaction. So, it is liable to tax on this amount at say 30%. Thus Subsidiary will reflect a profit of 100 crores
and a tax expense of 30 crores in its own financial statements.
If Parent has not sold the inventory at the year-end, it will include it in its closing inventory figure at a Cost (to itself) of 700 crores.
On Consolidation, the unrealized profit must be removed by 100 crores (i.e. Dr. Profit or Loss & Cr. Inventory (Asset))
Hence, in consolidated financial statements, the inventory will be measured at 600 crores (700-100) but its tax base is still 700 crores. Hence,
there is deductible temporary difference of 100 crores.
This requires the recognition of Deferred Tax Asset of 30 crores (100*30%)
➢ Please note, on the aforementioned illustration, if Parent was operated in a different tax environment and was taxed at 40% then the deferred
tax asset would be 40 crores (100*40%) as deferred tax is provided for at the buyer’s tax rate. This is because the tax rate and the tax base
of the asset must be consistent.
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IAS 16: PROPERTY, PLANT AND EQUIPMENT (1/2)
RECOGNITION CRITERIA OF PROPERTY, PLANT AND EQUIPMENT (PPE)
An item of PPE is recognized only if:
i. It is probable that future economic benefits associated with it will flow to the entity; and
ii. Cost of the item can be measured reliably
Note: Remember, an item of PPE must meet the recognition criteria before it is measured.
MEASUREMENT OF PROPERTY, PLANT AND EQUIPMENT
➢ Accounting Policy: Either Cost Model or Revaluation Model can be used.
➢ However, the same policy must be applied to each entire class of PPE. Class includes land, buildings, factory plant, aircraft, vehicles, office
equipment, furniture and fittings, etc.
Cost Model
➢ The asset is carried at cost less accumulated depreciation and impairment
Revaluation Model
➢ The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided
that fair value can be measured reliably
➢ Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially
from its fair value at the reporting date.
➢ If a revaluation results in an increase in value, it should be credited to OCI and accumulated in equity under the heading "revaluation surplus“.
But if the increase in value represents ‘reversal of a revaluation decrease of the same asset previously recognised as an expense’, then it
should be recognised in Profit or Loss.
➢ A decrease arising as a result of a revaluation should firstly be adjusted with revaluation surplus previously credited ,if any, and then the
balance to be recognised as an expense.
➢ When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under
the heading revaluation surplus. The transfer to retained earnings should not be made through profit or loss.
23

IAS 16: PROPERTY, PLANT AND EQUIPMENT (2/2)
DEPRECIATION
➢ Depreciation method should reflect the pattern in which the asset’s economic benefits are consumed.
➢ Depreciation commences when an asset is available for use and continues until the asset is derecognized, even if it is idle.
Methods of Depreciation
➢ An entity can use Straight Line Method (SLM), Weighted Average Value (WDV) Method, Sum of Units, etc.
➢ The chosen method of depreciation should be reviewed periodically and if the pattern of consumption of benefits has changed, the depreciation
method should be changed prospectively.
(Note: Actually change in depreciation method is a change in accounting policy. But this change should be applied prospectively. So, this is an
exceptional to IAS 1 which provides for change in accounting policy to be applied retrospectively unless other IAS/IFRS provide for otherwise)
BEARER PLANTS
A bearer plant (which is solely used to grow produce e.g. apple trees, grapevines, etc.) is measured at accumulated cost until it begins to bear
fruit and is then depreciated over its remaining useful life. This is in accordance with the Matching Concept of accounting. So, it is accounted for
in a similar manner to a self-constructed asset i.e. all costs are capitalized until the asset is in use and once in use, those costs are depreciated.
EXCHANGE OF ASSETS
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value of Asset
Received (first preference) unless:
➢ the exchange transaction lacks commercial substance, or
➢ the fair value of neither the asset received nor the asset given up is reliably measurable.
If the acquired asset is not measured at fair value, its cost is to be measured at the carrying amount of the asset given up.
24

IAS 19: EMPLOYEE BENEFITS (1/3)
SHORT TERM EMPLOYEE BENEFITS
➢ Those employee benefits which are expected to be settled within 12 months after the end of the reporting period
➢ The entity should recognise the amount of short term employee benefits expected to be paid in exchange for the service rendered by the
employee on accrual basis and without discounting.
TERMINATION BENEFITS
➢ A termination benefit to be settled wholly within 12 months after the end of the reporting period is treated as for ‘Short Term Benefit’
➢ Otherwise it is treated as for a Long-Term Benefit (i.e. with re-measurement at the end of each reporting period)
POST EMPLOYMENT BENEFITS
This covers Defined Contribution Plan and Defined Benefit Plans.
Defined Contribution Plan
These are those under which an entity:
➢ Pays fixed contributions into a separate plan; and
➢ Entity has no legal or constructive obligation to pay further contributions if the plan doesn’t have sufficient assets to meet benefits for service
in current & prior periods.
Its accounting treatment is straight forward as the entity’s obligation for each period is determined by the amount to be contributed for that
period.
Defined Benefit Plan
➢ In simple word, this is other than Defined Contribution plan. This plan requires actuarial valuation.
➢ Lets discuss this plan with an illustration on the next slide:
25

Illustration of Defined Benefit Plan
An entity provides a defined benefit pension scheme for its employees. The following information relates to the balances on the fund’s assets and
liabilities at the beginning and end of the year ending 31 December, 2019:
Present value of benefit obligation : 1270 lacs in Jan 1 and 1450 lacs in Dec 31
Fair Value of Plan Assets : 1025 lacs in Jan 1 and 1130 lacs in Dec 31
Service Cost for the year : 70 lacs
Contributions to the plan : 100 lacs
Benefits paid : Nil
Discount rate : 3%
Solution:
Remeasurements
Hence, 77.35 lacs rupees (70+7.35) is to be transferred to profit or loss and 97.65 lacs rupees to Other Comprehensive Income.
Moreover, Closing net defined liability of 320 lacs (1450-1130) shall form a part in Statement of Financial Position.
Please note that benefits paid decreases liability as well as plan assets hence there is NIL effect in remeasurements.
26
Particulars Amount in lacs
Opening Net Liability {1270-1025} 245
Less: Contributions Paid (100)
Add: Current Service Cost 70
Add: Finance Cost on opening net liability {245*3%} 7.35
Actuarial Loss {balancing figure} 97.65
Closing Net Liability {1450-1130} 320

ACTUARIAL VALUATION METHOD
Actuarial Valuation Method should be ‘Projected Unit Credit’ method to determine:
➢ Present Value of its defined benefit obligations
➢ Related current service costs
➢ Past service costs (where applicable)
Under this method, each period of service gives rise to an additional unit of benefit entitlement and measures each unit separately to build up the
final obligation.
DISCOUNT RATE
➢ Should be determined by reference to market yields on High Quality Corporate Bonds at the end of the reporting period (i.e. AAA rated)
➢ In countries where there is no ‘deep’ market in such bonds, the market yields on government bonds should be used.
27

IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE (1/2)
RECOGNITION CRITERIA
Government grants should not be recognized until there is ‘reasonable assurance’ that :
➢ the conditions attaching to them will be complied with; and
➢ the grants will be received
GRANTS RELATED TO ASSETS
➢ The grant can be treated either as Deferred Income or as a reduction in the carrying amount of the asset
GRANTS RELATED TO INCOME
➢ Credit separately under the head Other Income or deduct in related expense
REFUND / REPAYMENT OF GOVERNEMENT GRANTS
➢ It needs to be accounted for as ‘Change in Accounting Estimate’.
Refund related to Asset:
➢ Increase carrying amount of asset or reduce deferred income balance by the amount repayable
➢ Recognise the cumulative additional depreciation (that would have been recognized in the absence of the grant) immediately as an expense.
Refund related to Income:
➢ Apply first against any unamortised deferred credit
➢ Recognise any excess amount immediately as an expense in profit or loss
28

IAS 20: ACCOUNTING FOR GOVERNMENT GRANTS AND DISCLOSURE OF
GOVERNMENT ASSISTANCE (2/2)
LOANS AT NIL OR LOW INTEREST RATES
Government Loans with a below market rate of interest are a form of government assistance.
Please find below an illustration for ease of understanding:
An entity operates in an area where government provides interest-free loans to aid investment. On 1/1/2019, it received an interest free loan of
NPR 5 crores for investment in new agricultural projects. The loan is repayable on 31/12/2022.
The fair value of the loan has been calculated to be NPR 4.04 crores using an effective interest rate of 5.5%.
➢ In this case; the accounting entry on receipt of loan is: Dr. Cash 5 crores
Cr. Loan 4.04 crores
Cr. Government Grant (Deferred Income) 0.96 crores
➢ The entity will charge annual interest to Profit or Loss with a Matching Credit to profit or loss of the deferred income. The total interest for the
period of the loan will be NPR 0.96 crores (i.e. in Year 1: 4.04*5.5%= 0.22 crore is to be debited to Interest Expense and to be credited to
Deferred Income of Profit or loss and consecutively, NPR 0.23,0.25,0.26 crores in the Year 2,3 & 4 respectively)
➢ On repayment of loan:
Dr. Loan 4.04 crores
Dr. Government Grant (Deferred Income) 0.96 crores
Cr. Cash 5 crores
29

IAS 21: THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (1/1)
FOREIGN CURRENCY TRANSACTIONS
➢ Initially recorded at exchange rate at the date of transaction (averages are permitted if they approximate to actual i.e. if no significant
fluctuations)
➢ At each subsequent reporting date, report:
• Monetary items at the closing rate
• Non-monetary items at historical cost at the date of transaction
• Non-monetary items at fair value at the rate when fair value was determined
➢ Exchange differences arising when monetary items are settled or translated at different rates are reported in profit or loss
➢ If a gain or loss on a non-monetary item is recognised in Other Comprehensive Income (OCI) (E.g. property revaluation under IAS 16), any
foreign exchange element of that gain or loss is also recognised in OCI.
Note: Monetary Items are the money held and assets & liabilities to be received or paid in fixed or determinable number of units of currency i.e.
Payable/Receivable in Fixed Amount in foreign currency
FOREIGN OPERATIONS
➢ It refers to a subsidiary, associate, joint venture, or branch whose activities are based in a country or currency other than that of the reporting
entity
➢ Following translation rules are applied for conversion:
• Assets and Liabilities: Closing rate
• Income and Expenses: Exchange rates at the date of transactions
➢ All resulting exchange differences are recognised in OCI.
30

IAS 23: BORROWING COSTS (1/2)
➢ If borrowing cost is incurred for acquisition, construction or development of Qualifying Asset, it should be capitalized with the qualifying asset.
➢ Otherwise, it will be transferred to profit or loss (as an expense item).
QUALIFYING ASSET
➢ is an asset which takes substantial period of time to get ready for its intended use or sale.
➢ Substantial period of time is generally 12 months or more
➢ This could be property, plant, and equipment and investment property during the construction period, intangible assets during the
development period, or "made-to-order" inventories.
AMOUNT TO BE CAPITALISED
1) Specific Borrowings
➢ If the borrowing is for the qualifying asset (i.e. specific borrowing), capitalize the actual cost incurred less any income earned on temporary
investment of such borrowings
2) General Borrowings
➢ Where funds are part of a general pool, the eligible amount to be capitalized is determined by applying a Capitalisation rate to the expenditure
on that asset. The Capitalisation rate will be the weighted average of the borrowing costs applicable to the general pool (i.e. to consider only
the general borrowings for this calculation).
Note: In case the capitalized borrowing cost exceeds the actual incurred borrowing cost then the actual borrowing cost is to be capitalized.
31

IAS 23: BORROWING COSTS (2/2)
PERIOD OF CAPITALISATION
Commencement of Capitalisation:
Capitalisation to begin if all of the following conditions are satisfied:
➢ Expenditure on qualifying asset is being incurred; and
➢ Borrowing cost is being incurred; and
➢ Active development is taking place.
Suspension of Capitalisation:
Capitalisation to suspend if the active development is not taking place i.e. if the development is not taking place due to abnormal reasons.
Cessation of Capitalisation:
Capitalisation to cease if any of the following conditions is satisfied:
➢ Asset is ready for its intended use or sale; or
➢ Borrowing cost is not being incurred
EXCHANGE DIFFERENCES ON FOREIGN CURRENCY BORROWINGS
It can be treated as ‘Borrowing Cost’ to the extent of the lower of the following:
➢ Actual exchange loss on borrowed funds
➢ Estimated Borrowing cost (i.e. cost if loan was taken locally) ‘minus’ Actual Borrowing cost (i.e. cost on foreign borrowings)
DISCLOSURE REQUIREMENTS
➢ Amount of borrowing cost capitalized during the period
➢ Capitalisation rate used
32

IAS 24: RELATED PARTY DISCLOSURES (1/3)
Related Party Disclosures are required to make users aware of the possibility that the financial performance and position may have been affected
by the existence of related parties.
A related party is a person or an entity that is related to the reporting entity.
RELATED PARTY- INDIVIDUAL
A person or a close family member is related if he:
➢ has control or joint control of the reporting entity; or
➢ has significant influence over the reporting entity; or
➢ is a member of the Key Management Personnel of the reporting entity or its parent
Close family Member of an individual are those family members who may be expected to influence, or be influenced by that individual in their
dealings with the entity. They may include:
• Domestic partner
• Children
• Dependents of the individual or their domestic partner
RELATED PARTY- ENTITY
An entity is related to the reporting entity if any of the following conditions applies:
➢ They are the members of the same group i.e. parent/subsidiary/fellow subsidiary
➢ One entity is an associate or joint venture of the other entity (or another entity in the same group)
➢ Both entities are joint ventures of the same third party (or one is joint venture and the other is an associate)
➢ The entity is controlled or jointly controlled by related person or his close family member
➢ The entity is a post-employment plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity (if
the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity)
33

Control arises when an investor:
➢ has power over the investee
➢ rights to variable returns; and
➢ the ability to affect those returns
Parties are not related just because they:
➢ Have a director in common
➢ Two venturers simply because they share joint control
➢ Have normal business dealings with the entity as : Provider of finance, Trade unions, Government, agencies or utilities
➢ Are major customer, supplier, agent, etc.
DISCLOSURES
I. Disclosures for Control:
All related party relationships where control exists (irrespective of whether there have been related party transactions).
That means, Parent/Subsidiary related party relationships are disclosed irrespective of whether there have been any transactions between the
parties
II. Disclosures for Transactions:
The followings are to be disclosed:
➢ Nature and types of transactions with related parties
➢ Nature of related party relationship and information regarding the transactions and outstanding balances including-
• Amount of transactions
• Amount of outstanding balances and their terms/conditions and guarantees
• Allowance and expenses for doubtful debts
➢ Disclosures for each separate category of related parties 34

II. Disclosures for Transactions with KMPs:
Key Management Personnel’s (KMP) compensation in total and for the following categories to be disclosed:
• Short term employee benefits
• Post employment benefits
• Other long term benefits
• Termination benefits
• Share based payments
Note: Similar items may be aggregated so long as users can understand the effects of the transactions on the financial statements
EXEMPTION
There are many countries in which thousands of government entities would be related to each other. IAS 24 has therefore relaxed the disclosures
for some related parties.
A reporting entity is exempt from disclosure requirements in relation to related party transactions and outstanding balances, with:
➢ A government that has control, or joint control of, or significant influence over it; and
➢ Another entity that is a related party because the same government has control or joint control of, or significant influence over it also
However, disclosure regarding the name of the government and the nature of the relationship with the reporting entity is required if exemption is
applied.
35

IAS 33: EARNINGS PER SHARE (1/2)
BASIC EARNINGS PER SHARE (BASIC EPS)
➢ It is calculated as: (Earnings attributable to Equity shareholders / Weighted Average number of Ordinary Shares outstanding during the
period)
Earnings attributable to Equity shareholders
➢ The earnings numerators (profit or loss from continuing operations and net profit or loss) used for the calculation should be after deducting all
expenses including taxes, minority interests, and preference dividends.
Weighted Average number of Ordinary Shares outstanding during the period
➢ Weighted Average means considering time proportion of outstanding share capital.
➢ Time Period Consideration:
• Public Issue: Time proportion is relevant from the date of allotment
• Bonus Issue, Share Split, Share Consolidation: Time proportion is not relevant
• Right Issue- Paid Part: Time proportion is relevant
Bonus Part: Time proportion is not relevant
• Share Issue due to Amalgamation- Merger: Time proportion is not relevant
Purchase: Time proportion is relevant
• Underwriting Commission settled in shares: Time proportion is relevant
• Buy back of shares, forfeiture: Time proportion is relevant
36

IAS 33: EARNINGS PER SHARE (2/2)
DILUTED EARNINGS PER SHARE (DILUTED EPS)
➢ It is calculated as: (Earnings attributable to Equity shareholders after the effects of dilutive potential ordinary shares / Weighted Average
number of Ordinary Shares outstanding during the period after considering dilutive potential ordinary shares)
➢ Dilution, here, refers to a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible
instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified
conditions.
➢ Some of the examples of Potential Ordinary Shares include:
• Convertible Securities
• Options and warrants
• Contingently issuable shares
• Contracts that may be settled in ordinary shares or cash, etc.
➢ Dilution, here, refers to a reduction in earnings per share or an increase in loss per share resulting from the assumption that convertible
instruments are converted, that options or warrants are exercised, or that ordinary shares are issued upon the satisfaction of specified
conditions.
37

IAS 36: IMPAIRMENT OF ASSETS (1/2)
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset may be impaired (i.e. its carrying
amount may be higher than its recoverable amount).
When Carrying Amount exceeds the
Higher of
INDICATIONS OF IMPAIRMENT
INDICATIONS OF IMPAIRMENT
External Sources
➢ decline in market value
➢ negative changes in technology, markets, economy, or laws
➢ increases in market interest rates
➢ net assets of the company higher than market capitalization; etc.
Internal Sources
➢ obsolescence or physical damage
➢ asset is idle, part of a restructuring or held for disposal
➢ worse economic performance than expected
➢ for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets,
or a dividend exceeds the total comprehensive income of the investee; etc.
38
IMPAIRMENT LOSS
Recoverable Amount
Fair Value less Cost of Disposal
Value in Use (i.e. Present Value of Future Cash Flows expected
to be derived from an asset or cash generating unit)

IAS 36: IMPAIRMENT OF ASSETS (2/2)
RECOGNITION OF AN IMPAIRMENT LOSS
For assets carried at historical cost, impairment losses are recognized as an expense in profit or loss.
If the impaired asset is a revalued asset under IAS 16 or IAS 38, the impairment loss is treated as a revaluation decrease and recognized in
Other Comprehensive Income, reducing the revaluation surplus for that asset to the extent of the available revaluation surplus. The balance loss,
if any, is recognized as an expense in profit or loss.
ALLOCATION OF IMPAIRMENT LOSS WITHIN CASH GENERATING UNIT
If an impairment loss is recognized for a Cash Generating Unit (CGU), a problem arises regarding the credit entry in the statement of financial
position.
The impairment loss should be allocated between all assets of the CGU in the following order:
i. Goodwill allocated to the CGU, if any;
ii. Then, to the other assets of the unit on a pro-rata basis based on the carrying amount of each asset in the unit
However, where an individual asset within CGU has become impaired, the impairment will first be taken against that asset.
REVERSAL OF IMPAIRMENT LOSS
The increased carrying amount of the asset (due to reversal of impairment loss) should not exceed the carrying amount that would have been
determined (net of amortization or depreciation) had no impairment loss been recognized for the asset in prior years.
39

IAS 37: PROVISIONS, CONTINGENT LIABILITES & CONTINGENT ASSETS (1/3)
RECOGNITION
An entity must recognise a provision if:
➢ Present obligation has arisen as a result of past event; and
➢ Payment is probable; and
➢ Amount can be estimated reliably
MEASUREMENT
➢ The amount provided should be the best estimate at the end of the reporting period of the expenditure required to settle the obligation
➢ Gains from the expected disposal should not be taken into account when measuring a provision.
➢ The provision should be measured as a “Pre-tax Amount”. (The provision is calculated using the pre-tax costs and a pre-tax cost of capital. If
the eventual payment of obligation would attract tax relief then it is to be dealt with Deferred Tax Asset (if the recognition criteria for deferred
tax assets are met))
REIMBURSEMENT
If some (or all) of the expected outflow is expected to be reimbursed from a third party, the reimbursement should be recognised only when it is
virtually certain that the reimbursement will be received if the entity settles the obligation.
UNWINDING THE DISCOUNT
➢ Say for example, if payment is to be made after 10 years then the time value of money is also to be considered today
➢ Hence, ‘unwinding the discount’ describes the process of adding the financial cost of holding the liability until it matures. Hence it is reported as
Interest Expense in profit or loss every year till it matures.
40

DECOMMISSIONING COSTS
➢ When you build an asset that requires removal after the end of its useful life and restoration of the site, then a present obligation arises at the
time of its construction. The obligation would arise either from legislation (“legal obligation”) or from valid expectations of the third parties
created by the company (“constructive obligation”).
➢ So, it is basically the “Removal and Restoration Costs”.
➢ It is to be measured at Present Value (i.e. Future Cash Flows discounted at an appropriate discount factor)
➢ Decommissioning activities are common in the industries like mining, chemical, oil & gas, etc.
ONEROUS CONTRACTS
➢ If an entity has a contract that is onerous, the Present Obligation under that contract should be recognised as a Provision.
➢ Onerous contract, i.e. a loss making contract, is a contract in which the cost required to fulfill the contract is more than the expected economic
benefit from the said contract.
➢ For Example: An entity has entered into a contract with a vendor for the purchase of oil barrels @100 rupees per liter. The terms of contract
provides that if it is not purchased then the entity has to pay a compensation of 10 rupees per liter. In the meantime, the market price falls to
80 rupees per liter. So the entity decides to purchase from another vendor and to pay a compensation to the original vendor. In this case, the
entity must recognise a provision of 10 rupees per liter being the onerous contract which it decides not to purchase from original vendor and to
incur the compensation cost.
FUTURE OPERATING LOSSES
The future operating losses should not be recognised because:
➢ They do not arise out of past event
➢ They may also be avoided (i.e. they are not unavoidable)
The same concept is applied in future repairs and maintenance cost as well i.e. provision is not created on this because the future expenditure
could also be avoided by future actions (e.g. selling the assets).
41

RESTRUCTURING
Restructuring includes sale or termination of a line of business, closure of business locations, changes in management structure, fundamental
reorganisations, etc.
A management decision to restructure doesn’t give rise to constructive obligation unless the entity has, before the end of the reporting period:
➢ started to implement the restructuring plan (e.g. by the sale of assets); or
➢ announced the main feature of the plan (to those affected in a manner which is sufficient to raise a valid expectation in them that the
restructuring will occur)
Hence, a provision for liability to restructure can only be recognised when general recognition criteria are met.
CONTINGENT LIABILITIES
The entity is not required to recognise the contingent liabilities but should disclose them, unless the possibility of an outflow of economic
resources is remote
CONTINGENT ASSETS
The entity is not required to recognise the contingent assets but should disclose them, if the inflow of economic benefits is probable.
When the realization of income is virtually certain, the related asset is not a contingent asset and can now be recognised appropriately.
42

IAS 38: INTANGIBLE ASSETS (1/3)
If any intangibles are integral part of tangible assets, then it is to be accounted under IAS 16: Property, Plant & Equipment.
A resource controlled by the entity as a result of past events from which future economic benefits are
expected to flow to the entity
An identifiable non-monetary asset without physical substance. For example: Goodwill, Brands, Copyrights,
Licenses, etc.
DEFINITION CRITERIA
Identifiability Control Probable Future Economic Benefits Reliable Cost Measurement
➢ Identifiability Criterion is met when an intangible item:
a) is separable (i.e. capable of being separated or divided from the entity), or
b) arises from contractual or other legal rights
➢ Control Criterion is met when the entity has:
a) power to obtain future economic benefits from the underlying resources; and
b) ability to restrict the access of others to those benefits
43
Asset
Intangible
Asset
Criteria for recognition as Intangible Asset

RECOGNITION
An intangible asset should be recognized when it:
➢ Complies with the definition of an intangible asset (identifiability and control criteria discussed on previous slide)
➢ Meets the recognition criteria of assets i.e. probable future economic benefit and reliable cost measurement
INITIAL MEASUREMENT
➢ Should be measured initially at Cost
➢ The cost of an intangible asset acquired in a business combination to be measured at its Fair Value at the date of acquisition.
Fair Value at the date of acquisition might be measured using:
• Current bid price in active market
• Price of the most recent, similar transactions for similar assets
• Multiples applied to relevant indicators such as earnings
• Discounted future net cash flows
➢ In case of Government Grants (IAS 20), both the intangible asset (debit entry) and the grant (credit entry) may be recorded initially at either
Fair Value or Cost (which may be zero also)
➢ In case of Exchange of Assets, the cost of intangible asset acquired in exchange for a non-monetary asset (or a combination of monetary and
non-monetary assets) is measured at Fair Value (of asset acquired) unless:
• The exchange transaction lacks commercial substance; or
• The fair value of neither the asset received nor the asset given up is reliable measurable
In case of these exceptions, the initial cost of the asset acquired is the carrying amount of the exchanged asset. (Same concept as that of
IAS 16 i.e. PPE)
SUBSEQUENT MEASUREMENT
An entity can choose either Cost or Revaluation model. (But it is very rare for intangibles to be revalued in practice as generally fair value of
intangible assets doesn’t exist in an active market) 44

USEFUL LIFE
The useful life of an intangible asset should be assessed as:
➢ Finite (to be amortised)
➢ Indefinite (not to be amortised but is tested for impairment)
RESIDUAL VALUE
The residual value is assumed to be zero unless there is a commitment to purchase by a third party and there is an active market for that
particular asset.
AMORTISATION
➢ Begins when the asset is available for use
➢ The amortization method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity (e.g. unit of
production method). If that pattern cannot be determined reliably, the straight line method should be adopted.
IMPAIRMENT
➢ IAS 36 i.e. Impairment of Assets shall apply
RETIREMENTS AND DISPOSALS
An intangible asset should be derecognized (i.e. eliminated from Statement of Financial Position):
➢ On disposal; or
➢ When no future economic benefits are expected from its use or disposal
45

IAS 40: INVESTMENT PROPERTY (1/1)
Investment Property is property (land or a building, or part of a building, or both) held (by the owner or by the lessee as a right-of use asset):
➢ to earn rentals ‘and/or’ for capital appreciation
➢ but not for use in the production or supply of goods or services or for administrative purposes (owner-occupation); or for sale in the ordinary
course of business (i.e. inventory)
An entity can choose either Fair Value Model or Cost Model but it is highly recommended to value it at its Fair value.
An entity that chooses the Cost Model should disclose the fair value of its investment property.
46

IAS 41: AGRICULTURE (1/1)
IAS 41 covers the followings:
➢ Biological assets i.e. living animal or plant
➢ Agricultural produce at the point of harvest. (After the point of harvest, such produce falls under IAS 2: Inventories)
For example: Tea Leaves IAS 41
Processed Tea IAS 2
RECOGNITION
An entity should recognized a biological asset when, and only when:
➢ The entity controls the asset as a result of past event
➢ It is probable that future economic benefits associated with the asset will flow to the entity
MEASUREMENT
➢ Biological asset is measured at its ‘Fair Value less estimated costs to sell’
➢ Agricultural produce harvested from entity’s biological assets is measured at ‘Fair Value less estimated costs to sell at the point of harvest’.
Note: If fair value cannot be determined then the biological asset must be valued at ‘Cost less accumulated depreciation and any impairment
losses’. Once fair value can be reliably measured/determined, it is measured at ‘Fair Value less estimated Cost to sell’. Also, please note that the
cost to sell doesn’t include transport and other costs necessary to get the asset to the market
47

IFRS 1: FIRST TIME ADOPTION OF IFRS (1/2)
➢ Date of Transition for the first time adoption of IFRS is the beginning of the earliest period for which an entity presents full comparative
information under IFRSs for the first time. For example: An entity with a 31st December year end presenting its financial statements for 2019
will have a date of transition as January 1, 2018
➢ An entity’s first IFRS statements will include at least:
• 3 Statements of Financial Position; and
• 2 of each of the other statements
➢ Adjustments from previous GAAP are recognised directly in retained earnings (or, if appropriate, another category of equity)
➢ Previous GAAP assets and liabilities that do not qualify for recognition under IFRS are eliminated from the opening financial position (E.g.
research expenditures)
➢ Conversely, all assets and liabilities that are required to be recognised by IFRS must be recognised (E.g. deferred tax liabilities) and
appropriately classified (i.e. reclassify items as current/non-current, liability/equity in accordance with IFRSs as necessary (E.g. preference
shares with fixed maturity as debt rather than equity)
PRESENTATION AND DISCLOSURE
I. Comparative Information
➢ To comply with IAS 1: Presentation of Financial Statements, the first IFRS financial statements must include at least:
• 3 Statements of Financial Position;
• 2 Statements of Profit or loss and Other Comprehensive Income
• 2 Statements of Cash Flows
• 2 Statements of Changes in Equity; and
• Related notes, including comparative information
48

IFRS 1: FIRST TIME ADOPTION OF IFRS (2/2)
II. Explanation of Transition
➢ How the transition to IFRSs affected the reported financial position, performance and cash flows must be explained (This is achieved through
reconciliation and disclosure)
III. Reconciliations
➢ These help users to understand the material adjustments to the Statement of Financial Position and Statement of Profit or loss and Other
Comprehensive Income.
➢ Please find below an illustration of reconciliation:
Income Statement Reconciliation for the Year Ending December 31, 2018
49
Particulars Sub-note Restated previous GAAP Consolidated Adjustments IFRS
Revenue xxx xxx xxx xxx
Cost of Sales xxx xxx xxx xxx
and so on…..

IFRS 2: SHARE BASED PAYMENT (1/4)
This IFRS applies when a company acquires or receives goods & services for equity-based payment.
RECOGNITION
➢ If the shares are issued that vest immediately, then it can be assumed that these are in consideration of past services and hence the expense
should be recognised immediately.
➢ If the share options vest in the future then it is assumed that the equity instruments relate to future services and recognition is therefore
spread over the vesting period.
Note: All share-based payment transactions are recognised in the financial statements, using a Fair Value Measurement basis. Intrinsic Value
should be used where the fair value cannot be reliably estimated.
EQUITY SETTLED TRANSACTIONS
➢ The fair value of the goods and services RECEIVED should be used to value the share options unless the fair value of the goods cannot be
measured reliably.
➢ For transactions with employees and other providing similar services, the entity measures the fair value of the equity instruments (shares)
GRANTED because it is typically not possible to estimate reliably the fair value of employee services received.
EMPLOYEE STOCK OPTION PLAN (ESOP)
Calculation of Option Expense in ESOP is:
Note: Variables like vesting period, no. of employees estimated on vesting can change each year BUT Fair Value or Intrinsic Value shouldn’t be
changed in case of ESOP.
50
No. of options
expected to be
exercised
Fair Value of Option(not the share) i.e. worth of agreement
Or
Intrinsic Value of Option (i.e. MV on grant date-Exercise Price)
Expired
Period
Vesting Period
Expense
Recognised till
date

EMPLOYEE STOCK PURCHASE PLAN (ESPP) ‘or’ SWEAT EQUITY SHARES
➢ Wherever any company issues shares to its employees at concessional price, such shares are called Sweat Equity Shares.
➢ These are generally issued under ESPP. These shares generally do have the lock-in period i.e. restrictions on transfer of shares for up-to a
certain period.
➢ The Journal entry for this is:
Dr. Bank Issue Price/ Proceeds
Dr. Employee Compensation Fair Value – Proceeds
Cr. Equity Share Capital Par Value
Cr. Securities Premium Balancing Figure
(Being shares issued to employees)
STOCK APPRECIATION RIGHTS (SAR)
➢ Whenever employees are offered rights in appreciation of share prices, these rights are called ‘SAR’
➢ These are similar to ESOP (just for understanding purpose) except that SAR are cash settled
➢ The following is the procedure for recognition of SAR”
• Fair Value of rights will change each year and hence value of liability will be revised at every year end
• Employee Stock Option (ESO) Account will not be prepared, instead “Provision for Stock Appreciation Right” will be made. Such provision
is Non-Current/Current liabilities, based on expected payment date
• When SAR is settled, there could be a change in provided liability and settled liability, such difference shall be transferred to ‘Statement
of Profit or Loss’ as Gain or loss on settlement of SAR.
51
Expired
Period
Vesting Period
Expense
Recognised till
date
No. of SAR expected to be exercised Fair Value

CASH ALTERNATIVES [i.e. SHARE OPTION PLANS WITH CASH ALTERNATIVE]
➢ Whenever employees are offered shares options which can be settled either in cash or in shares, at choice of employee, then such ESOPs are
treated as follows:
a. Calculate ESOP Obligation i.e. (No. of ESOP * Fair Value of Share)
b. Calculate Cash Obligation i.e. (No. of options that can be availed in cash * Fair Value of Share)
c. Calculate Fair Value of Options (ESOP) i.e. {(ESOP Obligation – Cash Obligation) / No. of ESOP}
d. ESOP will be treated as usual while Cash Alternative will be treated as ‘Provision for SAR’
e. Cash Obligation will be revalued at current value each year (same as SAR), while fair value of ESOP will remain the same (same as
ESOP)
f. ESOP or Cash Obligation will be settled as per the choice of Employee:
• Transfer ESOP to Retained Earnings if employee opts for Cash
• Transfer Cash Obligation to ESOP if employee opts for ESOP
➢ If the issuing entity has the choice then it should determine whether it has a present obligation to settle in cash or by issue of equity. If cash,
then account for the transaction as cash settled. If no such cash obligation then account for the transaction as equity settled.
REPRICING / MODIFICATIONS IN EXERCISE PRICE
➢ An entity may modify the terms of a share-based payment
➢ Repricing generally is the reduction in exercise price of options by the entity so as to make it more attractive
➢ If this results in increase in fair value then such increased/new fair value must be accounted for from the repricing date to the vesting date
➢ If modification results in a decrease in fair value then the full amount of the original contract is expensed to profit or loss i.e. decrease shall be
ignored.
➢ In summary: Increase in Fair value increases the total expense BUT decrease in fair value due to reprising doesn’t change the total expense.
52

DEFERRED TAX IMPLIACATIONS DUE TO IFRS 2
➢ Generally a tax allowance is available for share-based transactions as a business expenses.
➢ Often, the tax deduction is based on the intrinsic value of the option (at exercise date), which is the difference between the market price of the
share and the exercise price of the option. So, the tax deduction benefit will be based upon the intrinsic value of the share and will only be
available once the options have been exercised
➢ But in case of IFRS 2, Fair Value of the option at the grant date is to be expensed (in case of ESOP). Hence, this results in Deferred Tax.
➢ On general note, while computing deferred tax on share based payments, carrying amount is Nil and Tax Base is to be calculated which creates
Deferred Tax Asset. Further, the deferred tax on the total amount expensed in the books is to be shown under profit or loss and remaining
amount of deferred tax, if any, is to be shown under other comprehensive income.
Please find below an illustration which describes the above referred implications:
On 1/1/2018, A company granted 10,000 share options to an employee vesting two years later on 31/12/2019. The fair value of each option
measured at the grant date was Rs. 40. Tax legislation in the country in which the entity operates allows a tax deduction of the intrinsic value of
the options on when they are exercised. The intrinsic value of the share options was Rs. 22 at 31/12/2018 and Rs. 44 at 31/12/2019, at which
point the options were exercised.
Its deferred tax calculation would be as follows:
Note: The maximum benefit that can be credited to profit or loss is the cumulative expense charged against profits i.e. Rs. 1,20,000 (10000
options*40*30%). Any benefit above 120000 (132000-120000) must be credited to OCI. 53
Particulars 31/12/2018 31/12/2019
Carrying Amount of share-based payment expense 0 0
Less: Tax Base of share based payment expense (10000*22*1)/2= 110000 10000*44= 440000
Temporary Difference 110000 440000
Deferred Tax Asset @30% 33000 132000

IFRS 5: NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS (1/4)
RECOGNITION CRITERIA
➢ The non-current asset must be available for immediate sale in its present condition. Please note that assets are not available for immediate
sale if they continue to be needed for a ongoing operations.
➢ If held-for-sale criteria is met only after the end of the reporting period then the assets CANNOT be treated retrospectively as held for sale.
However, the matter should be disclosed in a note to the financial statements (as a non-adjusting event after the reporting period)
➢ The sale must be highly probable (i.e. significantly more likely than probable). Hence, the management must be committed to a plan to sell the
asset.
➢ The sale should be expected to complete within one year from the date of classification. However, it could extend only if:
• Delay is beyond management’s control
• There is sufficient evidence that management remains committed to its plan to sell the asset
➢ Non-Current Assets acquired exclusively with a view to subsequent disposal are classified as held for sale at the acquisition date if:
• The one-year criterion is met; and
• It is highly probable that any other criteria that are not met at that date will be met within three months
➢ An asset that is to be abandoned is not classified as held for sale. These include those that are to be closed rather than sold and those that are
to be used to the end of their economic life. A non-current asset that has been temporarily taken out of use should not be treated as
abandoned. (These assets are to be presented in normal carrying amount)
DEFINITIONS
Disposal Group:
It is the group of assets (must include at least one non-current asset within the scope of IFRS 5) to be disposed of collectively in a single
transaction, and directly associated liabilities that will be transferred in the transaction.
54

OPERATIONS (2/4)
Discontinued Operation:
A discontinued operation is a component that either has been disposed of ‘or’ is classified as held for sale and
➢ represents a separate major line of business or geographical area of operations (a major operation); or
➢ is a part of a single coordinated plan to dispose of that major operation; or
➢ is a subsidiary acquired exclusively with a view to resale
DISCOUNTINUED OPERATIONS AND HELD FOR SALE CLASSIFICATION
If a group of assets (and liabilities) that meets the held for sale criteria also represents a ‘major operation’ then both a disposal group and a
discontinued operation arise.
However, the linkage between discontinued operations and the held for sale classification are not always clear.
For example: A plan to abandon an operation (rather than to sell it) would not lead to held for sale classification. It would be presented as a
discontinued operation only on abandonment.
MEASUREMENT OF NON-CURRENT ASSETS HELD FOR SALE
Initial Measurement
The asset or disposal group is measured at the lower of:
➢ Carrying Amount; and
➢ Fair Value less Costs to sell
Immediately before initial classification as held for sale, carrying amount is measured in accordance with the applicable IFRS (i.e. other IFRS to
which it was applicable prior to IFRS 5)
55

OPERATIONS (3/4)
Subsequent Measurement
If the asset or disposal group is still held at the year end, it will again be measured at the lower of :
➢ Carrying Amount; and
➢ Fair Value less Costs to sell
Recognition of gains on remeasurement is restricted to impairment losses previously recognised under IFRS 5 and IAS 36.
Note: Held for sale non-current assets are depreciated to the date of classification and from that date onwards are no longer depreciated.
But interest and other expenses attributable to the liabilities of a disposal group continue to be recognised.
CHANGES TO A PLAN OF SALE/ RECLASSIFICATION AS HELD FOR USE
If held for sale recognition criteria are no longer met, that classification ceases.
A non-current asset that ceases to be classified as held for sale is measured at the lower of:
➢ Carrying amount had the asset not been classified as held for sale; and
➢ Its recoverable amount at the date the criteria are no longer met.
Any adjustment to the carrying amount is included in income from continuing operation in the period in which the held for sale criteria ceased to
be met.
56

OPERATIONS (4/4)
PRESENTATION AND DISCLOSURE
I. Non-Current Assets Held for Sale
➢ Non-current assets classified as held for sale are to be shown separately from other assets in the Statement of Financial Position
➢ The liabilities of a ‘held for sale disposal group’ are similarly presented separately from other liabilities in the Statement of Financial Position
Note: Offsetting of such assets and liabilities is strictly prohibited
➢ Comparative information is not restated i.e. classification as held for sale is reflected in the period when the held for sale recognition criteria
are met
II. Discontinued Operations
A single amount in the Statement of Profit or loss and Other Comprehensive Income comprising:
➢ Post-tax profit or loss of discontinued operations
➢ Post-tax gain or loss recognised on:
• the measurement to fair value less costs to sell; or
• the disposal of the assets (or disposal groups) constituting the discontinued operation
II. Continuing Operations
If a component ceases to be classified as held for sale, the results of operations previously presented as discontinued are reclassified to
continuing operations for all periods presented.
Amounts for prior periods are then described as having been represented
Gains and losses on the remeasurement of ‘held for sale non-current assets’ that doesn’t meet the definition of a discontinued operation are
included in profit or loss from continuing operations.
57

IFRS 6: EXPLORATION FOR & EVALUATION OF MINERAL RESOURCES (1/1)
IFRS 6 applies to exploration & evaluation expenditures incurred for mineral resources (minerals, oil, natural gas and similar non-regenerative
resources).
But, it doesn’t apply to expenditure incurred:
➢ Before exploration & evaluation (e.g. Before legal rights obtained)
➢ After technical feasibility and commercial viability of extracting mineral resources are demonstrable
So,
Pre Expense (Usually)
Exploration & Evaluation IFRS 6
Post IAS 38: Intangible Assets
MEASUREMENT
➢ Initial Measurement is at Cost
➢ Subsequent Measurement is either Cost Model or Revaluation Model is to be applied
EXPENDITURES COVERED
IFRS 6 includes following expenditures:
➢ Acquisition of rights to explore
➢ Topographical, geological, geochemical studies, etc.
➢ Trenching, sampling
➢ Activities relating to the evaluation of technical feasibility and commercial viability
58

IFRS 8: OPERATING SEGMENTS (1/4)
An Operating Segment is a component that:
➢ Engages in business activities from which it may earn revenues and incur expenses (hence a startup operating not yet earning revenues may
be an operating segment, as revenues would be expected in the future);
➢ Its operating results are regularly reviewed by the “Chief Operating Decision Maker (CODM)” to make decisions and to assess its performance;
AND
➢ For which discrete financial information is available
Note: Corporate headquarters or other departments that may not earn revenues (or only incidental revenues) are not operating segments.
Chief Operating Decision Maker (CODM) describes the function which allocates resources to and assesses the performance of operating
segments (e.g. a CEO or board of directors). Please note that CODM is a function not a title.
Management’s Approach to Segment Reporting
Step 1: Identify the CODM
Step 2: Identify Operating Segments
Step 3: Aggregate Operating Segments
Step 4: Determine Reportable Segments
Step 5: Disclose Segment Information
Step 1: Identify the CODM
➢ Highest level of management responsible for: Resource Allocation & Performance Assessment
➢ CODM is a function not a title
➢ CODM can be a body (e.g. a committee, BOD) or a person (e.g. CEO)
➢ A reporting entity can have only one CODM 59

Step 2: Identify Operating Segments
➢ Component being able to earn revenues
➢ whose results are regularly reviewed by CODM
➢ for which discrete financial information is available
Step 3: Aggregation Criterion i.e. Aggregate Operating Segments
Two or more operating segments may be aggregated into a single operating segment if:
➢ It is consistent with the core principle of this IFRS
➢ The segments have similar economic characteristics
➢ They are similar in respect of:
• Nature of products & services (e.g. domestic or industrial)
• Nature of production process (e.g. maturing or production line)
• Types of customers (e.g. corporate or individual)
• Methods of distribution (e.g. door-to-door or online sales)
• Nature of regulatory environment (e.g. in shipping, banking, etc.)
Step 4: Determine Reportable Segments (Threshold tests)
Reportable segments are individual or aggregated operating segments that exceed any one of the following quantitative thresholds:
➢ Reported revenue is 10% or more of the combined revenue of all operating segments
➢ The amount of profit or loss is 10% or more of the greater of :
• Combined profit of all non-loss making operating segments; and
• Combined loss of all operating segments that reported a loss (in absolute term)
➢ Assets are 10% of more of combined assets; --- continued in next slide---
60

Notes:
• At least 75% of revenue must be included in reportable segments. So, if the total external revenue reported by operating segments is less than
75% of the entity’s revenue, then additional operating segments must be identified as reportable segments.
• Segments that fall below the threshold may also be considered reportable and separately disclosed, if management believes that the
information would be useful to users of financial statements.
• IFRS 8 suggests 10 as a practical limit to the number of reportable segments separately disclosed, as segment information may otherwise
become too detailed.
• Information about other business activities and operating segments that are not reportable are combined and disclosed in an ‘All Other
Segments” category
Step 5: Disclose Segment Information
The disclosure requirements include :
➢ General information about how the entity identified its operating segments (e.g. around products and services, geographical areas, regulatory
environments, or a combination of factors and whether segments have been aggregated);
➢ Types of products and services from which each reportable segment derives its revenues
➢ Information about revenues, profit or loss, assets and liabilities for each reportable segmens
➢ Reconciliation of the total of the reportable segments with the total for the entity for all of the followings:
• Revenue
• Profit or loss (before tax and discontinued operations)
• Assets (if applicable)
• Liabilities (if applicable)
• Every other material items
➢ Restatement of previously reported information
61

RESTATEMENT OF PREVIOUSLY REPORTED INFORMATION
➢ Where changes in the internal organization structure result in a change in the composition of reportable segments, corresponding information
must be restated, unless the information is not available and the cost to develop it would be excessive.
➢ An entity should disclose whether corresponding items have been restated
➢ If not restated, the current period segment information must be disclosed on both the old and new bases of segmentation, unless the
necessary information is not available and the cost to develop it would be excessive.
ENTITY WIDE DISCLOSURES
All entities subject to this IFRS are required to disclose information about the following, if it is not provided as part of the required reportable
segment information:
• Products and services
• Geographical areas; and
• Major customers (the identity of a major customer & the amount of revenue that each segment reports from that customer are not required to
be disclosed)
This disclosure is required regardless of CODM use and even if the entity has only one reportable segment.
62

IFRS 9: FINANCIAL INSTRUMENTS (1/8)
FINANCIAL INSTRUMENTS
Financial Instruments are contracts that give rise to Financial asset for one party and Financial liability or equity instrument for another party.
Point to be noted:
➢ There must be a contract (written or oral)
➢ There must be Financial Asset with corresponding Financial Liability/ Equity Instrument
For Example
➢ Debtors are financial asset for one party and financial liability for another party and these arise from contract.
➢ Investment in shares of Google Inc. is a financial asset for one party and it is equity instrument for Google Inc. arising from contract.
FINANCIAL ASSETS
These are the assets which qualify any of the following:
➢ Cash
➢ Investment in Equity Instruments
➢ Contractual Right to receive cash/ other financial assets (E.g. Trade Receivables, Bills Receivable, Investment in Convertible Debentures, etc.)
➢ Contractual Right to receive cash/ other financial assets in Potentially Favourable Conditions (E.g. Derivatives like forward contract, futures,
options, swaps, etc.)
➢ Contracts which will or may be settled in entity’s own shares
FINANCIAL LIABILITIES
These are the liabilities which qualify any of the following:
➢ Contractual Obligation to deliver cash/ other financial assets (E.g. Trade Payables, Bills Payable, Promissory Notes, Debentures, etc.)
➢ Contractual Obligation to deliver cash/ other financial assets in potentially unfavourable conditions (E.g. Derivative liabilities)
➢ Contractual Obligation to be settled in own Equity Shares (Please note that if the number of shares to be settled is fixed then it is Equity
Instrument; if variable then it is Financial Liability)
63

ACCOUNTING FOR FINANCIAL INSTRUMENT
Please find below a synopsis of the accounting treatment framework for financial instruments:
Abbreviations:- FVTPL: Fair Value Through Profit or Loss; FVTOCI: Fair Value Through Other Comprehensive Income; FI: Financial
Instrument (Please note that these abbreviations are being used in the upcoming slides as well)
TREATMENT OF TRANSACTION COSTS
➢ FVTPL Transferred to Profit or Loss
➢ FVTOCI & Amortised Cost Added to Financial Assets or deducted from Financial Liabilities
ACCOUNTING FOR INVESTMENT IN DERIVATIVES
➢ Always FVTPL
➢ Transaction Cost is transferred to Profit or Loss (as it is always FVTPL)
64
FI Nature of Financial Instrument Treatment summary
Financial
Assets
Derivatives FVTPL
Investment in Equity Instruments
FVTPL
FVTOCI
Other Financial Assets like Loan Receivable, Debtors, Advances to staff, Investment in
Debentures/ Bonds, etc.
Amortised Cost
FVTOCI
FVTPL
Financial
Liabilities
Derivatives FVTPL
Compound Financial Instruments Liability Part on Amortised Cost
Other Liabilities Amortised Cost

ACCOUNTING FOR INVESTMENT IN EQUITY INSTRUMENTS
➢ Either FVTPL or FVTOCI but not Amortised Cost
➢ If an equity investment is not held for trading, an entity can make an irrevocable election at initial recognition to measure it at FVTOCI with
only dividend income recognised in profit or loss.
ACCOUNTING FOR FINANCIAL ASSETS OTHER THAN DERIVATIVES & EQUITY INSTRUMENTS
If any entity has financial assets in the form of receivable or investment in debt, it should be accounted as follows:
➢ Amortised Cost (AC)
• Financial assets should be recognised at Amortised Cost IF FOLLOWING CONDITIONS ARE SATISFIED:
✓ Objective to hold financial assets should be to collect the contractual cash flows & not sales – ‘Business Model Test’
“AND”
✓ Contractual Cash Flows should not include rights other than cash flows – ‘Cash Flow Characteristics Test’
If any of the above condition is NOT satisfied, then Amortised Cost Method cannot be applied.
• Financial Asset is recorded at ‘Fair value plus transaction cost’
• Effective Interest Method (e.g. IRR) should be applied and Interest Income should be recorded based on Effective Interest
• Any amount exceeding fair value should be written off as expense
➢ Fair Value Through Other Comprehensive Income (FVTOCI)
• Financial assets should satisfy the following conditions for the application of FVTOCI :
✓ Objective to hold financial assets should be to collect the contractual cash flows & sale is only to be made to increase the return –
‘Business Model Test’
“AND”
✓ Contractual Cash Flows should not include rights other than cash flows – ‘Cash Flow Characteristics Test’
If any of the above condition is NOT satisfied, then FVTOCI cannot be applied.
65

• Financial Asset is recorded at ‘Fair value plus transaction cost’
• Effective Interest Method (e.g. IRR) should be applied and Interest Income should be recorded based on Effective Interest
• Financial Asset should be revalued at Fair value through OCI
• Effective Interest is calculated without the effect of revaluation
• Loss Allowance should be made if fair value becomes negative
➢ Fair Value Through Profit or Loss (FVTPL)
• Financial asset will be recorded at FVTPL if Amortised cost and FVTOCI cannot be applied.
Fair Value Option
Even if an instrument meets the two requirements to be measured at Amortised cost or FVTOCI (i.e. Business Model Test & Cash Flow
Characteristics Test) , IFRS 9 contains an option to designate, at initial recognition, a financial asset as measured at FVTPL if doing so eliminates
or significantly reduces a measurement or recognition inconsistency (sometimes referred to as an 'accounting mismatch') that would otherwise
arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases.
Reclassification of Financial Assets
➢ For financial assets, reclassification is required between FVTPL, FVTOCI and Amortised cost, if and only if the entity's business model objective
for its financial assets changes so its previous model assessment would no longer apply.
➢ The reclassification should be applied Prospectively
➢ The effect of reclassification should be considered as follows:
• Amortised Cost to FVTPL/FVTOCI: Any revaluation difference should be transferred to PL or OCI as the case may be.
• FVTPL to Amortised Cost: Revaluation of financial asset on the date of reclassification should be done & difference to be transferred to PL
• FVTOCI to Amortised Cost/FVTPL: Its revaluation up-to the date of reclassification should be adjusted in OCI
66

FINANCIAL LIABILITIES
➢ Financial liabilities held for trading are measured at FVTPL, and all other financial liabilities are measured at Amortised cost unless the fair
value option is applied
Treatment of Compound Financial Instruments / Hybrid Instruments
➢ Lets understand its treatment by way of below illustration:
Illustration: A company issues 2000 convertible, Rs.1000 bonds at par on 1/1/2017. Interest is payable annually in arrears at a nominal interest
rate of 6%. The prevailing market rate of interest at the date of issue of the bond was 9%. The bond is redeemable on 31/12/2019.
Here,
OFFSETTING OF FINANCIAL INSTRUMENTS
➢ Whenever financial assets and financial liabilities are the contract with the same party, and following conditions are satisfied then, set off is
possible:
• It is legally permitted
• Intention to settle on net basis exists
67
Particulars Amount
Present Value of principal repayable in 3 years’ time {2000000*0.772} (PVIF9%, 3= 0.772) 15,44,000
Present Value of Interest Stream 120000*2.531 (PVAF9%, 3= 2.531) 3,03,720
Total Liability Component 18,47,720
Equity Component (balancing figure) 1,52,280
Proceeds of the issue 20,00,000
Particulars Amount
Liability as on 1/1/2017 18,47,720
Interest @9% on initial liability (Finance Cost) 1847720*9% 1,66,295
Cash Paid 2000000*6% (1,20,000)
Liability as on 31/12/2017 18,94,015

IMPAIRMENT
➢ The impairment model in IFRS 9 is based on the premise of providing for expected losses.
➢ Financial assets measured either at Amortised cost or FVTOCI according to the Business Model are subject to impairment testing. (Since in
FVTPL, any impairment of the asset is automatically reflected in the measurement basis, so no further action is required. Hence impairment
testing is to be done for Amortised cost and FVTOCI)
➢ A loss allowance for any expected credit losses must be recognised in PL or OCI, depending on the classification of the asset
➢ Loss Allowance is the allowance for expected credit losses on:
• Financial assets measured at Amortised cost or FVTOCI
• Lease Receivables
• Contract Assets (under IFRS 15), Loan Commitments and financial guarantee contracts
➢ Credit Loss is the present value of the difference between all contractual cash flows due to be received and those expected to be received (i.e.
all cash shortfalls). It is to be discounted at original effective interest rate.
➢ The amount of the loss allowance depends on whether or not the instrument’s credit risk has increased significantly since initial recognition:
• If significant, the loss allowance is the amount of the lifetime expected credit losses (i.e. expected credit losses that result from all
possible default events over the life of the financial instrument);
• If not significant, the loss allowance is 12-month expected credit losses
➢ A credit loss can arise even if all cash flows due are expected to be received in full, if receipts are expected to be late, the expected present
value will fall.
DERECOGNITION OF FINANCIAL ASSETS & FINANCAIL LIABILITIES
➢ It means terminating Book Values of Financial Assets and Financial Liabilities.
➢ This is done only when contractual rights and obligations doesn’t exist
➢ Factoring is one of the methods for de-recognition. Under factoring, financial assets are transferred to some other entity against consideration:
• Factoring with recourse: Financial Assets will not be derecognized. Rather factoring will be considered as Loan.
• Factoring without recourse: Financial Assets will be derecognized. Any difference will be transferred to Profit or Loss. 68

HEDGE ACCOUNTING
➢ Hedge Accounting is voluntary. If hedge accounting is not used, hedged items and hedging instruments are accounted for in the same manner
as other financial assets and liabilities.
➢ Hedge Accounting recognises symmetrically the offsetting effects on profit or loss of changes in the fair values of the hedging instrument and
the related item being hedged.
➢ There are two types of hedging relationships:
• Fair Value Hedge: A hedge of the exposure to changes in the fair value of a recognised asset or liability
• Cash Flow Hedge: A hedge of the exposure to variability of Cash Flows.
Fair Value Hedge
➢ For a fair value hedge, the gain or loss on the hedging instrument is recognised in Profit or Loss with one exception that if the
hedged item is an equity instrument at FVTOCI, those amounts remain in OCI.
Lets understand the concept of fair value hedge accounting through below example:
Suraj owns inventories of 5,000 tons of timber which it purchased on 30/6/2017 for Rs.50,000. Management is concerned that the price of timber
might fall, which would have an effect on the selling price of the products that will use the timber. It has therefore entered into a futures contract
to sell the timber at an agreed price of Rs. 60,000 on 31/3/2018.
At 31/12/2017, the fair value of the timber has fallen to Rs.48,000 and the futures price for delivery on 31/3/2018 is now Rs. 58,000. Mgt. has
designated the timber as a hedged item and the futures contract as the hedging instrument and the hedge is deemed to be effective. Then,
If hedge accounting is NOT used:
The futures contract will be recognised as a derivative asset at a value of Rs. 2,000 (60000-58000) and the inventory will still be measured at
cost of Rs. 50,000. The accounting entry would be: Dr. Derivative Asset & Cr. Profit or Loss for Rs.2,000.
The gain on the futures contract is recognised immediately in Profit or Loss but no loss would be recognised on the value of inventory hence this
has created a mismatch when hedge accounting is not followed.
If hedge accounting is used: Pls refer the next slide---
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If hedge accounting is used:
The futures contract will still be recognised as a derivative asset of Rs. 2,000 but the value of inventory will now be measured at fair value of Rs.
48,000, so it matches the gain and loss in the Profit or Loss in the same period. The accounting entries would be:
Dr. Derivative Asset & Cr. Profit or Loss for Rs. 2,000 and Dr. Profit or Loss & Cr. Inventory for Rs. 2,000
This time both the gain and the loss affect Profit or Loss in the same period; hedge accounting has facilitated matching the upside with the
downside.
Hence, the gain or loss from remeasuring the hedging instrument at fair value should be recognised immediately in Profit or Loss.
Cash Flow Hedge
The portion of gain or loss on the hedging instrument that is determined to be an effective hedge is recognised in OCI and any remaining gain or
loss is hedge ineffectiveness that is recognised in profit or loss. (It is up-to the entity to decide on how much is the effective hedge)
70

IFRS 15: REVENUE FROM CONTRACTS WITH CUSTOMERS (1/3)
REVENUE RECOGNITION
IFRS 15 outlines five steps of the revenue recognition process:
Step 1: Identify the contract(s) with the customer
Step 2: Identify the separate performance obligations
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when (or as) a performance obligation is satisfied
Step 1: Identify the contract(s) with the customer
The contract can be written, verbal or implied based on customary business practices.
The revenue recognition principles of IFRS 15 apply only when a contract meets ALL of the following five criteria:
i. The parties to the contract have approved the contract;
ii. Each party’s right regarding the goods or services in the contract can be identified;
iii. The payment terms can be identified;
iv. The contract has commercial substance (i.e. the risk, timing or amount (RTA) of future cash flows is expected to change as a result of the
contract); and
v. Collection of consideration is considered probable (Note: Consideration may not be the same as the transaction price due to discounts &
bonuses)
These five criteria are assessed at the beginning of the contract. If the contract meets these criteria, they are not reassessed unless there is a
significant change in circumstances that make the contract rights and obligations unenforceable.
Note: A contract that doesn’t initially meet the criteria can be reassessed at a later date.
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Step 2: Identify the separate performance obligations
A performance obligation (PO) is a promise to deliver a good or service that meets both the following criteria:
Criterion 1: The customer can benefit from the good or service either on its own or together with other resources of the customer
Criterion 2: The promise to transfer the good or service is separately identifiable from other goods or services in the contract
If both these criteria are met then it shall be a Distinct Performance Obligation from other goods or services/promises in the contract. If not then,
all the goods and services in the contract (to the extent criteria is not met) are accounted for as a Single Performance Obligation.
Step 3: Determine the transaction price
Transaction price is the amount of consideration to which an entity is entitled in exchange for transferring goods or services.
It doesn’t include the amount collected for third parties (e.g. sales taxes)
The effect of following must be considered when determining the transaction price:
➢ Time Value of Money (However the time value of money doesn’t need to be considered fi the length of the contract is less than a year)
➢ Fair Value of any non-cash consideration (For Example: Barter)
➢ Estimates of Variable Consideration (For Example: Discounts, incentives, penalties, performance bonus, rebates, refunds, etc.)
➢ Consideration payable to the customer (It is treated as a reduction in the transaction price unless the payment is for goods or services received
from the customer)
Step 4: Allocate the transaction price to the performance obligations
Allocate the transaction price to each separate performance obligation identified in Step 2.
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Step 5: Recognize revenue when (or as) a performance obligation is satisfied
➢ Recognize revenue when (or as) a performance obligation is satisfied by “transferring a promised good or service (i.e. an asset) to the
customer”.
➢ A good or service is said to have transferred when (or as) the customer gains control of the asset.
➢ Performance obligation will be satisfied over time or at a point of time. For a performance obligation satisfied over time, an entity would select
an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied.
73

IFRS 16: LEASES (1/6)
IFRS 16: Leases was issued by the International Accounting Standards Board (IASB) in 2016 and is effective from January 1, 2019. Before IFRS
16, the relevant standard was IAS 17.
As a result of IFRS 16, more leased assets and lease obligations will appear in the Statement of Financial Position
I. LESSEE ACCOUNTING
➢ A lessee applies a single lease accounting model, under which it recognises all major leases on the Statement of Financial Position.
➢ Two major optional exemption that make this standard easier to apply are:
• Short Term Leases i.e. for less or equal to 12 months
• Leases of low value items (although the standard doesn’t specify a monetary amount, a reasonable amount can be indicated as leases of low
value items)
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Statement of Financial Position Statement of Profit or Loss
Asset: Lease Expense:
- Right of Use Assets - Depreciation
- Interest
Liabilities:
- Lease Liability

Measuring Lease Liability
It is discounted using the interest rate implicit in the lease, if known, or the lessee’s incremental cost of borrowing
Initial Measurement of Right of Use Asset
Direct Cost includes commission, legal fee (*if contingent on origination of lease), cost of negotiating lease terms and conditions (*if contingent
on origination of lease), cost of arranging collaterals, payment made to existing tenants to obtain lease, etc. BUT excludes general overheads and
cost to obtain offer for potential leases.
*if the cost would have incurred irrespective of lease being granted or not, then do not consider such cost.
IFRS 16 doesn’t specify that a right of use is in scope of either IAS 16 or IAS 38. Instead, it appears that right of use is a new
category of asset in the scope of IFRS 16 itself.
75
Lease Liability
Present Value of
Lease Rentals
Present Value of Expected
Payments at the end of Lease
Particulars Amount
Initial Lease Liability xxx
Add: Initial Direct Cost xxx
Add: Prepaid Lease Payments xxx
Add: Estimated Cost to dismantle, remove or restore, measured in accordance with IAS 37
(provision/decommissioning cost/etc.)
xxx
Less: Lease Incentive Received xxx
Right of Use Asset xxx

Subsequent Measurement of Lease Liability
➢ After initial recognition, lease liability is measured at amortized cost using effective interest method.
➢ The liability may require remeasurement if the terms of the lease are modified or the payment schedule is changed
➢ Revised Discount Rate may be used to remeasure liability when the lease term changes due to a change in non-cancellable period or when the
assessment of exercise of purchase option changes.
Subsequent Measurement of Right of Use Asset
After lease commencement, a lessee shall measure the right-of-use asset using a Cost Model, unless :
➢ the right-of-use asset is an investment property and the lessee fair values its investment property under IAS 40
➢ the right-of-use asset relates to a class of PPE to which the lessee applies IAS 16’s revaluation model, in which case all right-of-use assets
relating to that class of PPE can be revalued
Under the Cost Model, a right-of-use asset is measured at Cost less Accumulated depreciation and Accumulated impairment losses.
Depreciation on Right of Use Asset
➢ Depreciation is charged on the same basis as assets which are owned.
➢ The period over which the asset is depreciated is the lower of:
• Lease term; and
• Useful life
BUT if the lessee is reasonably certain to retain ownership at the end of the lease term then the asset is depreciated over its useful life.
76

Impairment of Right of Use Asset
➢ Lessee applies IAS 36: Impairment of Assets to determine whether a right-of-use asset is impaired and to account for the impairment.
➢ After recognition of an impairment loss, the future depreciation charges for the right of use asset are adjusted to reflect the revised carrying
amount.
Note: Any remeasurement of the lease liability will be adjusted against the carrying amount of the right-of-use asset. Then, the new revised
depreciation is calculated prospectively.
➢ The right-of-use asset cannot be reduced below zero. Any further adjustment of the lease liability is taken to profit or loss
Lease Modification
➢ A lease modification arises when there is a change in the scope of a lease, or the consideration for a lease, that was not part of the original
lease terms and conditions.
➢ Any lease modification is accounted for as a ‘separate lease’ only if:
• It increases the scope the scope of the lease by adding the right-of-use one or more underlying assets; and
• The consideration increases by an amount that corresponds to the stand-alone price of the increase in scope of the lease, after adjusting for
any specifics of the new contract
Otherwise just make necessary adjustments (remeasurement) in the existing Lease Liability and Right-of-use asset.
77

Sale and Lease Back
➢ The treatment of a sale and lease back of an asset depends on whether the revenue recognition criteria of IFRS 15 have been met
➢ If the revenue recognition criteria of IFRS 15 are met, then IFRS 15 shall apply i.e. the seller (lessee) will:
• Derecognise the asset sold
• Recognise a right-of-use asset for the asset leased back and simultaneously recognise the lease liability
If the asset is sold at a price that differs from its fair value, the seller must adjust the sale proceeds to Fair Value by treating the difference as:
• A prepayment of lease rentals, if sold at a below-market price; or
• Additional financing if sold at an above-market price (i.e. the difference of sale price and fair value is to be considered as an additional
financing and its treatment will be same as of lease liability)
➢ If the criteria of IFRS 15 are not met, then the seller must apply IFRS 9: ‘Financial Instruments’ and recognise a financial liability in respect of
the proceeds received (i.e. account for it as a loan).
Hence, no sale can be recognised and the asset cannot be derecognized if the criteria of IFRS 15 are not met.
II. LESSOR ACCOUNTING
A lessor classifies a lease as an Operating Lease or Finance Lease as follows:
➢ Leases that substantially transfers all the risk and reward incidental to ownership of the underlying asset is a Finance Lease
➢ All other leases are Operating Leases
78

II. LESSOR ACCOUNTING (continued..)
Finance Lease
➢ Indicators of a Finance Lease are:
• Ownership transfers at the end of the lease
• Lessee has option to purchase at a price below fair value
• Lease term is for the majority of the underlying asset’s useful life
• Present Value of minimum (future) lease payments is substantially equal to its (asset’s) fair value
• The underlying asset is of a specialized nature and can only be used by the lessee
➢ Presentation of Finance Lease:
Statement of Financial Position
• Derecognise the underlying asset
• Recognise “Asset held under Finance Lease” equal to the present value of lease payments to be received
Statement of Profit or Loss
• Recognise finance income on the receivable based on the effective interest method
• Rentals received by the lessor will then be split into a repayment of capital element and an interest element (i.e. Dr. Cash and Cr. Asset held
under finance lease & Cr. Finance Income)
Operating Lease
➢ Continue to recognise the underlying asset and depreciate normally
➢ Operating Lease Rentals will be credited to profit or loss on a straight line basis, unless a more systemic basis is deemed appropriate
➢ The difference of lease amount received and amount credited is treated as Unearned Income (Lease Equalization Reserve)
79

CONSOLIDATED FINANCIAL STATEMENTS (1/8)
EXCLUSION FROM CONSOLIDATION
➢ A subsidiary that has been acquired exclusively with the intention to resell it, it is not consolidated provided that it meets the IFRS 5 criteria of
a disposal group on acquisition. In this case, it is carried at fair value less costs to sell and disclosed separately.
➢ There are no exclusions from consolidation of individual subsidiaries which meet the control criteria.
SUNDRY PROVISIONS OF IFRS 10
➢ Intra-group balances and intra-group transactions and resulting unrealized profits should be eliminated in full
➢ The date of acquisition is based on when control passes and is not necessarily the legal date of acquisition.
EXEMPTION FROM PREPARING GROUP ACCOUNTS
➢ A parent need not present consolidated financial statements if:
• It is a wholly owned or partially owned subsidiary (provided the other shareholders have no objection to this i.e. 100% acceptance)
• The parent’s debt or equity instruments are not traded on a public market (i.e. not listed)
• The parent has not filed its financial statements with a recognised stock market (i.e. not in the process of listing also)
• The ultimate (or an intermediate) parent presents consolidated financial statements in accordance with IFRS.
80
Group
Parent Subsidiary
Control over investee arises when an investor is exposed, or has rights, to variable returns (e.g. dividends) from its involvement with the
investee and has the ability to affect those returns (which may be by virtue of agreement as well) through its power over the investee.
While assessing whether control exists, the existence and effect of currently exercisable potential ordinary shares (i.e. options or convertibles)
should be considered.

GOODWILL
➢ Goodwill only arises on consolidation; goodwill is not an asset of the parent or subsidiary
➢ Once recognised, goodwill must be tested annually for impairment and any fall in value will be recognised as an expense in the Consolidated
Profit or Loss. Goodwill impairment can Never be reversed.
➢ If non-controlling interest is valued at fair value, then its value will be reduced to the extent of the impairment loss relating to its percentage
shareholding. But it will not be reduced if Non-Controlling Interest is valued at its Proportionate share of identified net assets.
BARGAIN PURCHASE
➢ It is credited to Profit or Loss
➢ If on initial measurement, the fair value of the acquiree’s net assets exceeds the cost of acquisition, the acquirer reassesses:
• The value of net assets acquired;
• That all relevant assets and liabilities have been identified; and
• That the cost of the combination has been correctly measured.
➢ If there still remains an excess after the reassessment, then that excess is recognised immediately in Profit or Loss
NON-CONTROLLING INTEREST
➢ IFRS 3 allows for the non-controlling interest to be valued in one of two ways at the date of acquisition:
• At the proportionate share of the subsidiary’s identifiable net assets
• At fair value
INTRA GROUP BALANCES
➢ Consolidation represents the position and performance of a group of companies as if they were a single entity.
➢ Hence, intra-group balances are to be cancelled against each other
➢ Balances between the parent and subsidiary may not always agree with each other due to either Goods-in-transit or Cash-in-transit: contd…
81

• For Goods-in-transit- Add the price of the goods to consolidated inventory and the unrealized profit will be deducted from the selling
company’s profits
• For Cash-in-transit- Add the cash to the consolidated cash balance
UNREALISED PROFIT
➢ Unrealized profit on goods held in inventory or on other assets by the buying company at the year end is deducted from group inventory/ asset
➢ If the parent sold the goods, the adjustment is against consolidated retained earnings.
➢ If the subsidiary sold the goods, the adjustment is made in the determination of net assets at the reporting date.
INTRA-GROUP TRANSFER OF NON-CURRENT ASSETS
➢ On an intra-company transfer, a profit or loss may have been recognised by the selling company. This must be eliminated on consolidation.
➢ Summary of requisite adjustments on this is:
• Eliminate profit; and
• Adjust the depreciation charge
CONTINGENT LIABILITIES OF THE ACQUIREE
➢ IAS 37: ‘Provisions, Contingent Liabilities and Contingent Assets’ doesn’t allow contingent liabilities to be recognised in the financial statements
➢ However, as per IFRS 3, a contingent liability of a subsidiary that is a present obligation that has not been recognised (because an outflow of
economic benefits is not probable) must be recognised in the Consolidated Financial Statements as long as its fair value can be measured
reliably.
➢ Any future costs that the acquirer expects to incur in respect of plans to restructure the subsidiary must not be recognised as a provision at the
acquisition date. This will be treated as Post-Acquisition Cost (as such liabilities are not liabilities of the acquiree at the date of acquisition)
82

MEASUREMENT
➢ All assets and liabilities of the subsidiary that are recognised in the Consolidated Statement of Financial Position are measured at their
acquisition date fair values.
➢ This reflects the amount that would have been paid to acquire the individual assets and liabilities at the acquisition date and correctly identify
the value of goodwill acquired
➢ The non-controlling interest of the subsidiary is measured at either at Fair Value or at the proportionate share of subsidiary’s identifiable net
assets
ACCOUNTING FOR FAIR VALUE ADJUSTMENT
➢ If the subsidiary has not reflected fair values in its accounts, this must be done before consolidation.
➢ All assets and liabilities should be valued at fair value on acquisition and any changes to those values in the post-acquisition period will be
adjusted against retained earnings.
➢ Any additional (or reduced) depreciation based upon the fair value differences must be allowed for.
DEFERRED TAX
➢ If the fair value of an asset on consolidation is greater than the asset’s carrying amount, an additional taxable temporary difference will arise,
over and above that already recognised in the subsidiary’s single entity accounts.
➢ Recognition of the additional deferred tax liability is balanced by an increase in the amount of goodwill recognised on acquisition, as the value
of net assets has decreased.
DIVIDENDS
➢ Simply ignore dividends received by parent from the subsidiary on consolidation as Consolidation of Financial Statements will include
subsidiary’s profit and dividends from subsidiary are appropriations of profit and are Intra-Group Items.
➢ Hence, Dividend Income in the Consolidated Statement of Profit or Loss will be dividends received from non-group companies.
83

DISPOSAL
Following treatments are required in case of full disposal:
➢ Consolidated Statement of Profit or Loss and Other Comprehensive Income: Consolidate up until the date of disposal (as this PL & OCI are for
the period)
➢ Consolidated Statement of Financial Position: Since it is the position as on reporting date, the subsidiary no longer exists, so not consolidated.
➢ It is highly likely that the disposal of subsidiary will be classified as a discontinued operation. In this case, the results for the subsidiary to the
date of disposal will be presented separately from the results of the continuing operations.
INITIAL ACCOUNTING DETERMINED PROVISIONALLY
➢ If accurate figures cannot be assigned to elements of the business combination then provisional values are assigned to those elements at the
date of acquisition
➢ Any new information that becomes available, relating to acquisition date assets and liabilities, is retrospectively adjusted against the initial
provisional amounts recognised as long as the information is known within the measurement period. (please note that the measurement period
cannot exceed one year after the acquisition date)
➢ Subsequent Adjustments are treated in accordance with IAS 8:’Accounting Policies, Changes in Accounting Estimates and Errors’:
• An error in acquisition values is treated retrospectively
• A change in estimate is treated prospectively.
Now, lets discuss on the treatment for investments in associates or joint arrangement in the upcoming slides ------
84

IAS 28: INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
IFRS 11: JOINT ARRANGEMENTS
ASSOCIATE
➢ An associate is an entity over which an investor has significant influence.
➢ Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control
over those policies (i.e. only to participate & not to control)
➢ Generally, a holding of 20% or more of the voting rights of the investee indicates significant influence, unless it can be demonstrated otherwise
JOINT ARRANGEMENT
➢ A joint arrangement is an arrangement under which two (or more) parties have joint control.
➢ Joint control is the contractually agreed sharing of control of an arrangement.
➢ A Joint Arrangement is contractual and classified as either:
• Joint Operation: If the parties only have rights to individual/specific assets and obligations for liabilities, it is a Joint Operation and IFRS
11 applies
• Joint Venture: If the parties have rights to the net assets of the arrangement, it is a Joint Venture and IAS 28 applies.
Note: An investment in an Associate and Joint Venture should be accounted for using the Equity Method.
ASSOCIATES AND JOINT VENTURES
(Please note that, in this section, all references to associate shall apply to Joint Ventures as well)
➢ A group is defined as a parent and all of its subsidiaries. An associate is not a part of the group as it is not a subsidiary (i.e. it is not controlled
by the group). As such, the accounting treatment of the associate and JV are different to that of subsidiaries.
➢ Associates must be accounted for using the Equity method regardless of the fact that the investor may not have investments in subsidiaries &
doesn’t therefore prepare Consolidated Financial Statements. 85

Treatment of Associates & JV in Consolidated Statement of Financial Position
In group accounts, replace the investment as shown in the individual company’s statement financial position with:
Note: Do not consolidate line-by-line the associate’s or JV’s net assets. The associate is not a subsidiary, therefore all the net assets are not
controlled as they are for a subsidiary.
Treatment of Associates & JV in Consolidated Statement of Profit or Loss
➢ Do not add in the associate’s and JV’s revenue and expense line-by-line as this is not a consolidation and associate & JV are not the subsidiary
➢ Include group’s share in the associate & JV’s Profit after Tax (PAT) in the Consolidated Profit or Loss. For example: If 40% share and PAT of
associate is 2,00,000 then recognise 40% of 2,00,000 i.e. 80,000 separately under the head “Income from Associate” in Consolidated
Statement of Profit or Loss.
➢ Please note that the investment in the associate & JV can be reduced to Nil but no further (i.e. the investment in associate will not be negative,
even if there are post-acquisition losses of the associate)
Impairment
➢ After application of the equity method, including recognizing the associate’s losses, the investor should consider whether it is necessary to
recognise any additional impairment losses
➢ The entire carrying amount of the investment is tested for impairment by comparing it with its recoverable amount.
Unrealised Profit
➢ Unrealised profits are eliminated to the extent of the investor’s interest in the associate. 86
Particulars Amount
Cost of Investment xxx
Add/Less: Share of Post-Acquisition Profit or Loss xxx
Less: Any Impairment Loss recognised xxx
xxx

Exemptions to Equity Accounting
➢ If the associate or JV that is classified as held for sale under IFRS 5: ‘Non Current Assets Held for Sale and Discontinued Operations’
➢ It will be measured at the lower of its carrying amount (e.g. cost) and Fair Value less costs to sell.
JOINT OPERATIONS (under IFRS 11)
➢ A joint operation exists when an entity only has a share in the individual assets or liabilities of the joint arrangement (E.g. an oil company
sharing control of a pipeline)
➢ The accounting for any assets, liabilities, revenue and expenses will be in accordance with the relevant standard (E.g. IAS 16 for property)
➢ A joint operator recognises:
• Its assets, to include a share of any jointly-held assets
• Its liabilities, to include a share of any liabilities jointly incurred
• Its revenue, from the sale of its share of any output from the joint operation
• Its share of any revenue from the sale of the output of the joint operation; and
• Its expenses, to include a share of any jointly-incurred expenses
➢ If a joint operator sells goods to the joint operation at a profit or loss then it recognises the profit or loss only to the extent of the other parties’
interests in the joint operation.
➢ Similarly, if an joint operator purchases goods from a joint operation, it cannot recognise its share of any gains or losses until it resells them to
an external party.
87

Disclaimer
The information is intended only as a general guide and is not a substitute for professional advice. So, the information provided
herewith is intended to offer the user general information and is not intended to replace or serve as substitute for any audit, advisory,
tax or other professional advice or service. The viewer’s discretion is highly appreciated and the presenter doesn’t accept or assume
any responsibility or liability for any loss arising as a result of action taken or not taken based on the information available in this
presentation.
Moreover, this presentation may contain information sourced from publicly available information or other third party sources. The
presenter does not independently verify any such sources and is not responsible for any loss whatsoever caused due to reliance
placed on information sourced from such sources. The information contained in this presentation is intended solely for information.
88

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