Dear All,Model 5 has been uploaded in the portal. Requirements.docx

Dear All,
Model 5 has been uploaded in the portal.
Requirements:
You are required to prepare a report identifying the following
criteria for each standard in the model.
1. Definition
2. Recognition and de-recognition
3. Measurements
4. Disclosure
5. If possible, link it with a financial statement of a Kuwaiti
company listed in the financial market.
The deadline to submit the report is May 6, 2015. The report
will not be accepted after the due date.
The report will be graded out of 20%. You can do the project
alone or in a group up to 3 students.
Regards,
Wasim
Model 5
Accounting for Assets and liabilities – Part 2
Certificate in International Financial
Reporting
Module 5: Accounting for assets and liabilities – part 2
Module 5: What you will learn - Accounting for assets and
liabilities – part 2
This module deals with a number of IFRSs that give rise to the
recognition of liabilities:
x x

Fair value measurement - IFRS 13
Financial Instruments: Presentation – IAS 32, Recognition and
measurement – IFRS 9 and IAS 39, Disclosure IFRS 7
Provisions, contingent liabilities and contingent assets - IAS 37
Events after the reporting period - IAS 10
Employee benefits - IAS 19
Income taxes - IAS 12
Shared-based payment - IFRS 2
Agriculture – IAS 41
Exploration for and evaluation of mineral resources – IFRS 6
x x x x x x x
© 2014 Association of Chartered Certified Accountants
Certificate in International Financial Reporting
Table of contents
Select a topic to study or click next.
Fair value measurement – IFRS 13
Financial Instruments Exercise – IFRS 9 Question Exercise –
IFRS 9 Answer
Exercise - IAS 37 Question
Exercise - IAS 37 Answer
Case study - provisions, contingent liabilities and contingent
assets Case study Question - provisions, contingent liabilities
and contingent assets
Case study Answer - provisions, contingent liabilities and
contingent assets
Events after the reporting date - IAS 10
Exercise - IAS 10 Question Exercise - IAS 10 Answer Employee
benefits - IAS 19
Exercise - IAS 19 Question 1
Exercise - IAS 19 Answer 1
Exercise - IAS 19 Answer 2

Exercise - IAS 12 Answer
Case study Question - deferred tax
Case study Answer - deferred tax
Share-based payment - IFRS2
Agriculture – IAS 41
Exploration for and evaluation or mineral resources - IFRS 6
Frequently asked questions
Quick Quiz
Fair Value Measurement – IFRS 13
IFRS 13 was published in May 2011 and established for the first
time
a single source of guidance for fair value measurement of assets
and liabilities under IFRS.
The key points from the standard are as follows:
Fair value is defined by IFRS 13 as the price that would be
received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(appendix A).
It is effective for accounting periods beginning on or after 1
January
2013, with early application permitted. It should be applied
prospectively from the period in which it is adopted (i.e. there
is no need for entities to go back to prior periods and restate
fair values for the new requirements of IFRS 13).
In order to measure fair value the entity must determine
(paragraph B2):
x
x

The asset or liability to be measured
The principal market for the asset or liability (i.e. the one with
the greatest volume and level of activity)
The appropriate valuation technique to use (to reflect the
assumptions market participants would use when valuing the
asset or liability)
For a non-financial asset, the highest and best use
It does not prescribe when fair value should be used, only how
to
apply it when required by another standard.
x
This standard is applicable to all transactions and balances
requiring measurement at fair value under another standard,
with the exception of share-based payments accounted for under
IFRS 2 and leases falling within the scope of IAS 17.
x
Measurement Guidance
Valuation Techniques
Fair value measurement should then
IFRS 13 outlines three valuation techniques that may be applied
(paragraph 62):
x
Take account of any characteristics that might be relevant to a
market participant (e.g. condition and location of an asset)
Assume an orderly transaction between market participants at
the measurement date under current market conditions
Assume the transaction takes place in the principal market (or
failing this the most advantageous market)
Take account of highest and best use re a non financial asset
(even if this is not its current use)

Assume transfer of a liability or own equity instrument (i.e.
assume the liability remains outstanding but is passed to a 3rd
party, not that the liability is paid off or settled)
Reflect non-performance risk where a liability is concerned
(including the entity’s own credit risk).
1.
Market approach – uses prices and other relevant information
generated by market transactions involving identical or similar
assets or liabilities
Cost approach – current replacement cost
Income approach – discounted future cash flows or income and
expenses
x
2.
3.
x
x
Either one, or where appropriate a combination, of these
valuation
techniques should be selected and consistently applied.
x
x
Reporting
Disclosure
The standard outlines a ‘fair value hierarchy’.
Inputs used to measure fair value are divided into three
categories.,
The three categories are:

Level 1 – quoted prices in active markets for identical assets
and
liabilities
Level 2 – observable inputs other than those classified in level
1
Level 3 – unobservable inputs
The standard required entities to apply Level 1 when the
relevant
information is available (e.g. to value quoted shares). Where
such information is not available then Level 2 should be
applied. Level 3 should only be used as a last resort.
Detailed disclosure requirements are prescribed by the standard,
for the
most part following the fair value hierarchy described. The
disclosures are both qualitative and quantitative
For further information and a summary of this standard please
click on the following hyperlink to Deloitte’s IAS Plus website
where a summary of the standard can be accessed:
http://www.iasplus.com/standard/ifrs13.htm
Financial instruments
The topic of financial instruments is sufficiently complicated
that it
was necessary to split it into three standards. Originally these
were:
IFRS 9 is not yet complete. However in response to requests
that the
accounting for financial instruments be improved quickly, the
IFRS 9 project has been split into phases. As each phase is
completed the relevant portions of IAS 39 are deleted and
chapters in IFRS 9 are created.

x IAS 32 dealing with presentation issues (i.e. where to
record items
in the statement of profit or loss and statement of financial
position).
x IAS 39 dealing with recognition and measurement issues
(i.e. when to record an item in the financial statements and at
what value)
x IFRS 7 looking at disclosures (all the extra information
that should be supplied about financial instruments in addition
to the numbers that appear in the primary financial statements).
So far, the IASB has issued the chapters of IFRS 9 relevant to
all areas
except impairment and hedging. These sections will follow with
the aim that
IAS 39 will be replaced in its entirety in 2013.
For the purposes of this course, the main standard examinable is
IFRS 9. All questions in the assessment will test IFRS 9 unless
specifically stated otherwise. Therefore if there is no specific
reference to a standard, you should assume that the question is
testing IFRS
9.
A summary of the key points from the remaining chapters of
IAS 39 on impairment and hedging are included and this is part
of the examinable material of the course. If a question is testing
IAS 39 this will be specifically stated.
However the IASB has been working on a new standard, IFRS 9
Financial Instruments (‘IFRS 9’) that will ultimately replace
IAS 39 entirely in dealing with recognition and measurement
issues. It was originally intended to be effective for accounting
periods beginning on or after 1
January 2013. However the IASB deferred this to 1 January
2015. Early application is permitted though.
Following the key definitions on the next page, IAS 32, IFRS 7,
IFRS 9 and the relevant remaining chapters of IAS 39 will each
be covered in turn.

Reporting
Definitions
Key elements of definitions are provided below. For full
definitions refer to
paragraph 11 of IAS 32.
Financial asset – cash, an equity instrument of another entity
(i.e. an
investment) or a contractual right to receive cash (e.g. trade
receivables).
Financial liability – a contractual obligation to deliver cash or
another
financial asset to another entity.
Equity – any contract that evidences a residual interest in the
assets of
an entity after deducting all of its liabilities.
Financial instrument – any contract that gives rise to a financial
asset in
one entity and a financial liability or equity instrument of
another entity (e.g. debentures are a financial instrument as the
issuing company has a liability and the investing entity has a
financial asset, or right to receive cash).
Note that investments in subsidiaries, associates and joint
ventures and
employee benefit obligations are excluded from the scope of
IAS 32, 39 and IFRS 7.

IAS 32 - Presentation
Financial instruments of an issuer should be classified
on the basis of whether their substance is that they are equity or
liability. For example, if an enterprise has issued some
preference shares that contain elements that fit the definition of
liability (the shares could be redeemable on a specified date
such that the entity has an obligation to deliver cash) then the
share is to be treated as a liability despite its legal
classification.
Offsetting of financial assets against financial liabilities is only
allowed when there is a legally enforceable right of set off
which the enterprise intends to use.
Compound instruments should be split into their
component parts. For example, a convertible debenture is in
economic substance partly a debt and partly a share. Its price in
the market will depend on the relative importance of these two
parts. According to IAS 32 such a debenture should be
presented as partly debt and partly equity.
The presentation of the returns on such instruments should
follow
the above classifications. For example, any instrument shown as
debt should have a return shown as an interest expense even if it
is legally called a dividend..
http://www.iasplus.com/standard/ias32.htm

IAS 32 - Presentation
Convertible debt: Worked example
On 1 January 20X9, an entity issues convertible loan notes
totalling
$500,000. Interest is payable annually in arrears at 6%. The
market rate of interest for similar loan notes with no conversion
rights attached is 7%. The loan notes are redeemable on 31
December 20Y2. Show how they should be treated in the
financial statements when issued.
IAS 32 states that compound instruments should be split into
their components parts. The liability component should be
valued as if it were a similar liability with no conversion rights
attached. The difference between this figure and the value of the
compound instrument as a whole is the value of the equity part.
Equity component:
The equity component = (5,000 x $100) - $483,063 = $16,937
Comment:
On 1 January 20X9, the entity will record a liability equal to
$483,063 and in a separate reserve in equity the amount
$16,937, which represents the value of the option to convert to
shares at a later date.
Subsequently the discount of 7% will unwind, creating a finance
charge each year in the statement of profit or loss and
increasing the value of the liability in the statement of financial
position. Each annual payment of interest at 6% (i.e. $30,000)
will reduce the liability.
Liability component:
Date
31 Dec 20X9
31 Dec 20Y0
31 Dec 20Y1
31 Dec 20Y2
Cash Flow
$30,000 (w)
$30,000 (w)
$30,000 (w)

$30,000 (w)
+ $500,000
Discount Factor
1/1.07
1/1.072
1/1.073
1/1.074
Present value
$28,037
$26,203
$24,489
$404,334
Total value of Liability component:
$483,063
(w) ($500,000 x 6%) = $30,000.
Reporting
IFRS 7 - Disclosures
An entity must group its financial instruments into classes of
similar
instruments and, when disclosures are required, make
disclosures by class.
The two main categories of disclosures required by IFRS 7 are:
a.
b.
Information about the significance of financial instruments
Information about the nature and extent of risks arising from
financial instruments.

IFRS 9 - Financial Instruments
The main elements of this standard are as follows:
4. A financial asset shall be measured at amortised cost if
both of the following conditions are met:
1. An entity shall recognise a financial asset or financial
liability
when the entity becomes a party to the contractual provisions of
the instrument
x The asset is held within a business model whose objective
is to hold assets in order to collect contractual cash flows
x The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding
2. All financial assets are initially measured at fair value plus
transaction costs with the exception of ‘financial assets at fair
value through profit or loss’, which are held at fair value only
(no transaction costs).
5. Financial assets not measured at amortised cost as described
in point 4 above shall be measured at fair
value.
3. Subsequent measurement is determined by classification of
the financial asset either at amortised cost or fair value on the
basis of:
6. Aside from the guidance as outlined in points 3 to 5 above,
an entity may also, at initial recognition, decide to
designate a financial asset as measured at fair value through

profit or loss 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 recognising the gains and
losses on them on different bases.
x The entity’s business model for managing the financial
assets
x The contractual cash flow characteristics of the financial
asset
IFRS 9 - Financial Instruments
7. Gains and losses on both categories of financial asset
described above are recognised in profit or loss, except
for an investment in equity instruments that is not held for
trading where, at initial recognition, an entity chooses to make
an irrevocable election to present gains and losses through other
comprehensive income or where a hedging relationship exists
(hedging rules from IAS 39 still apply).
10. Financial liabilities are initially measured at fair value plus
transaction costs with the exception of those held for trading or
designated ‘at fair value through profit or loss’, which are held
at fair value only (no transaction costs).
11. After initial recognition liabilities held for trading or those
designated at FVTPL are held at fair value. All other financial
liabilities are held at amortised cost.
8. There are two categories of financial liability:
x those held for trading or designated ‘at fair value through
profit or
loss’ (FVTPL)

x any other financial liability
9. An entity can only choose to designate a liability at FVTPL if
doing
so eliminates or significantly reduces an accounting mismatch.
The result is that most financial liabilities will fall into the
second ‘default’ category of
the two listed above.
IAS 39: Recognition and measurement
Whilst IFRS 9 remains incomplete, IAS 39 remains the only
source of
guidance relating to impairment of financial assets and hedging
rules.
12. Hedge accounting constitutes an extra, special set of rules
that
can be applied to financial instruments when an entity enters a
hedging arrangement. An entity can designate a hedging
instrument so that its change in fair value is offset against the
change in fair value of a hedged item. For example, if an
enterprise has committed to pay an amount of foreign currency
in six months time, it might buy the currency in advance in
order to avoid the risk of the foreign currency
rising in value before the date of payment. Hedge accounting
involves designating the advance purchase as designed to fulfil

the future obligation. It is allowed when certain
conditions are met (e.g. formal documentation exists, hedge is
effective).
A financial asset is only impaired where there is objective
evidence
resulting from one or more events that occurred after the initial
recognition of the asset. Such objective evidence could include
the counterparty defaulting on repayments of interest or capital,
or going into liquidation, such that the full value of the
financial asset may not be recoverable.
Financial assets should be reviewed for objective evidence of
impairment at each reporting date and a full impairment review
performed where evidence is identified (paragraph 58).
The amount of impairment loss is measured as the difference
between the
carrying amount and the present value of estimated future cash
flows recoverable (discounted at the financial asset’s original
effective interest rate – paragraph 63).
Exercise - IFRS 9 Question
Please review the following exercise:
How can an auditor tell whether a financial asset should be held
at fair
value through profit or loss or at amortised cost?
It is impossible to tell by looking at a financial asset (which is
represented merely by a piece of paper) whether it should be

held at amortised cost or at fair value through profit or loss.
The auditors must consider the properties of the instrument.
By definition only investments in debt instruments will qualify
for classification at amortised cost since these will give rise to
payments of principal and interest. Examples include loans
made by the entity, and investments in bonds.
As shares do not have cash flows that are solely principal and
interest they cannot be measured at amortised cost. By default
therefore all investments in equities must be held at fair value.
Reporting
Key definitions of IAS 37:
Provision
x A liability of uncertain timing or amount.
Liability
x Present obligation as a result of past events
x Settlement is expected to result in an outflow of resources
(payment)
Contingent liability
x a possible obligation depending on whether some uncertain
future event occurs, or
x a present obligation but payment is not probable or the
amount cannot be measured reliably
Contingent asset
x a possible asset that arises from past events, and
x whose existence will be confirmed only by the occurrence
or non- occurrence of one or more uncertain future events not
wholly within the control of the enterprise.

Basic feature of IAS 37
It defines provisions as liabilities of uncertain timing or
amount.
That is, a provision must meet the definition of liability as
found in the framework that there should be an expectation of
an outflow of:
x resources,
x a past event
and at the reporting date:
x a legally enforceable obligation to a third party or a
constructive obligation (paragraph 10).
.
“This standard excludes certain items covered by
other standards such as financial instruments dealt
with by
IASs 32 and 39 and IFRS 7 and also excludes
executory contracts
where both sides of the contract are equally
unperformed (paragraph 1).”
Provisions
A provision should be recognised in the statement of financial
position when it meets the definition of a liability, where there
is a probable outflow of resources and, the extra feature as

usual for the recognition of assets and liabilities, is that there
should be a reliable estimate (paragraph 14).
There should be no provision for future operating losses, but
there
may be provision for onerous contracts (paragraph 63).
There are a number of explanations about restructuring
provisions
in the context of this standard, but they make it clear that such
provision should not be set up unless there is an obligation at
the reporting period end date (paragraph 72). .
Once a provision has been recognised it should be measured at
the
best estimate of the future outflow. This means that it is also
required to discount the numbers where this would be material,
at pre-tax discount rates assuming that the provision is
measured in pre-tax terms (paragraphs 36,45 and 47).
Any expected gains from disposals of assets related to the
setting
up of provisions should be ignored, but reimbursements, for
example from insurance contracts, should be accounted for
(paragraphs 51 and
53)..
Reporting
Liabilities
A contingent liability is defined in two different ways:
1. IPossible obligations.
2. Existing obligations at the reporting date which are not

recognised as liabilities either because they will probably not
lead to an outflow or are not able to be measured reliably
(paragraph 10).
Contingent liabilities should be disclosed where they are
material in size
and not remote.
Contingent gains should not be recognised, but should be noted
where
material (paragraph 31)..
A provision can only be recognised when there is an obligation
at the
reporting date. Should one recognise a provision for the
possible loss of a law case?
At first sight the possible loss of the law case might seem to be
a contingent liability that should therefore not be recognised.
However, the wrong act that has led to the enterprise being
taken to court was committed in the past, and if the enterprise is
likely to lose the case then an obligation does exist at the
reporting date and there is an expectation of future outflows of
cash. This implies that the enterprise must consult its lawyers
and estimate whether it is likely to lose the case and then
estimate, as well as possible, the size of the liability and then
provide for it. The amount should, of course, be discounted if

that would be material. This is rather like recognition of a
payable creditor; in such a case it does not take a creditor to sue
one in court in order to be forced to recognise that one has an
obligation.

Reporting
assets
Newberg is a German company. On the right you can see
Newberg’s
statement of profit or loss for 2007and 2008.
On the following page you can see some accounting policies and
notes.
The facts are loosely based on a real case, but the company,
year and exact numbers have been changed.
Consolidated statements of income (in billions Euro)
2007
2008
Sales
32
38
Cost of goods sold
(10)
(12)
------
------
Gross profit
22

26
Marketing and distribution
(8)
(10)
Research and development
(5)
(6)
Administrative
(2)
(2)
Other expenses
(1)
(1)
------
------
Operating profit
6
7
Non-operating income
3
3
------
------
Results before special charges and taxes
9
10
Special charges
Acquired in-process research and development
-
(9)
Restructuring
-

(6)
Taxes
On result before special charges
(2)
(2)
Benefit from special charges
-
3
------
------
7
------
(4)
------
Net income (loss)
assets
Extracts from significant accounting policies and notes
Basis of preparation of financial statements. The consolidated
financial statements of the Newberg Group are prepared in
accordance with International Financial Reporting Standards.
Obtaining clearance from the regulatory authorities caused a
delay
in completing the transaction. These final clearances were
received on
24 February 2009 and the purchase of the shares was completed
on 10

March 2009.
Consolidation policy. The consolidated financial statements of
the
Group include the parent and the companies which it controls
(subsidiaries). Control is the power to govern the financial and
operating policies of an enterprise so as to obtain benefits from
its activities. Control is normally evidenced when the Group
owns, either directly or indirectly, more than 50% of the voting
rights of a company’s share capital.
The acquisition was accounted for under the purchase method of
accounting. Accordingly, the cost of the acquisition, including
expenses incidental thereto, was allocated to identifiable assets
and liabilities and to in-process research and development based
on their estimated fair
values. The portion of the acquisition cost allocated to in-
process research and development was charged in full against
income. This approach is consistent with the Group’s
accounting policy for research and development costs. After
consideration of these items, the excess of the acquisition cost
over the fair values was recorded as goodwill.
Changes in group organisation. On 24 June 2008, a subsidiary
of
Newberg entered into an agreement with the shareholders of
Orange Limited to purchase all of the issued and outstanding
common shares. Completion of the transaction was not possible
until certain regulatory clearances had been obtained. In view of
the overall materiality of the transaction and the advanced state
of the integration planning, the consolidated financial
statements of the Group give effect to the acquisition of Orange
Limited from 31 December 2008..
When you have studied the notes and table please go to the next
page to
see a question relating to the case study.

Case study Question - provisions, contingent liabilities and
contingent assets
Please review the following case study question:
Do you think that a provision for restructuring costs should
have been set
up at 31 December 2008? (Other questions on this case will be
asked in
Module 6).
Page | 22
According to IAS 37, a provision should be set up when:
1. there is a probable expected outflow,
2. it can be measured reliably,
3. there is a past event, and
4. there is an obligation.
In this case, perhaps the first two criteria could be satisfied. It
is not clear whether there is a past event, and it seems most
unlikely that there was an obligation. The latter could only be
set up by committing the company irrevocably to transferring
resources to a third party.
The exact facts would need to be examined. However, since the
subsidiary (Orange) does not seem to have been controlled by
the balance sheet date, it seems unlikely that the Group could
have created a liability in it.
Events after the reporting date - IAS 10
The standard deals with two types of event that occur after the

reporting date. First, adjusting events, which are those that
provide information concerning conditions which did exist at
the reporting date. These should lead to recognition
changes,that is changing the numbers in the statement of
financial position. The second type of events after the reporting
date are non-adjusting events. These give information about
conditions that did not already exist at the reporting date and
they should not lead to changes to the numbers in the statement
of financial position, but, if material, to disclosures in the notes
(paragraphs 3, 8 and 10).
Examples of adjusting events are better information about the
status of customers at the reporting date, enabling an entity to
measure the size of its receivables more accurately. An example
of a non-adjusting event would be the destruction of some of an
entity's assets accidentally, perhaps by fire, after the reporting
date (paragraph 22 for more
examples).
If dividends on ordinary shares are proposed, but not declared,
after the reporting date then these should not be recognised as
liabilities (paragraph 12).
Whether or not an enterprise is a going concern should be
assessed
at the stage at which the financial statements are being
prepared, which is, of course, after the reporting date.
If it is determined that an enterprise is not a going concern, then
the accounts should be prepared on the break up basis (even if
the events leading to the conclusion occurred after the reporting
date). This of course does not apply if only part of the
enterprise is not a going concern. The reporting unit is the
whole of the enterprise and the status
of going concern should be assessed for that whole reporting
enterprise
(paragraph 14).

Can proposed dividends be a liability?
A proposed dividend could certainly be a liability if it has been
approved at the Annual General Meeting, but this will not have
happened by the time that the financial statements are prepared.
This led IAS 10 to conclude that proposed dividends should not
be accrued.
This standard applies to all employee benefits, not just to
pensions,
except those to which IFRS 2 “Share Based Payment” applies
(paragraph2).
Defined benefit plans are much more complicated, and a large
part
of the standard deals with them. Constructive obligations as
well as written contractual ones should be accounted for
(paragraph 61).
The standard deals with such issues as accounting for
accumulating
paid absences and for bonus plans. In each case the standard
requires an enterprise to establish whether there is a liability at
the reporting date and to account for any liability (paragraphs

16 and 19).
An entity recognises the net defined benefit liability in the
statement of
financial position (paragraph 63).
Where an entity has a surplus in a defined benefit plan, the net
defined benefit asset can be recognised but there are limits on
the size of this asset (paragraph 64).
In a country with special forms of employee benefit systems
such as
multi-employer plans and government plans, these should be
accounted for as other plans on the basis of their legal and
institutional arrangements (paragraphs 32 and 43).
Defined contribution plans (where the entity’s obligation for
each
reporting period is simply the amount to be contributed for that
period) present few difficulties for accounting but the standard
does cover them (paragraph 51).
Actuarial gains and losses for retirement benefits are recognised
in
full immediately through other comprehensive income (i.e.
outside profit or loss) (paragraph 57).
Past service costs, which are caused, for example, if the benefits
in
the plan are increased, should be recognised in the period they
were granted, with no reference to vesting criteria (paragraph
103).
When calculating the value of the obligation, the projected unit
credit

method should be used and a discount rate measured by
reference to interest rates on high quality corporate bonds
(paragraphs 67 and 83).
“The Basic Principle of IAS 19:
The cost of providing employee benefits should
be recognised in the period in which the benefit
is earned by the employee, rather than when
it is paid or payable.”
Do possible future pay rises give rise to a present liability for
pensions?
Page | 27
The issue is not whether future pay rises give rise to a present
liability. The liability exists anyway and the future pay rises are
a part of correctly estimating the size of the liability. Therefore
the best estimate of future pay rises should be taken into
account.

When a defined benefit plan is enhanced, when should the cost
of
improving the benefits for existing pensioners be recognised?
Under the revisions to IAS 19 published in June 2011, past
service costs are all recognised in the period they are granted.
This includes those relating to existing pensioners and also to
current employees (who may or may not qualify for the
enhanced benefit at the date it is granted) since no reference is
made to any vesting criteria in the latest update to IAS 19.
This standard largely concerns accounting for deferred tax. It
changed the basis of calculation to “temporary differences”,
which are calculated by reference to the difference between the
tax basis and the financial reporting basis of assets and
liabilities, instead of “timing differences”, which are based on
tax and book differences for revenues and expenses (paragraph
5).
There are also special rules for investments in subsidiaries,
associates and joint ventures. They amount to saying that
temporary differences that are unlikely to reverse where the
investor is in control of that process (for example, by being able
to stop the payment of dividends) need not be accounted for
(paragraphs 39 and 44).
The measurement of deferred tax assets and liabilities should be
based on tax rates that are expected to apply, but that generally
means current tax rates, although future rates can be used where
they have been enacted (paragraphs 47 and 51).
Deferred tax liabilities should be recognised for all temporary
differences, except those relating to non-deductible goodwill
amortisation and the initial recognition of certain assets and

liabilities in transactions that affect neither accounting profit
nor taxable profit.
Deferred tax amounts should not be discounted. At first sight,
this
seems surprising because other liabilities are required to be
discounted (see IAS 37). However, discounting would require
knowledge of when temporary differences would reverse, which
would require a large amount of guesswork (paragraph 53).
Deferred tax assets should similarly be recognised assuming
that
future taxable profit is probable. Deferred tax assets include, of
course, those arising on tax loss carry forwards (paragraphs 24
and 34).
The double entry for the creation of deferred tax assets and
liabilities should be charged to profit or loss or other
comprehensive income (and disclosed in the statement of profit
or loss and other comprehensive income) (paragraphs 58 and
61).
Deferred tax assets should be presented on the statement of
financial position separately from deferred tax liabilities
(paragraphs
69 and 74).
please click on the following hyperlink to Deloitte’s IAS Plus
For further information and a summary of this standard
website where a summary of the standard can be accessed:

“Temporary difference:
A difference between the carrying amount of
an asset or liability and its tax base.
“Taxable temporary difference:
A temporary difference that will result in taxable
amounts in the future when the carrying amount
of the asset is recovered or the liability is settled.
“Deductible temporary difference:
A temporary difference that will result in amounts
that are tax deductible in the future when the
carrying amount of the asset is recovered
or the liability is settled.”
A deferred tax liability is recognised on the revaluation of an
asset that is
intended for continuing use in the business. Does this meet the
framework’s definition of liability?
Despite the requirements of IAS 12 this amount does not meet
the Framework’s definition of a liability because at the
reporting date there is no legally enforceable obligation of the
enterprise to pay any tax since the enterprise has not disposed
of the asset.
Case study Question - deferred tax
Suppose that a British company, Acrobat, applies IFRS.

It purchases a machine for $10,000 in early 2008. The machine
is expected to last for ten years and to have no residual value.
The accounting year is the calendar year. The company is fairly
small and is able to claim 40% tax depreciation (capital
allowances) in the year of purchase. Suppose also, that Acrobat
buys land at $3m in early 2008, and revalues it to fair value of
$5m at 31 December 2008. What are the “temporary
differences” in 2008?
Case study Answer - deferred tax
Model Answer
The temporary differences are:
(i) Machine
Financial reporting basis of asset: 10000 - 1000 =
Tax basis of asset: 10000 - 4000 =
$9000
$6000
$3000
(ii) Land
Financial reporting basis of asset =
Tax basis of asset =
$5m
$3m
$2m
The temporary differences would be $2,003,000.

Share-based payment - IFRS 2
An equity settled share-based payment is a transaction in which
a
company issues equity instruments to another party in exchange
for goods and services. The most common example of such a
transaction is where employees receive equity instruments in
exchange for services rendered.
A cash settled share based payment is where another party
(again usually an employee) receives a cash payment whose
amount depends on the share price of the company.
For example, if a company grants a director 200 share options
on 1
January 2006, and these vest after two years, and assuming each
option has a value of $3 at the date of the grant, then at 31
December 2006, the accounting entry would be:
$
Debit Share Option expense (1 year)
Credit Equity
300
300
.
IFRS2 applies to all entities and there is no exemption for
private or
small companies.
It is important to differentiate between shares issued to acquire
a company which is accounted for under IFRS3 ‘Business
Combinations’ and shares issued for employee services

accounted for under IFRS2.
The issue of shares or rights to acquire shares requires an
increase in equity and the debit entry will be an expense when
the goods or services are consumed. If the share issue is linked
to past services, then the value of the shares given to the
employees will be expensed immediately.
If the issue of shares relates to a future vesting period, then the
value of the shares should be expensed over that period. .
Reporting
Agriculture - IAS 41
It covers all biological assets to the point of harvest (paragraph
1).
Biological assets are measured at each reporting period end date
at
their fair values less point-of-sale costs (paragraph 12).
Agricultural produce is measured at harvest at fair value less
point-
of-sale costs. This becomes the cost of inventory (paragraph
13).
Gains and losses go to profit or loss (paragraphs 26 and 28).
If fair value is not reliably determined, then measure at cost
(paragraph 30).
Government grants are treated as income when their conditions

are
met (paragraph 34).
Reporting
Exploration for and evaluation or mineral resources - IFRS 6
IFRS 6 imposes few requirements on companies that are
engaged in
exploration for, and evaluation of, mineral resources. The
‘standard’ merely requires entities to develop a policy for the
extent to which such expenditure should be capitalised and to
disclose that policy clearly in the financial statements..
That said IFRS 6 does require entities recognising exploration
and evaluation assets to perform an impairment test on those
assets when facts and circumstances suggest that the carrying
amount of the assets may exceed their recoverable amount.
IFRS 6 requires disclosure of information that identifies and
explains
the amounts recognised in its financial statements arising from
the exploration for and evaluation of mineral resources,
including:
a. its accounting policies for exploration and evaluation
expenditures including the recognition of exploration and
evaluation assets
b. the amounts of assets, liabilities, income and expense and
operating and investing cash flows arising from those assets.

Frequently asked questions
1.
If a company’s board of directors has decided on a
restructuring,
should the company not make a provision for the restructuring,
redundancy costs, etc?
Surely it gives useful information to the users of financial
statements to show a proposed dividend as a liability?
Can a deferred tax asset be shown in the financial statements if
the company is making losses?
1. It depends on the facts. A board decision does not of itself
create an
obligation to a third party, and the board could change its mind.
In such cases, IAS 37 does not allow a provision. This may not
be “prudent” but this is overridden by the need to comply with
the framework’s definition of a liability. Only when the
decision is communicated to those affected by the restructuring
would it be appropriate to recognise a provision
2.
3.
2. IAS 10 is based on the idea that it is not useful to show
something
as a liability that is not in accordance with the definition of a
liability.
The information about the proposed dividend can be given in
the notes.
3. It is unlikely as it must be probable that future taxable profits

will be
available against which to use the asset.
Reporting
Quick Quiz
Module 5 quick
quiz
Reporting
Module 5: quick quiz
Question 1
Dodo Ltd is preparing its financial statements to 31 December
20X3. The accounts are due to be finalised by 31 March 20X4.
Which of the following should not be adjusted in the financial
statements?
A.
On 1st February Dodo receives written confirmation that a
customer, Looney Bin, has gone into Liquidation. At the year
end the balance due from Looney Bin was material.
B.
On 27th March torrential rain causes one of three warehouses to
flood, damaging some of the inventory held there. Dodo
continues to trade successfully although at a reduced level.
C.
Dodo manufactures a specialist component for the computer
hardware industry. It costs $3.35 to produce and would
normally sell for $5.20. At the year end this component is held
in inventory at cost. However due to the launch of an updated
product, this component is only selling for $2.90

D.
On 15th March a legal case against Dodo arising prior to 31
December 20X3 is settled for $300,000. In the draft financial
statements a provision is included for substantially more.
The correct answer is B.
The flood is not indicative of conditions that were in place at
the year end and this type of event is never reflected in the
financial statements as it could not possibly have been foreseen.
Reporting
Question 2
The management team at Super Safe Ltd try to be as prudent as
possible when preparing the annual financial statements. Under
IAS 37 which of the following should they provide in the
financial statements:
A.
The overall operating loss they expect the company to record in
the following financial year.
B.
Costs associated with the restructuring of their sales and
marketing
division. Plans have been drafted by the board but not yet
announced.
C.
The loss they are anticipating on a contract they have in place
to
buy rubber matting at $15 per metre. The contract runs until the
end of next year and they are currently able to sell the matting
for
$12 per metre.
D.
All of the above.

The correct answer is C.
This is an onerous contract – effectively the company is tied in
to recording a loss on this matting.
Forecast operating losses should not be provided because at the
reporting date there is no ‘obligation’ to record that loss in the
following year.
Restructuring costs may be provided, if there is an obligation.
At present, management have not created any obligation to go
ahead with their plans though. To create an obligation to
proceed they must announce the plans.
Reporting
Question 3
A company purchased an item of plant for $270,000 on 1
January 20X0. The plant is depreciated in the financial
statements straight line over 5 years. For tax purposes the plant
is has a life of 3 years. What is the deferred tax balance in
respect of the plant on 31st December 20X1?
The applicable rate of corporate income tax is 30%
A.
Liability of $10,800
B.
Asset of $10,800
C.
Liability of $21,600
D.
Asset of $21,600

Reporting
Question 4
I C Ltd manufactures fridge freezers and with each one sold
offers a free guarantee. In one year the company expects to sell
30,000 fridge freezers. Of these they expect 1% to be returned
under the guarantee requiring major repair work costing on
average $300. They also expect
5% to be returned requiring minor repairs costing on average
$100.
How should the company record this guarantee policy in their
financial
statements?
A.
Recognise a provision of $240,000 on the statement of financial
position and disclose details in the notes.
B.
Disclose the details of the guarantee policy in the notes to the
financial statements
C.
Disclose the details of the guarantee policy in the notes,
including
an estimate of the likely cost to the company of fulfilling the
guarantee.
D.
No disclosure of the guarantee policy is required.
The correct answer is A.
The company has an obligation in offering the guarantee, and it
is probable, over the entire population of 30,000 washing
machines, that they will have to pay something in repairs cost.
Disclosure alone is therefore insufficient. The provision is
calculated using expected values:
(1% x 30,000 x $300) + (5% x 30,000 x $100) = $240,000

Reporting
Question 5
Sha La La Ltd recently suffered a small fire in one corner of the
warehouse. They have placed a claim with their insurer for
$220,000 to cover the cost of repairing the damage. They have
not had confirmation yet but believe it is more likely than not
that they will receive the payout.
How should the company treat this in the annual financial
statements?
A.
Nothing should be recognised or disclosed in relation to the
claim
until the company is certain of the outcome.
B.
A receivable for the full amount should be recognised on the
statement of financial position.
C.
A receivable for half the value of the claim should be
recognised at
this stage, as it is not certain that the money will be received
and this is more prudent than recognising the full amount.
D.
The details of the insurance claim should be disclosed in the
notes
to the financial statements.
The correct answer is D.
The insurance claim represents a contingent asset that will
probably result in an inflow of economic benefits and so should
be disclosed but not recognised on the statement of financial
position.

Reporting
Question 6
Under IFRS 9, which of the following financial assets should be
held at amortised cost:
1.
2.
3.
A fixed interest rate loan
An investment in a convertible loan note
A zero coupon bond
A.
All of the above
B.
1 and 3
C.
1 only
D.
1 and 2
The correct answer is B.
IFRS 9 states that a financial asset should be held at amortised
cost if the asset is held within a business model whose objective
is to hold assets in order to collect contractual cash flows and
the contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of
principal and interest on the principal amount outstanding. An
investment in a convertible loan note does not therefore qualify
to be held at amortised cost because the conversion option
would not be considered to represent either principal or interest.

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