Summary of key provisions of IAS & IFRS

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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
Summary of key provisions of IAS & IFRS which may be relevant to ACCA
financial reporting and audit papers for 2012 examinations
2010 Conceptual Framework for Financial Reporting
 Objectives:
 Meets the needs of a range of users
 Financial performance as per SOCI
 Financial position as per SOFP
 reporting entity:
 Separate legal entity
 Commercial substance of corporate group
 qualitative characteristics:
 fundamental characteristics of relevance and faithful representation
 enhancing characteristics of comparability, verifiability, timeliness and understandability
 elements of financial statements:
 Assets – rights to future economic benefits as a result of a past transaction or event
 Liabilities – future obligations to transfer economic benefits as a result of a past
transaction or event
 Equity – residual interest in an entity’s assets after deduction of all liabilities
 Income – the increase in economic benefits during an accounting period
 Expenses – decreases in economic benefits during an accounting period
 recognition in financial statements:
 Recognise if it meets the definition of an element of the financial statements, it is
probable that there will be an inflow or outflow of economic benefits and it can be
reliably measured.
 measurement in financial statements
 Usually historical cost or fair value, but could be present value or amortised cost
 presentation of financial information – useful to users of FS
Note that the Conceptual Framework for Financial Reporting was published in September 2010

and becomes an examinable document for 2012 examinations. There is little change so far in
comparison with the previous framework document – in effect, definitions etc have been carried
forward to the 2010 Framework document, although there has been some change re qualitative
characteristics.
Note – you may want to refer to your ACCA Paper F7 Financial Reporting study
materials for further detailed information.
Note – you should not rely upon this document for knowledge and understanding of
all aspects of these reporting standards and other examinable documents; rather
they should be used as an aid or as a prompt to your studies.
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
Note also that the 2010 Framework is part of a long-term convergence project between the IASB
and US FASB, so the above content may change at some future date.
IAS 1 – Presentation of financial statements
 Provides formats for classification and presentation of financial information
 Identifies components of financial statements
 Note items of OCI must now be classified as either items that may be reclassified to profit or
loss in future periods, or those items which will not be reclassified in future periods
IAS 2 - Inventories
 Valued at lower of cost and fair value less selling costs (i.e. NRV) for each separate item or
product
 Include all costs of getting item or product to current location and condition
IAS 7 – Statement of cash flows
 Standard format – may use direct or indirect method
 Three standard headings = operating, investing and financing
 Some flexibility within format – eg which profit figure to start with
IAS 8 – Accounting policies, changes in accounting estimates and errors
 Accounting policies should be appropriate and relevant, be consistently applied and be
disclosed

 Changes in estimates are taken to SOCI – e.g. change in depreciation method or revised
estimate of NRV
 Changes in accounting policy and fundamental errors should be accounted for as a Prior
Period Adjustment to re-state the opening position and comparative information
IAS 10 – Events after the reporting period
 Definition – those events between SOFP date and date of approval of financial statemen ts
 Adjusting events – those which provide additional evidence of the situation existing at the
SOFP date e.g. insolvency of major debtor notified shortly after the year end
 Non-adjusting events – those which do not provide evidence of the situation at the SOFP
date e.g. share issue after the year end. Disclose only, but may become adjusting event if
going concern basis threatened.
IAS 11 - Construction contracts
 Long-term defined as contract straddling two or more accounting periods
 Recognise foreseeable losses – prudent
 Recognise element of attributable profit – matching
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
IAS 12 – Income Taxes
 Tax on company income charge in SOCI and recognise as a current liability
 Deferred tax based upon full provision at SOFP date:
 Permanent differences ignored
 Temporary differences accounted for
IAS 16 – Property, plant & equipment
 Initial measurement – cost directly attributable to bringing the asset into working condition;
now compulsory to capitalise finance costs (if IAS 23 criteria met).
 Capitalise subsequent expenditure which enhances economic benefits of the asset.
 May be revalued – take revaluation to revaluation reserve and disclose in SOCI as other
income and SOCIE; continue to depreciate asset over remaining expected useful life.
Disclose name, date and qualifications of valuer in notes to the financial statements.

 Charge depreciation to reflect economic benefits consumed during the period
 May be possible not to charge depreciation if it is immaterial due to very long expected
useful life of asset and/or high residual values. If this is the case, asset to be maintained to a
high standard and is unlikely to suffer from economic or technical obsolescence.
 Refer also to IAS 36 – impairment of assets.
IAS 17 - Leases
 Operating lease – any lease not a finance lease – hire charges to IS on straight-line basis
 Finance lease:
 substantially all of economic useful life of asset and transfer of risks and rewards to
lessee – capitalise asset and liability at FV
 depreciation charge and finance cost charged to SOCI
 Sale and leaseback transactions:
 Operating leaseback – derecognise asset and recognise gain or loss on disposal
 Finance leaseback:
 defer gain or loss on disposal and amortise over lease term
 recognise finance lease asset and finance lease obligation
 account for annual depreciation charge and finance costs in IS
IAS 18 – Revenue
 Revenue should be recognised in the period to which it relates
 When has revenue been earned?
o When risks and rewards have been transferred
o When work or service has been substantially delivered or performed
o Upon identification of a critical point in a commercial relationship
IAS 20 – Accounting for government grants
 Match revenue grants against expense to which they relate
 Match capital grants with assets to which they relate – two possibilities
 account for gross cost of asset and deferred income on SOFP
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11

 preferred treatment as it provides more information
 account only for net cost of asset on SOFP
IAS 23 – Borrowing costs
 Compulsory to capitalise borrowing cost during construction of a non-current asset when;
o Expenditure being incurred
o Borrowing being incurred
o Activities to construct asset started
 Part of harmonisation between IAS/US GAAP
IAS 27 (revised) – Separate financial statements
 Applies if consolidated financial statement not prepared – disclose why
 Disclose basis upon which subsidiaries, associates and joint arrangements have been
accounted for in these financial statement
IAS 28 (revised) – Investment in associates and joint ventures
 Associate - able to exert significant influence, but not control
 Indicated by 20%-50% of equity shares in another entity
 Equity accounting in group FS:
 share of profit after tax for the year in SOCI
 cost plus share of profits/losses since gaining influence in SFP
IAS 32 - Financial Instruments – Presentation
IAS 39 - Financial Instruments – Recognition and Measurement
IFRS 7 – Financial Instruments – Disclosures
IFRS 9 - Financial Instruments
 Use definitions of asset and liability per Framework to classify financial instruments
according to commercial substance.
 Returns on financial instruments in SOCI to be classified on consistent basis as financial
instrument on SOFP.
 Split compound or hybrid instruments into liability and equity elements at inception.
 Classification of financial assets per IFRS 9:
 Fair value through P&L (FVTPorL) is normal default classification for all financial assets
 Fair value through other comprehensive income (FVTOCI)

 can apply to equity instruments only upon initial recognition
 any impairment losses part of OCI movement in year
 no recycling of impairment losses or of gains/loss on subsequent disposal
 Financial assets measured at amortised cost – must pass two tests:
 business model test – asset held to collect contractual cash flows
 contractual cash flows characteristics test – cash flows consist solely of payment of
interest and capital.
 if either test failed, must be measured as FVTPorL
 if at amortised cost, subject to annual impairment review
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
 Financial liabilities classification of financial liabilities per IFRS 9 as either:
 Financial liabilities recognised at amortised cost (unless derivative or held for trading
then recognised at FVTPorL)
 Note – can still opt to measure liabilities at FVTPorL to eliminate or reduce financial
mismatch
IAS 33 – Earnings per share
 EPS = Profit after tax - NCI - dividends
Weighted average no. of equity shares
 Consider:
o Market issue at full price
o Bonus issue
o Rights issue
o Diluted EPS – convertible debt and options/warrants
IAS 36 – Impairment of assets
 Definition – reduction in recoverable amount below carrying value in the FS
 May apply to individual asset, collection of assets or cash generating unit (CGU)
 Cannot write down an individual asset to an amount lower than its recoverable amount.
 Normally only expected to perform impairment review if there is indication that asset(s)

may be impaired
 Compulsory impairment review required annually:
 IFRS 3 – goodwill on acquisition
 Financial assets
IAS 37 – Provisions, contingent liabilities and contingent assets
 Provision is a liability which has uncertainty regarding the exact amount to be paid and/or
the timing of such payments
 It is the minimum unavoidable obligation and may be discounted to PV for long-term
provisions
 May be the result of a legal or constructive obligation
 It will exclude:
 Future operating losses
 Relocation and retraining of existing employees
 Periodic repairs
 Statements of future intention
 Contingent liability – a possible obligation arising from a past event which will only
be confirmed by the outcome of one or more future uncertain events
IAS 38 – Intangible assets
 Assets without physical substance which entity has the right to control and from which it
derives economic benefits
 If finite useful life, then amortise
 If infinite life, then recognise at cost with annual impairment review
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
 Research and development costs dealt with by IAS 38
 Compulsory capitalisation if definition of development costs met
 Otherwise immediate write-off to SOCI
IAS 40 – Investment property
 Definition – development completed, held for investment potential and rented on arm’s

length basis to non-group member.
 Use cost model – if so account for as IAS 16 and depreciate over expected useful life
 Use valuation model – no depreciation charged and keep valuation up to date (any change
in valuation carried to SOCI)
IFRS 3 Revised – Business combinations
 Part of harmonisation between IFRS and US GAAP
 Costs incurred as part of acquisition are now charged to SOCI
 Now need to estimate FV of any contingent consideration at date of acquisition
 Choice of goodwill accounting:
o Proportionate or net basis – group share of goodwill only
o Gross or fair value basis – recognise NCI share of goodwill also
 Goodwill is a permanent intangible non-current asset and subject to annual impairment
review
IFRS 5 – Non-current assets held-for-sale and discontinued activities
 In group FS, cannot be held for sale if sold to another group member
 Conditions for held for sale:
o Must be a commitment to sell
o Must be immediately available
o Must be in current condition
o Must be at realistic price
o Must be actively marketed
o Thus – expect to be disposed of within 12 months
 Separate disclosure of discontinued activities in SOCI
IFRS 10 – Consolidated financial statements
 Elements of control:
o Power over the investee
o Exposure, or rights to, variable returns
o Ability to use that power
 Subject to periodic review to determine whether control acquired/lost or continues
 Potential voting rights (e.g. share options and convertible loans) must be capable of being

exercised
IFRS 13 – Fair value measurement
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Tony Sweetman – Kaplan Publishing
& Kaplan Financial Dec 11
 Does not apply to transactions covered by IAS 17 and IFRS 2
 Provides single and standardised definition and source of guidance for fair value
measurements
 Definition – the amount received to sell an asset or transfer a liability in an orderly (i.e. no t
distress) transaction between willing parties in an arm’s length transaction at the
measurement date
 Presumed to take place in an active market – principal or most advantageous market
 Excludes transactions costs – they are not a feature of the asset or liability to be valued