Ifrs 15 revenue from contracts with customers

Friday, 13 April 2018 10:58 PM

5 STAGES APPROACH
STAGE NO . 1 Identification of contract
STAGE NO . 2 Identification of performance obligation
STAGE NO. 3 Transaction price
STAGE NO. 4 Allocation of price to separate performance obligation
STAGE NO .5 Book revenue

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 IFRS 15 – REVENUE FROM CUSTOMER CONTRACTS
(Replacing IAS 11 (Construction Contracts) & IAS 18 (Revenues))
5 STAGES:
1. Identification of Contract
2. Identification of Performance Obligation (Is it a single Obligation or there are different Obligations?)
3. Contract Price
4. Allocation of Price of Different Performance Obligation on the basis of Stand-alone Prices (only in
case of Different [Link])
5. Book Revenue

STAGE 1: Identification of Contract

IDENTIFICATION OF CONTRACT

Legal Rights Terms Defined Probable Chances of

Economic Outflow

Legally Enforceable
 Financial Position of Buyer
 Financial Usage of Buyer
 Past Practice

STAGE 2: Identification of Performance Obligation  Payment Terms

IDENTIFICATION OF PERFORMANCE
OBLIGATION

For Separate Performance Obligation

The entity promise to provide that Customer gets the benefit of that goods/
goods/ service is separately identifiable service separately OR together with
from other goods in contract other goods

Provided Separately Benefited Separately

Means market has people in it - If both meets, then different Performance Obligations
providing these goods/ services
- If anyone meets, then single Performance Obligation
separately

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EXAMPLES OF DIFFERENT PERFORMANCE OBLIGATIONS:
1. Books + Teaching
2. Generator + Maintenance Service
3. Drug + Marketing
4. Mobile + Simm Contract
5. Car + Warranty (Buy)
6. Goods Sold + Warehouse Services (Bill & Hold Sales)  “Custodial Services”

EXAMPLES OF SINGLE PERFORMANCE OBLIGATION:

1. Teaching one paper
2. Construction of a bungalow
3. Making a software

STAGE 3: Contract Price

1. Variable consideration can only be booked if its reversal is Impossible/ Improbable

E.g. of variable consideration  Penalty/ Incentive Clause (E.g. of Property Construction)

- Now if IFRS-15, revenue from “Sale OR Return” can be booked through expectation (E.g. Hyper star)
(This was not allowed earlier in IAS-18)
- But if Rental possible, then you can’t book variable revenue E.g. Asset Management (Arif Habib,
because revenue dependent on stock market index)

2. Variable consideration is booked through statistical tools like

Expected Value Analysis Most Likely Outcome

- Also if there is a material gap between time of delivery of goods/ services and the time of payment,
then we need to consider “Significant Financing Component”

NOTE: Non-cash consideration (Other than cash) from customer will be recorded at its Fair value.

2 Cases of Significant Financing Component

EXAMPLE 1: Goods/ Services sold today but payment after 2 years (2 [Link], 1. Goods, 2. Loan)

P.V of
Amount Received = 10,000 P.V = 11,000 12,100

Yr. 0 Yr. 1 Yr. 2

Interest Rate = 10%

Entries : Receivable 10,000

Sales 10,000
--------------------------
Year 1: Receivable 1,000
Interest Income 1,000

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 --------------------------
Year 2: Receivable 1,100
Interest Income 1,100
End of Tenor:
Bank 12,100
Receivable 12,100

EXAMPLE 2: Payment received today but Goods/ Services to be delivered after 2 years (In IFRS-15, Treat
this transaction as loan which will be invested in future. In IAS-18, this was treated as deferred income)

P.V of
Amount Received = 10,000 P.V = 11,000 12,100

Yr. 0 Yr. 1 Yr. 2

Incremental Borrowing Rate = 10%

Delivery of Goods

Entries: Bank 10,000

Loan 10,000
--------------------------
Year 1: Interest Expense 1,000
Loan 1,000
--------------------------
Year 2: Interest Expense 1,100
Loan 1,100
End of Tenor (Delivery of Goods):
Loan 12,100
Sales 12,100

STAGE 4: Allocation of Price on Different Performance Obligations on the basis of stand-

alone Prices

Stand-alone Price  $1,000

Generator

1,200 Stand-alone Price  $500

2 Years Maintenance Service

NOTE: If (assume) discounting is immaterial, then as per IFRS-15, future year’s income shall be booked
as deferred income.

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 Phone Stand-alone Price  $100

480 Stand-alone Price  $480

24 Months Network Service

Year 1:
Bank 480
Sales 281.5
Deferred income 198.5

STAGE 5: Book Revenue

BOOK REVENUE

Point in Time Over Time

- No Responsibility from now onwards 3 CASES

- Book revenue when Control Transfers 1. Customers gets benefit from goods/ services
HINTS: simultaneously (E.g. Teaching)
1. Legal title transferred 2. Seller performance creates an asset which
2. Possession transferred comes in the control of customer (E.g.
3. Risks & Rewards transferred Construction at customer’s plot, i.e. according
to stages of completion, book revenue)
3. The asset generated is of specialized nature and
of no use to seller + seller has right to receive
cash for work done to date. (E.g. Wheel cap
making Machine for Toyota with Toyota logo
marking technology).

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 WARRANTIES

Special Warranty/ Bought Standard Warranty

 Supplied separately  By Culture

 Benefitted separately  By Law

 It is like a separate contract  This warranty is not a separate performance

 It is treated as separate performance obligation obligation

 Entry:  This warranty is covered according to IAS-37

Bank 120,000  Entry:

Sales 100,000 P&L XXX

Deferred Income 200,000 Provision XXX

MODIFICATION Change in price/ scope OR duties

Treated as a Not Treated as a

Separate Contract Separate Contract

 Goods/ services are distinct &  Goods/ services are not distinct

 Prices charged of those goods/ services  Prices charged for additional goods/

reflect standalone prices of those goods/ services does not reflect standalone

services (market price of extra work/ job prices of those goods/ services E.g. Big

done) Discount (Question)

 Treat It as a separate contract  Merge it with the existing contract, as a

cumulative catch up adjustment

Substance over Form: The economic substance of transactions and events must be recorded in the
financial statements rather than just their legal form in order to present a true and fair view of the affairs
of the entity.

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 Issue of Discount:

E.g. 2 Markers, Rs. 15 Each & 3 rd Marker for Free

Yr. 0 Rs. 30 Rs. 0 Yr. 1

Entry: Bank 30

Sales 30

Yr. 0 Rs. 20 Rs. 10 Yr. 1

Booking future profits in today’s books is overstating today’s profits and is treated as Fraud
in accounting!

Therefore; Entry: Bank 30

Sales 20

Deferred income 10

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 IAS 40 – Investment Property
EARNING RENTALS & CAPITAL APPRECIATION

Investment property is land or buildings held to earn rentals or for capital growth or both.

SCOPE/ APPLICATION:
Type Of Property Applicable Accounting Standard
Property bought for routine resale IAS–2
Property bought for use in business IAS–16
Construction of property for 3rd party IFRS–15
Construction of property for future owner occupied use (self- IAS–16
construction asset)
Construction of building for the future investment property IAS–40
Land bought but no use yet decided by management IAS–40

DUAL USE OF PROPERTY:

If both portions* can be sold separately means separate lease papers for both properties, then separate
standards on both portions (RENTED IAS 40 & OWNED IAS 16).
If both portions cannot be sold separately, then look for/ check significance (E.g basis used e.g. Floor
Area, Revenue Generation).

* Means One portion of the asset is used in business, and for the other portion you are earning rent.

ANCILLIARY SERVICES:
 If ancillary services are insignificant and rental income is major, then IAS 40 applies on complete
property e.g. Dolmen Mall (only shops rented from where rental income is earned significantly)
 If ancillary services are significant in comparison with rental income, then IAS 16 applies on
complete property E.g Hotels ( where they don’t just earn from rooms , they have other services
like pick & drop, marriage hall, laundry services , from where they earn more than rent)

IAS 40 - MEASRUMENT MODELS:

1. Cost Model:
a. Cost less Accumulated Depreciation
b. Same as IAS-16

2. Fair Value model

a. Recorded at F.V
b. All changes in F.V taken to P&L
c. No depreciation in case of F.V (Logic – Automatic Booking)

NOTE: If IAS-40 (Whichever model i.e. Cost or F.V Model) is applied on one investment property, then it
will be applied on all other Investment properties. (I.e. if one property on cost model then the rest of
properties are also to be kept on cost model).

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CASE 1: If Parent co. has given a property on rent to Subsidiary:
In individual Book of Parent Co.  IAS-40 applies.
In Individual Books of Subsidiary & In Group  IAS-16 applies (Because if we look at this on group level,
then this asset is being used by subsidiary in its business, therefore IAS-16).

CASE 2: If Parent co. is selling an asset to Subsidiary:

This sale will not actually be a sale because asset is being sold inside the group.
Therefore in this case, in individual Book of Parent Co.  IFRS-5 applies.
In Individual Books of Subsidiary & In Group  IAS-16 applies (since the asset is being sold, therefore
IAS-16 will apply with depreciation which wasn’t booked under IFRS-5 will now be booked).

CHANGING MODELS:
Change is allowed if that change increases relevance & reliability of Financial Statements.
Standard says that it is highly unlikely that a change from Fair Value Model to Cost Model will increase
relevance & reliability.
 Model’s Change will always be treated as Change In Accounting Policy

CHANGE IN USE: If a property was first used in own business (E.g. MHA Institute), but later it was rented
out, then it means IAS-16 will be applied first and then after Change in use IAS-40 will apply.

If cost Model is used in IAS-40: Simply transfer the carrying value at the date of change in use to other
standard (IAS-16). Only change the name of IAS. Cost model treatment is same in both IASs.

If Fair Value Model is used in IAS-40:

I. IAS-16 to IAS-40: Revalue the property at the date of change in use using IAS-16 and then shift
to IAS-40. No depreciation will be charged afterwards.

II. IAS-40 to IAS-16: Revalue the property at the date of change in use using IAS-40 and then shift it
to IAS-16. Now, calculate remaining life of asset and then depreciate.

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 IFRS 16 – Leases
(Old Standard – IAS 17)
A LEASE is an agreement whereby one party pays another in order to use an asset for an agreed length
of time

1. Finance Lease: A finance lease is a lease that transfers substantially all the risks and rewards of
ownership to the party using the asset. In some cases legal ownership is transferred at the end of the
lease. It is like a bought asset on loan. It’s normally for the major life of asset. In Finance lease, repairs
& insurance are responsibility of lessee.
Entry: PPE XXX
Finance Lease Obligation XXX

As Finance lease is a loan, that’s why lease rentals paid are treated as repayment of loan.

Entry: Finance Lease Obligation (principal) XXX

Interest Expense (Interest) XXX
Cash XXX

2. Operating Lease: An operating lease is any lease other than a finance lease. It is like taking an asset
on rent. Where;
 No Rent
 No FLO
 Complete rental is booked as expense.
 It’s for a short period of time
 Repairs & insurance are responsibility of lessor.

LESSEE’S BOOKS
(With New Changes)

New Treatment: For lessee, all leases should now be treated as Finance Leases according to New IFRS
I.e.
IFRS – 16. Except;
1. Lease with Lease term of less than 12 months.
2. Low value assets (Immaterial value, not defined in exact nos. by Framework).

According to New IFRS (Asset & obligation should be booked/ recognized at any cost);
Entry: Right to Use Asset XXX [Depreciate]
Finance Lease Obligation XXX [P.V of lease Obligation (P.V of M.L.P) (L.A.S)]

Off Balance Sheet Financing (Fraud): An Asset having a life of 10 years, this asset is taken on an
operating lease of 3 years  Obligation should therefore be booked.
Off Balance Sheet Financing means to take loan without reporting/ recognizing any liability against it. E.g
Airlines.

NOTE: Right to use Asset is booked on the basis of P.V of future cash flows.

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 Lease Amortization Schedule – Lessee

Date Rental Finance Cost Decrease in FLO Balance of FLO

Entry: Interest Expense XXX

Lease Obligation XXX
Cash XXX

NOTE: If first payment now I.e. at the start of Year 1, Decrease in obligation will be done on Day 1. It
should be treated as pure decrease in loan.

Entry: Lease Obligation XXX (No element of Interest)

Cash XXX

IF LEASE TERM & LIFE IS DIFFERENT, Then for DEPRICIATION:

1. If the asset is expected to be transferred to the lessee at the end of the lease, then always
depreciate it over the life of the asset. (Logic  Because in this case, lessee will use the asset
throughout its life)

2. If the asset is not expected to be transferred to the lessee at the end of the lease, then
depreciate it on the lower of;

I. Lease Term
II. Life of Asset

NOTE: Life of asset can be lower than lease term if lessee wants to pay lower rentals.

Initial Direct Cost by Lessee in Lease  must be Capitalized & Depreciated

The asset is providing us benefit for many years. Therefore we would spread such cost over life of asset.
Entry: Right to use XXX
Cash XXX

Sale & Leaseback

A. If sold at Fair Value:

1. If the sale meets the Criteria of IFRS-15 (I.e. Life = 20 Yrs., Lease term = 4 Yrs.):
– I.e. Performance Obligation Satisfied, then de-recognize the asset.
– Book right to use the asset according to the interest retained.
– Book gain on disposal to the extent of sale.

2. If sale doesn’t meet the Criteria of IFRS-15 (I.e. Life = 20 Yrs., Lease term = 20 Yrs.):
– I.e. no risks and rewards have been transferred
– Then no need to de-recognize asset
– Just book entire transaction as a loan.
– No Right to use
– No gain/loss on disposal.

STEPS of IFRS -16:

1. IFRS-15 Criteria
2. P.V of Minimum Lease Payments
3. Right to use retained*
4. Entry

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 *RIGHT TO USE ASSET (Retained)  Carrying Value of Asset at the Date of Disposal X [P.V
of Lease Obligation/ F.V of Asset]

E.g.  When an asset is sold and leased back where asset has life of 10 years, and we leased it back
for 3 years, then right to use will be booked according to retention I.e. (3/10 = 30%)

B. If sold for more than Fair Value:

- If sold for more than F.V, then excess of S.P over F.V Is treated as a loan
- & obviously loan repayment is included in Interest lease Rentals.
- This extra loan has nothing to do with R.T.U
- R.T.U will be calculated on pure “P.V of future lease rentals”.

C. If sold for less than Fair Value:

- If sold for less than F.V, then difference of F.V over S.P Is treated as a prepayment
- & prepayment has nothing to do with R.T.U.
- It will still be calculated on pure “P.V of future lease rentals”.

RIGHT TO USE ASSET (Retained)  Carrying Value of Asset at the Date of Disposal X [P.V of
Lease Obligation – Extra loan + Prepayments/ F.V of Asset]

Entry: Bank XXX

R.T.U XXX
Loss on disposal XXX
PPE XXX
P.V of lease Rentals XXX
Gain on disposal XXX

Criteria of IFRS-16:
- Specific Asset I.e. Asset should be exclusively identified in the agreement (Asset should be the
same one which is identified in the agreement)
- Right to use or right to control the use must be transferred to lessee (there must be major/
significant rights transferred).
- Transfer should be made in exchange of a consideration.

Read IFRS Box  IFRS 16  ILMI MASLA (Link shared by Sir Mustafa)

ILMI MASLA: In old IAS (IAS-17), Building with life of 100 years is when taken on lease, for 3 years, is
an operating lease.
Also, if landlord is giving an asset i.e. room for rent for $20,000 and also maintenance expense for $5000
as well. There, in old P&L, both costs were expensed out in a single entry.
Entry: P&L 25000
Cash 25000
But in new IFRS, all leases are finance leases in which all rentals are not expensed out, but repayment of
rental in which only principal and interest is paid.
Therefore, separate accounting will be done, in this case, by apportionment of lease rental & maintenance
expense.
Apportionment will be done on the basis of standalone prices of 1. Lease Payment 2. Maintenance Exp.

 See link of this article for the whole story in IFRS-BOX

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 LESSOR’S BOOKS
(Same as IAS-17, No Changes)
IFRS – 16 has brought changes in lessee’s books but not lessor’s books.

Case # 1: If Lessor not a Manufacturer or Dealer (E.g. Bank lessor In Car Leasing):
Entry: Machine XXX
Cash XXX
Finance Lease Receivable XXX
Machine XXX
Lease Rentals:
Entry: Bank XXX
Finance Lease Receivable XXX
Interest Income XXX
If first Payment Now:
Entry: Bank XXX
Finance Lease Receivable XXX

Case # 2: If Lessor a Manufacturer or Dealer (E.g Toyota Company Car Leasing):

2 INCOMES
1. Sales Income 2. Interest Income
Entry: Inventory XXX
Cash XXX
Finance Lease Receivable XXX
Sales XXX
Cost of Sales XXX
Inventory XXX
Future Rentals:
Entry: Bank XXX
Finance Lease Receivable XXX
Interest Income XXX

 In finance Lease, risks and rewards are transferred to lessee.

Lease Amortization Schedule – Lessor

Date Rental Finance Income Decrease in FLR Balance of FLR

Residual Values
If lessor has an expectation that lessee will make a very bad use of his asset, then;

1. Guaranteed Residual Value (GRV): I.e. Scrap value guaranteed by lessee or any party
related to lessee

2. Unguaranteed Residual Value (UGRV): Portion of scrap value not guaranteed by lessee

NOTE: If nothing is mentioned in question, then assume that the asset is sold for Zero and the lessee
will need to pay the GRV.
Case E.g. If asset value is $20000 where the GRV given is $12000 and UGRV is 8000.

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  If the asset gets sold for $13000, then no GRV will be paid by lessee.
 And if asset gets sold for zero $, then lessee will need to pay the whole GRV of 12000.
 And if asset gets sold for $3000, then lessee will need to pay the GRV of 9000.

Incase if Lessor is a Manufacturer or Dealer

2 INCOMES
Sales Income 2. Interest Income

If lessor is giving asset on 0% interest rate, then calculate Present Value of Minimum Lease Payment
using Market Interest Income.
Entry: Finance Lease Receivable XXX
Sales XXX

And now record Interest Income throughout the life using Market Interest Rate.

NOTE:
1. Recording Future’s profits in today’s books is a crime in accounting
2. If two unknown parties are doing a transaction, they will do it at at least Market Interest Rate.
3. When products cannot be sold, then they are given on a discounted price. This discount is called
as Trade discount which decreases your sales (FLOP product). Trade discount always drops/ hits
your today’s sale (Sales Income  Now).

Past Paper Study – CAR PART

1. Case #1:
 Car part  Manufacturer of seats.
 Got an order of 1 Million seats.
 But customer didn’t guarantee a minimum amount.
 Now all risks and rewards of asset are constructed on Car Part  IAS 16  Normal

2. Case #2:
 Car part (Lessor)  Customer (Lessee)
 Entry: Finance Lease Receivable XXX
Machine XXX
 Guaranteed Number of Seats. Car part purchases an asset/ machine (A Specific Asset) to fulfill
the order.
 If customer cancels the deal, then customer will pay the remaining Value of Machine.
 Car part cannot use this machine for any other customer
(E.g Honda is going to manufacture a car that will fly. We will make a special plant for this
Honda’s Car seat and we take a deal/ promise by Honda that they will buy 20 Mn. Units from us)
 Therefore risk & rewards/ right to control the asset have been transferred in this case.
Therefore it is a leasing arrangement & the asset is specific.
 The Leasing of machine will be in form of rentals.
 Entry: Bank XXX
Finance Lease Receivable XXX
Interest Income XXX
(The remaining will be booked as Sales)

Past Paper Study – BLACK CUTT

Case: Local Govt.  Transport Co. (Black Cutt):

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  10 buses only to be booked (leased) for local govt.
 Name of local govt. to be printed on bus.
 Transport company cannot cancel the contract for 5 years (which is the remaining life of the
buses)
 Now right to use has been transferred to local govt. in this case
 This is a finance lease since asset is Specific & right to control the asset is also
transferred. Therefore, it is a Finance Lease.
 From Govt.  One payment will be for normal service charge and second for the rental
of buses given on rent to govt.
Entry: Bank XXX
Finance Lease Receivable XXX
Interest Income XXX

Substance Over Form: Transaction by the looks of it looks something else and in actuality is something
else (different).

Past Paper Study – CAR PART

Case # 3:
 Car part  Show Room
 Car part is bound to re-purchase vehicles after 2 years at 70% of original price
 Expected Fair value at the end of Year 2  55% of original price
 Life of Car  5 Years.
 Therefore, it is an operating lease since we used the asset for 2 years out of 5 years.
Entry: Bank XXX
Deferred Income XXX
Loan XXX
Advance rent of 2 Years
Entry: Year 1 Deferred Income XXX
P&L XXX

Entry: Year 2 Deferred Income XXX

P&L XXX

 IAS 2  IFRS 16 =====> From Dealer (Show Room) To Rent A Car

Entry: PPE XXX [Depreciate]
Inventory XXX

The initial Receipt must be split between Two Elements

1. P.V Of Loan (70% of original price)

2. Deferred Income (2 years’ Advance Rental)

 This loan will be unwinded in next 2 years (Discount rate used will be the same for unwinding
which was used on the time of Discounting).
 Deferred income will be transferred to Rental Income account over 2 years.
 Also for these cases, no intention of resale, that is why they will be re-classified from Inventory
to PPE.
 Also, these cars will be depreciated according to usage pattern.
 As the customer is using car for 2 years out of 5 years, therefore this lease will be an
Operating Lease for Car Part.

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 IFRS 2 – Share Based Payment
1. Definition/ Objective
2. Criticism
3. Types of SBP transactions
4. Equity settled SBP
5. Measurement
6. How to calculate value of share option
7. Grant & its details
8. Various dates
9. Vesting Period & Performance condition
10. Cancellation (Acceleration Principle)
11. Modification (Beneficial for Ee or Er)
12. Cash settled SBP
13. Scope of IFRS-2 & Hints
14. Group Aspects of IFRS-2
15. Replacement SBP award at the time of takeover
16. Important Notes

Definition: A share-based transaction is one in which the entity transfers equity instruments, such
as share options, in exchange for goods and services supplied by employees or third parties.
IFRS 2 requires an entity to reflect the effects of share-based payments in its financial statements.
Criticism: There are four criticisms that were put forth when this IFRS came in;
 No cost, therefore No change
 Expense does not meet the definition of framework
 EPS hits twice
 Adverse Economic Consequence

Buying of Goods:
Inventory XXX
Equity XXX

Services from Employees:

P&L XXX
Equity XXX

Types of Share Based Payments

1. Equity Settled Share based Payments.
2. Cash Settled Share based Payments.
3. Options

I. Equity Settled Share Based Payments:

The employee receives shares/share options at the end of a fixed period of employment.

II. Cash Settled Share Based Payments:

The employee receives a cash bonus based upon the current share price

III. Option:
a. If Option is with Employee: The employee has an option to take shares or cash equivalent
of shares after agreed(X) no. of years.

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 b. If Option is with Employer: The option is with the employer to give shares or cash equivalent
of shares after agreed(X) no. of years.

NOTE: All share based payment transactions are recorded at Fair Value. In addition to this,
IFRS 13 Fair Value Measurement does not apply to share-based payment transactions within
the scope of IFRS 2.

1. Equity Settled Share Based Payments:

The employee receives shares/share options at the end of a fixed period of employment.
Entry: P&L XXX
Equity XXX

Measurement:
Direct Measurement (Pehla Darja): This measurement type can be used when in the deal of exchange,
F.V of the goods can be maintained. Therefore, record transactions at the fair value of goods received.
It is normally applied in case of goods/ machine.

Indirect Measurement (Majboori): If F.V of goods/ services received cannot be calculated, then record
transaction on the F.V of equity Instrument transferred E.g Employee services (Here we will work on the
F.V of our shares given to Employee).
Entry: Machine XXX
Equity/ Share capital XXX

Difference between Shares & Share Options: Share means actual shares (In essence/ Soul, E.g.
Marriage). But share options will be given in future upon fulfillment of certain conditions (E.g. Engagement).

How to calculate the Value of Share Options:

1. If the share options of a company are getting traded in the market (I.e. an active market), then
total value of that market share can be taken.
2. If not, then option pricing models are used to calculate the value of share options (E.g. Black
Scholes Option Pricing Model).

GRANT
1. Unconditional Grant: No services are needed in future for this grant. It is given without any
conditions. Complete expense needs to be booked immediately once this grant is given.

2. Conditional Grant: It depends upon a number of conditions. In this case, the expense has to be
booked over the life of vesting period.

a. Service Condition (Stay for X no. of years in service, then you will qualify):
 Must be checked & revised at the end of each reporting date.
 Stay for Minimum no. of years
 If not fulfilled in the end, then Reverse Expense in P&L
SPBR XXX
P&L XXX

b. Performance Condition:
I) Performance Non-Market Condition:
 Other than share price (Performance target)
 E.g. Sales target, EPS target, passing rate , Inventory control, profit target
 Must be checked and revised at the end of each reporting date
 If not fulfilled at the end, then Reverse Expense in P&L

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 SPBR XXX
P&L XXX

II) Performance Market Condition:

 Share price target, dividend yield, earning yield
 It is incorporated in the F.V of option at the grant date
 Never check/ revise market condition at each reporting date
 If market condition is not fulfilled in the end, then within equity transfer (No reversal
in P&L, transfer in equity)
SPBR XXX
P&L XXX
Various Dates:
Grant Date: The date on which agreement is done between Employer & Employee.

Vesting Date: The date on which the employee meets/ qualifies the agreed conditions.

Vesting Period: It is the difference between grant date & vesting date.

NOTE: In equity settled share based payments, ALWAYS use Fair value of option at the Grant Date to
record expense (No revision is done in Equity, if after Grant Date F.V changes, we will not take account for
those changes. F.V will be locked at grant date.

Vesting Period & Performance Condition

Vesting Period Varies with Performance Non-Market Condition:
Book expense according to expected vesting period, which must be revised every year (Because Non-
Market Performance condition). Revision is allowed in Non-Market Performance Condition.

Vesting Period Varies with Performance Market Condition:

Calculate expected vesting period (using statistical tools) at grant date and strictly no need to revise it
(ReasonPerformance Market condition, due to volatility in share price, revision is not allowed in Market
condition).

NOTE: If target (Share Price) not achieved, then transfer the whole expense within equity.
Entry: Share Base Payment Reserve XXX
Retained Earnings XXX

NOTE: If Service condition OR performance non-market condition is not achieved, then reversal has to be
booked in P&L.
Entry: Share Base Payment Reserve XXX
P&L XXX

CANCELLATION

Acceleration principle always applies at the time of cancellation. It is actually a punishment.

CASE # 1: Cancellation without Settlement: Under this case, transfer is done within equity.
Entry: Share Base Payment Reserve XXX
Retained Earnings XXX

CASE # 2: Cancellation with Settlement: It should be treated like company is buying back its own
shares which is called as “Treasury Shares”*.

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*Entry: When company issued shares, entry passed at that time:
Cash XXX
Equity XXX

Entry: On buy back I.e. Treasury Shares:

Equity XXX
Cash XXX

If settlement price is more than the F.v of shares at the settlement date, then excess of settlement price
over fair value is treated as “Compensation Expense”.

E.g. Fair Value at Settlement Date  $20

Settlement Price  $23

Entry: Equity 20
P&L 3
Cash 23

Practical Advice: If performance non-market target is given to employees, then we should not cancel the
option since if target doesn’t meet, then all expense goes to P&L as reversal (Income). Therefore, we
should not cancel if we know that employee will not meet the non-market condition.

MODIFICATION
a) If Beneficial for Employee:
 Treat it as a separate Contract
 Just book expense on the basis of Incremental Fair Value (Later cost to be borne by
Employer) at the date of modification & spread it over remaining vesting period.
o Where;
INCREMENTAL F.V = F.V just after modification - F.V just before modification

b) If Beneficial for Employer:

 Do nothing (Ignore this benefit)
 Just book original agreement

12. Cash Settled Share Based Payments:

1. Entry: P&L XXX

Liability XXX

2. Use F.V of option at each reporting date

3. Share Appreciation Rights - With a cash settled transaction, the employee receives a bonus based
upon the entity’s share price. This bonus may also be referred to as ‘Share Appreciation Rights’.

F.V of Option = Intrinsic Value + Time Value (level of uncertainty)

Where;
Intrinsic Value = Market Price - Exercise Price

NOTE: In SAR, payment is always made on the basis of intrinsic value.

But before exercise date, liability is valued using F.V of option.

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NOTE: Once vesting period has finished, do not work on Table Format, work on T- Accounts Format.

SCOPE OF IFRS – 2

1. Transactions with employees in the capacity of shareholders is out of the scope of

IFRS – 2 (once share option is exercised, then employee becomes a shareholder. Therefore, if
bonus issue or right issue is done, then IFRS-2 doesn’t apply) E.g Bonus Issue, Right Issue

2. Share exchange in case of business combination is accounted for under IFRS – 3

(Share consideration) (Share consideration/ Share exchange  when parent company gives
shares to subsidiary and takes control of subsidiary (I.e. when parent co. at the time of take over
gives its share in form of payment to take control) this transaction is out of scope of IFRS – 2)

3. Share based payment transactions that fall under the scope of IAS 32/ IAS 39/ IFRS
9 are out of scope of IFRS – 2 (IFRS – 2 only applies when payment is done in form of shares
or equivalent cash for receiving goods and services. A dangerous activity is done in Pakistan
which is called Net Cash Settlement. It is a derivative and is used for speculation E.g. Sugar
booked in a forward contract for three months with no intention of physical delivery. Derivative
comes under scope of IFRS 9, not IFRS 2)

HINTS:
1. The agreement allows Net Cash Settlement
2. Past practice of Net Cash Settlement
3. The entity sells shortly just after delivery
4. The underlying item itself is a cash equivalent (Cash equivalent Not Sugar, wheat, flour. The
instrument booked (good) is a cash equivalent of prize bond. Hence IFRS 2 will not apply, rather
IFRS 9 will apply).
If intention of physical delivery in ordinary course of business & paying in
entity’s own shares, then IFRS – 2 is applied!

GROUP ASPECTS OF IFRS – 2

If a certain target is given to subsidiary by parent Co, and on achieving the target, parent company will
give its shares in return
It is an Investment for the controlling people/ parent co. / shareholders/ owners
Entry: Investment XXX
Share Base Payment Reserve XXX

Here, the employees of Subsidiary Co. will be motivated to work when they’ll get shares of P. Co. for
achieving a certain target. Therefore, they will work and earn for S. Co. bringing in more revenue for
Sub. Co. therefore, matching principle will apply for booked revenue against expense.
It is an Equity Settled SBP for S. CO. because of matching principle.
Entry: P&L XXX
Equity XXX

In Group Accounts also, this transaction is recorded as Equity Settled SBP.

Entry (Group): P&L XXX
Share Base Payment Reserve XXX

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Logic: Since when books are consolidated due to this share option, S. co. revenue will increase which will
eventually result in increase in consolidated revenue for the group. Therefore P. Co. will book expense
against SBPR due to matching concept.
Ultimately Sub. Co. will not book/ issue shares but will book expense against equity which will be later
shifted to retained earnings (and ultimately P Co. will be issuing its share, since shareholders are helping
its S. Co. and this help is an investment).

Replacement Share Based Payment Award at the time of Take Over

1. If Replacement is Mandatory:
Then it is part of CoI (Cost of Investment) (IFRS-3), part of consideration.

2. If Replacement is Non – Mandatory:

Then it is given to motivate P. Co. employees, then IFRS-2 is applied.
Where if;
 Vesting Condition: Spread over vesting period.
 Non - Vesting Condition: Immediately expense out*.

*E.g.: (S. Co. says to its employees that stay with us for 4 years and we will give you $30 Mn. Shares,
but after 4 years P. Co. Takes over the S. Co. on the same day when S. Co. had to give its shares to its
Employees)

Important NOTES: When buying any product/ asset against shares, IFRS-2 applies
When issuing shares to employees who are existing shareholders i.e. in the capacity of
shareholder, IFRS-2 does not apply.
When buying any good/ services and in return you give your own co. shares OR shares of a co.
in your group of companies OR you pay cash equivalent to these shares, only these come under scope of
IFRS-2

Post Combination Services: Condition imposed by P. Co. after Take over.

NOTE: Giving shares of any other company (not in our Group) comes under the scope of IAS-19.

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 IAS 37
Provisions, Contingent Liabilities & Contingent Assets

Provision: A Provision is a liability of uncertain timing or amount.

Criteria (for provision recognition):

1. An entity has a present obligation arising from past events.

2. It is probable than there will be an outflow of economic benefit
3. A reliable estimate can be made of the amount of the Obligation.

Present Obligation    
Outflow of E.B Probable Probable Possible Remote
Reliable Estimate  X  
Disclosure Disclosure
Do
Treatment Provision without Financial with Financial
Nothing
Effect* Effect**
*Something is better than nothing
**The amount of loss will be disclosed to SHs.
Where;
Remote Less than 10%
Possible 10% to 50%
Probable 50% to 90%
Virtually Certain 90% +

Present Obligation:
1. Legal Obligation:
 An obligation which is enforceable by law
2. Constructive Obligation:
 An obligation which is created on the basis of Past practice / Published Policies / Acts.

Example: Warranty of A.C compressor  5 Years Legal Obligation

2 Years Constructive Obligation

Reliable Estimate:
1. Expected Value Analysis:
 Where there are more than one transaction involved E.g. Warranty
 Multiple different outcomes with probabilities
 Under below example, total no. of units = 8200

2. Most Likely Outcome:

 In case of single transaction E.g. Court case
 Just pick the outcome with highest probability (E.g. 60%)
 Under below example, total no. of units = 10000

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 Outcomes Probability
10000 units 60% 6000
7000 units 10% 700
5000 units 30% 1500
8200 units
Per unit Repair Cost = £10  Therefore, Total Cost = 8200 X 10 = 82000

Why IASB launched IAS 37?

Company used to make fake provisions & used to reverse it (Timings Manipulation)

No Provision In case of;

I. Self-Insurance
II. Future Operating Losses (there is no obligation to make losses in future, company may shut its
operations in future)
III. Future Part Replacement

Provision is Dependent upon Obligating Events;

a) In case of compulsory disposal cost/ decommissioning liabilities, complete obligating event
arises on Day 1 that is why complete provision is recognized on day 1.
b) In case of environmental provision, “if” obligating event arises gradually, therefore provision is
recognized gradually over the period/ life of asset.
c) But sometimes, environmental provision is created because of past event (Purana Gunaah),
complete provision is therefore created immediately.

Onerous Contracts: Onerous contracts are where the Signed + unavoidable cost of fulfilling the
Contract outweighs the benefit that will be received. The excess unavoidable costs should therefore be
provided for. E.g. 2 years Non-cancellable leases recorded at lower of;
 Penalty
 P.V of future rentals

NOTE: No provision to be booked for future fixed assets!

Restructuring Costs: (same old criteria as for provisions (3)) should only be provided when there is a
constructive obligation, programmed, planned and controlled by management. It includes scope of
business and manner in which business is conducted.
E.g. Delayering, closure of business locations, conversion of labor intensive to capital intensive

This would arise from;

I. Detailed formal plan (required by auditors) that includes;
a. Approval from BOD
b. Reasons for restructuring
c. an estimate of the costs/ penalties and the timescale, and

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 d. Location/ # of people effected
e. Date of Implementation

II. Creates valid expectation through Announcement or by Starting Restructuring that includes an
announcement to those affected by the restructuring and;
a. Restructuring provision only for directly attributable cost arising because of
restructuring (If 20 Rs, then 20 Rs provision, not 40 Rs.) E.g. Redundancy cost, Penalties
b. No Restructuring provision for ongoing costs E.g. Training Cost OR Staff Relocation Cost

Contingent Liabilities/ Possible Obligation: It is an obligation that arises from past events and whose
existence will only be confirmed by occurrence or non-occurrence of one or more uncertain future
uncertain future events, not wholly within the Entity’s control.
It is a very much uncertain liability, whose recognition criteria is not met. Therefore, no entry/ recognition
is made. Only disclosure is required. (E.g. Court Case, Selling expired food products in Past)
Where;
Remote Do nothing
Possible Disclosure
Probable Provision
Virtually Certain Liability (At this point, it is no
more a contingent liability)

Contingent Asset/ Possible Asset: It is an asset that arises from past events and whose existence will only
be confirmed by occurrence or non-occurrence of one or more uncertain future uncertain future events,
not wholly within the Entity’s control. (E.g. Claiming Insurance for fire due to smoking, Infringement of
Asset)
Where;
Remote
Do nothing
Possible
Probable Disclosure
Virtually
Asset
Certain*
*At this point, asset is no more Contingent
Entry: P&L XXX
Insurance Receivable XXX

E.g: Re-imbursement: P&L 100,000

Provision 100,000

(E.g.: 30% Insurance cover):

Insurance Receivable 30,000
P&L 30,000

Note:
1. It is allowed in income statement to offset the above & write the difference (I.e. 70,000), But in
case of SOFP, offsetting is not allowed because parties are different(SOFP doesn’t allow offsetting
of different parties)

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 2. Plus, second entry cannot exceed the first entry in any case, as written in IAS (Prudence).

EXAMPLES OF PROVISION:
1. Warranty
2. Decommissioning Liability/ Compulsory Disposal Cost
3. Environmental Provision
4. Restructuring Costs
5. Onerous Contracts

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 IAS 41
Agriculture/ Biological Assets
(In ICAEW, only knowledge of this IAS is needed)

Biological Asset A living Plant/ Animal Cow Cow Tree

Agricultural Produce Output of biological Asset Milk Meat Fruits
IAS – 2 Inventory Lower of Cost OR NRV Processed Processed Harvested

On Biological Asset: Always IAS-41 Applies.

On Agricultural Produce: IAS-41applies on it but only until it is with biological assets. But after getting
away/ out from the biological asset, it goes into scope of IAS-2.

To apply IAS 41: Agriculture activity is must.

Biological Asset is recorded at  Fair Value – CTS*
CTS  No transaction cost is taken because it is an entity based factor.

NOTE: Changes in F.V are to be taken to P&L (Marked to Market)

IAS 41 will not apply on land where animals are kept/ fruits are cultivated. Here, if land is owned, IAS-16
will apply & if it is rented, then IAS-40 will apply.

NOTE: From the day of Harvest onwards, IAS – 2 will apply. No changes from here onwards will be taken
to P&L because no recording is done on F.V* and IAS-41 has finished. Therefore, on the day of harvest,
the F.V will be taken as cost of that day under IAS-2. If F.V further goes upward, it will still be recorded
at cost (I.e. Lower of cost & NRV).

* Here if F.V is not given, we will calculate F.V by the help of Level-3 (IFRS-13), IFRS-3 using market
based factors and by the viewpoint of participants, we will calculate the F.V.

NOTE: If at initial recognition, company is not able to calculate F.V, then we can record biological asset at
cost less accumulated depreciation and impairment loss (not the case now, since IFRS-13 is available (3
levels). But once fair value is calculated, then we can’t revert back to cost. This exemption of cost less
acc. depreciation is only allowed at initial recognition.

If any cow (biological asset) gives Birth, Then;

Entry: Asset XXX
P&L XXX

(This is called Management of Change)

NOTE: Re-capping IFRS-13 which is used in more than 20 accounting standards, where F.V is calculated
from the view point of Market Participants (as it promotes Market Based Factors and discourages Entity
Based Factors), even if the agricultural property is owned, even then Notional Rent/Assumed Rent is

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calculated by the view of Market Participants and will be accounted for as per IFRS-13 here while
determining Fair value of Biological Asset in IAS-41.

Common characteristics of Biological Assets:

1. Capacity to change
2. Management of change (sale, agricultural produce or additional biological assets (Breeding))
3. Measurement of change (weight wise ,capacity wise, quality wise)

Recognition Criteria of Biological Assets:

1. Control
2. Future Economic Benefit (probable chances of future economic benefit)
3. Cost reliably measured

Activity / Process Applicable IAS

Cultivation IAS – 41
Forest IAS – 41
Zoo –Bird Park IAS – 16 [Zoo/ Bird Park Hires Animals for Display]
Ocean Fishing IAS – 2
Security Dog IAS – 16
Fish Farming IAS – 41 [Aquarium Business done after fishing]
Wood Yard IAS – 2
Medicine for Plant IAS – 2. Also IAS – 38 in case of R&D
Real Lobster Restaurant IAS 41

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 IAS 21
Effects of Foreign Exchange

1. MONETARY ITEMS:
– Cash
– Amount to be received or paid in fixed OR determinable amount of money
– E.g Receivables, Payables, Loan notes, Cash.

2. NON MONETARY ITEMS:

– All assets other than monetary
i. PPE (IAS 16)
ii. Intangibles (IAS 38)
iii. Shares (IFRS 9)
iv. Inventory (IAS 2)
v. Investment Property (IAS 40)

Credit Sales:
Entry: 1. Receivable XXX
Sales XXX
2. Receivable XXX
P&L XXX
3. Bank XXX
Receivable XXX
P&L XXX

NOTE:
 Exchange gain/ loss on monetary items will be taken to P&L.
 At the time of settlement, exchange gain/ loss will also go to P&L.
 Monetary items are re-translated at every year end.

Credit Purchases:
Entry: 1. Purchases XXX
Payable XXX
2. P&L XXX
Purchases XXX
3. Payable XXX
P&L XXX
Bank XXX

 Loan Receivable OR Loan Payable are also monetary just like Receivable and Payable

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IAS 16  COST MODEL  IAS – 16 says that the day the non-monetary asset is bought, bring the
asset into your local currency on the same day. (IAS – 16, PPE, Cost Model)

IAS 16  REVALUATION MODEL  IAS – 16 says that the revaluation should be done that frequent
that there is only a nominal/ marginal difference remaining in F.V and M.V of the asset.
Entry (F.V through OCI): 1. Investment XXX
Bank XXX
2. Investment XXX
OCI XXX
3. OCI XXX
Investment XXX

Interest expense  calculated on Effective Interest Rate

Interest Paid calculated on  Coupon Interest Rate
ALWAYS  Effective Interest Rate is greater than Coupon Interest Rate.

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 IFRS 11
Joint Arrangements
For Joint Arrangement, Joint control is must (means unanimous consent of Parties).

NOTE: For Partnership, living human beings are necessary. Companies are not human, therefore no
partnership is possible in the case of companies, and only joint arrangement is possible.

Example # 1:

Company Company
A B
33% 33%

Company
C
33%

 Article says for every decision, 2/3 Majority is must.

 Now that’s not joint control (No unanimous consent), but significant influence is possible here.

Example # 2:

15%

Company C

50% Company B
Company A
35%

 Article says for any decision, 75% voting is must

 A & B Have Joint Control

Under JOINT AARANGEMENT, comes;

1. Joint Operations:
– Not operated through separate vehicle.
– Interest of parties in Assets/ liabilities (on the name of investor).
– Revenues and costs are distributed according to agreement.

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 – TREATMENT: Book your share of Asset/ Liability/ Revenue & Expense in your books.

2. Joint Venture (Forming a separate ltd. Company with shares issued to investors):
– Operated through a separate vehicle.
– Limited Liability.
– Interest of parties in “Net Assets” (Equity).
– Parties don’t get share of Revenues and Costs, they get profit distribution.
– TREATMENT: Each party will treat this Investment under “Equity Accounting” like
Associates.

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 IAS 24 – Related Parties
Scope: IAS 24 requires disclosure of related party transactions and outstanding balances, in the separate
financial statements of;

 A parent
 A venture or
 An investor

What constitutes a related party?

A party is related to an entity if:

 Directly (subsidiary) or, indirectly (sub. of sub) through one or more intermediaries, the party:
 Controls, is controlled by, or is under common control with, the entity (this includes parents,
subsidiaries and fellow subsidiaries)
 Has an interest in the entity that gives it significant influence (power to participate) over the
entity or
 Has joint control over the entity
 The party is an associate
 The party is a joint venture in which the entity is a venture
 The party is a member of key management personnel of the entity or its parent
 The party is a close member of the family of any individual referred to above
 The party is an entity that is controlled, jointly controlled or significantly influenced by (not trade
investment), any individual referred to above or
 The party is a post-employment benefit plan for the benefit of employees

Definition:

Related party transaction: A transfer of resources (goods), services or obligations (loans) between related
parties, regardless of whether a price is charged.

What must be disclosed?

 A related party relationship between parent and subsidiaries

Compensation, being the consideration in exchange for their services, received by key
management personnel.

 Disclosure required about related parties only if transactions have taken place between them
during the period:
o The nature of the relationship (but remember this always must be disclosed in respect of a
parent)
o The amount of the transactions (probably disclosure of an underpriced or normal market value
(arm’s length) transaction
o The amount of any balance outstanding at the year end
o The terms and conditions attaching to any outstanding balance (for example security or
guarantees have been provided and what form the payment will take)
o If an amount has been provided (provision for doubtful debt) against or written off any
outstanding balance due
 Disclosure of the fact that transactions are on an arm’s length basis

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NOTE: Baker Tilly audit firm conducted a session on Related Parties & communicated that if during a
year, an RP transaction was not done, then this has to be disclosed as well. (NO RP transaction
disclosure)

EXAMPLE # 1:

PARENT CO. 3RD Party

SALES = 1000
SOLD FOR 300

70%

COST = 100 30% NCI

SUBSIDIARY CO.

Case # 1: Profit to Subsidiary Co. = 900

REASON: Undervalued Transaction

Case # 2: Profit to Subsidiary Co. = 200

Profit to Parent Co. = 700

REASON: Tax Saving

Transfer Pricing
To gain higher share of profit

EXAMPLE # 2:

PARENT CO.

SUB Co1 SUB Co2 SUB Co3 SUB Co4

Parent co. planned to sell S4 & Ordered S1, S2 & S3 to buy goods from S4. Now this again requires RP
Disclosure.

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EXAMPLE # 3:

Mr. A

Y Co.

X Co.

Key Management Personnel & their companies are RPs for the organization. And Disclosure is must for RP
transactions!

EXAMPLE # 4:

Brothers
MUSTAFA SUBHAN

DIRECTOR of Owner of
COMPANY A COMPANY Y

Manufacturer of Tube light Supplier of Glass

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EXAMPLE # 5:
Salaries of key management and their benefits as well are also RP transactions i.e. forming a company to
maintain plan assets.
(E.g. Short term Benefits, Long term Benefits, Post-Employment Benefits, Termination Benefits).

KEY MANAGEMENT PERSONNEL: Those who are directly (EDs) or Indirectly (NEDs) involved in
planning, control & decision making of the organization.

NOTE: Even if within related parties, transactions is done on market basis, still disclosure is must.
Disclosure is must in both cases i.e. whether transaction is done on normal market value basis or undervalue
basis.

NOTE: Within group transactions are eliminated when consolidation is done.

NOTE: If a company has 3 boards, then all directors’ (e.g. 8 directors) in each board individual benefit
shall not be disclosed, but the total benefit given to total directors (8) should be provided in F.S in following
breakup;
 Short term Benefits
 Long term Benefits
 Post-Employment Benefits
 Termination Benefits
 Share options (IFRS-2)

An information is material if it changes the decision of its users

1. Quantitative Aspect of Materiality
2. Qualitative Aspect of Materiality

NOTE: “In case of government, its subsidiaries and fellow subsidiaries, there is an exemption from routine
disclosures. You just need to disclose significant transactions during the year and relationship between
RPs.”

IMPORTANT: In IAS-24, RP transactions, sometimes a transaction may be immaterial by its quantitative

aspect, but may be material by its qualitative aspect (E.g. PM, Yousuf Raza Gillani punished by court for 32
seconds, supporters started to protest hard on it. E.g. Materiality Level of a company $10,000, But director
sold a company car for $1000 to his brother, still material from qualitative aspect even below materiality
from the quantitative aspect).

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 IFRS 8 – Operating Segments
(OLD STANDARD – IAS 14)
1. Scope of standard: This standard is mandatory for companies, whose debt or equity instruments are
traded publicly (listed entities, public ltd. Companies).

NOTE: Segment wise reporting is extremely beneficial for Shareholders because it provides detailed
information.

2. Identification of Operating Segments (3 conditions):

1. Involves in revenue earning activity OR may incur expenses*

2. Whose performance reviewed by CODM (Chief Operating Decision Maker). CODM is a function. It
may be a group of people. (Criticism This point is under the control of entity)**
3. Whose separate/ discrete financial information is available

* That’s why corporate headquarters are not normally operating segments

** As the selection of segment (setting up of CODM) is in control of management, it reduces comparability

(criticism)

3. Identification of Separately Reportable Segments:

Quantitative Threshold (Materiality)
a) 10% (Internal + External) Revenue
b) 10% Profits
c) 10% Assets
NOTE: Any 1 of the above if passed, report the segment as an operating segment!

4. 75% test:
75% test is based on “External Revenue”

A B C All Other Segments (Kachra)

20 30 10 40
External Revenue:
60/100 X 100 = 60% < 75%
Company must fulfill 75% Criteria!
IFRS -8 states that if the total external turnover reported by the operating segments identified by the
size criteria is less than 75% of total entity revenue, than additional segments need to be reported on
(aggregated) until 75% level is reached (This is called “Aggregation”).

Aggregation is “PERMITTED” but not required. It is only allowed if segments have same characteristics
and shares and they can be viewed together for the purpose of the size criteria.
(Aggregation means adding up two or more segments together to make one single segment).
MAJORITY of Aggregation Criteria like;
1. Type of Product (Same)
2. Raw material used (Same)
3. Production Process (Same)
4. Distribution Channel (Same)
5. Same regulatory body.
NOT ALL CRITERIA SHOULD MEET BUT MAJORITY OF THE 5 ABOVE!

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FLEXIBITLY: Management can report any segment separately, if they believe that segment’s information
is useful for shareholders (for decision making).

OLD IAS – 14 (Till 2006) NEW IFRS – 8 (After 2006)

Make segments a/c to Management
Accounting structure. (E.g. means Cost
accounting performance structure can be
copy pasted to Financial reporting
performance structure)
Make segments according to Risk &
In Simple Words  “HOW YOU RUN
Returns of segments (According to risk &
YOUR BUSINESS”
returns of segments)
ADVANTAGES:
E.g. Cost Accounting Reporting Product
1. Time Savings  Less work
wise
2. CEO/ Chairman Report aligned with
Financial Reporting  Geographical
Segment Info
Location wise
DISDVANTAGE:
Management structure may change, so if
management structure changes, then you
need to change financial reporting structure
also.

NOTE: If a segment was less than 10% last year, but this year it is more than 10%, so now it is separately
reportable. So now you need to show this segment in last year comparatives.

NOTE: If in any segment, a single customer’s revenue is 10% or more than total revenue of the
organization, then it needs to be disclosed.

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 FINANCIAL ASSETS

DEBT EQUITY

AMORTIZED FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

COST THROUGH OCI THROUGH P&L THROUGH P&L THROUGH OCI

 Pure Long Term  Medium Term  Pure short Term  Default Category  Election Required (Irrevocable
 2 Tests:  Mixed Category  E.g. Convertible loan  For Short Term Trading Election)
(i)Business Model Test  In income Statement, it will  Transaction Cost  P&L  Recorded at Fair Value  Recorded at Fair Value
(Held Till Maturity) be recorded through  All changes in F.V to be  All changes in F.V to be
(ii)Contractual Cash Flow Amortized Cost accounting taken to P&L reported in OCI
Characteristics Test  But in SOFP, it is recorded at  Transaction Cost  P&L  On disposal, all previous equity
(Interest + Principle, F.V with gain/ loss to be to be transferred in R.E (within
No Betting) recorded in “OCI” equity transfer)
 But on disposal, all previous  Transaction Cost  Capitalize
OCI will be recycled to P&L
 Transaction Cost  Capitalize Important Points:
• For both equity categories, dividends received are always
booked in P&L.
• No Re-classification in equity (locked categories)
• Re-classification in Debt categories allowed if “Business Model
Changes” (E.g. of P. co. and S. co. (Asset Management Dept.))
• No Re-classification allowed, if Market of the instrument is
temporarily “ceased”
• No Re-classification allowed if entity just wishes to classify
Prepared by: Arsalan M. Khan • Re-classification is always done “Prospectively” (E.g. Past Paper) Page 6 of 12
 IFRS 9 – FINANCIAL INSTRUMENTS
Loan = 1000 Loan = 1331

0 3
Effective Interest Rate = 10% Redemption Premium = 331
Redemption Premium: It will be spread over the life of the loan by using effective interest rate.

 The party issuing loan notes is actually taking a loan

 The party subscribing loan notes is the one who gives loan.

Discount: by name is a discount, but actually it is an expense which will also be spread over the life of
the loan.

Issue Cost: Issue cost is expensed initially which will also be spread over the life of the loan as it is an
expense.

Physical Interest: Physical interest is interest paid each year by using coupon/ cash interest rate.

Amortization Table will start from Net Cash (i.e. face value after deducting/ netting discount & issue
cost)

Four factors used in Financial Instruments;

1. Redemption Premium
2. Discount
3. Issue Cost OR Transaction Cost
4. Physical Interest Payable/ Receivable

Amortized Cost Interest Expense Interest Paid Amortization Amortized Cost

B/F (M.I.R) (C.I.R) C/F

Financial Asset Financial Liability

Cash (Torch) X
Contractual Right to receive cash E.g. Receivable, Contractual obligation to deliver cash (Torch)
Loan notes (Torch)
Contractual Right to receive a Financial Asset is Contractual obligation to deliver a Financial Asset
also a “Financial Asset” is also a “Financial Liability”
Exchange of Financial Asset that are potentially Exchange of Financial Asset that are potentially
favorable for the entity unfavorable for the entity
Equity Instruments of other Entity (Torch) X

Financial Instrument: is any contract that generates a “Financial Asset” for one entity & “Financial
Liability” (E.g. Loan Notes) OR “Equity Instrument” (E.g. Ordinary shares) of other entity.

Prepared by: Arsalan M. Khan Page 1 of 12

 Inventory,

PPE & Not a Financial Asset

Prepayment

 Warranty provisions are not normally Financial Liabilities (99% cases not, it is a F.L)
 Income tax liabilities are statutory obligation (Not contractual obligation) that’s why not a financial
liability.
 Redeemable Preference Shares are a financial liability.
 Ordinary Shares are not a financial liability.
 Cash dividend is not a financial liability.

MIZAAJ
SOFP

Assets ----------------------------------------------------- 1000

=
Standard says that
Capital ----------------------------------------------------- 900 whenever there is a
+ hint of liabilities, then
Liabilities -------------------------------------------------- 100 Financial Liability shall
SOFP
be booked instead of
Equity.
Assets ----------------------------------------------------- 1000
Standard is strict in
= booking Financial
Liability
Capital ----------------------------------------------------- 300
+
Liabilities -------------------------------------------------- 700

Puttable Instruments (Right to sell)

Gives right to the investor to redeem anytime (Means from issuer point of view, there is a contractual
obligation to deliver cash)
E.g. Mutual Funds (Units)
 These puttable instruments are recorded as a Financial Liability in the books of issuer.

In their books, these are puttable

Puttable Instruments Meezan Instruments i.e. a Financial Liability
UNITS Mutual Fund

Stock
Investor Market

Prepared by: Arsalan M. Khan Page 2 of 12

Call options  Right to Purchase (IFRS 2 – Call Option for Employees)

Put Option  Right to Sell

Contingent Settlement Provision

Normal Equity Arrangement
“Cash payment dependent on One or More Uncertain Events, not wholly controllable for the
organization”.

TREATMENT: It is always recorded as a Financial Liability (EXCEPT)

(EXCEPTIONS);
1. If the condition attached is highly abnormal (Impossible)
2. Cash payment only in case of liquidation.

Compound Financial Instruments

(Hybrid Financial Instruments)
Compound financial instruments contains both debt & equity elements E.g. Convertible loan Notes
STEPS:
1. Treat complete transaction as loan
2. Identify all possible cash flows
3. Discount all cash flows using current market interest rate (liability element)
4. Difference between consideration received and liability element is equity
5. Unwinding of discount

NOTE: Standard says that according to the arrangement (attraction of the transaction, conversion
option), book both debt & equity instrument on Day 1.

Entry:
Bank XXX
Liability XXX
Equity XXX

Entry (When interest is paid):

Interest Expense XXX
Cash XXX
Liability XXX

Entry (If converted into Shares):

Equity XXX
Loan XXX
Ordinary Shares XXX
Share Premium XXX

Entry (If Redeemed):

Loan XXX
Cash XXX
--------------------------------------
Equity XXX
R.E XXX

Prepared by: Arsalan M. Khan Page 3 of 12

 Interest Cost/ Dividends /
Redemption Premium

OR

Any cost

DEBT EQUITY

 To be recorded in P&L  To be recorded in Equity

 One Exemption;
o Company planned a share
issue and then cancelled it.
Now all cost will go to P&L

NOTE: If issue cost related to convertible loan notes, then it will be booked in “Debt” & “Equity”
according to their weightage.

Entry:
Bank 100,000
Liability 85,000
Equity 15,000
ISSUE COST = 2,000
Entry:
Liability 1,700
Equity 300
Cash 2,000

Entry FOR ORDINARY DIVIDEND:

Retained Earnings XXX
Cash/Dividend Payable XXX

OFFSETTING
CONDITIONS
1. Legal & Enforceable Rights
2. Settlement on Net basis i.e. transactions dates must be same
3. Counter parties must be same

NOTE: If you do offsetting without condition, then you will hide two risks;
a) Credit Risk
b) Liquidity Risk

TREASURY SHARES:
 Company buying back its own shares
 To be booked in equity
 Gain/ loss on treasury shares also to be booked in equity

Prepared by: Arsalan M. Khan Page 4 of 12

 E.g. BOUGHT
Entry: (BUY BACK)
Equity XXX
Cash XXX
E.g. SOLD
Entry:
Cash XXX
Equity XXX

Treasury Shares

Promise to deliver FIXED # of Promise to deliver VARIABLE # of

Entity’s own Equity Instruments Entity’s own Equity Instruments is
is recorded as “Equity” on Day 1 recorded as “Liability” on Day 1

(Risk is defined here i.e. FIXED) (Risk is not defined here)

While doing the above treatment, Standard thought of RISK i.e.

 Equity Equity
Low Risk High Risk
 Liability Liability

Company promised to deliver Company promised to deliver

Shares Shares worth $500,000

Entry: Building XXX Building XXX

Equity XXX Liability XXX

NOTE: IAS 1 says that if a company has its treasury shares, then the company must disclose it.

NOTE: No dividend has to be declared OR paid on treasury shares (means giving dividend to yourself).

Prepared by: Arsalan M. Khan Page 5 of 12

 FINANCIAL ASSETS

DEBT EQUITY

AMORTIZED FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

COST TROUGH OCI TROUGH P&L TROUGH OCI TROUGH P&L

!!!Details of above categories are written in separate landscape presentation!!!

Important Points:
 For both equity categories, dividends received are always booked in P&L.
 No Re-classification in equity (locked categories)
 Re-classification in Debt categories allowed if “Business Model Changes” (E.g. of P. co. and S. co.
(Asset Management Dept.))
 No Re-classification allowed, if Market of the instrument is temporarily “ceased”
 No Re-classification allowed if entity just wishes to classify
 Re-classification is always done “Prospectively” (E.g. Past Paper)

SCENARIO:

Cost = 10,000 F.V = 12,000 Sold for = 13,000

1st Nov. 08 31st Dec. 08 31st Mar. 09

Transaction Cost = 200

Entry: Investment 10,000

Cash 10,000
--------------------------
Investment 200
Cash 200
--------------------------
31st Dec. 08

Investment 1800
OCI/ Other Equity 1,800
31st Mar. 09
Bank 13,000
Investment 12,000
P&L 1,000
------------------------------

Prepared by: Arsalan M. Khan Page 6 of 12

 OCI/ Other Equity 1800
Retained Earnings 1800

Re-Classification

1. Amortized cost to Fair Value through P&L:

 Bring investment to F.V at the date of Reclassification.
 From now onwards it will be recorded at F.V with changes taken to P&L.
 Entry: Financial Asset XXX
P&L XXX

2. Fair Value through P&L to Amortized Cost:

 Fair value of investment at the date of Re-classification will be treated as Amortized cost (from
now onwards.
 Finance Dept. will compute Effective Interest Rate (For Amortized cost accounting).

Impairment of Financial Assets

1. Incurred loss Model:

 Old IAS 39
 Objective evidence required
 It is like Bad debts written off.

2. Expected loss Model:

 Book provision according to expectation
 3 Stages in this model
o Stage 1 & Stage 2 are like allowance for receivables

STAGE 1 STAGE2 STAGE 3

 Risk = Very Low  Risk = High  Incurred loss
 Only next 12 months  Lifetime expected losses to  Lifetime Expected Credit
expected losses* to be be booked Loss (ECL) to be booked
booked  No objective evidence  Objective evidence required
 No objective evidence required Entry:
required Entry: P&L XXX
Entry: P&L XXX Receivable/ F.A XXX
P&L XXX Allowance XXX
Allowance XXX (Specific Provision)
(General Provision)

*Meaning of Next 12 Months Expected Losses:

Means if default occurs in Next 12 months, what will be the total lifetime loss present value multiplied by
“Probability of Default”.

In SOFP:
Total Receivables XXX
Less: All. For Receivables XXX
NET RECEIVABLES XXX

Prepared by: Arsalan M. Khan Page 7 of 12

OBJECTIVE EVIDENCE (BOOK Pg. # 13):
Impairment of Financial Assets = Amortized Cost:
Impairment Hints (Objective Evidences)
 Borrower in financial difficulty
 Break of Contract i.e. Interest not paid
 Borrower about to bankrupt (Probable chances of bankruptcy)
 Lender growing concession E.g. Re-construction

Interest Free Loans to Employees

 Financial Asset for the company
 Amortized cost Accounting is applied

De-recognition of Financial Assets

1. Exercised
Entry: Bank XXX
Financial Asset XXX

2. Lapsed
Entry: P&L XXX
Financial Asset XXX

3. Risk & Rewards Transferred (E.g. of Factoring, Insured Bad Debt)

Entry: Receivable XXX
Sales XXX
-----------------------------
Entry: Bank XXX
P&L XXX
Receivable XXX

4. Risk & Rewards Not Transferred (E.g. of Factoring, Un-Insured Bad Debt)
Entry: Receivable XXX
Sales XXX
-----------------------------
Entry: Bank XXX
Loan XXX
Name Used by
FINANCIAL LIABILITIES Examiner – F.V Option

AMORTIZED COST Fair Value through P&L

 Default  Short term, derivative nature liability

 All Liabilities (Almost)  If cash generated from that loan is used to

invest in an Asset recorded at F.V, then liability

will be recorded at F.V (to avoid accounting

mismatch

Prepared by: Arsalan M. Khan Page 8 of 12

NOTE:

IF loan is invested in any investment where it is recorded at F.V i.e. asset side recorded at F.V, then
liability side shall also be recorded at F.V, otherwise it will result in a mismatch.

Fair Value of both financial asset and financial liability are dependent on Interest rates (Correlation)

But in properties, on liability side, it is not only dependent on interest rates as properties have various
factors on which it is dependent.

Fair Value of Liability

Present value of Future Cash Flows

using Sum of 2 interest rates

Market Interest Entity’s Own

Rate Credit Risk

 Changes in Fair Value of loan, because of changes in Market interest rates will be booked in “P&L”
 Changes in Fair Value of loan, because of changes in “Entity’s Own Creditworthiness” will be
booked in “OCI”

Derivatives (Shart Lagana)

3 Conditions
1. Initial investment very low, sometimes zero (as compared to Non-Derivative)
2. Its value is dependent on some other factor like Share price, exchange rates, interest rates,
weather etc.
3. They settle at Future date

2 reasons for Derivatives

GAMBLING HEDGING

Fair value through P&L Hedge Accounting

Hedge Accounting:  Hedging means betting against yourself

Hedge accounting is all about “Matching” & “Offsetting”

o Same Period
o Same Statement

Prepared by: Arsalan M. Khan Page 9 of 12

Hedge Item: which contains Risk. E.g.;
 Inventory
 Receivables
 Payables
 Shares

Hedge Instrument: Derivative which is used to minimize risk of that hedged item. E.g.;
 Futures
 Options
 Interest rate swaps
 Forward Contracts

1. Fair Value Hedge:

 For Recognized Asset/ Recognized Liability (Hedge Item in Books)
 Firm commitment
 Risk being changes in Fair value of that asset that will ultimately affect my P&L
 E.g. Inventory

Accounting Treatment: In F.V hedge accounting, both Hedge Item and Hedging Instrument are recorded
at fair values with changes taken to “P&L”.

NOTE: When hedge accounting starts, all other IASs are kept aside. Before starting hedge accounting,
permission needs to be taken from auditors. (Ref. E.g. Inventory not recorded at lower of cost or NRV
but F.V)

2. Cash Flow Hedge:

 For Recognized Asset/ Recognized Liability (Hedge Item in Books)
 Highly probable forecast transaction
 Risk being variability in cash flows that will ultimately affect my P&L
 E.g. Company buying a machine after 6 months in $, now changes in exchange rate will
result in more/ less outflow (Reason  Machine’s condition almost depreciated  HFS
 evidence for auditor to prove highly probable forecast transaction)
 E.g. Company planning to take loan after 6 months. If interest rate changes at that time,
company will have to pay more/ less interest.

Accounting Treatment: Normally in Cash Flow hedge accounting, only Hedge Instrument is recorded in
the books. Hedge item will come in future. That’s why F.V gain/loss of hedging instrument is parked in
OCI today. & it will be re-classified to P&L, when hedge item will come in future.

3 CASES of CASH FLOW HEDGE:

1. IF F.V change of Hedge Item > F.V change of Hedge Instrument  Then;
Future gain/loss of Hedge Instrument will be recognized in OCI.

2. IF F.V change of Hedge Item = F.V change of Hedge Instrument  Then;

Future gain/loss of Hedge Instrument will be recognized in OCI.

Prepared by: Arsalan M. Khan Page 10 of 12

 3. IF F.V change of Hedge Item < F.V change of Hedge Instrument  Then;
Effective Portion of gain/loss of Hedge Instrument will be recognized in OCI
Ineffective Portion of gain/loss of Hedge Instrument will be recognized in P&L (Jangli Pauda)

SOME ITEMS THAT CANNOT BE CLASSIFIED AS HEDGE ITEM:

1. Entity’s own equity Instruments.

2. Investment in Fixed rate loan for cash flow hedge (Because no variability in cash flow risk)
3. Investment in Associate (For consolidated books) (Because in consolidated books  we apply
equity accounting. But in F.V hedge accounting, both hedge item & hedge instrument are
recorded at F.V and in equity accounting we don’t bring investment in associate to fair value.
But in individual books P. Co. records investment in Associates at F.V. So, in individual books F.V
Hedge accounting can be applied for investment in Associates.
4. Future Profits.

DISCONTINUATION OF HEDGE ACCOUNTING (Prospectively)

CASH FLOW HEDGE

1. If highly probable forecast transaction is still expected to occur, then we will leave gain/ loss on
Hedging Instrument in OCI & this OCI will be matched with Future Hedge Item.

2. If highly probable forecast transaction is not expected to occur, then we will simply transfer all
existing gain/ loss on hedging instrument from OCI to P&L because there is nothing to match in
future.
NOTE:
Closing of hedging instrument contract (Forward Market Contract) will only have two reasons i.e. above two
points.
Effective Hedge is where the entries of Hedge Item & Hedge Instrument are exactly the same or very near. Not like
below Hedge i.e.
HEDGE ITEM  Entry: Inventory 100,000
P&L 100,000
HEDGE INSTRUMENT  Entry: P&L 2,000
Derivative. Liability 2,000

Effectiveness: 2,000/ 100,000 * 100 = 20%

As per IAS 39’s criteria of effectiveness, the % foe an effective hedge should be in Between 80% to 125%. However,
IFRS 9 has not defined any % criteria for effective but says that entries should be same or near.

Criteria for Hedge Accounting

Under IFRS-9, Hedge accounting rules can only be applied if the hedging relationship meets the
following criteria:
1. The hedging relationship consists only of eligible hedging instruments and hedged items.

Prepared by: Arsalan M. Khan Page 11 of 12

 2. At the inception of the hedge, there must be a formal documentation clearly identifying the
hedged item and the hedging instrument (documentation shall never be backdated).
3. The hedging relationship meets all effectiveness requirements
The hedge effectiveness requirements are as follows;
a. There must be an economic relationship between the hedged item (oil) and the hedged
instrument (Future oil market, not sugar market)
b. The effect of credit risk does not dominate the value changes that result from that economic
relationship.
 Credit risk may lead to erratic fair value movements in either the hedged item or the
hedging instrument. For example, if the counter party of a derivative experiences a
decline in creditworthiness, the fair value of the derivative (the hedging instrument) may
fall substantially. This movement is unrelated to changes in the fair value of the item and
would lead to hedge ineffectiveness.
c. The hedge ratio of the hedging relationship is the same as that resulting from the quantity
of the hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge the quantity of hedged item.

EMBEDDED DERIVATIVES
HOST CONTRACT + DERIVATIVE
(Non-derivative)

If host Contract is a Financial If host Contract is not a Financial Asset, then

Asset, then record complete apply separate standard on host contract &
transaction at F.V through P&L F.V through P&L on derivative if;
(Logic  it doesn’t meet 3 condition; (ALL THREE)
Contractual Cash Flow
1. Economic characteristics of host contract
Characteristics Test of
and derivative are not closely related
Amortized cost)
2. The derivative may survive stand alone.
3. The entire instrument not recorded at Fair
value.

If these conditions do not meet then Record complete instrument at F.V

CONSOLIDATION ISSUES
 P. Co. buying goods from S. Co. at Fair value
 S. Co. selling goods to P. Co. at Fair value.
 Now, in individual books of both companies, Risk exists. That’s why in individual books Hedge
accounting in permitted.
 But in consolidated books, no risk. That’s why no hedge accounting is allowed.

Prepared by: Arsalan M. Khan Page 12 of 12

Ias 8 changes in accounting policy
Thursday, February 28, 2019 10:07 AM

ACCOUNTING POLICIES: Are rules regulations, principles of

accounting governed by IAS/IFRS.
e.g. fifo , avce
Revaluation model, cost model.
Accounting policies must be applied consistently.(comparison issue)

That’s why changes in accouting policies not allowed unless

1. Allowed by accounting standard.( e.g. ias 2 lifo)
2. That change improves presentation , relevance of financial statements.( e.g.
revenue……2. cost model to fair value model ( ias 40 )

Changes in accounting policies must be applied Retrospectively..( logic

comparison should always be like with like)

Means opening balance restated.

# SOFPS AND 2 SOCI are restated

Whenever it is said to adjust anything retrospectively , it means adjust it in

opening retained earning

f7 starting standards Page 1

CHANGES IN ACCOUNTING ESTIMATES ARE THE BASIS USED FOR JUDGEMENT OF ACCOUNTING
POLICIES
Eg.
1. Changes in useful life
2. Changes in scrap value
3. Changes in doubtful debt
4. Changes in provision

CHANGES IN ACCOUNTING ESTIMATE MUST BE ADJUSTED PROSPECTIVELY…

LOGIC: BECAUSE ACCOUNTING ESTIMATION DEPENDS ON AVAILABILITY OF INFORMATION AND THAT
INFO WAS NOT AVAILABLE BEFORE…

PRIOR PERIOD ERRORS..

Are Errors, fraud, omission or mis interpretation of facts.. Occurred in past but discovered now..

f7 starting standards Page 2

PRIOR PERIOD ERRORS..
Are Errors, fraud, omission or mis interpretation of facts.. Occurred in past but discovered now..

They are adjusted Retrospectively if material

( logic = matching principle)

f7 starting standards Page 3

f7 starting standards Page 4
f7 starting standards Page 5
 FINANCIAL ASSETS

DEBT EQUITY

AMORTIZED FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

COST THROUGH OCI THROUGH P&L THROUGH P&L THROUGH OCI

 Pure Long Term  Medium Term  Pure short Term  Default Category  Election Required (Irrevocable
 2 Tests:  Mixed Category  E.g. Convertible loan  For Short Term Trading Election)
(i)Business Model Test  In income Statement, it will  Transaction Cost  P&L  Recorded at Fair Value  Recorded at Fair Value
(Held Till Maturity) be recorded through  All changes in F.V to be  All changes in F.V to be
(ii)Contractual Cash Flow Amortized Cost accounting taken to P&L reported in OCI
Characteristics Test  But in SOFP, it is recorded at  Transaction Cost  P&L  On disposal, all previous equity
(Interest + Principle, F.V with gain/ loss to be to be transferred in R.E (within
No Betting) recorded in “OCI” equity transfer)
 But on disposal, all previous  Transaction Cost  Capitalize
OCI will be recycled to P&L
 Transaction Cost  Capitalize Important Points:
• For both equity categories, dividends received are always
booked in P&L.
• No Re-classification in equity (locked categories)
• Re-classification in Debt categories allowed if “Business Model
Changes” (E.g. of P. co. and S. co. (Asset Management Dept.))
• No Re-classification allowed, if Market of the instrument is
temporarily “ceased”
• No Re-classification allowed if entity just wishes to classify
Prepared by: Arsalan M. Khan • Re-classification is always done “Prospectively” (E.g. Past Paper) Page 6 of 12
 IFRS 9 – FINANCIAL INSTRUMENTS
Loan = 1000 Loan = 1331

0 3
Effective Interest Rate = 10% Redemption Premium = 331
Redemption Premium: It will be spread over the life of the loan by using effective interest rate.

 The party issuing loan notes is actually taking a loan

 The party subscribing loan notes is the one who gives loan.

Discount: by name is a discount, but actually it is an expense which will also be spread over the life of
the loan.

Issue Cost: Issue cost is expensed initially which will also be spread over the life of the loan as it is an
expense.

Physical Interest: Physical interest is interest paid each year by using coupon/ cash interest rate.

Amortization Table will start from Net Cash (i.e. face value after deducting/ netting discount & issue
cost)

Four factors used in Financial Instruments;

1. Redemption Premium
2. Discount
3. Issue Cost OR Transaction Cost
4. Physical Interest Payable/ Receivable

Amortized Cost Interest Expense Interest Paid Amortization Amortized Cost

B/F (M.I.R) (C.I.R) C/F

Financial Asset Financial Liability

Cash (Torch) X
Contractual Right to receive cash E.g. Receivable, Contractual obligation to deliver cash (Torch)
Loan notes (Torch)
Contractual Right to receive a Financial Asset is Contractual obligation to deliver a Financial Asset
also a “Financial Asset” is also a “Financial Liability”
Exchange of Financial Asset that are potentially Exchange of Financial Asset that are potentially
favorable for the entity unfavorable for the entity
Equity Instruments of other Entity (Torch) X

Financial Instrument: is any contract that generates a “Financial Asset” for one entity & “Financial
Liability” (E.g. Loan Notes) OR “Equity Instrument” (E.g. Ordinary shares) of other entity.

Prepared by: Arsalan M. Khan Page 1 of 12

 Inventory,

PPE & Not a Financial Asset

Prepayment

 Warranty provisions are not normally Financial Liabilities (99% cases not, it is a F.L)
 Income tax liabilities are statutory obligation (Not contractual obligation) that’s why not a financial
liability.
 Redeemable Preference Shares are a financial liability.
 Ordinary Shares are not a financial liability.
 Cash dividend is not a financial liability.

MIZAAJ
SOFP

Assets ----------------------------------------------------- 1000

=
Standard says that
Capital ----------------------------------------------------- 900 whenever there is a
+ hint of liabilities, then
Liabilities -------------------------------------------------- 100 Financial Liability shall
SOFP
be booked instead of
Equity.
Assets ----------------------------------------------------- 1000
Standard is strict in
= booking Financial
Liability
Capital ----------------------------------------------------- 300
+
Liabilities -------------------------------------------------- 700

Puttable Instruments (Right to sell)

Gives right to the investor to redeem anytime (Means from issuer point of view, there is a contractual
obligation to deliver cash)
E.g. Mutual Funds (Units)
 These puttable instruments are recorded as a Financial Liability in the books of issuer.

In their books, these are puttable

Puttable Instruments Meezan Instruments i.e. a Financial Liability
UNITS Mutual Fund

Stock
Investor Market

Prepared by: Arsalan M. Khan Page 2 of 12

Call options  Right to Purchase (IFRS 2 – Call Option for Employees)

Put Option  Right to Sell

Contingent Settlement Provision

Normal Equity Arrangement
“Cash payment dependent on One or More Uncertain Events, not wholly controllable for the
organization”.

TREATMENT: It is always recorded as a Financial Liability (EXCEPT)

(EXCEPTIONS);
1. If the condition attached is highly abnormal (Impossible)
2. Cash payment only in case of liquidation.

Compound Financial Instruments

(Hybrid Financial Instruments)
Compound financial instruments contains both debt & equity elements E.g. Convertible loan Notes
STEPS:
1. Treat complete transaction as loan
2. Identify all possible cash flows
3. Discount all cash flows using current market interest rate (liability element)
4. Difference between consideration received and liability element is equity
5. Unwinding of discount

NOTE: Standard says that according to the arrangement (attraction of the transaction, conversion
option), book both debt & equity instrument on Day 1.

Entry:
Bank XXX
Liability XXX
Equity XXX

Entry (When interest is paid):

Interest Expense XXX
Cash XXX
Liability XXX

Entry (If converted into Shares):

Equity XXX
Loan XXX
Ordinary Shares XXX
Share Premium XXX

Entry (If Redeemed):

Loan XXX
Cash XXX
--------------------------------------
Equity XXX
R.E XXX

Prepared by: Arsalan M. Khan Page 3 of 12

 Interest Cost/ Dividends /
Redemption Premium

OR

Any cost

DEBT EQUITY

 To be recorded in P&L  To be recorded in Equity

 One Exemption;
o Company planned a share
issue and then cancelled it.
Now all cost will go to P&L

NOTE: If issue cost related to convertible loan notes, then it will be booked in “Debt” & “Equity”
according to their weightage.

Entry:
Bank 100,000
Liability 85,000
Equity 15,000
ISSUE COST = 2,000
Entry:
Liability 1,700
Equity 300
Cash 2,000

Entry FOR ORDINARY DIVIDEND:

Retained Earnings XXX
Cash/Dividend Payable XXX

OFFSETTING
CONDITIONS
1. Legal & Enforceable Rights
2. Settlement on Net basis i.e. transactions dates must be same
3. Counter parties must be same

NOTE: If you do offsetting without condition, then you will hide two risks;
a) Credit Risk
b) Liquidity Risk

TREASURY SHARES:
 Company buying back its own shares
 To be booked in equity
 Gain/ loss on treasury shares also to be booked in equity

Prepared by: Arsalan M. Khan Page 4 of 12

 E.g. BOUGHT
Entry: (BUY BACK)
Equity XXX
Cash XXX
E.g. SOLD
Entry:
Cash XXX
Equity XXX

Treasury Shares

Promise to deliver FIXED # of Promise to deliver VARIABLE # of

Entity’s own Equity Instruments Entity’s own Equity Instruments is
is recorded as “Equity” on Day 1 recorded as “Liability” on Day 1

(Risk is defined here i.e. FIXED) (Risk is not defined here)

While doing the above treatment, Standard thought of RISK i.e.

 Equity Equity
Low Risk High Risk
 Liability Liability

Company promised to deliver Company promised to deliver

Shares Shares worth $500,000

Entry: Building XXX Building XXX

Equity XXX Liability XXX

NOTE: IAS 1 says that if a company has its treasury shares, then the company must disclose it.

NOTE: No dividend has to be declared OR paid on treasury shares (means giving dividend to yourself).

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 FINANCIAL ASSETS

DEBT EQUITY

AMORTIZED FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE

COST TROUGH OCI TROUGH P&L TROUGH OCI TROUGH P&L

!!!Details of above categories are written in separate landscape presentation!!!

Important Points:
 For both equity categories, dividends received are always booked in P&L.
 No Re-classification in equity (locked categories)
 Re-classification in Debt categories allowed if “Business Model Changes” (E.g. of P. co. and S. co.
(Asset Management Dept.))
 No Re-classification allowed, if Market of the instrument is temporarily “ceased”
 No Re-classification allowed if entity just wishes to classify
 Re-classification is always done “Prospectively” (E.g. Past Paper)

SCENARIO:

Cost = 10,000 F.V = 12,000 Sold for = 13,000

1st Nov. 08 31st Dec. 08 31st Mar. 09

Transaction Cost = 200

Entry: Investment 10,000

Cash 10,000
--------------------------
Investment 200
Cash 200
--------------------------
31st Dec. 08

Investment 1800
OCI/ Other Equity 1,800
31st Mar. 09
Bank 13,000
Investment 12,000
P&L 1,000
------------------------------

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 OCI/ Other Equity 1800
Retained Earnings 1800

Re-Classification

1. Amortized cost to Fair Value through P&L:

 Bring investment to F.V at the date of Reclassification.
 From now onwards it will be recorded at F.V with changes taken to P&L.
 Entry: Financial Asset XXX
P&L XXX

2. Fair Value through P&L to Amortized Cost:

 Fair value of investment at the date of Re-classification will be treated as Amortized cost (from
now onwards.
 Finance Dept. will compute Effective Interest Rate (For Amortized cost accounting).

Impairment of Financial Assets

1. Incurred loss Model:

 Old IAS 39
 Objective evidence required
 It is like Bad debts written off.

2. Expected loss Model:

 Book provision according to expectation
 3 Stages in this model
o Stage 1 & Stage 2 are like allowance for receivables

STAGE 1 STAGE2 STAGE 3

 Risk = Very Low  Risk = High  Incurred loss
 Only next 12 months  Lifetime expected losses to  Lifetime Expected Credit
expected losses* to be be booked Loss (ECL) to be booked
booked  No objective evidence  Objective evidence required
 No objective evidence required Entry:
required Entry: P&L XXX
Entry: P&L XXX Receivable/ F.A XXX
P&L XXX Allowance XXX
Allowance XXX (Specific Provision)
(General Provision)

*Meaning of Next 12 Months Expected Losses:

Means if default occurs in Next 12 months, what will be the total lifetime loss present value multiplied by
“Probability of Default”.

In SOFP:
Total Receivables XXX
Less: All. For Receivables XXX
NET RECEIVABLES XXX

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OBJECTIVE EVIDENCE (BOOK Pg. # 13):
Impairment of Financial Assets = Amortized Cost:
Impairment Hints (Objective Evidences)
 Borrower in financial difficulty
 Break of Contract i.e. Interest not paid
 Borrower about to bankrupt (Probable chances of bankruptcy)
 Lender growing concession E.g. Re-construction

Interest Free Loans to Employees

 Financial Asset for the company
 Amortized cost Accounting is applied

De-recognition of Financial Assets

1. Exercised
Entry: Bank XXX
Financial Asset XXX

2. Lapsed
Entry: P&L XXX
Financial Asset XXX

3. Risk & Rewards Transferred (E.g. of Factoring, Insured Bad Debt)

Entry: Receivable XXX
Sales XXX
-----------------------------
Entry: Bank XXX
P&L XXX
Receivable XXX

4. Risk & Rewards Not Transferred (E.g. of Factoring, Un-Insured Bad Debt)
Entry: Receivable XXX
Sales XXX
-----------------------------
Entry: Bank XXX
Loan XXX
Name Used by
FINANCIAL LIABILITIES Examiner – F.V Option

AMORTIZED COST Fair Value through P&L

 Default  Short term, derivative nature liability

 All Liabilities (Almost)  If cash generated from that loan is used to

invest in an Asset recorded at F.V, then liability

will be recorded at F.V (to avoid accounting

mismatch

Prepared by: Arsalan M. Khan Page 8 of 12

NOTE:

IF loan is invested in any investment where it is recorded at F.V i.e. asset side recorded at F.V, then
liability side shall also be recorded at F.V, otherwise it will result in a mismatch.

Fair Value of both financial asset and financial liability are dependent on Interest rates (Correlation)

But in properties, on liability side, it is not only dependent on interest rates as properties have various
factors on which it is dependent.

Fair Value of Liability

Present value of Future Cash Flows

using Sum of 2 interest rates

Market Interest Entity’s Own

Rate Credit Risk

 Changes in Fair Value of loan, because of changes in Market interest rates will be booked in “P&L”
 Changes in Fair Value of loan, because of changes in “Entity’s Own Creditworthiness” will be
booked in “OCI”

Derivatives (Shart Lagana)

3 Conditions
1. Initial investment very low, sometimes zero (as compared to Non-Derivative)
2. Its value is dependent on some other factor like Share price, exchange rates, interest rates,
weather etc.
3. They settle at Future date

2 reasons for Derivatives

GAMBLING HEDGING

Fair value through P&L Hedge Accounting

Hedge Accounting:  Hedging means betting against yourself

Hedge accounting is all about “Matching” & “Offsetting”

o Same Period
o Same Statement

Prepared by: Arsalan M. Khan Page 9 of 12

Hedge Item: which contains Risk. E.g.;
 Inventory
 Receivables
 Payables
 Shares

Hedge Instrument: Derivative which is used to minimize risk of that hedged item. E.g.;
 Futures
 Options
 Interest rate swaps
 Forward Contracts

1. Fair Value Hedge:

 For Recognized Asset/ Recognized Liability (Hedge Item in Books)
 Firm commitment
 Risk being changes in Fair value of that asset that will ultimately affect my P&L
 E.g. Inventory

Accounting Treatment: In F.V hedge accounting, both Hedge Item and Hedging Instrument are recorded
at fair values with changes taken to “P&L”.

NOTE: When hedge accounting starts, all other IASs are kept aside. Before starting hedge accounting,
permission needs to be taken from auditors. (Ref. E.g. Inventory not recorded at lower of cost or NRV
but F.V)

2. Cash Flow Hedge:

 For Recognized Asset/ Recognized Liability (Hedge Item in Books)
 Highly probable forecast transaction
 Risk being variability in cash flows that will ultimately affect my P&L
 E.g. Company buying a machine after 6 months in $, now changes in exchange rate will
result in more/ less outflow (Reason  Machine’s condition almost depreciated  HFS
 evidence for auditor to prove highly probable forecast transaction)
 E.g. Company planning to take loan after 6 months. If interest rate changes at that time,
company will have to pay more/ less interest.

Accounting Treatment: Normally in Cash Flow hedge accounting, only Hedge Instrument is recorded in
the books. Hedge item will come in future. That’s why F.V gain/loss of hedging instrument is parked in
OCI today. & it will be re-classified to P&L, when hedge item will come in future.

3 CASES of CASH FLOW HEDGE:

1. IF F.V change of Hedge Item > F.V change of Hedge Instrument  Then;
Future gain/loss of Hedge Instrument will be recognized in OCI.

2. IF F.V change of Hedge Item = F.V change of Hedge Instrument  Then;

Future gain/loss of Hedge Instrument will be recognized in OCI.

Prepared by: Arsalan M. Khan Page 10 of 12

 3. IF F.V change of Hedge Item < F.V change of Hedge Instrument  Then;
Effective Portion of gain/loss of Hedge Instrument will be recognized in OCI
Ineffective Portion of gain/loss of Hedge Instrument will be recognized in P&L (Jangli Pauda)

SOME ITEMS THAT CANNOT BE CLASSIFIED AS HEDGE ITEM:

1. Entity’s own equity Instruments.

2. Investment in Fixed rate loan for cash flow hedge (Because no variability in cash flow risk)
3. Investment in Associate (For consolidated books) (Because in consolidated books  we apply
equity accounting. But in F.V hedge accounting, both hedge item & hedge instrument are
recorded at F.V and in equity accounting we don’t bring investment in associate to fair value.
But in individual books P. Co. records investment in Associates at F.V. So, in individual books F.V
Hedge accounting can be applied for investment in Associates.
4. Future Profits.

DISCONTINUATION OF HEDGE ACCOUNTING (Prospectively)

CASH FLOW HEDGE

1. If highly probable forecast transaction is still expected to occur, then we will leave gain/ loss on
Hedging Instrument in OCI & this OCI will be matched with Future Hedge Item.

2. If highly probable forecast transaction is not expected to occur, then we will simply transfer all
existing gain/ loss on hedging instrument from OCI to P&L because there is nothing to match in
future.
NOTE:
Closing of hedging instrument contract (Forward Market Contract) will only have two reasons i.e. above two
points.
Effective Hedge is where the entries of Hedge Item & Hedge Instrument are exactly the same or very near. Not like
below Hedge i.e.
HEDGE ITEM  Entry: Inventory 100,000
P&L 100,000
HEDGE INSTRUMENT  Entry: P&L 2,000
Derivative. Liability 2,000

Effectiveness: 2,000/ 100,000 * 100 = 20%

As per IAS 39’s criteria of effectiveness, the % foe an effective hedge should be in Between 80% to 125%. However,
IFRS 9 has not defined any % criteria for effective but says that entries should be same or near.

Criteria for Hedge Accounting

Under IFRS-9, Hedge accounting rules can only be applied if the hedging relationship meets the
following criteria:
1. The hedging relationship consists only of eligible hedging instruments and hedged items.

Prepared by: Arsalan M. Khan Page 11 of 12

 2. At the inception of the hedge, there must be a formal documentation clearly identifying the
hedged item and the hedging instrument (documentation shall never be backdated).
3. The hedging relationship meets all effectiveness requirements
The hedge effectiveness requirements are as follows;
a. There must be an economic relationship between the hedged item (oil) and the hedged
instrument (Future oil market, not sugar market)
b. The effect of credit risk does not dominate the value changes that result from that economic
relationship.
 Credit risk may lead to erratic fair value movements in either the hedged item or the
hedging instrument. For example, if the counter party of a derivative experiences a
decline in creditworthiness, the fair value of the derivative (the hedging instrument) may
fall substantially. This movement is unrelated to changes in the fair value of the item and
would lead to hedge ineffectiveness.
c. The hedge ratio of the hedging relationship is the same as that resulting from the quantity
of the hedged item that the entity actually hedges and the quantity of the hedging
instrument that the entity actually uses to hedge the quantity of hedged item.

EMBEDDED DERIVATIVES
HOST CONTRACT + DERIVATIVE
(Non-derivative)

If host Contract is a Financial If host Contract is not a Financial Asset, then

Asset, then record complete apply separate standard on host contract &
transaction at F.V through P&L F.V through P&L on derivative if;
(Logic  it doesn’t meet 3 condition; (ALL THREE)
Contractual Cash Flow
1. Economic characteristics of host contract
Characteristics Test of
and derivative are not closely related
Amortized cost)
2. The derivative may survive stand alone.
3. The entire instrument not recorded at Fair
value.

If these conditions do not meet then Record complete instrument at F.V

CONSOLIDATION ISSUES
 P. Co. buying goods from S. Co. at Fair value
 S. Co. selling goods to P. Co. at Fair value.
 Now, in individual books of both companies, Risk exists. That’s why in individual books Hedge
accounting in permitted.
 But in consolidated books, no risk. That’s why no hedge accounting is allowed.

Prepared by: Arsalan M. Khan Page 12 of 12

 IFRS 15 – REVENUE FROM CUSTOMER CONTRACTS
(Replacing IAS 11 (Construction Contracts) & IAS 18 (Revenues))
5 STAGES:
1. Identification of Contract
2. Identification of Performance Obligation (Is it a single Obligation or there are different Obligations?)
3. Contract Price
4. Allocation of Price of Different Performance Obligation on the basis of Stand-alone Prices (only in
case of Different [Link])
5. Book Revenue

STAGE 1: Identification of Contract

IDENTIFICATION OF CONTRACT

Legal Rights Terms Defined Probable Chances of

Economic Outflow

Legally Enforceable
 Financial Position of Buyer
 Financial Usage of Buyer
 Past Practice

STAGE 2: Identification of Performance Obligation  Payment Terms

IDENTIFICATION OF PERFORMANCE
OBLIGATION

For Separate Performance Obligation

The entity promise to provide that Customer gets the benefit of that goods/
goods/ service is separately identifiable service separately OR together with
from other goods in contract other goods

Provided Separately Benefited Separately

Means market has people in it - If both meets, then different Performance Obligations
providing these goods/ services
- If anyone meets, then single Performance Obligation
separately

Prepared by: Arsalan M. Khan Page 1 of 6

EXAMPLES OF DIFFERENT PERFORMANCE OBLIGATIONS:
1. Books + Teaching
2. Generator + Maintenance Service
3. Drug + Marketing
4. Mobile + Simm Contract
5. Car + Warranty (Buy)
6. Goods Sold + Warehouse Services (Bill & Hold Sales)  “Custodial Services”

EXAMPLES OF SINGLE PERFORMANCE OBLIGATION:

1. Teaching one paper
2. Construction of a bungalow
3. Making a software

STAGE 3: Contract Price

1. Variable consideration can only be booked if its reversal is Impossible/ Improbable

E.g. of variable consideration  Penalty/ Incentive Clause (E.g. of Property Construction)

- Now if IFRS-15, revenue from “Sale OR Return” can be booked through expectation (E.g. Hyper star)
(This was not allowed earlier in IAS-18)
- But if Rental possible, then you can’t book variable revenue E.g. Asset Management (Arif Habib,
because revenue dependent on stock market index)

2. Variable consideration is booked through statistical tools like

Expected Value Analysis Most Likely Outcome

- Also if there is a material gap between time of delivery of goods/ services and the time of payment,
then we need to consider “Significant Financing Component”

NOTE: Non-cash consideration (Other than cash) from customer will be recorded at its Fair value.

2 Cases of Significant Financing Component

EXAMPLE 1: Goods/ Services sold today but payment after 2 years (2 [Link], 1. Goods, 2. Loan)

P.V of
Amount Received = 10,000 P.V = 11,000 12,100

Yr. 0 Yr. 1 Yr. 2

Interest Rate = 10%

Entries : Receivable 10,000

Sales 10,000
--------------------------
Year 1: Receivable 1,000
Interest Income 1,000

Prepared by: Arsalan M. Khan Page 2 of 6

 --------------------------
Year 2: Receivable 1,100
Interest Income 1,100
End of Tenor:
Bank 12,100
Receivable 12,100

EXAMPLE 2: Payment received today but Goods/ Services to be delivered after 2 years (In IFRS-15, Treat
this transaction as loan which will be invested in future. In IAS-18, this was treated as deferred income)

P.V of
Amount Received = 10,000 P.V = 11,000 12,100

Yr. 0 Yr. 1 Yr. 2

Incremental Borrowing Rate = 10%

Delivery of Goods

Entries: Bank 10,000

Loan 10,000
--------------------------
Year 1: Interest Expense 1,000
Loan 1,000
--------------------------
Year 2: Interest Expense 1,100
Loan 1,100
End of Tenor (Delivery of Goods):
Loan 12,100
Sales 12,100

STAGE 4: Allocation of Price on Different Performance Obligations on the basis of stand-

alone Prices

Stand-alone Price  $1,000

Generator

1,200 Stand-alone Price  $500

2 Years Maintenance Service

NOTE: If (assume) discounting is immaterial, then as per IFRS-15, future year’s income shall be booked
as deferred income.

Prepared by: Arsalan M. Khan Page 3 of 6

 Phone Stand-alone Price  $100

480 Stand-alone Price  $480

24 Months Network Service

Year 1:
Bank 480
Sales 281.5
Deferred income 198.5

STAGE 5: Book Revenue

BOOK REVENUE

Point in Time Over Time

- No Responsibility from now onwards 3 CASES

- Book revenue when Control Transfers 1. Customers gets benefit from goods/ services
HINTS: simultaneously (E.g. Teaching)
1. Legal title transferred 2. Seller performance creates an asset which
2. Possession transferred comes in the control of customer (E.g.
3. Risks & Rewards transferred Construction at customer’s plot, i.e. according
to stages of completion, book revenue)
3. The asset generated is of specialized nature and
of no use to seller + seller has right to receive
cash for work done to date. (E.g. Wheel cap
making Machine for Toyota with Toyota logo
marking technology).

Prepared by: Arsalan M. Khan Page 4 of 6

 WARRANTIES

Special Warranty/ Bought Standard Warranty

 Supplied separately  By Culture

 Benefitted separately  By Law

 It is like a separate contract  This warranty is not a separate performance

 It is treated as separate performance obligation obligation

 Entry:  This warranty is covered according to IAS-37

Bank 120,000  Entry:

Sales 100,000 P&L XXX

Deferred Income 200,000 Provision XXX

MODIFICATION Change in price/ scope OR duties

Treated as a Not Treated as a

Separate Contract Separate Contract

 Goods/ services are distinct &  Goods/ services are not distinct

 Prices charged of those goods/ services  Prices charged for additional goods/

reflect standalone prices of those goods/ services does not reflect standalone

services (market price of extra work/ job prices of those goods/ services E.g. Big

done) Discount (Question)

 Treat It as a separate contract  Merge it with the existing contract, as a

cumulative catch up adjustment

Substance over Form: The economic substance of transactions and events must be recorded in the
financial statements rather than just their legal form in order to present a true and fair view of the affairs
of the entity.

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 Issue of Discount:

E.g. 2 Markers, Rs. 15 Each & 3 rd Marker for Free

Yr. 0 Rs. 30 Rs. 0 Yr. 1

Entry: Bank 30

Sales 30

Yr. 0 Rs. 20 Rs. 10 Yr. 1

Booking future profits in today’s books is overstating today’s profits and is treated as Fraud
in accounting!

Therefore; Entry: Bank 30

Sales 20

Deferred income 10

Prepared by: Arsalan M. Khan Page 6 of 6

Ias 8 changes in accounting policy
Thursday, February 28, 2019 10:07 AM

ACCOUNTING POLICIES: Are rules regulations, principles of

accounting governed by IAS/IFRS.
e.g. fifo , avce
Revaluation model, cost model.
Accounting policies must be applied consistently.(comparison issue)

That’s why changes in accouting policies not allowed unless

1. Allowed by accounting standard.( e.g. ias 2 lifo)
2. That change improves presentation , relevance of financial statements.( e.g.
revenue……2. cost model to fair value model ( ias 40 )

Changes in accounting policies must be applied Retrospectively..( logic

comparison should always be like with like)

Means opening balance restated.

# SOFPS AND 2 SOCI are restated

Whenever it is said to adjust anything retrospectively , it means adjust it in

opening retained earning

f7 starting standards Page 1

CHANGES IN ACCOUNTING ESTIMATES ARE THE BASIS USED FOR JUDGEMENT OF ACCOUNTING
POLICIES
Eg.
1. Changes in useful life
2. Changes in scrap value
3. Changes in doubtful debt
4. Changes in provision

CHANGES IN ACCOUNTING ESTIMATE MUST BE ADJUSTED PROSPECTIVELY…

LOGIC: BECAUSE ACCOUNTING ESTIMATION DEPENDS ON AVAILABILITY OF INFORMATION AND THAT
INFO WAS NOT AVAILABLE BEFORE…

PRIOR PERIOD ERRORS..

Are Errors, fraud, omission or mis interpretation of facts.. Occurred in past but discovered now..

f7 starting standards Page 2

PRIOR PERIOD ERRORS..
Are Errors, fraud, omission or mis interpretation of facts.. Occurred in past but discovered now..

They are adjusted Retrospectively if material

( logic = matching principle)

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f7 starting standards Page 4
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 IAS 12 – INCOME TAX
(Application of Matching Principle)
This treatment is done because of difference! Difference of reporting in Accounting World & Tax World.

Accounting World  Accrual Basis

Tax World  Cash Basis/ Receipt Basis

And because of this difference of these two worlds, DEFERRED TAX came into this world!

Income will match with (result in) Tax Expense i.e. Income Increases  Tax Expense Increases
Expense will match with (result in) Tax Benefit i.e. Expense Increases Tax Benefit Increases

DIFFERENCE

Timing Difference Abhi nahi Aur kabhi nahi

TEMPORARY NON-TEMPORARY

1. Dividends Receivable 1. IAS 20 – Government Grants

2. Provisions, Accrued Expense 2. Fines/ Penalties (Buray Log)

3. IAS 2 – Inventory (Damage) 3. Political Donations

4. Issue Cost (Loan Notes) 4. Goodwill in Business Combination (Tax Dept. treats P. Co.’s

5. Tax Accelerated Depreciation investment in S. Co. as a Normal Investment. They don’t

6. IAS 38 – Capitalized Development Cost recognize goodwill and so amortization. But in accounting

7. IFRS – 16 Leases (Tax Dept. treats all leases as Operating books, we record goodwill impairment as an expense & if we

Lease) go to Tax Dept., they will say ABHI NAHI AUR KABHI NAHI. In

8. Convertible loan notes (Tax Dept. treats it as a pure loan) Tax world, goodwill is taken as Investment in Shares)

9. IAS 19 – Employee Benefits, DBO Accounting (Current

Service Cost)

10. IFRS 2 – Share Based Payments

Prepared by: Arsalan M. Khan Page 1 of 3

 TEMPORARY DIFFERENCE

TAXABLE TEMPORARY DIFFERENCE DEDUCTABLE TEMPORARY DIFFERENCE

1. Because of which future taxable profit increases 1. Because of which future taxable profit decreases

2. You need to pay tax in future. 2. You get tax benefit in future.

3. Results in Deferred Tax Liability 3. Results in Deferred Tax Asset

4. E.g. Dividends 4. E.g. Provisions

P&L XXX D.T.A XXX

D.T.L XXX P&L XXX

SOFP APPROACH:

Carrying Value Tax Base Temporary Difference

Asset TAXABLE TEMPORARY DIFFERENCE

Asset DEDUCTABLE TEMPORARY

DIFFERENCE

DEDUCTABLE TEMPORARY
Liability
DIFFERENCE

Liability TAXABLE TEMPORARY DIFFERENCE

Note: Answers will be same in Income Statement Approach & SOFP Approach. As whatever comes in
Income Statement goes later to SOFP.
E.g. Receivables XXX
Sales XXX

UNUSED TAX LOSSES

 D.T.A, due to unused tax losses, can only be recognized, if it is probable that they will set off
future taxable profits. In some jurisdictions, there is an expiry date of unused losses. In that
case, it must be probable that future taxable profits arises before the expiry date.

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  If the company has sufficient taxable temporary difference to use the deductible temporary
difference (E.g. Dividends Receivable)
 If tax planning opportunities are available to the company (75% group P. Co offsets S. Cos losses)
 If that loss arises from identifiable reasons and that reason is ceased now (Flop Product)

EXCEPTION (NON-TEMPORARY DIFFERENCE):

 In case of Undistributed Profits of Subsidiary Co. & Associates, where P. Co. has control over the
dividend policy of S. Co. & it is probable that P. Co. wont withdraw any dividends from S. Co.
o “YOU CAN BUT YOU WON’T”
 Corporate America saves its money in Mexico

IMPORTANT POINTS:

Entry: D.T.A. XXX

P&L XXX

 In any case, D.T.A can only be booked, if it’s probable that company will get tax benefit
 Any change in D.T.A or D.T.L is adjusted prospectively
 D.T.A & D.T.L can be offset, if company has legal & enforceable right to offset current tax
payment
 That’s why normally, D.T.A in P. Co.’s books and D.T.L in S. Co.’s books can’t offset each other.
 For deferred tax, use those tax rates which are enacted before reporting date.

REASONS FOR DIFFERENCE IN ACTUAL TAX RATE & EFFECTIVE TAX RATE

 Non Temporary difference

 Foreign subsidiaries different tax rates
 Over/ under provision of last year.
 Deferred tax booked on different rates

Prepared by: Arsalan M. Khan Page 3 of 3

Ias 19 Employee benefit
Wednesday, 07 March 2018 11:39 PM

New Section 2 Page 1

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Ias 20 govt grant
Wednesday, February 27, 2019 11:03 PM

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Ias 37
Sunday, 11 February 2018 04:35 PM

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IAS 41 IAS 21
Saturday, 24 February 2018 06:59 PM

corporate reporting Page 1

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Ifrs 8 operating segment
Sunday, 18 February 2018 05:18 PM

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Ifrs 2 SBP
Saturday, 17 March 2018 05:42 PM

Financial instruments final Page 1

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iFinancial instruments
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 How should this be accounted for?
QUESTION A company owns inventories of 20,000 gallons of oil which cost $400,000 on 1
December 20X3. In order to hedge the function in the market value of the oil the company signs
a futures contract to deliver 20,000 gallons of oil on 31 March 20X4 at the futures prices of $22
per gallon.
The market price of oil on 31 December 20X3 is $23 per gallon and the futures price for delivery
on march20X4 is $24 per gallon.

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 TEST YOUR UNDERSTANDING 16 – FAIR VALUE HEDGE.
On 1 January 20X8 and entity purchased equity instrument for their fair value $900,000. The
were designated upon initial recognition to be classified as fair value through other
comprehensive income.

At 30 September 20X8, the equity instrument was still worth $900,000 but the entity became
worried about the risk of a decline in value. It therefore entered into a futures contract to sell
the shares for $900,000 is six month time. It identified the futures contract to sell the shares for
$900,000 in six months time. It identified the futures contract as a hedging instrument as part
of a fair value hedging arrangement. The fair value hedge was correctly documented and
designated upon initial recognition. All effectiveness criteria have been complied with.
By the reporting date of 31 December 20X8, the fair value of the equity instrument had fallen
to $800,000, and the fair value of the futures contract had risen by $90,000.
REQUIRED:
Explain the accounting treatment of the fair value hedge arrangement based upon available
information.

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 Q. Brit, a UK entity has contracted to buy one hundred tones of raw material from a German
entity. The materials will cost € 500,000 and will be delivered and paid for in Euros on 30 June
20X5. Brit takes out forward contract to buy € 500,000 on 30 June 20X5 at a cost of $ 320,000
at the year end of 30 April 20X5, the Euro has appreciated and the value of € 500,000 is now $
325,000.

Q. Grayton (whose functional currency is the $) decided in January that is will need to buy an
item of plant in one year time for KR 200,000 in one year time for the fixed sum of $100,000.
The fair value of this contract at inception is zero and is designated as a hedging instrument
At Grayton’s year end on 31 July, the KR has depreciated and the value of KR 200,000 is
$90,000. It remains at the value until the plant is bought.

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 TEST YOU UNDERSTANDING 18 CASH FLOW HEDGE.
A company enters into a derivative contract in order to protect its future cash flows relating to
a recognized financial assets. At inception when the fair value of the hedging instrument was
nil, the relationship was documented as a cash flow hedge.
By the reporting date, the loss in respect of the future cash flows amounted to $9,100 in fair
value terms. It has been determined that the hedging relationship meets al effectiveness
criteria.
Required:
Explain the accounting treatment of the cash flow hedge if the fair value of the hedging
instrument at the reporting date is.
a) $8,500
b) $10,000

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 a) $8,500
b) $10,000

CRITERIA FOR HEDGE ACCOUNTING

Under IFRS9 hedge accounting rules can only be applied if the hedging relationship meets the
following criteria.
1. The hedging relationship consists only if eligible hedging instruments, and hedged items.
2. At the inception of the hedge there must be formal documentation identifying the hedged item
and the hedging instrument.
3. The hedging relationship meets all eff3ectivness requirements see later section for more
details.
The hedge effectiveness requirements are as follows.

1) There must be an economic relationship between the hedged item and the hedging instrument.

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 CRITERIA FOR HEDGE ACCOUNTING
Under IFRS9 hedge accounting rules can only be applied if the hedging relationship meets the
following criteria.
1. The hedging relationship consists only if eligible hedging instruments, and hedged items.
2. At the inception of the hedge there must be formal documentation identifying the hedged item
and the hedging instrument.
3. The hedging relationship meets all eff3ectivness requirements see later section for more
details.
The hedge effectiveness requirements are as follows.

1) There must be an economic relationship between the hedged item and the hedging instrument.
For example if the price of a share falls below $10 the fair value of a futures contract to sell the
share for $ 10 rises.
2) The affect of credit risk does not dominate the value changes that result from that economic
relationship.
Credit risk may lead to erratic fair value movements in either the hedged item or the hedging
instrument. For Example, if the country party of a derivative experiences a decline in credit
worthiness, the fair value of the derivative (the hedging instrument) may fall substantially. This
movement is unrelated to changes in the fair value of the item and would lead to hedge in
effectiveness.
3) The hedge ratio of the hedging relation is the same as that resulting from the quantity of the
hedged item that the entity actually hedges and the quantity of the hedging instrument that
the entity actually uses to hedge that quantity of hedged item.
For example, an entity may have 100 kg of gold but it chooses to enter into futures contracts to
fix the selling price of only 90 kg. the relationship between the 90 kg of inventory and the
quantity of derivative contracts actually entered into is hedged ratio. The designation of the
hedged item and the edging instrument must reflect that ratio.
However any imbalance between the quantity of the hedged item and the hedging instrument
must not create ineffectiveness that is inconsistent with the purpose of hedge accounting.

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Impairment financial asset
Wednesday, January 2, 2019 5:27 PM

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IFRS 13 FAIR VALUE MEASUREMENT
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Ifrs 16 leasing
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Saturday, 10 February 2018 04:14 PM

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