Regulatory framework and Ethics

1. Need for IFRS Standards

1. Impact of globalization
2. Advantages and disadvantages of IFRS
i. Advantages
1. Making comparison easier with it’s foreign competitors
2. Cross border listing
3. Foreign subsidiaries will have common accounting language
4. Takeovers and merges are easy across the globe
ii. Disadvantages
1. Cost of implementation
2. Application of Judgement. Remove the defense of referring to the sub-clauses in the
court.

2. IASB IFRS Foundation

IFRS Advisory council IASB IFRS Interpretation committee

3. Developing IFRS standards

1. IASB Establishes Advisory committee
2. IASB develop and publish Discussion paper
3. IASB develop and publish Exposure draft, after receipt and review of comments
4. IASB issues IFRS, after receipt and review of comments

Interpretation committee of IFRS Standards

Two main responsibilities are
1. Issues not specifically addressed in IFRS Standard
2. Unsatisfactory or conflicting interests have developed
Authority and application of IFRS interpretations committee interpretations
Interpretation committee due process
- Identify and review issues associated with the topic and consider application of conceptual frame work
- Study national accounting requirements and practice, exchange views with national standard setters
- Publication of draft interpretation for public comments
- consideration of all comments
- Approval of IFRS interpretation committee, if no more than 4 voted against
- Approval of board by at least 9 votes

4. Managing the change to IFRS Standards

5. Ethical and Professional principles

Conceptual framework for financial reporting

2. Purpose:
a. Assist IASB to develop IFRS
b. Assist preparers of accounts to develop accounting policies in case where there is no IFRS applicable to a
particular transaction or where a choice of accounting policies exist
c. Assists all parties to understand and interpret IFRS standards
3. Objective of general purpose financial reporting: To provide financial information about the reporting entity
4. Qualitative characteristics of useful financial information

Fundamental Characteristics Enhancing Characteristics

Information is useful if present these The useful information is enhanced if these characteristics
characteristics are maximized
1) Relevance 1) Comparability
a. Capable of making difference in decisions 2) Verifiability
b. Materiality: Omitting, misstating, a. Different knowledgeable and independent
Obscurement influence decisions observers could reach consensus
2) Faithful representation 3) Timeliness
a. Complete 4) Understandability
b. Neutral a. Financial statements are prepared for those who have
c. Free from error a reasonable knowledge of business and economic
And Substance overform (Economic activities and who review and analyse the information
substance over legal form) diligently

5. Elements of financial statements

Asset Present economic resource controlled by the entity as a result of past event
Liability Present obligation of the entity to transfer an economic resource
Equity Residual interest in assets of the entity after deducting all its liabilities
Income Increase in asset or decrease in liability result in increase in equity other than contributions from
holders of equity
Expenditure Decrease in asset or increase in liability result in decrease in equity other than distributions to
holders of equity
6. Recognition and Derecognition
Recognise and item if
a. It is and element and
b. Useful ie. Relevant and faithful representation
7. Measurement basis
a. Historical cost
b. Current cost
i. Fair value: The price that would be received to sell and asset or paid to transfer a liability in an
orderly transaction between market participants
ii. Value in use
iii. Fulfilment value
iv. Current cost
8. Factors to consider in selecting measurement basis
a. Nature of information provided
b. Useful ness of information provided
c. Other factors
i. Cost constraint
ii. Enhancing qualitative characteristics
9. Presentation and disclosure
10. Concept of capital and maintenance
a. Financial: Increase in profit
b. Physical : Increase in physical productive capacity
11. Current IFRS Standards and revised Conceptual Framework
Professional and Ethical duty of the accountant

Fundamental Principles Threats to the fundamental principles

1) Integrity :Straight forward and Honest Self-interest
2) Objectivity : Not to allow bias, conflict of Self-review
interest, undue influence of others to override Advocacy
professional judgement Familiarity
3) Professional competence and due care: Intimidation
Professional Knowledge and skill What should the accountant to do
4) Confidentiality : Unless legal or professional  Discuss and convince the director about treatment,
right or duty and non-compliance
5) Professional behavior: Comply with laws and  Internal procedure to mitigate risks
regulation  Discuss the matter with other directors or Audit
committee
 Seek professional advice from ACCA
 Seek legal advise
 Finally, if matter cannot be satisfactorily resolved,
resignation

Non-current assets held for sale and discontinued operations (IFRS 5)

Shall classify If its carrying amount will be recovered principally through a sale transaction and not through
continuing use.

Criteria to classify Non-current assets as held for sale

1. Available for immediate sale

2. Sale is highly probable
a. Price must be reasonable
b. Unlikely that significant changes will be made to the plan (No change to the plan) 3
c. Management must be Committed 1
d. Active 2 program to locate a buyer and complete plan must have been initiated
e. Sale is expected to complete within one year from the date of classification as held for sale

C – Commitment to sale S – Sale is probable

A – Active program to locate buyer O- One year

P – Present condition N – No change in plan

Measurement

Before classification After classification

In line with applicable IFRS Lower of CA and FV less cost to sell (Impairment to P&L)

After classification, not to be depreciated

Revenue from contracts with customers (IFRS 15)

1. Identify contracts with customers

a. Contract exist
b. All of the following criterial are met
1. Parties have approved the contract
2. Entity can identify each party’s rights
3. Entity can identify payment terms
4. Contract has commercial substance
5. It is probable that the entity will collect consideration

c. If criteria not met, IFRS 15 not applicable. If met in future then IFRS 15 applicable

d. If criterial not met and consideration already received from customer, entity should recognize the collection
received as revenue when
1. The entity has no remaining obligations to the customer and
Substantially all of the consideration has been received and is not refundable,
OR
The contract has been terminated and consideration is not refundable
2. Identify separate performance obligation
3. Determine the transaction price
4. Allocate transaction price to performance obligations
5. Recognize revenue when performance obligation is satisfied

Contract costs
Warranties:

Standard warranty IAS 37, Additional warranty as separate performance obligation

and transaction price to be allocated based on
standalone price
Principle Vs Agent:
Repurchase agreement:
Consignment arrangement
Bill and hold arrangement: Two performance obligations. 1. Sale of Material 2. Custodial service (Over period
of time)
Sale with a right to return: Expected value method to be used
Property Plant and Equipment (IAS 16)

Initial recognition:
 Employee training cost should not be added to the assets as future benefits from training may not accrue if they
left organization.
 Testing cost of machine to be added to the asset. Any proceeds received from selling items made during such
testing should be credited to P&L account

 In cost model also revaluation is required to be done if the carrying value is significantly different from fair value
No major diff between cost model and revaluation model as under both methods revaluation can be done
 Assets under revaluation model to be revalued systematic, periodic basis at suitable intervals. Not required at
each reporting period.
 Revaluation gain if any will go to OCI and then Other components of Equity (Other reserves) (Normal profit will
go to retained earnings)
 Revaluation loss

Permanent Temporary
Impairment under IAS 36 Fair value loss
Charge to P&L Charge to P&L
 De recognition: When a property is under litigation, derecognize and show in contingent assets if there is
probability that litigation will be resolved in you favor
 Transferring revaluation surplus to retained earnings (Transfer an amount equal to additional depreciation,
which was resulted because of revaluation, every year from revaluation reserve to retained earnings
 If yearly transfer of revaluation surplus is not done, In the year of derecognition of asset revaluation surplus to
be transferred to retained earnings

Depreciation
 Land and buildings are dealt with separately even when they have acquired together because land normally
have an unlimited life and therefore not depreciated.
 Useful life / Depreciation method of property plant and equipment should be carried at least at each financial
year end.
 Where an asset require overhauls in order to continue to operate, the cost of overhaul is treated as an
additional component and depreciated over the period to the next overhaul
 Carrying amount in some circumstances be higher than market value ie net realizable value. As per IAS 16
carrying value of an asset can not be greater than its recoverable amount. Recoverable amount is the amount
recoverable from future use. This may be higher than market value.
This make sense if you think of specialized machine which could not fetch much in second hand market but
which will produce goods which can be sold at a profit for many years.

IAS 36 Impairment of assets

 Impairment value of an asset should be adjusted first to the revaluation surpluses if any and remaining to be
debited to P&L
 While reversing Impairment, carrying value of an asset should not exceed the amount of the carrying value had
the asset not impaired.
 CGU: Gross Impairment value should first adjust against Goodwill next against specific impaired assets and arrive
net Impairment value
Gross CGU less Goodwill less specific impaired asset less Inventory less not impaired assets and arrive net CGU
value
 Apportion Net impaired value against net CGU value
 Goodwill once impaired cannot be reversed.

IFRS 16 Leases

What is Lease: Lease is an agreement or part of agreement which give raise to

1. Right of control and use of an

2. An identifiable asset
3. For an agreed period: Extension and termination periods as per lessee should consider
4. In Exchange of consideration

 Identifiable asset: Lessor shall not have a right to substantially substitute the asset. It is ok if replaces the assets
when it is under repairs

Finance lease (Lessee)

 Calculation of interest when lease payments made at the end of the year:

Year Opening balance of Add Interest (Calculate Less Lease Closing

Lease liability Interest on OB) payment Balance
 Calculation of interest when lease payments made at the beginning of the year

Year Opening balance Less Lease Balance lease Add Interest Closing
of Lease liability payment liability (Calculate Interest Balance
on after deduct
pmt)
 Calculation when lease is started not at the beginning of the year (Mid of the year). Calculate interest in two
parts 1st Year beginning to lease cutoff date 2nd from lease cutoff date to end of the financial year. Interest
should be calculated on balance at the lease cutoff date.

Operating lease (Lessee)

Accounting is same as finance lease.

 Exemption in case of low value items and short life items: In such cases lease rental should be accounted in
straight line method or any other appropriate method. (Not expense as on when incurred. It should be total
lease rental divided by No of years)

IAS 38 Intangible Assets

 Identifiable (Separable, Contractual / legal right)

 Subsequent measurement: Cost model or Revaluation model (Same as IAS 16, except here no depreciation
instead amortization)
o Definite – Amortize
o Indefinite – No amortization but impairment to be tested annually
 Development cost which satisfy PIRATE should be capitalized
P – Probable future economic benefits
I – Intention to complete
R – Resources of Technical and Financial
A – Ability to use or sell
T- Technical feasibility
 E – Estimate (Reliable estimate)

IAS 19 Employee benefits

 In statement of financial position net plan asset / liability should be shown (Not plan assets and liabilities
separately)
 Since plan liabilities should be recorded at PV, unwinding to be done. Whereas unwinding to be done on net
plan assets (Not on plan liability). Unwinding will be either on net Liability or on net assets. If liability debit P&L
and credit Liability. If assets, Credit P&L and Debit assets

IAS 12 – Income taxes

Tax expense = Current tax +/- deferred tax

 Temporary difference and permanent difference

 Tax expense is the tax calculated on accounting profit. If tax expense is more than tax as per income tax, that
means we are providing for future taxes and hence it is deferred tax liability. If it is other way round deferred tax
asset will arise
 Deferred tax asset and liability is usually calculated based on carrying amount and tax base.
CA > TB – DTL
CA< TB - DTA
 Tax base of development cost is nil since the relevant tax deduction has already been claimed
 Rate of Tax: The tax rate in force (or expected to be inforce) when the asset is realized or the liability is settled,
should be applied to temporary differences to calculate deferred tax balance. The rate must be based on
legislation enacted or substantially enacted by the reporting date.
 Deferred tax on undistributed profits of subsidiaries should be recognized unless the parent is able to control
the timing of dividend payments and it is unlikely that dividends will be paid for the foreseeable future
 Unrealized profit on intragroup trading
 Deferred tax Asset and liability to be shown separately in Balance sheet. Can not be setoff with each other
except there is direct relation between them which is very rare case
 DTL due to fair value gain in consolidation to be debited to Good will
 DTA due to fair value loss in consolidation to be credited to Good will
Special Cases
 Revalued assets:
o When asset revalued, gain recognized in OCI
o Difference between CA and TB is timing difference and tax on TD will be debited to
 OCI to the extent it pertains to Revaluation portion
 P&L to the extent it pertains to CA before revaluation
 Share based payment:
 Leases
 Unused tax losses
 Business combination and deferred taxes
o Provision for unrealized profit
o Fair value adjustments
o Unremitted earnings

IAS 41 Agriculture

 Bearer plants should be accounted for under IAS 16. They are measured at accumulated costs until maturity and
are then subject to depreciation and impairment charges
  Biological assets should be measured, including initial recognition, at fair value less cost to sell (Net market
value). If fair value cannot be determined then can be measured at cost less accumulated depreciation and
impairment losses. This alternative basis of is only allowed on initial recognition.
 Fair value increase, Physical change Vs Market price change
 Presentation and disclosure: Should be classified as separate class, neither current nor non-current

IFRS 2 – Share based payment

 Grant date is the date of entering in to agreement.

 Vesting date is the date when the vesting period ends
 Vesting period is the period for which service to be rendered
 Exercise date is the date when the shares can be exercised.
 Exercise period is the period between vesting date and exercise date

IAS 20 – Government grant (To be recognized when conditions attached to it is met)

 Revenue grant :
o Methods
 1. Net of Grant : Expense less Grant
 2. Gross: Show total grant as income and expense under expense
 Capital grant
o Metods
 1. Net value under asset
 2. Gross show in asset and show same amount in liability as deferred income. Transfer amount
equivalent of depreciation to P&L every year

IAS 23 – Borrowing cost

IAS 37- Provisions, contingent assets and liabilities

Provision should be recognized when

 Present obligations (Legal or constructive) as a result of past event

 Probable that transfer of resources embodying economic benefits is required to settle the obligation
 Reliable estimate can be made of its amount

Provision is a liability of uncertain timing or amount:

More than 50% to 100% - Provision

10% to 49% - disclose

% Probability Out flow Inflow

90 -95 Virtually certain Liability Asset
50-90 Probable Provision Contingent asset
10-50 Possible Contingent liability Ignore
<10% Remote Ignore Ignore

Probable transfer of liability more than 50%: Where there is an number of similar obligations the probability should be
based on considering the population as a whole, rather than one single item.
 Large population of items (Warranty of goods): Expected value
 Single item (Legal case) : Most likely outcome
 Gain from expected disposal of assets should not be considered in measurement of provision
 Provision liability Vs Reimbursement (if certain then recognize as asset)
 Onerous contract: Provision should be created lower of
o The cost of fulfilling the contract
o The cost penalties from failure to fulfil the contract.
 Provision for restructuring
o Detailed formal plan
o Raised a valid expectation