Objective of IAS 2

The objective of IAS 2 is to prescribe the accounting treatment for inventories. It provides guidance for determining the cost of
inventories and for subsequently recognising an expense, including any write-down to net realisable value. It also provides
guidance on the cost formulas that are used to assign costs to inventories.
Scope
Inventories include assets held for sale in the ordinary course of business (finished goods), assets in the production process for
sale in the ordinary course of business (work in process), and materials and supplies that are consumed in production (raw
materials). [IAS 2.6]
However, IAS 2 excludes certain inventories from its scope: [IAS 2.2]
o work in process arising under construction contracts (see IAS 11 Construction Contracts)
o financial instruments (see IAS 39 Financial Instruments: Recognition and Measurement)
o biological assets related to agricultural activity and agricultural produce at the point of harvest (see IAS 41 Agriculture).
Also, while the following are within the scope of the standard, IAS 2 does not apply to the measurement of inventories held by:
[IAS 2.3]
Fundamental principle of IAS 2
Inventories are required to be stated at the lower of cost and net realisable value (NRV). [IAS 2.9]
Measurement of inventories
Cost should include all: [IAS 2.10]
o costs of purchase (including taxes, transport, and handling) net of trade discounts received
o costs of conversion (including fixed and variable manufacturing overheads) and
o other costs incurred in bringing the inventories to their present location and condition
IAS 23 Borrowing Costs identifies some limited circumstances where borrowing costs (interest) can be included in cost of
inventories that meet the definition of a qualifying asset. [IAS 2.17 and IAS 23.4]
Inventory cost should not include: [IAS 2.16 and 2.18]
o abnormal waste
o storage costs
o administrative overheads unrelated to production
o selling costs
o foreign exchange differences arising directly on the recent acquisition of inventories invoiced in a foreign currency
o interest cost when inventories are purchased with deferred settlement terms.
The standard cost and retail methods may be used for the measurement of cost, provided that the results approximate actual
cost. [IAS 2.21-22]
For inventory items that are not interchangeable, specific costs are attributed to the specific individual items of inventory. [IAS
2.23]
For items that are interchangeable, IAS 2 allows the FIFO or weighted average cost formulas. [IAS 2.25] The LIFO formula, which
had been allowed prior to the 2003 revision of IAS 2, is no longer allowed.
The same cost formula should be used for all inventories with similar characteristics as to their nature and use to the entity. For
groups of inventories that have different characteristics, different cost formulas may be justified. [IAS 2.25]
Write-down to net realisable value
NRV is the estimated selling price in the ordinary course of business, less the estimated cost of completion and the estimated
costs necessary to make the sale. [IAS 2.6] Any write-down to NRV should be recognised as an expense in the period in which
the write-down occurs. Any reversal should be recognised in the income statement in the period in which the reversal occurs.
[IAS 2.34]
Expense recognition
IAS 18 Revenue addresses revenue recognition for the sale of goods. When inventories are sold and revenue is recognised, the
carrying amount of those inventories is recognised as an expense (often called cost-of-goods-sold). Any write-down to NRV and
any inventory losses are also recognised as an expense when they occur. [IAS 2.34]
 Overview
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is applied in selecting and
applying accounting policies, accounting for changes in estimates and reflecting corrections of prior
period errors.
The standard requires compliance with any specific IFRS applying to a transaction, event or condition,
and provides guidance on developing accounting policies for other items that result in relevant and
reliable information. Changes in accounting policies and corrections of errors are generally
retrospectively accounted for, whereas changes in accounting estimates are generally accounted for on
a prospective basis.
IAS 8 was reissued in December 2005 and applies to annual periods beginning on or after 1 January
2005.
Key definitions [IAS 8.5]
 Accounting policies are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
 A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or
related expense, resulting from reassessing the expected future benefits and obligations associated with
that asset or liability.
 International Financial Reporting Standardsare standards and interpretations adopted by the
International Accounting Standards Board (IASB). They comprise:
o International Financial Reporting Standards (IFRSs)
o International Accounting Standards (IASs)
o Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or
the former Standing Interpretations Committee (SIC) and approved by the IASB.
 Materiality. Omissions or misstatements of items are material if they could, by their size or nature,
individually or collectively, influence the economic decisions of users taken on the basis of the financial
statements.
 Prior period errors are omissions from, and misstatements in, an entity's financial statements for one or
more prior periods arising from a failure to use, or misuse of, reliable information that was available and
could reasonably be expected to have been obtained and taken into account in preparing those
statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies,
oversights or misinterpretations of facts, and fraud.
Selection and application of accounting policies
When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the
accounting policy or policies applied to that item must be determined by applying the Standard or
Interpretation and considering any relevant Implementation Guidance issued by the IASB for the
Standard or Interpretation. [IAS 8.7]
In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or
condition, management must use its judgement in developing and applying an accounting policy that
results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management
must refer to, and consider the applicability of, the following sources in descending order:
 the requirements and guidance in IASB standards and interpretations dealing with similar and related
issues; and
 the definitions, recognition criteria and measurement concepts for assets, liabilities, income and
expenses in the Framework. [IAS 8.11]
Management may also consider the most recent pronouncements of other standard-setting bodies that
use a similar conceptual framework to develop accounting standards, other accounting literature and
accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11.
[IAS 8.12]
 Consistency of accounting policies
An entity shall select and apply its accounting policies consistently for similar transactions, other events
and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of
items for which different policies may be appropriate. If a Standard or an Interpretation requires or
permits such categorisation, an appropriate accounting policy shall be selected and applied consistently
to each category. [IAS 8.13]
Changes in accounting policies
An entity is permitted to change an accounting policy only if the change:
 is required by a standard or interpretation; or
 results in the financial statements providing reliable and more relevant information about the effects of
transactions, other events or conditions on the entity's financial position, financial performance, or cash
flows. [IAS 8.14]
Note that changes in accounting policies do not include applying an accounting policy to a kind of
transaction or event that did not occur previously or were immaterial. [IAS 8.16]
If a change in accounting policy is required by a new IASB standard or interpretation, the change is
accounted for as required by that new pronouncement or, if the new pronouncement does not include
specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]
Retrospective application means adjusting the opening balance of each affected component of equity
for the earliest prior period presented and the other comparative amounts disclosed for each prior
period presented as if the new accounting policy had always been applied. [IAS 8.22]
 However, if it is impracticable to determine either the period-specific effects or the cumulative effect of
the change for one or more prior periods presented, the entity shall apply the new accounting policy to
the carrying amounts of assets and liabilities as at the beginning of the earliest period for which
retrospective application is practicable, which may be the current period, and shall make a
corresponding adjustment to the opening balance of each affected component of equity for that period.
[IAS 8.24]
 Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of
applying a new accounting policy to all prior periods, the entity shall adjust the comparative information
to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]
Disclosures relating to changes in accounting policies
Disclosures relating to changes in accounting policy caused by a new standard or interpretation include:
[IAS 8.28]
 the title of the standard or interpretation causing the change
 the nature of the change in accounting policy
 a description of the transitional provisions, including those that might have an effect on future periods
 for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
 the amount of the adjustment relating to periods before those presented, to the extent practicable
 if retrospective application is impracticable, an explanation and description of how the change in
accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]
 the nature of the change in accounting policy
 the reasons why applying the new accounting policy provides reliable and more relevant information
 for the current period and each prior period presented, to the extent practicable, the amount of the
adjustment:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
 the amount of the adjustment relating to periods before those presented, to the extent practicable
 if retrospective application is impracticable, an explanation and description of how the change in
accounting policy was applied.
Financial statements of subsequent periods need not repeat these disclosures.
If an entity has not applied a new standard or interpretation that has been issued but is not yet
effective, the entity must disclose that fact and any and known or reasonably estimable information
relevant to assessing the possible impact that the new pronouncement will have in the year it is applied.
[IAS 8.30]
Changes in accounting estimates
The effect of a change in an accounting estimate shall be recognised prospectively by including it in
profit or loss in: [IAS 8.36]
 the period of the change, if the change affects that period only, or
 the period of the change and future periods, if the change affects both.
However, to the extent that a change in an accounting estimate gives rise to changes in assets and
liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related
asset, liability, or equity item in the period of the change. [IAS 8.37]
Disclosures relating to changes in accounting estimates
Disclose:
 the nature and amount of a change in an accounting estimate that has an effect in the current period or
is expected to have an effect in future periods
 if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an
entity shall disclose that fact. [IAS 8.39-40]
Errors
The general principle in IAS 8 is that an entity must correct all material prior period errors
retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS
8.42]
 restating the comparative amounts for the prior period(s) presented in which the error occurred; or
 if the error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for the earliest prior period presented.
However, if it is impracticable to determine the period-specific effects of an error on comparative
information for one or more prior periods presented, the entity must restate the opening balances of
assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable
(which may be the current period). [IAS 8.44]
Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period,
of an error on all prior periods, the entity must restate the comparative information to correct the error
prospectively from the earliest date practicable. [IAS 8.45]
Disclosures relating to prior period errors
Disclosures relating to prior period errors include: [IAS 8.49]
 the nature of the prior period error
 for each prior period presented, to the extent practicable, the amount of the correction:
o for each financial statement line item affected, and
o for basic and diluted earnings per share (only if the entity is applying IAS 33)
 the amount of the correction at the beginning of the earliest prior period presented
 if retrospective restatement is impracticable, an explanation and description of how the error has been
corrected.
Financial statements of subsequent periods need not repeat these disclosures
 IAS 10

Key definitions
Event after the reporting period: An event, which could be favourable or unfavourable, that occurs between the
end of the reporting period and the date that the financial statements are authorised for issue. [IAS 10.3]
Adjusting event: An event after the reporting period that provides further evidence of conditions that existed at
the end of the reporting period, including an event that indicates that the going concern assumption in relation to
the whole or part of the enterprise is not appropriate. [IAS 10.3]
Non-adjusting event: An event after the reporting period that is indicative of a condition that arose after the end
of the reporting period. [IAS 10.3]

Accounting
 Adjust financial statements for adjusting events - events after the balance sheet date that provide further evidence
of conditions that existed at the end of the reporting period, including events that indicate that the going concern
assumption in relation to the whole or part of the enterprise is not appropriate. [IAS 10.8]

 Do not adjust for non-adjusting events - events or conditions that arose after the end of the reporting period. [IAS
10.10]

 If an entity declares dividends after the reporting period, the entity shall not recognise those dividends as a liability
at the end of the reporting period. That is a non-adjusting event. [IAS 10.12]

Going concern issues arising after end of the reporting period

An entity shall not prepare its financial statements on a going concern basis if management determines after the
end of the reporting period either that it intends to liquidate the entity or to cease trading, or that it has no
realistic alternative but to do so. [IAS 10.14]
IAS 16

Objective of IAS 16
The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The
principal issues are the recognition of assets, the determination of their carrying amounts, and the
depreciation charges and impairment losses to be recognised in relation to them.
Scope
IAS 16 applies to the accounting for property, plant and equipment, except where another standards
requires or permits differing accounting treatments.
The cost model in IAS 16 also applies to investment property accounted for using the cost model
under IAS 40 Investment Property. [IAS 16.5]

Recognition
Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS
16.7]
 it is probable that the future economic benefits associated with the asset will flow to the entity, and
 The cost of the asset can be measured reliably.
This recognition principle is applied to all property, plant, and equipment costs at the time they are
incurred. These costs include costs incurred initially to acquire or construct an item of property, plant
and equipment and costs incurred subsequently to add to, replace part of, or service it.
IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property,
plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of
an item of property, plant, and equipment with a cost that is significant in relation to the total cost of
the item must be depreciated separately. [IAS 16.43]
IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement
at regular intervals. The carrying amount of an item of property, plant, and equipment will include the
cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future
benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is
derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]
Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may
require regular major inspections for faults regardless of whether parts of the item are replaced. When
each major inspection is performed, its cost is recognised in the carrying amount of the item of
property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary,
the estimated cost of a future similar inspection may be used as an indication of what the cost of the
existing inspection component was when the item was acquired or constructed. [IAS 16.14]
Initial measurement
An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes
all costs necessary to bring the asset to working condition for its intended use. This would include not
only its original purchase price but also costs of site preparation, delivery and handling, installation,
related professional fees for architects and engineers, and the estimated cost of dismantling and
removing the asset and restoring the site (see IAS 37 Provisions, Contingent Liabilities and Contingent
Assets). [IAS 16.16-17]
If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be
recognised or imputed. [IAS 16.23]
If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost
will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b)
the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired
 item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS
16.24]
Measurement subsequent to initial recognition
IAS 16 permits two accounting models:
 Cost model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
 Revaluation model. The asset is carried at a revalued amount, being its fair value at the date of
revaluation less subsequent depreciation and impairment, provided that fair value can be measured
reliably. [IAS 16.31]
The revaluation model
Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount
of an asset does not differ materially from its fair value at the balance sheet date.
If an item is revalued, the entire class of assets to which that asset belongs should be revalued.
Revalued assets are depreciated in the same way as under the cost model (see below).
If a revaluation results in an increase in value, it should be credited to other comprehensive income and
accumulated in equity under the heading "revaluation surplus" unless it represents the reversal of a
revaluation decrease of the same asset previously recognised as an expense, in which case it should be
recognised in profit or loss. [IAS 16.39]
A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it
exceeds any amount previously credited to the revaluation surplus relating to the same asset.
When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained
earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained
earnings should not be made through profit or loss. [IAS 16.41]
Depreciation (cost and revaluation models)
For all depreciable assets:
The depreciable amount (cost less residual value) should be allocated on a systematic basis over the
asset's useful life [IAS 16.50].
The residual value and the useful life of an asset should be reviewed at least at each financial year-end
and, if expectations differ from previous estimates, any change is accounted for prospectively as a
change in estimate under IAS 8. [IAS 16.51]
The depreciation method used should reflect the pattern in which the asset's economic benefits are
consumed by the entity [IAS 16.60]; a depreciation method that is based on revenue that is generated
by an activity that includes the use of an asset is not appropriate. [IAS 16.62A]

The depreciation method should be reviewed at least annually and, if the pattern of consumption of
benefits has changed, the depreciation method should be changed prospectively as a change in estimate
under IAS 8. [IAS 16.61
Depreciation should be charged to profit or loss, unless it is included in the carrying amount of another
asset [IAS 16.48].
Depreciation begins when the asset is available for use and continues until the asset is derecognised,
even if it is idle. [IAS 16.55]
Recoverability of the carrying amount
IAS 16 Property, Plant and Equipment requires impairment testing and, if necessary, recognition for
property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more
than recoverable amount. Recoverable amount is the higher of an asset's fair value less costs to sell and
its value in use.
Any claim for compensation from third parties for impairment is included in profit or loss when the
claim becomes receivable. [IAS 16.65]
Derecognition (retirements and disposals)
An asset should be removed from the statement of financial position on disposal or when it is
withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on
disposal is the difference between the proceeds and the carrying amount and should be recognised in
profit and loss. [IAS 16.67-71]
If an entity rents some assets and then ceases to rent them, the assets should be transferred to
inventories at their carrying amounts as they become held for sale in the ordinary course of business.
[IAS 16.68A]

Dec 2010 F7 Question

The directors of Tunshill are disappointed by the draft profit for the year ended 30 September 2010. The
company’s assistant accountant has suggested two areas where she believes the reported profit may be
improved:
(i) A major item of plant that cost $20 million to purchase and install on 1 October 2007 is being
depreciated on a straight-line basis over a five-year period (assuming no residual value). The plant is
wearing well and at the beginning of the current year (1 October 2009) the production manager
believed that the plant was likely to last eight years in total (i.e. from the date of its purchase). The
assistant accountant has calculated that, based on an eight-year life (and no residual value) the
accumulated depreciation of the plant at 30 September 2010 would be $7·5 million ($20 million/8 years
x 3). In the financial statements for the year ended 30 September 2009, the accumulated depreciation
was $8 million ($20 million/5 years x 2). Therefore, by adopting an eight-year life, Tunshill can avoid a
depreciation charge in the current year and instead credit $0·5 million ($8 million – $7·5 million) to the
income statement in the current year to improve the reported prof t.
Required:
Comment on the acceptability of the assistant accountant’s suggestions and quantify how they would
affect the financial statements if they were implemented under IFRS. Ignore taxation.
Dec 2008
June 2013 F7 Question
Speculate owns the following properties at 1 April 2012:

Property A: An office building used by Speculate for administrative purposes with a depreciated
historical cost of $2 million. At 1 April 2012 it had a remaining life of 20 years. After a
reorganisation on 1 October 2012, the property was let to a third party and reclassified as an
investment property applying Speculate’s policy of the fair value model. An independent valuer
assessed the property to have a fair value of $2·3 million at 1 October 2012, which had risen to
$2·34 million at 31 March 2013.

Property B: Another office building sub-let to a subsidiary of Speculate. At 1 April 2012, it had a
fair value of $1·5 million which had risen to $1·65 million at 31 March 2013.

Required:
Prepare extracts from Speculate’s entity statement of profit or loss and other comprehensive
income and statement of financial position for the year ended 31 March 2013 in respect of
the above properties. In the case of property B only, state how it would be classified in
Speculate’s consolidated statement of financial position.

Dec 2012 F7 Question

Shawler is a small manufacturing company specialising in making alloy castings. Its main item of plant is
a furnace which was purchased on 1 October 2009. The furnace has two components: the main body
(cost $60,000 including the environmental provision – see below) which has a ten-year life, and a
replaceable liner (cost $10,000) with a five-year life.
The manufacturing process produces toxic chemicals which pollute the nearby environment. Legislation
requires that a clean-up operation must be undertaken by Shawler on 30 September 2019 at the latest.
Shawler received a government grant of $12,000 relating to the cost of the main body of the furnace
only.
The following are extracts from Shawler’s statement of financial position as at 30 September 2011 (two
years after the acquisition of the furnace):
Carrying amount
$
Non-current assets
Furnace: main body 48,000
replaceable liner 6,000
Current liabilities
Government grant 1,200
Non-current liabilities
Government grant 8,400

Environmental provision 18,000 (present value discounted at 8% per annum)

Required:
(i) Prepare equivalent extracts from Shawler’s statement of financial position as at 30 Sept 2012;
(ii) Prepare extracts from Shawler’s income statement for the year ended 30 September 2012 relating
to the items in the statement of financial position.
F7 June 2014
Summary of IAS 20

Objective of IAS 20
The objective of IAS 20 is to prescribe the accounting for, and disclosure of, government grants and
other forms of government assistance.

Scope
IAS 20 applies to all government grants and other forms of government assistance. [IAS 20.1] However,
it does not cover government assistance that is provided in the form of benefits in determining taxable
income. It does not cover government grants covered by IAS 41 Agriculture, either. [IAS 20.2] The
benefit of a government loan at a below-market rate of interest is treated as a government grant. [IAS
20.10A]

Accounting for grants

A government grant is recognised only when there is reasonable assurance that (a) the entity will
comply with any conditions attached to the grant and (b) the grant will be received. [IAS 20.7]
The grant is recognised as income over the period necessary to match them with the related costs, for
which they are intended to compensate, on a systematic basis. [IAS 20.12]
Non-monetary grants, such as land or other resources, are usually accounted for at fair value, although
recording both the asset and the grant at a nominal amount is also permitted. [IAS 20.23]
Even if there are no conditions attached to the assistance specifically relating to the operating activities
of the entity (other than the requirement to operate in certain regions or industry sectors), such grants
should not be credited to equity. [SIC-10]
A grant receivable as compensation for costs already incurred or for immediate financial support, with
no future related costs, should be recognised as income in the period in which it is receivable. [IAS
20.20]
A grant relating to assets may be presented in one of two ways: [IAS 20.24]
 as deferred income, or
 by deducting the grant from the asset's carrying amount.
A grant relating to income may be reported separately as 'other income' or deducted from the related
expense. [IAS 20.29]
If a grant becomes repayable, it should be treated as a change in estimate. Where the original grant
related to income, the repayment should be applied first against any related unamortised deferred
credit, and any excess should be dealt with as an expense. Where the original grant related to an asset,
the repayment should be treated as increasing the carrying amount of the asset or reducing the
deferred income balance. The cumulative depreciation which would have been charged had the grant
not been received should be charged as an expense. [IAS 20.32]

Disclosure of government grants

The following must be disclosed: [IAS 20.39]
 accounting policy adopted for grants, including method of balance sheet presentation
 nature and extent of grants recognised in the financial statements
 unfulfilled conditions and contingencies attaching to recognised grants

Government assistance
Government grants do not include government assistance whose value cannot be reasonably measured,
such as technical or marketing advice. [IAS 20.34] Disclosure of the benefits is required. [IAS 20.39(b)]
Summary of IAS 23
Objective of IAS 23
The objective of IAS 23 is to prescribe the accounting treatment for borrowing costs. Borrowing costs
include interest on bank overdrafts and borrowings, finance charges on finance leases and exchange
differences on foreign currency borrowings where they are regarded as an adjustment to interest costs.

Key definitions
Borrowing cost may include: [IAS 23.6]
 interest expense calculated by the effective interest method under IAS 39,
 finance charges in respect of finance leases recognised in accordance with IAS 17 Leases, and
 exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
This standard does not deal with the actual or imputed cost of equity, including any preferred capital not
classified as a liability pursuant to IAS 32. [IAS 23.3]
A qualifying asset is an asset that takes a substantial period of time to get ready for its intended use or
sale. [IAS 23.5] That could be property, plant, and equipment and investment property during the
construction period, intangible assets during the development period, or "made-to-order" inventories.
Scope of IAS 23
Two types of assets that would otherwise be qualifying assets are excluded from the scope of IAS 23:
 qualifying assets measured at fair value, such as biological assets accounted for under IAS 41
Agriculture
 inventories that are manufactured, or otherwise produced, in large quantities on a repetitive
basis and that take a substantial period to get ready for sale (for example, maturing whisky)
Accounting treatment
Recognition
Borrowing costs that are directly attributable to the acquisition, construction or production of a
qualifying asset form part of the cost of that asset and, therefore, should be capitalised. Other
borrowing costs are recognised as an expense. [IAS 23.8]
Measurement
Where funds are borrowed specifically, costs eligible for capitalisation are the actual costs incurred less
any income earned on the temporary investment of such borrowings. [IAS 23.12] Where funds are part
of a general pool, the eligible amount is determined by applying a capitalisation rate to the expenditure
on that asset. The capitalisation rate will be the weighted average of the borrowing costs applicable to
the general pool. [IAS 23.14]
Capitalisation should commence when expenditures are being incurred, borrowing costs are being
incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress
(may include some activities prior to commencement of physical production). [IAS 23.17-18]
Capitalisation should be suspended during periods in which active development is interrupted. [IAS
23.20] Capitalisation should cease when substantially all of the activities necessary to prepare the asset
for its intended use or sale are complete. [IAS 23.22] If only minor modifications are outstanding, this
indicates that substantially all of the activities are complete. [IAS 23.23]
Where construction is completed in stages, which can be used while construction of the other parts
continues, capitalisation of attributable borrowing costs should cease when substantially all of the
activities necessary to prepare that part for its intended use or sale are complete. [IAS 23.24]
Disclosure [IAS 23.26]
 amount of borrowing cost capitalised during the period
 capitalisation rate used
Objective of IAS 36
To ensure that assets are carried at no more than their recoverable amount, and to define how recoverable
amount is determined.
Scope IAS 36 applies to all assets except: [IAS 36.2]
 inventories (see IAS 2), deferred tax assets (see IAS 12), financial assets (see IFRS 9), investment property
carried at fair value (see IAS 40), agricultural assets carried at fair value (see IAS 41), non-current assets
held for sale (see IFRS 5)
Therefore, IAS 36 applies to (among other assets):
 land, buildings, machinery and equipment, investment property carried at cost, intangible assets
goodwill, investments in subsidiaries, associates, and joint ventures carried at cost, assets carried at
revalued amounts under IAS 16 and IAS 38
Key definitions [IAS 36.6]
Impairment loss: the amount by which the carrying amount of an asset or cash-generating unit exceeds its
recoverable amount
Carrying amount: the amount at which an asset is recognised in the balance sheet after deducting accumulated
depreciation and accumulated impairment losses
Recoverable amount: the higher of an asset's fair value less costs of disposal* (sometimes called net selling price)
and its value in use
* Prior to consequential amendments made by IFRS 13 Fair Value Measurement, this was referred to as 'fair value
less costs to sell'.
Fair value: the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date (see IFRS 13)
Value in use: present value of the future cash flows expected to be derived from an asset or cash-generating unit
Identifying an asset that may be impaired
At the end of each reporting period, an entity is required to assess whether there is any indication that an asset
may be impaired (i.e. its carrying amount may be higher than its recoverable amount). IAS 36 has a list of external
and internal indicators of impairment. If there is an indication that an asset may be impaired, then the asset's
recoverable amount must be calculated. [IAS 36.9]
The recoverable amounts of the following types of intangible assets are measured annually whether or not there is
any indication that it may be impaired. In some cases, the most recent detailed calculation of recoverable amount
made in a preceding period may be used in the impairment test for that asset in the current period: [IAS 36.10]
 an intangible asset with an indefinite useful life
 an intangible asset not yet available for use
 goodwill acquired in a business combination
Indications of impairment [IAS 36.12]
External sources:
 market value declines, negative changes in technology, markets, economy, or laws, increases in market
interest rates, net assets of the company higher than market capitalisation
Internal sources:
 obsolescence or physical damage, asset is idle, part of a restructuring or held for disposal
 worse economic performance than expected
These lists are not intended to be exhaustive. [IAS 36.13] Further, an indication that an asset may be impaired may
indicate that the asset's useful life, depreciation method, or residual value may need to be reviewed and adjusted.
Determining recoverable amount
 If fair value less costs of disposal or value in use is more than carrying amount, it is not necessary to
calculate the other amount. The asset is not impaired. [IAS 36.19]
 If fair value less costs of disposal cannot be determined, then recoverable amount is value in use.
 For assets to be disposed of, recoverable amount is fair value less costs of disposal. [IAS 36.21]
Fair value less costs of disposal
 Fair value is determined in accordance with IFRS 13 Fair Value Measurement
 Costs of disposal are the direct added costs only (not existing costs or overhead). [IAS 36.28]
Value in use
The calculation of value in use should reflect the following elements: [IAS 36.30]
 an estimate of the future cash flows the entity expects to derive from the asset
 the time value of money, represented by the current market risk-free rate of interest
Cash flow projections should be based on reasonable and supportable assumptions, the most recent budgets and
forecasts, and extrapolation for periods beyond budgeted projections. [IAS 36.33] IAS 36 presumes that budgets
and forecasts should not go beyond five years; for periods after five years, extrapolate from the earlier budgets.
[IAS 36.35] Management should assess the reasonableness of its assumptions by examining the causes of
differences between past cash flow projections and actual cash flows. [IAS 36.34]
Cash flow projections should relate to the asset in its current condition – future restructurings to which the entity
is not committed and expenditures to improve or enhance the asset's performance should not be anticipated.
Estimates of future cash flows should not include cash inflows or outflows from financing activities, or income tax
receipts or payments. [IAS 36.50]
Discount rate
In measuring value in use, the discount rate used should be the pre-tax rate that reflects current market
assessments of the time value of money and the risks specific to the asset. [IAS 36.55]
If a market-determined asset-specific rate is not available, a surrogate must be used that reflects the time value of
money over the asset's life as well as country risk, currency risk, price risk, and cash flow risk. The following would
normally be considered:
 the entity's own weighted average cost of capital
 the entity's incremental borrowing rate
 other market borrowing rates.
Recognition of an impairment loss
 An impairment loss is recognised whenever recoverable amount is below carrying amount. [IAS 36.59]
 The impairment loss is recognised as an expense (unless it relates to a revalued asset where the
impairment loss is treated as a revaluation decrease). [IAS 36.60]
 Adjust depreciation for future periods. [IAS 36.63]
Cash-generating units
Recoverable amount should be determined for the individual asset, if possible. [IAS 36.66]
If it is not possible to determine the recoverable amount (fair value less costs of disposal and value in use) for the
individual asset, then determine recoverable amount for the asset's cash-generating unit (CGU). [IAS 36.66] The
CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the
cash inflows from other assets or groups of assets. [IAS 36.6]
Impairment of goodwill
Goodwill should be tested for impairment annually. [IAS 36.96]
To test for impairment, goodwill must be allocated to each of the acquirer's cash-generating units, or groups of
cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether
other assets or liabilities of the acquiree are assigned to those units or groups of units. Each unit or group of units
to which the goodwill is so allocated shall: [IAS 36.80]
 represent the lowest level within the entity at which the goodwill is monitored for internal management
purposes; and
 not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments.
A cash-generating unit to which goodwill has been allocated shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the goodwill, with the recoverable amount of the unit:
 If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the goodwill
allocated to that unit is not impaired
 If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise
an impairment loss.
The impairment loss is allocated to reduce the carrying amount of the assets of the unit (group of units) in the
following order:
 first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units);
and
  then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.
The carrying amount of an asset should not be reduced below the highest of: [IAS 36.105]
 its fair value less costs of disposal (if measurable)
 its value in use (if measurable)
 zero.
If the preceding rule is applied, further allocation of the impairment loss is made pro rata to the other assets of the
unit (group of units).

Reversal of an impairment loss

 Same approach as for the identification of impaired assets: assess at each balance sheet date whether
there is an indication that an impairment loss may have decreased. If so, calculate recoverable amount.
[IAS 36.110]
 No reversal for unwinding of discount. [IAS 36.116]
 The increased carrying amount due to reversal should not be more than what the depreciated historical
cost would have been if the impairment had not been recognised. [IAS 36.117]
 Reversal of an impairment loss is recognised in the profit or loss unless it relates to a revalued asset
 Adjust depreciation for future periods. [IAS 36.121]
 Reversal of an impairment loss for goodwill is prohibited. [IAS 36.124]

June 2009
JUNE 2012 F7 Question
Telepath acquired an item of plant at a cost of $800,000 on 1 April 2010 that is used to produce and
package pharmaceutical pills. The plant had an estimated residual value of $50,000 and an estimated life
of five years, neither of which has changed. Telepath uses straight-line depreciation. On 31 March 2012,
Telepath was informed by a major customer (who buys products produced by the plant) that it would no
longer be placing orders with Telepath. Even before this information was known, Telepath had been
having difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant
for the next three years will be:
$’000
year ended: 31 March 2013 220
31 March 2014 180
31 March 2015 170

On 31 March 2015, the plant is still expected to be sold for its estimated realisable value.
Telepath has confirmed that there is no market in which to sell the plant at 31 March 2012.
Telepath’s cost of capital is 10% and the following values should be used:
value of $1 at: $
end of year 1 0·91
end of year 2 0·83
end of year 3 0·75

(ii) Telepath owned a 100% subsidiary, Tilda, that is treated as a cash generating unit. On 31 March
2012, there was an industrial accident (a gas explosion) that caused damage to some of Tilda’s plant.
The assets of Tilda immediately before the accident were:
$’000
Goodwill 1,800
Patent 1,200
Factory building 4,000
Plant 3,500
Receivables and cash 1,500
–––––––
12,000
–––––––
As a result of the accident, the recoverable amount of Tilda is $6·7 million

The explosion destroyed (to the point of no further use) an item of plant that had a carrying amount of
$500,000.
Tilda has an open offer from a competitor of $1 million for its patent. The receivables and cash are
already stated at their fair values less costs to sell (net realisable values).

Required:
Calculate the carrying amounts of the assets in (i) and (ii) above at 31 March 2012 after applying
any impairment losses.

Calculations should be to the nearest $1,000.

 Objective
The objective of IAS 37 is to ensure that appropriate recognition criteria and measurement bases are
applied to provisions, contingent liabilities and contingent assets and that sufficient information is
disclosed in the notes to the financial statements to enable users to understand their nature, timing and
amount. The key principle established by the Standard is that a provision should be recognised only
when there is a liability i.e. a present obligation resulting from past events. The Standard thus aims to
ensure that only genuine obligations are dealt with in the financial statements – planned future
expenditure, even where authorised by the board of directors or equivalent governing body, is excluded
from recognition.
Scope
IAS 37 excludes obligations and contingencies arising from: [IAS 37.1-6]
 financial instruments that are in the scope of IAS 39 Financial Instruments: Recognition and
Measurement (or IFRS 9 Financial Instruments)
 non-onerous executory contracts
 insurance contracts (see IFRS 4 Insurance Contracts), but IAS 37 does apply to other provisions,
contingent liabilities and contingent assets of an insurer
 items covered by another IFRS. For example, IAS 11 Construction Contracts applies to obligations arising
under such contracts; IAS 12 Income Taxes applies to obligations for current or deferred income
taxes; IAS 17 Leases applies to lease obligations; and IAS 19 Employee Benefits applies to pension and
other employee benefit obligations.
Key definitions [IAS 37.10]
Provision: a liability of uncertain timing or amount.
Liability:
 present obligation as a result of past event
 settlement is expected to result in an outflow of resources (payment)
Contingent liability:
 a possible obligation depending on whether some uncertain future event occurs, or
 a present obligation but payment is not probable or the amount cannot be measured reliably
Contingent asset:
 a possible asset that arises from past events, and
 whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the entity.
Recognition of a provision
An entity must recognise a provision if, and only if: [IAS 37.14]
 a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event),
 payment is probable ('more likely than not'), and
 the amount can be estimated reliably.
An obligating event is an event that creates a legal or constructive obligation and, therefore, results in
an entity having no realistic alternative but to settle the obligation. [IAS 37.10]
A constructive obligation arises if past practice creates a valid expectation on the part of a third party,
for example, a retail store that has a long-standing policy of allowing customers to return merchandise
within, say, a 30-day period. [IAS 37.10]
A possible obligation (a contingent liability) is disclosed but not accrued. However, disclosure is not
required if payment is remote. [IAS 37.86]
In rare cases, for example in a lawsuit, it may not be clear whether an entity has a present obligation. In
those cases, a past event is deemed to give rise to a present obligation if, taking account of all available
evidence, it is more likely than not that a present obligation exists at the balance sheet date. A provision
should be recognised for that present obligation if the other recognition criteria described above are
 met. If it is more likely than not that no present obligation exists, the entity should disclose a contingent
liability, unless the possibility of an outflow of resources is remote. [IAS 37.15]
Measurement of provisions
The amount recognised as a provision should be the best estimate of the expenditure required to settle
the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay
to settle the obligation at the balance sheet date or to transfer it to a third party. [IAS 37.36] This means:
 Provisions for one-off events (restructuring, environmental clean-up, settlement of a lawsuit) are
measured at the most likely amount. [IAS 37.40]
 Provisions for large populations of events (warranties, customer refunds) are measured at a probability-
weighted expected value. [IAS 37.39]
 Both measurements are at discounted present value using a pre-tax discount rate that reflects the
current market assessments of the time value of money and the risks specific to the liability. [IAS 37.45
and 37.47]
In reaching its best estimate, the entity should take into account the risks and uncertainties that
surround the underlying events. [IAS 37.42]
If some or all of the expenditure required to settle a provision is expected to be reimbursed by another
party, the reimbursement should be recognised as a separate asset, and not as a reduction of the
required provision, when, and only when, it is virtually certain that reimbursement will be received if the
entity settles the obligation. The amount recognised should not exceed the amount of the provision.
[IAS 37.53]
In measuring a provision consider future events as follows:
 forecast reasonable changes in applying existing technology [IAS 37.49]
 ignore possible gains on sale of assets [IAS 37.51]
 consider changes in legislation only if virtually certain to be enacted [IAS 37.50]
Remeasurement of provisions [IAS 37.59]
 Review and adjust provisions at each balance sheet date
 If an outflow no longer probable, provision is reversed.
Some examples of provisions
Circumstance Recognise a provision?

Restructuring by sale of Only when the entity is committed to a sale, i.e. there is a binding sale
an operation agreement [IAS 37.78]

Restructuring by Only when a detailed form plan is in place and the entity has started to
closure or implement the plan, or announced its main features to those affected. A
reorganisation Board decision is insufficient [IAS 37.72, Appendix C, Examples 5A & 5B]

Warranty When an obligating event occurs (sale of product with a warranty and
probable warranty claims will be made) [Appendix C, Example 1]

Land contamination A provision is recognised as contamination occurs for any legal obligations
of clean up, or for constructive obligations if the company's published
policy is to clean up even if there is no legal requirement to do so (past
event is the contamination and public expectation created by the
company's policy) [Appendix C, Examples 2B]

Customer refunds Recognise a provision if the entity's established policy is to give refunds
 (past event is the sale of the product together with the customer's
expectation, at time of purchase, that a refund would be available)
[Appendix C, Example 4]

Offshore oil rig must be Recognise a provision for removal costs arising from the construction of
removed and sea bed the the oil rig as it is constructed, and add to the cost of the asset.
restored Obligations arising from the production of oil are recognised as the
production occurs [Appendix C, Example 3]

Abandoned leasehold, A provision is recognised for the unavoidable lease payments [Appendix C,
four years to run, no Example 8]
re-letting possible

CPA firm must staff No provision is recognised (there is no obligation to provide the training,
training for recent recognise a liability if and when the retraining occurs) [Appendix C,
changes in tax law Example 7]

Major overhaul or No provision is recognised (no obligation) [Appendix C, Example 11]

repairs

Onerous (loss-making) Recognise a provision [IAS 37.66]

contract

Future operating losses No provision is recognised (no liability) [IAS 37.63]

Restructurings
A restructuring is: [IAS 37.70]
 sale or termination of a line of business
 closure of business locations
 changes in management structure
 fundamentalreorganisations.
Restructuring provisions should be recognised as follows: [IAS 37.72]
 Sale of operation: recognise a provision only after a binding sale agreement [IAS 37.78]
 Closure or reorganisation: recognise a provision only after a detailed formal plan is adopted and has
started being implemented, or announced to those affected. A board decision of itself is insufficient.
 Future operating losses: provisions are not recognised for future operating losses, even in a
restructuring
 Restructuring provision on acquisition: recognise a provision only if there is an obligation at acquisition
date [IFRS 3.11]
Restructuring provisions should include only direct expenditures necessarily entailed by the
restructuring, not costs that associated with the ongoing activities of the entity. [IAS 37.80]
What is the debit entry?
When a provision (liability) is recognised, the debit entry for a provision is not always an expense.
Sometimes the provision may form part of the cost of the asset. Examples: included in the cost of
inventories, or an obligation for environmental cleanup when a new mine is opened or an offshore oil
rig is installed. [IAS 37.8]
Use of provisions
Provisions should only be used for the purpose for which they were originally recognised. They should
be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no
longer probable that an outflow of resources will be required to settle the obligation, the provision
should be reversed. [IAS 37.61]
Contingent liabilities
Since there is common ground as regards liabilities that are uncertain, IAS 37 also deals with
contingencies. It requires that entities should not recognise contingent liabilities – but should disclose
them, unless the possibility of an outflow of economic resources is remote. [IAS 37.86]
Contingent assets
Contingent assets should not be recognised – but should be disclosed where an inflow of economic
benefits is probable. When the realisation of income is virtually certain, then the related asset is not a
contingent asset and its recognition is appropriate. [IAS 37.31-35]
 Objective
The objective of IAS 38 is to prescribe the accounting treatment for intangible assets that are not dealt with
specifically in another IFRS. The Standard requires an entity to recognise an intangible asset if, and only if, certain
criteria are met. The Standard also specifies how to measure the carrying amount of intangible assets and requires
certain disclosures regarding intangible assets. [IAS 38.1]
Scope
IAS 38 applies to all intangible assets other than: [IAS 38.2-3]
 financial assets (see IAS 32 Financial Instruments: Presentation
 expenditure on the development and extraction of minerals, oil, natural gas, and similar resources
 intangible assets arising from insurance contracts issued by insurance companies
 intangible assets covered by another IFRS, such as intangibles held for sale (IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations), deferred tax assets (IAS 12 Income Taxes), lease assets (IAS 17 Leases), assets arising
from employee benefits (IAS 19 Employee Benefits (2011)), and goodwill (IFRS 3 Business Combinations).
Key definitions
Intangible asset: an identifiable non-monetary asset without physical substance. An asset is a resource that is
controlled by the entity as a result of past events (for example, purchase or self-creation) and from which future
economic benefits (inflows of cash or other assets) are expected. [IAS 38.8] Thus, the three critical attributes of an
intangible asset are:
 identifiability
 control (power to obtain benefits from the asset)
 future economic benefits (such as revenues or reduced future costs)
Identifiability: an intangible asset is identifiable when it: [IAS 38.12]
 is separable (capable of being separated and sold, transferred, licensed, rented, or exchanged, either individually
or together with a related contract) or
 arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from
the entity or from other rights and obligations.
Examples of intangible assets
 patented technology, computer software, databases and trade secrets
 trademarks, trade dress, newspaper mastheads, internet domains
 video and audiovisual material (e.g. motion pictures, television programmes)
 customer lists
 mortgage servicing rights
 licensing, royalty and standstill agreements
 import quotas
 franchise agreements
 customer and supplier relationships (including customer lists)
 marketing rights
Intangibles can be acquired:
 by separate purchase
 as part of a business combination
 by a government grant
 by exchange of assets
 by self-creation (internal generation)
Recognition
Recognition criteria. IAS 38 requires an entity to recognise an intangible asset, whether purchased or self-created
(at cost) if, and only if: [IAS 38.21]
 it is probable that the future economic benefits that are attributable to the asset will flow to the entity; and
 the cost of the asset can be measured reliably.
This requirement applies whether an intangible asset is acquired externally or generated internally. IAS 38 includes
additional recognition criteria for internally generated intangible assets (see below).
 The probability of future economic benefits must be based on reasonable and supportable assumptions about
conditions that will exist over the life of the asset. [IAS 38.22] The probability recognition criterion is always
considered to be satisfied for intangible assets that are acquired separately or in a business combination. [IAS
38.33]
If recognition criteria not met. If an intangible item does not meet both the definition of and the criteria for
recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognised as an expense
when it is incurred. [IAS 38.68]
Business combinations. There is a presumption that the fair value (and therefore the cost) of an intangible asset
acquired in a business combination can be measured reliably. [IAS 38.35] An expenditure (included in the cost of
acquisition) on an intangible item that does not meet both the definition of and recognition criteria for an
intangible asset should form part of the amount attributed to the goodwill recognised at the acquisition date.
Reinstatement. The Standard also prohibits an entity from subsequently reinstating as an intangible asset, at a
later date, an expenditure that was originally charged to expense. [IAS 38.71]
Initial recognition: research and development costs
 Charge all research cost to expense. [IAS 38.54]
 Development costs are capitalised only after technical and commercial feasibility of the asset for sale or use have
been established. This means that the entity must intend and be able to complete the intangible asset and either
use it or sell it and be able to demonstrate how the asset will generate future economic benefits.
If an entity cannot distinguish the research phase of an internal project to create an intangible asset from the
development phase, the entity treats the expenditure for that project as if it were incurred in the research phase
only.
Initial recognition: in-process research and development acquired in a business combination
A research and development project acquired in a business combination is recognised as an asset at cost, even if a
component is research. Subsequent expenditure on that project is accounted for as any other research and
development cost (expensed except to the extent that the expenditure satisfies the criteria in IAS 38 for
recognising such expenditure as an intangible asset). [IAS 38.34]
Initial recognition: internally generated brands, mastheads, titles, lists
Brands, mastheads, publishing titles, customer lists and items similar in substance that are internally generated
should not be recognised as assets. [IAS 38.63]
Initial recognition: computer software
 Purchased: capitalise
 Operating system for hardware: include in hardware cost
 Internally developed (whether for use or sale): charge to expense until technological feasibility, probable future
benefits, intent and ability to use or sell the software, resources to complete the software, and ability to measure
cost.
 Amortisation: over useful life, based on pattern of benefits (straight-line is the default).
Initial recognition: certain other defined types of costs
The following items must be charged to expense when incurred:
 internally generated goodwill [IAS 38.48]
 start-up, pre-opening, and pre-operating costs [IAS 38.69]
 training cost [IAS 38.69]
 advertising and promotional cost, including mail order catalogues [IAS 38.69]
 relocation costs [IAS 38.69]
For this purpose, 'when incurred' means when the entity receives the related goods or services. If the entity has
made a prepayment for the above items, that prepayment is recognised as an asset until the entity receives the
related goods or services. [IAS 38.70]
Initial measurement
Intangible assets are initially measured at cost. [IAS 38.24]
Measurement subsequent to acquisition: cost model and revaluation models allowed
An entity must choose either the cost model or the revaluation model for each class of intangible asset. [IAS 38.72]
Cost model. After initial recognition intangible assets should be carried at cost less accumulated amortisation and
impairment losses. [IAS 38.74]
 Revaluation model. Intangible assets may be carried at a revalued amount (based on fair value) less any
subsequent amortisation and impairment losses only if fair value can be determined by reference to an active
market. [IAS 38.75] Such active markets are expected to be uncommon for intangible assets. [IAS 38.78] Examples
where they might exist:
 production quotas
 fishing licences
 taxi licences
Under the revaluation model, revaluation increases are recognised in other comprehensive income and
accumulated in the "revaluation surplus" within equity except to the extent that they reverse a revaluation
decrease previously recognised in profit and loss. If the revalued intangible has a finite life and is, therefore, being
amortised (see below) the revalued amount is amortised. [IAS 38.85]
Classification of intangible assets based on useful life
Intangible assets are classified as: [IAS 38.88]
 Indefinite life: no foreseeable limit to the period over which the asset is expected to generate net cash inflows for
the entity.
 Finite life: a limited period of benefit to the entity.
Measurement subsequent to acquisition: intangible assets with finite lives
The cost less residual value of an intangible asset with a finite useful life should be amortised on a systematic basis
over that life: [IAS 38.97]
 The amortisation method should reflect the pattern of benefits.
 If the pattern cannot be determined reliably, amortise by the straight-line method.
 The amortisation charge is recognised in profit or loss unless another IFRS requires that it be included in the cost of
another asset.
 The amortisation period should be reviewed at least annually. [IAS 38.104]
Expected future reductions in selling prices could be indicative of a higher rate of consumption of the future
economic benefits embodied in an asset. [IAS 18.92]
The standard contains a rebuttable presumption that a revenue-based amortisation method for intangible assets is
inappropriate. However, there are limited circumstances when the presumption can be overcome:
The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]
Measurement subsequent to acquisition: intangible assets with indefinite useful lives
An intangible asset with an indefinite useful life should not be amortised. [IAS 38.107]
Its useful life should be reviewed each reporting period to determine whether events and circumstances continue
to support an indefinite useful life assessment for that asset. If they do not, the change in the useful life
assessment from indefinite to finite should be accounted for as a change in an accounting estimate. [IAS 38.109]
The asset should also be assessed for impairment in accordance with IAS 36. [IAS 38.111]
Subsequent expenditure
Due to the nature of intangible assets, subsequent expenditure will only rarely meet the criteria for being
recognised in the carrying amount of an asset. [IAS 38.20] Subsequent expenditure on brands, mastheads,
publishing titles, customer lists and similar items must always be recognised in profit or loss as incurred.
 Definition of investment property
Investment property is property (land or a building or part of a building or both) held (by the owner or by the
lessee under a finance lease) to earn rentals or for capital appreciation or both. [IAS 40.5]
Examples of investment property: [IAS 40.8]
o land held for long-term capital appreciation
o land held for undetermined future use
o building leased out under an operating lease
o vacant building held to be leased out under an operating lease
o property that is being constructed or developed for future use as investment property
The following are not investment property and, therefore, are outside the scope of IAS 40: [IAS 40.5 and 40.9]
o property held for use in the production or supply of goods or services or for administrative purposes
o property held for sale in the ordinary course of business or in the process of construction of development for
such sale (IAS 2 Inventories)
o property being constructed or developed on behalf of third parties (IAS 11 Construction Contracts)
o owner-occupied property (IAS 16 Property, Plant and Equipment), including property held for future use as
owner-occupied property, property held for future development and subsequent use as owner-occupied
property, property occupied by employees and owner-occupied property awaiting disposal
o property leased to another entity under a finance lease
In May 2008, as part of its Annual Improvements Project, the IASB expanded the scope of IAS 40 to include property
under construction or development for future use as an investment property. Such property previously fell within
the scope of IAS 16.
Other classification issues
Property held under an operating lease. A property interest that is held by a lessee under an operating lease may
be classified and accounted for as investment property provided that: [IAS 40.6]
o the rest of the definition of investment property is met
o the operating lease is accounted for as if it were a finance lease in accordance with IAS 17 Leases
o the lessee uses the fair value model set out in this Standard for the asset recognised
An entity may make the foregoing classification on a property-by-property basis.
Partial own use. If the owner uses part of the property for its own use, and part to earn rentals or for capital
appreciation, and the portions can be sold or leased out separately, they are accounted for separately. Therefore
the part that is rented out is investment property. If the portions cannot be sold or leased out separately, the
property is investment property only if the owner-occupied portion is insignificant. [IAS 40.10]
Ancillary services. If the entity provides ancillary services to the occupants of a property held by the entity, the
appropriateness of classification as investment property is determined by the significance of the services provided.
If those services are a relatively insignificant component of the arrangement as a whole (for instance, the building
owner supplies security and maintenance services to the lessees), then the entity may treat the property as
investment property. Where the services provided are more significant (such as in the case of an owner-managed
hotel), the property should be classified as owner-occupied. [IAS 40.13]
Intracompany rentals. Property rented to a parent, subsidiary, or fellow subsidiary is not investment property in
consolidated financial statements that include both the lessor and the lessee, because the property is owner-
occupied from the perspective of the group. However, such property could qualify as investment property in the
separate financial statements of the lessor, if the definition of investment property is otherwise met. [IAS 40.15]

Recognition
Investment property should be recognised as an asset when it is probable that the future economic benefits that
are associated with the property will flow to the entity, and the cost of the property can be reliably measured. [IAS
40.16]
Initial measurement
Investment property is initially measured at cost, including transaction costs. Such cost should not include start-up
costs, abnormal waste, or initial operating losses incurred before the investment property achieves the planned
level of occupancy. [IAS 40.20 and 40.23]
Measurement subsequent to initial recognition
IAS 40 permits entities to choose between: [IAS 40.30]
o a fair value model, and
o a cost model.
One method must be adopted for all of an entity's investment property. Change is permitted only if this results in a
more appropriate presentation. IAS 40 notes that this is highly unlikely for a change from a fair value model to a
cost model.

Fair value model

Investment property is remeasured at fair value, which is the amount for which the property could be exchanged
between knowledgeable, willing parties in an arm's length transaction. [IAS 40.5] Gains or losses arising from
changes in the fair value of investment property must be included in net profit or loss for the period in which it
arises. [IAS 40.35]
Fair value should reflect the actual market state and circumstances as of the balance sheet date. [IAS 40.38] The
best evidence of fair value is normally given by current prices on an active market for similar property in the same
location and condition and subject to similar lease and other contracts. [IAS 40.45] In the absence of such
information, the entity may consider current prices for properties of a different nature or subject to different
conditions, recent prices on less active markets with adjustments to reflect changes in economic conditions, and
discounted cash flow projections based on reliable estimates of future cash flows. [IAS 40.46]
There is a rebuttable presumption that the entity will be able to determine the fair value of an investment
property reliably on a continuing basis. However: [IAS 40.53]
o If an entity determines that the fair value of an investment property under construction is not reliably
determinable but expects the fair value of the property to be reliably determinable when construction is
complete, it measures that investment property under construction at cost until either its fair value becomes
reliably determinable or construction is completed.
o If an entity determines that the fair value of an investment property (other than an investment property
under construction) is not reliably determinable on a continuing basis, the entity shall measure that
investment property using the cost model in IAS 16. The residual value of the investment property shall be
assumed to be zero. The entity shall apply IAS 16 until disposal of the investment property.
Where a property has previously been measured at fair value, it should continue to be measured at fair value until
disposal, even if comparable market transactions become less frequent or market prices become less readily
available. [IAS 40.55]
Cost model
After initial recognition, investment property is accounted for in accordance with the cost model as set out in IAS
16 Property, Plant and Equipment – cost less accumulated depreciation and less accumulated impairment losses.
[IAS 40.56]
Transfers to or from investment property classification
Transfers to, or from, investment property should only be made when there is a change in use, evidenced by one
or more of the following: [IAS 40.57]
o commencement of owner-occupation (transfer from investment property to owner-occupied property)
o commencement of development with a view to sale (transfer from investment property to inventories)
o end of owner-occupation (transfer from owner-occupied property to investment property)
o commencement of an operating lease to another party (transfer from inventories to investment property)
o end of construction or development (transfer from property in the course of construction/development to
investment property
When an entity decides to sell an investment property without development, the property is not reclassified as
investment property but is dealt with as investment property until it is disposed of. [IAS 40.58]
The following rules apply for accounting for transfers between categories:
o for a transfer from investment property carried at fair value to owner-occupied property or inventories, the
fair value at the change of use is the 'cost' of the property under its new classification [IAS 40.60]
o for a transfer from owner-occupied property to investment property carried at fair value, IAS 16 should be
applied up to the date of reclassification. Any difference arising between the carrying amount under IAS 16 at
that date and the fair value is dealt with as a revaluation under IAS 16 [IAS 40.61]
o for a transfer from inventories to investment property at fair value, any difference between the fair value at
the date of transfer and it previous carrying amount should be recognised in profit or loss [IAS 40.63]
o when an entity completes construction/development of an investment property that will be carried at fair
value, any difference between the fair value at the date of transfer and the previous carrying amount should
be recognised in profit or loss. [IAS 40.65]
When an entity uses the cost model for investment property, transfers between categories do not change the
carrying amount of the property transferred, and they do not change the cost of the property for measurement or
disclosure purposes.
Disposal
An investment property should be derecognised on disposal or when the investment property is permanently
withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal
should be calculated as the difference between the net disposal proceeds and the carrying amount of the asset
and should be recognised as income or expense in the income statement. [IAS 40.66 and 40.69] Compensation
from third parties is recognised when it becomes receivable. [IAS 40.72]
Objective
The objective of IAS 41 is to establish standards of accounting for agricultural activity – the management of the
biological transformation of biological assets (living plants and animals) into agricultural produce (harvested
product of the entity's biological assets).

Scope
IAS 41 applies to biological assets with the exception of bearer plants, agricultural produce at the point of harvest,
and government grants related to these biological assets. It does not apply to land related to agricultural activity,
intangible assets related to agricultural activity, government grants related to bearer plants, and bearer plants.
However, it does apply to produce growing on bearer plants.
Note: Bearer plants were excluded from the scope of IAS 41 by Agriculture: Bearer Plants (Amendments to IAS 16
and IAS 41), which applies to annual periods beginning on or after 1 January 2016.
Key definitions
[IAS 41.5]
Biological asset A living animal or plant

Bearer plant* A living plant that:

1. is used in the production or supply of agricultural produce

2. is expected to bear produce for more than one period, and
3. has a remote likelihood of being sold as agricultural produce, except for incidental scrap
sales.

Agricultural The harvested product from biological assets

produce

Costs to sell The incremental costs directly attributable to the disposal of an asset, excluding finance
costs and income taxes
* Definition included by Agriculture: Bearer Plants (Amendments to IAS 16 and IAS 41), which applies to annual
periods beginning on or after 1 January 2016.

Further examples
Biological assets Agricultural produce Harvested products
Trees in a plantation forest Logs Lumber
Plants Harvested cane Sugar
Dairy cattle Milk Cheese
Vines Grapes Wine
Bushes Leaf Tea or tobacco

Initial recognition
An entity recognises a biological asset or agriculture produce only when the entity controls the asset as a result of
past events, it is probable that future economic benefits will flow to the entity, and the fair value or cost of the
asset can be measured reliably. [IAS 41.10]
Measurement
Biological assets within the scope of IAS 41 are measured on initial recognition and at subsequent reporting dates
at fair value less estimated costs to sell, unless fair value cannot be reliably measured. [IAS 41.12]
Agricultural produce is measured at fair value less estimated costs to sell at the point of harvest. [IAS 41.13]
Because harvested produce is a marketable commodity, there is no 'measurement reliability' exception for
produce.
The gain on initial recognition of biological assets at fair value less costs to sell, and changes in fair value less costs
to sell of biological assets during a period, are included in profit or loss. [IAS 41.26]
A gain on initial recognition (e.g. as a result of harvesting) of agricultural produce at fair value less costs to sell are
included in profit or loss for the period in which it arises. [IAS 41.28]
All costs related to biological assets that are measured at fair value are recognised as expenses when incurred,
other than costs to purchase biological assets.
IAS 41 presumes that fair value can be reliably measured for most biological assets. However, that presumption
can be rebutted for a biological asset that, at the time it is initially recognised, does not have a quoted market
price in an active market and for which alternative fair value measurements are determined to be clearly
unreliable. In such a case, the asset is measured at cost less accumulated depreciation and impairment losses. But
the entity must still measure all of its other biological assets at fair value less costs to sell. If circumstances change
and fair value becomes reliably measurable, a switch to fair value less costs to sell is required. [IAS 41.30]
Guidance on the determination of fair value is available in IFRS 13 Fair Value Measurement. IFRS 13 also requires
disclosures about fair value measurements.

Other issues
The change in fair value of biological assets is part physical change (growth, etc) and part unit price change.
Separate disclosure of the two components is encouraged, not required. [IAS 41.51]
Agricultural produce is measured at fair value less costs to sell at harvest, and this measurement is considered the
cost of the produce at that time (for the purposes of IAS 2 Inventories or any other applicable standard). [IAS
41.13]
Agricultural land is accounted for under IAS 16 Property, Plant and Equipment. However, biological assets (other
than bearer plants) that are physically attached to land are measured as biological assets separate from the land.
In some cases, the determination of the fair value less costs to sell of the biological asset can be based on the fair
value of the combined asset (land, improvements and biological assets). [IAS 41.25]
Intangible assets relating to agricultural activity (for example, milk quotas) are accounted for
under IAS 38 Intangible Assets.

Government grants
Unconditional government grants received in respect of biological assets measured at fair value less costs to sell
are recognised in profit or loss when the grant becomes receivable. [IAS 41.34]
If such a grant is conditional (including where the grant requires an entity not to engage in certain agricultural
activity), the entity recognises the grant in profit or loss only when the conditions have been met. [IAS 41.35]
IFRS5: Non-current assets held for sale and discontinued operations

The need for an accounting standard on discontinued operations

IFRS5 Non-current assets held for sale and discontinued operations sets out requirements for disclosure
of financial information relating to discontinued operations and non-current assets that will soon be sold
off.

The reason for requiring disclosure of information about discontinued operations is as follows:
 Closing down some operations will affect the future financial prospects of the entity.
 It is therefore appropriate that users of the financial statements should be provided with relevant
information about the discontinuation. This will help them to make a more reliable prediction of
the future performance of the entity.

This information can be produced by providing information about discontinued operations separately
from information about continuing operations.

Definition of discontinued operations

IFRS5 defines a discontinued operation as a component of an entity that either:
 has been disposed of in the period, or
 is classified as ‘held for sale’ (it has not yet been disposed of, but disposal willoccur ‘soon’).

A ‘component’ of an entity is defined as operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. The component of the
entity must:
 represent a separate major line of business or a significant geographical area ofoperations, or
 be a part of a single and co-ordinated plan to dispose of a separate major line ofbusiness or a
significant geographical area of operations, or
 be a subsidiary company acquired exclusively with a view to re-sale.

If an entity disposes of an individual non-current asset, or plans to dispose of an individual asset in the
immediate future, this is not classified as a discontinued operation unless the asset meets the definition
of a ‘component of an entity’. The asset disposal should simply be accounted for in the ‘normal’ way,
with the gain or loss on disposal included in the operating profit for the year.

Non-current assets held for sale

Non-current assets ‘held for sale’ can be either:
 specific non-current assets, or
 a ‘disposal group’. A disposal group is a group of cash-generating assets (andperhaps some
liabilities) that will be disposed of in a single transaction.

A disposal group might be, for example, a major business division of a company.
For example accompany that operates in both shipbuilding and travel and tourism might decide to put
its shipbuilding division up for sale. If the circumstances meet the definition of ‘held for sale’ in IFRS5,
the shipbuilding division would be a disposal group held for sale.

A non-current asset (or a disposal group) should be classified as held for sale if its carrying amount will
be recovered mainly through a sale transaction rather than through continuing use. For this to be the
case:
  the non-current asset or disposal group should be available for immediate sale,
 in its present condition under terms that are usual and customary; and
 its sale should be highly probable.
For the sale to be highly probable:
 management must be committed to the sale
 an active programme to locate a buyer must have been initiated
 the asset or disposal group must be actively marketed for sale at a price that isreasonable in
relation to its current fair value
 the sale should be expected to take place within one year from the date of classification as ‘held for
sale’
 significant changes to the plan or the withdrawal of the plan should be unlikely.

An operation cannot be classified as discontinued in the balance sheet if the criteria for classifying it as
discontinued are not met until after the end of the reportingperiod. For example, suppose that an entity
with a financial year ending 30 June shuts down a major line of business in July and puts another major
line of business up for sale. It cannot classify these as discontinued operations in the financial
statements of the year just ended in June, even though the financial statements for this year have not
yet been approved and issued.
An asset that has been abandoned cannot be classified as ‘held for sale’.
Example
Entity R had the following assets at 31 March Year 4. Both assets would meet the definition of
‘component’ of Entity R, as defined by IFRS5.

(1) A property that it offered for sale for $5 million during June Year 3. The market for this type of
property has deteriorated and at 31 March Year 4 abuyer had not yet been found. Management does
not wish to reduce the pricebecause it hopes that the market will improve. Shortly after the year end
(after31 March Year 4) the entity received an offer of $4 million and the propertywas eventually sold for
$3.5 million during May Year 4, before the financialstatements were authorised for issue.
(2) Plant with a carrying value of $2.5 million. At 31 March Year 4 the entity hadceased to use the
plant but was still maintaining it in working condition sothat it could still be used if needed. Entity R sold
the plant on 14 May Year 4.

Can either of these assets be classified as ‘held for sale’ in the financial statementsfor the year ended 31
March Year 4?

The measurement of non-current assets and disposal groups held for sale
Assets held for sale and disposal groups should be valued at the lower of:
 their carrying amount (i.e. current values in the statement of financial position, as established in
accordance with accounting standards and principles), and
 fair value minus costs to sell.

If the value of the ‘held for sale’ asset is adjusted from carrying amount to fair value minus costs to sell,
any impairment should be recognised as a loss in the income statement (statement of comprehensive
income) for the period.

A non-current asset must not be depreciated (or amortised) while it is classified as ‘held for sale’ or
while it is part of a disposal group that is held for sale.
Presentation and disclosure
IFRS5 states: ‘An entity shall present and disclose information that enables users of the financial
statements to evaluate the financial effects of discontinued operations and disposals of non-current
assets (or disposal groups)’.

Disclosure in the statement of financial position

Non-current assets classified as held for sale must be disclosed separately from other assets in the
statement of financial position.

Similarly, assets and liabilities that are part of a disposal group held for sale must be disclosed separately
from other assets and liabilities in the statement of financial position. (The assets and liabilities in a
disposal group should not be offset and presented as a single net amount).

Income statement disclosure

Information about discontinued operations (both operations already discontinued and those classified
as held for sale) must be presented in the statement of comprehensive income or in a note to the
financial statements.

There must be a single amount on the face of the statement of comprehensive income (or income
statement) for the total of:
 the after-tax profit or loss for the period from the discontinued operations, and
 the after-tax gain or loss on disposal (based on the fair value minus costs to sellof the asset or
disposal group).

On the face of the statement of comprehensive income (or income statement) or in a note to the
accounts, this total amount should be analysed into:
 the revenue, expenses and pre-tax profit for the period from the discontinued operations
 the related tax charge
 the pre-tax gain or loss on disposal
 the related tax on the disposal.

If this analysis is shown on the face of the statement of comprehensive income (or income statement), it
should be presented in a separate section relating to discontinued operations, separately from
continuing operations.

For comparative purposes, the figures for the previous year should be re-presented, so that disclosures
relating to discontinued operations in the prior period relate to all discontinued operations up to the
end of the current year.

Note on discontinued operations and the statement of cash flows

The statement of cash flows is covered in a later chapter. However, IFRS5 states that in the statement
of cash flows, there should be separate disclosure of the net cash flows in the period attributable to
operating activities, investing activities and financing activities of the discontinued operations.
These disclosures may be presented either on the face of the statement of cash flows or in the notes to
the financial statements.
Additional disclosures
Additional disclosures about discontinued operations must be included in the notes to the financial
statements. These include:
 a description of the non-current asset or disposal group
 a description of the facts and circumstances of the sale
 in the case of operations and non-current assets ‘held for sale’, a description ofthe facts and
circumstances leading to the expected disposal and the expectedmanner and timing of the disposal.
 IFRS 9 - Questions
June 2010

Wardle’s activities include the production of maturing products which take a long time before they are
ready to retail. Details of one such product are that on 1 April 2009 it had a cost of $5 million and a fair
value of $7 million. The product would not be ready for retail sale until 31 March 2012.

On 1 April 2009 Wardle entered into an agreement to sell the product to Easyfinance for $6 million. The
agreement gave Wardle the right to repurchase the product at any time up to 31 March 2012 at a fi xed
price of $7,986,000, at which date Wardle expected the product to retail for $10 million. The compound
interest Wardle would have to pay on a three-year loan of $6 million would be:
$
Year 1 600,000
Year 2 660,000
Year 3 726,000
This interest is equivalent to the return required by Easyfinance.
Required:
Assuming the above fi gures prove to be accurate, prepare extracts from the income statement of
Wardle for the three years to 31 March 2012 in respect of the above transaction:
(i) Reflecting the legal form of the transaction; (2 marks)
(ii) Reflecting the substance of the transaction. (3 marks)
Note: statement of fi nancial position extracts are NOT required.
The following mark allocation is provided as guidance for this requirement:
(c) Comment on the effect the two treatments have on the income statements and the statements
of financial position and how this may affect an assessment of Wardle’s performance. (5 marks)

Details relating to construction of Apex’s new store:

Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1 April 2009.
The loan is redeemable at a premium which means the loan has an effective finance cost of 7·5% per
annum. The loan was specifically issued to finance the building of the new store which meets the
definition of a qualifying asset in IAS 23. Construction of the store commenced on 1 May 2009 and it was
completed and ready for use on 28 February 2010, but did not open for trading until 1 April 2010. During
the year trading at Apex’s other stores was below expectations so Apex suspended the construction of
the new store for a two-month period during July and August 2009. The proceeds of the loan were
temporarily invested for the month of April 2009 and earned interest of $40,000.
Required:
Calculate the net borrowing cost that should be capitalised as part of the cost of the new store
and the finance cost that should be reported in the income statement for the year ended 31 March
2010. (5 marks)

Pingway issued a $10 million 3% convertible loan note at par on 1 April 2007 with interest payable
annually in
arrears. Three years later, on 31 March 2010, the loan note is convertible into equity shares on the basis
of $100 of loan note for 25 equity shares or it may be redeemed at par in cash at the option of the loan
note holder. One of the company’s financial assistants observed that the use of a convertible loan note
was preferable to a non-convertible loan note as the latter would have required an interest rate of 8% in
order to make it attractive to investors. The assistant has also commented that the use of a convertible
loan note will improve the profit as a result of lower interest costs and, as it is likely that the loan note
holders will choose the equity option, the loan note can be classified as equity which will improve the
company’s high gearing position.
Required:
Comment on the financial assistant’s observations and show how the convertible loan note
should be accountedfor in Pingway’s income statement for the year ended 31 March 2008 and
statement of financial position as atthat date.(10 marks)
Downing
Figure reported in Trail Balance
5% convertible loan notes (note (iii)) CR 30,000

(iii) Downing Co issued 300,000 $100 5% convertible loan notes on 1 April 2015. The loan notes can be
convertedto equity shares on the basis of 25 shares for each $100 loan note on 31 March 2018 or
redeemed at par forcash on the same date. An equivalent loan note without the conversion rights would
have required an interestrate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are:
5% 8%
End of year 1 0·95 0·93
2 0·91 0·86
3 0·86 0·79

XTOL
5% convertible loan note (note (iv)) CR 50,000
(iv) On 1 April 2013, Xtol issued a 5% $50 million convertible loan note at par. Interest is payable
annually in arrearson 31 March each year. The loan note is redeemable at par or convertible into equity
shares at the option of theloan note holders on 31 March 2016. The interest on an equivalent loan note
without the conversion rightswould be 8% per annum.
The present values of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are:
5% 8%
End of year 1 0·95 0·93
2 0·91 0·86
3 0·86 0·79

Highwood
Trade receivables 47,100
8% convertible loan note (note (ii)) 30,000
Administrative expenses (note (vi)) 30,700

(ii) The 8% $30 million convertible loan note was issued on 1 April 2010 at par. Interest is payable
annually in
arrears on 31 March each year. The loan note is redeemable at par on 31 March 2013 or convertible into
equity
shares at the option of the loan note holders on the basis of 30 equity shares for each $100 of loan note.
Highwood’s finance director has calculated that to issue an equivalent loan note without the conversion
rights itwould have to pay an interest rate of 10% per annum to attract investors.
The present value of $1 receivable at the end of each year, based on discount rates of 8% and 10% are:
8% 10%
End of year 1 0·93 0·91
2 0·86 0·83
3 0·79 0·75

(vi) On 31 March 2011 Highwood factored (sold) trade receivables with a book value of $10 million to
Easyfinance.
Highwood received an immediate payment of $8·7 million and will pay Easyfinance 2% per month on
any uncollected balances. Any of the factored receivables outstanding after six months will be refunded
to Easyfinance. Highwood has derecognised the receivables and charged $1·3 million to administrative
expenses.
If Highwood had not factored these receivables it would have made an allowance of $600,000 against
them.

Example: Volt Meter Ltd purchased 40,000 9% $100 loan notes of Watt power Co. at par value and paid
transaction cost of $150,000
Loan notes are redeemable after 4 years at 10.132% premium

Effective interest calculated for loan notes is 10% per year

Fair value of each loan note as at year end was:

1 $104.60
2 $106.25
3 $108.9
4 $110.13

Required:
How these loan notes would be reported in Financial Statements of Volt meter ltd assuming:
(a) Volt meter business model is achieved by holding financial assets till maturity
(b) Volt meter business model is to hold some financial assets and sell if needed some
(c) Volt meter has elected to report changes into profit or loss

Example: Power Supply has acquired 8% of 25 cents $8 million share capital of Resistant ltd. at $13.6
each at 15th April, 2022 and paid $684,000 commission to brokerage house.

Shares had a fair value of $14.2 at yearend 31st December, 2022. Resistant ltd paid dividend of 80 cents
per share in September, 2022

Required: Show how this investment would be reported in Financial statements of Power Supply
assuming

(a) FVTOCI option has not been exercised

FVTOCI option has been exercised at initial recognition

IFRS 13: Fair Value Measurement
Introduction
Some IFRSs require or allow entities to measure or disclose the fair value of assets, liabilities or their own
equity instruments. Some of these standards contained little guidance on the meaning of fair value. Others
did contain guidance but this was developed over many years and in a piecemeal manner.
The purpose of IFRS 13 is to:
 define fair value;
 set out a single framework for measuring fair value; and
 specify disclosures about fair value measurement.
IFRS 13 does not change what should be fair valued nor when this should occur.
Scope limitations
IFRS 13 does not apply to share based payment transactions within the scope of IFRS 2.
Measurements such as net realisable value (IAS 2 Inventories) or value in use (IAS 36 Impairment of Assets)
have some similarities to fair value but are not fair value and are outside of the scope of IFRS 13.
Definition
Fair value is the price that would be received to sell an asset or paid to transfer aliability in an orderly
transaction between market participants at the measurementdate (i.e. it is an exit price).
Comments on the definition
This definition emphasises that fair value is a market-based measurement, not anentity-specific
measurement. In other words, if two entities hold identical assetsthese assets (all other things being equal)
should have the same fair value and this isnot affected by how each entity uses the asset or how each entity
intends to use theasset in the future.
An entity must use the assumptions that market participants would use whenpricing the asset or liability
under current market conditions when measuring fairvalue.
Fair value at initial recognition
In most cases the price paid for an asset is its fair value. However, this is not alwaysthe case. The price of
some assets might vary depending on whether the asset isbeing bought (entry price) or sold (exit price).
If such an asset is purchased and IFRS allows or requires the asset to be measuredinitially at fair value there
will be a gain or a loss (the difference between theamount paid for the asset and the amount it could be sold
for). Any such gain orloss must be recognised in profit or loss. (This will only relate to certain financialassets
[liabilities]).
Measuring fair value
Fair value measurement assumes that the asset (liability) is exchanged in an orderlytransaction between
market participants to sell the asset (transfer the liability) at themeasurement date under current market
conditions.
However, in each case fair value measurement looks at the asset (liability) from thepoint of view of a market
participant. The fair value must take into account allfactors that a market participant would consider relevant
to the value. These factorsmight include:
 the condition and location of the asset; and
 restrictions, if any, on the sale or use of the asset.
IFRS 13 defines an active market as a market in which transactions for the asset(liability) take place with
sufficient frequency and volume to provide pricinginformation on an on-going basis.
If an active market exists then it will provide information that can be used for fairvalue measurement. If there
is no such active market (e.g. for the sale of anunquoted business or surplus machinery) then a valuation
technique would benecessary.
A quoted price in an active market provides the most reliable evidence of fairvalue and must be used to
measure fair value whenever available.
It would be unusual to find an active market for the sale of non- financial assets so some other sort of
valuation technique would usually be used to determine their fair value.
Principal or most advantageous market
Fair value measurement is based on a possible transaction to sell the asset ortransfer the liability either:
 in the principal market for the asset or liability; or
 in the absence of a principal market, in the most advantageous market for the asset or liability.
Note that if there is a principal market for the asset or liability, the fair valuemeasurement must use the price
in that market even if a price in a different marketis potentially more advantageous at the measurement
date.
Different entities might have access to different markets. This might result indifferent entities reporting
similar assets at different fair values.
Transaction costs
The price in the principal (or most advantageous) market used to measure the fairvalue of the asset (liability)
is not adjusted for transaction costs.
 Fair value is not “net realisable value” or “fair value less costs to sell”; and
 Using the price that an asset can be sold for as the basis for fair valuation does not mean that the entity
intends to sell it
Transport costs
If location is a characteristic of the asset the price in the principal (or mostadvantageous) market is adjusted
for the costs that would be incurred to transportthe asset from its current location to that market.
Example:
An entity holds an asset which could be sold in one of two markets.
Information about these markets and the costs that would be incurred if a sale wereto be made is as follows:

a) What fair value would be used to measure the asset if Market A were theprincipal market?
b) What fair value would be used to measure the asset if no principal market couldbe identified?
Fair value of non-financial assets – further comment
Fair value measurement of a non-financial asset must value the asset at its highestand best use. This must
take into account use of the asset that is:
 physically possible – physical characteristics that market participants would takeinto account when
pricing the asset (e.g. the location or size of a property).
 legally permissible – any legal restrictions on the use of the asset that market participants would take
into account when pricing the asset (e.g. the zoning regulations applicable to a property).
 financially feasible – whether a use of the asset that is physically possible and legally permissible
generates adequate income or cash flows (taking into account the costs of converting the asset to that
use) to produce an investment return that market participants would require from an investment in that
asset put to that use.
Valuation techniques
The objective of using a valuation technique is to estimate the price at which anorderly transaction to sell the
asset (or to transfer the liability) would take placebetween market participants at the measurement date
under current marketconditions.
IFRS 13 requires that one of three valuation techniques must be used:
 market approach – uses prices and other relevant information from market transactions
 involving identical or similar assets and liabilities;
 cost approach – the amount required to replace the service capacity of an asset (also known as the
current replacement cost)
 income approach – converts future amounts (cash flows, profits) to single current (discounted) amount.
An entity must use a valuation technique that is appropriate in the circumstancesand for which sufficient
data is available to measure fair value, maximising the useof relevant observable inputs and minimising the
use of unobservable inputs.
A valuation technique should be used to maximise the use of relevant observableinputs and minimise the use
of unobservable inputs.
Quoted price in an active market provides the most reliable evidence of fair valueand must be used to
measure fair value whenever available.
Fair value hierarchy
IFRS 13 establishes a fair value hierarchy to categorise inputs to valuationtechniques into three levels.