Notes of Financial Reporting

(PIPFA)
Written by:
Muhammad Naseem

Financial Reporting (PIPFA)

Description

Page No.

IAS 1 Presentation of Financial Statements

03

IAS 2 Inventory .

05

IAS 7 Cash Flow Statements

09

IAS 8 Accounting polices, change in accounting estimates & errors

13

IAS 10 Post Balance Sheet Events .

14

IAS 11 Construction contracts .

16

IAS 12 Deferred Taxation

18

IAS 16 PPE

24

IAS 17 Leases .

27

IAS 18 Revenue Recognition .

33

IAS 23 Borrowing Cost

35

IAS 24 Related Parties

37

IAS 36 Impairment

39

IAS 37 Provision, Contingent Liabilities, Contingent Assets .

40

IAS 38 Intangible Assets...

43

IAS 40 Investments

45

Partnership accounts

47

Consolidated accounts

51

Pass Paper solutions

60

Muhammad Naseem

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Financial Reporting (PIPFA)

IAS-1: Presentation of Financial Statements

Objective and Scope

To prescribe the basis for presentation of general purpose financial statements, in order to ensure
comparability both with the entitys own financial statements of previous periods and with the financial
statements of other entities.
In order to fulfill this objective, financial statements must provide information about the following
aspects of an entitys results.
a)
b)
c)
d)
e)
f)

Assets
Liabilities
Equity
Income and expenses (including gains and losses)
Contributions by and distribution to owner
Cash flows

Along with other information in the notes and related documents, this information will assist users in
predicting the entitys future cash flows
Components of financial statements:
1.
2.
3.
4.
5.

A statement of financial position at the end of period

A statement of comprehensive income for the period
Statement changes in equity, for the period
A statement of cash flows
Notes comprising summary of accounting policies and explanatory notes

Following concepts are paper related

Going Concern
The entity is normally viewed as a going concern, that is, as continuing in operation for the foreseeable
future. It is assumed that the entity has neither the intention nor the necessity of liquidation or of
curtailing materially the scale of its operations.

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Financial Reporting (PIPFA)

Accrual basis of accounting
Items are recognized as assets, liabilities, equity, income and expenses when they satisfy the definitions
and recognition criteria for those elements in the Framework.
Materiality
Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements.
Prudence
The inclusion of a degree of caution in the exercise of the judgments needed in making the estimates
required under conditions of uncertainty, such that assets or income are not overstated and liabilities or
expenses are not understated.
Substance over form
The principle that transactions and other events are accounted for and presented in accordance with
their substance and economic reality and not merely their legal form.
Impracticable
Applying a requirement is impracticable when the entity cannot apply it after making every reasonable
effort to do so.

Muhammad Naseem

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Financial Reporting (PIPFA)

IAS 2: Inventory

IAS 2 was revised in December 2003. It lays out the required accounting treatment for inventories
(stock) under the historical cost system. The major area of contention is the cost value of inventory to be
recorded. This is recognised as an asset of the entity until the related revenues are recognised at which
point the inventory is recognised as an expense. Part or all of the cost of inventories may also be
expensed if a write- down to net realizable value is necessary.
In other words, the fundamental accounting assumption of accruals requires costs to be matched with
associated revenues. In order to achieve this, costs incurred for goods which remain unsold at the year
end must be carried forward in the statement of financial position and matched against future revenues.
1) Inventories are assets:
. Held for sale in the ordinary course of business
. In the process of production for such sale
. In the form of materials or supplies to be consumed in the production process or in the
rendering of services.
2) Net realizable value is the estimated selling price in the ordinary course of business less the
estimated costs of completion and the estimated costs necessary to make the sale.
3) Fair value is the amount for which an asset could be exchanged or a liability settled between
knowledgeable, willing parties in an arms length transaction.

1
- Cost
- NRV

2
Inventory System
- Periodic ( FIFO & ARG)
- Perpetual ( FIFO & ARG)

3
Calculation of closing stock
through trading account
App. By Mark up & Margin

Muhammad Naseem

4
- Correction of stock sheet
- Stock taking before B/S date
- Stock taking after B/S date

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Financial Reporting (PIPFA)

Part 1:
a) Cost of purchase (purchase price + import duties + non refundable taxes + Transportation,
handling Less Trade discount)
b) Cost of conversion (Labor + FOH)
c) Other cost directly attributable to bring the inventory to the present condition & location
Overhead type

FOH (Factory overhead)

SOH (Selling overhead)
AOH ( Admin overhead)

Direct Material
Direct Labor
FOH

xxx
xxx
xxx
---------------------Total FC
xxx
Add: W.I.P opening
xxx
Less: W.I.P closing
xxx
--------------------Cost of good production
xxx
Add: Finish good opening
xxx
Less: Finish good closing
xxx
----------------------Cost of good sold
xxxx
Inventory shall be measure at lower of cost & NRV
These below costs will not be included in inventory cost
a) AOH (Admin overhead)
b) SOH (Selling overhead)
c) Storage cost
d) Abnormal loss
Part 2:
If stock is given in the trail balance then it assumed that company is using Perpetual inventory system
If stock is given out side the trail balance then it assumed that company is using Periodic inventory
system

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Financial Reporting (PIPFA)

Part 3:
Markup always on cost & Margin on sale, to calculate need to use following formula
S = C + G.P (S is sale, C is cost & G.P is gross profit)
For example: sale = Rs 100,000/- & G.P 20% Margin then find cost?
S= C + G.P
100,000 = X + 20%
X= 100,000 * 20% = Rs 80,000/If Sale = Rs 100,000/- & G.P 20% Markup then find cost?
S=C+G.P
100,000= X + 20% of X
100,000= 1.20 X
X = 100,000/1.20
X= Rs 83,333/Trading Account
xxx
xxx
xxx
xxx
xxx

Opening stock
Purchases
Sale return
Carriage in
Gross profit

Sale
Purchase return
Closing Stock
(Bal. figure)

xxx

xxx
xxx
xxx

xxx

Example Question:
Opening stock Rs 100,000/- , purchases Rs 300,000/-, Purchase return Rs 20,000/-, Sales Rs 500,000/-,
Sale Return Rs 50,000/- and GP 30% markup. Find Closing stock?
Trading Account
Opening stock

100,000

Sale

Purchases

300,000

Purchase return

20,000

Sale return

50,000

Closing Stock

33,846

Gross profit

103,846
553,846

500,000

553,846

S = C + GP
500,000 50,000 = X + 30% of X
450,000 = 1.30X
X = 450,000/1.30
X = 346,154 * 30%
GP = 103,846/Muhammad Naseem

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Financial Reporting (PIPFA)

Part 4:
1 - Correction of stock:
Stock
+ under stock
- over stock

Xxx
Xxx
(xxx)

Adjusted stock

Xxx

2 Stock taking before balance sheet date:

Stock
+ net purchases
- net sale
(cost of good sold)

xxx
xxx
(xxx)

Adjusted stock

Xxx

3 Stock taking after balance sheet date:

Stock
- net purchases
+ net sale
(cost of good sold)
Adjusted stock

Muhammad Naseem

Xxx
(xxx)
Xxx
Xxx

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Financial Reporting (PIPFA)

IAS 7: Cash Flow Statements

Information relating to cash flows helps users of financial statements to assess:

A. The ability of the entity to generate cash and cash equivalents
B. The need of entity for cash
A statement of cash flow allows users of the financial statements to evaluate the ability of the entity to
generate cash flows and the timing and certainty of those cash flows. This may influence the economic
decisions taken by users.
A statement of cash flow is therefore required because it provides useful information that other
financial statements do not provide.
The statement of cash flow provides information on the liquidity, viability and adaptability of the entity,
which is not provided by the other financial statements. A company may have high net assets and large
profits, but these are not a guarantee of financial viability. If the entity makes sales on credit, but later
cannot collect the debts it is owed by customers, it may not have cash to spend on replacing the
inventory it has sold, in order to make further sales.
Cash is the lifeblood of a business; the statement of cash flow therefore plays an important role in
understanding the financial position of an entity.
IAS 7 states that cash flow should be presented under three headings:
A. Cash flow from operating activities
B. Cash flow from investing activities
C. Cash flow form financing activities
Cash flows are itemized under each of these three headings, and the total cash flow is also shown for
each heading. Together, they explain the total increase or decrease in cash equivalents during the
financial period.
Statements of cash flows, as their name indicates and show cash flows that have occurred during the
period. Non cash transactions are excluded. For example, if a company re-values and item of property or
makes a bonus issue of shares, these transactions would not feature in the statement of cash flow
because they do not involve a flow of cash.
The only non cash items included in a statement of cash flow are adjustments to the profit before tax,
when the indirect method is used to present cash flows from operating activities.
Cash flow from operating activities can be presented by using two methods; Direct & indirect method
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Financial Reporting (PIPFA)

Cash flow statement

Cash flow from

Operating activities

cash flow from

investing activities

Inflow outflow

inflow

Sale of FA
Sale of LTL
Int. received

CA
CL

Inflow
Less
Add

outflow

purchase of FA
purchase of LTL
interest paid

cash flow from

financing activities

inflow

issued Capital
issued LTL

outflow

paid divid.
paid LTL

Out flow
Add
Less

Formats of cash flow statement as follow for Direct & Indirect method
Cash flow statement
Indirect method
RS
CF from operating activities
Net profit

xxxx

Adjustments:
Add:
Depreciation Exp
Amortization Exp
Provision for debts
Provision for tax
Interest Exp
Loss on disposal
Less:
Interest income
Gain on disposal
Net CF from operating Act.

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxx

Muhammad Naseem

RS

Cash flow statement

direct method
RS
CF from operating activities
Net CF from operating Act.
Before WC item changes:
Add:
Decrease in CA
Increase in CL
Less:
Increase in CA
Decrease in CL
Tax paid
interest paid
CF from investing activities
Add:
Sale of FA

RS

xxxx
xxx
xxx
xxx
xxx
xxx
xxx
xxxxx
xxx
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Financial Reporting (PIPFA)

Before WC item changes:
Add:
Decrease in CA
Increase in CL
Less:
Increase in CA
Decrease in CL
Tax paid
interest paid

xxx
xxx
xxx
xxx
xxx
xxx
xxxxx

Less:

xxxxx

CF from investing activities

Add:

Less:

Sale of FA
Sale of LTL
Interest received
Purchase of FA
Purchase of LTL

xxx
xxx
xxx
xxx
xxx

Sale of LTL
Interest received
Purchase of FA
Purchase of LTL

xxx
xxx
xxx
xxx
Xxxx

CF from financing activities

Add:
Issued s. capital
Received LT Loan

Xxx
Xxx

Less:

Xxx

Paid dividend

Xxx
Xxxx
Net increase in cash & cash equivalent
Add:
Opening balance of Cash
Closing balance of cash & cash equivalent

Paid LT Loan

xxxx

xxxx

xxx
xxx
xxx
xxx
xxxx

Xxxx

CF from financing activities

Add:
Less:

Issued s. capital
Received LT Loan
Paid dividend
Paid LT Loan

Net increase in cash & cash equivalent

Xxxxx

Add:
Opening balance of Cash
Closing balance of cash & cash
equivalent

Xxx
Xxxxx

Cash and Cash equivalent

Opening

Closing

Cash

Xxx

Xxx

Bank
Market Securities

Xxx
Xxx
Xxxx
(xxx)
Xxxx

Xxx
Xxx
Xxxx
(xxx)
Xxxx

Bank overdraft

Muhammad Naseem

xxxx

Page 11

xxxx
xxxxx
xxx
xxxxx

Financial Reporting (PIPFA)

Note:

we will make T accounts for following

Fixed Asset
Long term liabilities
Equity
Current asset (only interest received)
Current liabilities (only for interest paid, taxation, dividend payable)

There are two steps for solving cash flow statement question
Step 1 find cash & cash equivalent
Step 2 Critical accounts for missing information

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Financial Reporting (PIPFA)

IAS 8: Accounting polices, change in accounting estimates & errors
There are three stages in this IAS, which are as follows:
1. Accounting polices
2. Change in accounting estimates
3. Errors (financial & non financial)
Stage 1: if you change accounting polices then its effect retrospective statements (past, current, future)
Stage 2: if you change accounting estimates then its effect prospective statements (current & future)
Stage 3: if you change errors then its effect retrospective statements (past, current & future)
Accounting Polices
Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an
entity in preparing and presenting financial statements.
Change in accounting estimate
A change in accounting estimate is an adjustment of the carrying amount of an asset or a liability or the
amount of the periodic consumption of an asset, that results from the assessment of the present status
of, and expected future benefits and obligations associated with, assets and liabilities, changes in
accounting estimates result from new information or new developments and, accordingly, are not
corrections of errors
Errors
Prior period errors may result on the basis of mathematical calculation, over sight or omissions. Correct
these retrospectively. There is no longer any allowed alternative treatment.
This involves:
Either restating the comparative amounts for the prior periods in which the error occurred, or when the
error occurred before the earliest prior period presented, restating the opening balances of assets,
liabilities and equity for that period so that the financial statements are presented as if the error had
never occurred.
Only where it is impracticable to determine the cumulative effects of an error on prior periods can an
entity correct and error prospectively.
Following disclosures are required:
a) Nature of error
b) Amount involved
c) Circumstance leading that correction

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Financial Reporting (PIPFA)

IAS 10: Post Balance Sheet Events

1st Jan

Balance sheet date

31st December

Balance sheet publish date

15th March

Condition exists or not

Definition:
Events occurring after the reporting period are those events, both favorable and unfavorable, that occur
between the end of the reporting period and the date on which the financial statements are authorized
for issue. Two types of events can be identified:
a) Those that provide further evidence of conditions that existed at the end of the reporting
period.
b) Those are indicative of conditions that arose subsequent to the end of the reporting period.
Accounting treatment:
a) Adjust assets and liabilities where events after the reporting date provide further evidence of
conditions existing at the reporting date.
b) Do not adjust, but instead disclose, important events after reporting date that do not affect
condition of assets and liabilities at the reporting date.
c) Dividends for period proposed/declared after the reporting date but before FS are approved
should not be recognised as a liability at the reporting date.
Disclosure:
a) Nature of events
b) Estimate of financial effect
Purpose of IAS 10:
The financial statements are prepared as at the end of the reporting period, but often the accounts are
not authorized by the directors until some months later. During this time events may take place within
the entity that should be communicated to the shareholders.

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Financial Reporting (PIPFA)

Events after the reporting period have two main objectives:
a) To specify when an entity should adjust its financial statements for events that occur after the
reporting period, but before the financial statements are authorized for issue.
b) To specify the disclosures that should be given about events that have occurred after the
reporting period but before the financial statements were authorized for issue
IAS 10 also includes a requirement that the financial statements should disclose when the statements
were authorized for issue, and who gave the authorization.
As we discuss above adjusting and non adjusting events after balance sheet date, which are as follows;

Adjusting events
1.
2.
3.
4.
5.
6.

Settlement of court cases

Bad debts after BS date.
Inventory at lower of cost & NRV
Declaration of bonus
Fraud & errors
Determine the cost of PPE

Muhammad Naseem

Non adjusting events

1. Loss due to theft or fire after BS date
2. Decline in the value of investment.
3. Dividends
4.Major business combination sale of subsidiary
5. Plan to discontinuous the major operations
6. Disposal of assets
7.Change in asset price or foreign exchange rate
8. Change in tax rate and law
9. Contingent liabilities
10. Litigation arising solely at of events
11. Implementation of major restructuring

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Financial Reporting (PIPFA)

IAS 11: Construction Contracts
Construction contract: A contract specifically negotiated for the construction of an asset or a
combination of assets that are closely interrelated or interdependent in terms of design, technology and
function or their ultimate purpose or use.
Standard differentiates between fixed price contracts and cost plus contracts.
Fixed price contract: A contract in which the contractor agrees to a fixed contract price or a fixed rate
per unit of output, which in some cases is subject to cost escalation clauses
Cost plus contract: A construction contract in which the contractor is reimbursed for allowable or
otherwise defined costs, plus a percentage of these costs or a fixed fee.
Combining and segmenting construction contracts:
The standard lays out the factors which determine whether the construction of a series of assets under
one contract should be treated as several contracts.
a) Separate proposals are submitted for each asset.
b) Separate negotiations are undertaken for each asset; the customer can accept or reject each
individually.
c) Identifiable costs and revenues can be separated for each asset.
There are also circumstances where a group of contracts should be treated as one single construction
contract.
a) The groups of contracts are negotiated as a single package.
b) Contracts are closely interrelated, with an overall profit margin.
c) The contracts are performed concurrently or in a single sequence.
Rule for recognition
Outcome can not be measured reliably

Outcome can be measured reliably

No profit taken on contract, only

Revenue recognize which can be
Recoverable

Expected profit

Revenue, cost & profit taken

according to stage of completion

Expected loss

Full loss recognized

% of completion with reference to cost

% of completion with reference to contract

=Cost to date/ total cost x 100

=work certified/ contract price x 100

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Financial Reporting (PIPFA)

For Cost formula
Income statement

For work certified formula

Income statement

Revenue(bal.figure)
Cost

A
?
xx

B
?
Xx

C
?
Xx

GP

xxx

Xxx

Xxx

Revenue
Cost(bal. figure)

A
xx
?

B
Xx
?

C
xx
?

GP

xxx

Xxx

xxx

A
xx
xx

B
xx
xx

C
Xx
Xx

(xx)

(xx)

(xx)

xxx

xxx

Xxx

Balance Sheet
Amount due from /due to customer
Add:

Cost to date
Profit / loss to date

Less:

Progress billing to date

Estimated profit
A
xxx

B
xxx

C
Xxx

Total cost

(xxx)

(xxx)

(xxx)

Total estimated profit

xxxx

xxxx

Xxxx

Contract price
Cost to date
Estimated further cost to complete

Xx
Xx

if percentage is not given for attributed profit then you have to find this %
If you are using cost formula then:

Cost to date / total cost x 100

if you are using work certified then:

work certified/ contract price x 100

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Financial Reporting (PIPFA)

IAS 12: Deferred Taxation
What is deferred tax?
When a company recognizes an asset or liability, it expects to recover or settle the carrying amount of
that asset or liability. In other word, it expects to sell or use up assets, and to pay off liabilities. What
happens if that recovery or settlement is likely to make future tax payments larger or smaller then they
would otherwise have been if the recovery or settlement had no tax consequences?
Deferred tax

Balance sheet (Assets)

TTD (taxable temporary difference)

Deferred tax Expense & liability

Balance sheet (liability)

DTD (deductable temporary difference)

Deferred tax asset & liability

1. Current tax estimation for current tax:

Tax expense
To Tax provision

2. under provide:
Tax expense prior
To Income tax provision

1. Over provide:
Tax provision
To Income tax expense prior

4. Deferred tax expense:

Deferred tax expense
To Deferred tax liability

Deferred tax income:

Deferred tax asset
To Deferred tax income

Definitions:
1) Deferred tax liabilities are the amounts of income taxes payable in future periods in respect of
taxable temporary differences.
2) Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
a) Deductible temporary differences;
b) The carry forward of unused tax losses;
c) The carry forward of unused tax credits.
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Financial Reporting (PIPFA)

3) Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and its tax base. Temporary differences may be either:
a) Taxable temporary differences, which are temporary differences that will result in taxable
amounts in determining taxable profit /loss of future periods when the carrying amount of the
asset or liability is recovered or settled;
b) Deductible temporary differences, which are temporary differences that will result in amounts
that are deductible in determining taxable profit/loss or future periods when the carrying
amount or the asset or liability is recovered or settled.
4) The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes
or tax base of an asset is the amount that will be deductible for tax purposes against any taxable
economic benefits that will flow to the entity when it recovers the carrying value of the asset.
Where those economic benefits are not taxable, the tax base of the asset is the same as its carrying
amount.
Accounting profit form the basis for computing taxable profits, on which the tax liability for the year is
calculated; however, accounting profits and taxable profits are different. There are two reasons for the
differences.
Permanent difference: These occur when certain items of revenue or expense are excluded from the
computation of taxable profits (for example, entertainment expenses may not be allowable for tax
purposes).
Temporary differences: These occur when items of revenue or expense are included in both accounting
profits and taxable profits, but not for the same accounting period. For example, an expense which is
allowable as a deduction in arriving at taxable profits for 2011 might not be included in the financial
accounts until 2012 or later. In the long run, the total taxable profits and total accounting profits will be
the same (except for permanent differences) so that timing differences originate in one period and are
capable of reversal in one or more subsequent periods. Deferred tax is the tax attributable to temporary
differences.
Taxable temporary differences
All taxable temporary differences give rise to a deferred tax liability
Transaction that affect the statement of comprehensive income under TTD
a)
b)
c)
d)
e)

Interest revenue received in arrears

Sale of good revenue
Depreciation of an asset
Development cost
Prepaid expenses

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Financial Reporting (PIPFA)

Transaction that affect the statement of financial position under TTD
a) Depreciation of an asset is not deductible for tax purposes. No deduction will be available for tax
purposes when the asset is sold/scrapped.
b) A borrower records a loan at proceeds received (amount due at maturity) less transaction costs.
The carrying amount of the loan is subsequently increased by amortization of the transaction
costs against accounting profit. The transaction costs were, however, deducted for tax purposes
in the period when the loan was first recognized.

Fair value adjustments and revaluations

a) Financial assets or investment property are carried at fair value. This exceeds cost, but no
equivalent adjustment is made for tax purposes.
b) Property, plant and equipment is revalued by an entity under IAS 16, but no equivalent
adjustment is made for tax purposes.
Remember the rule I gave you above, that all taxable temporary differences give rise to a deferred
liability? There are two circumstances given in the standards where this does not apply.
a) The deferred tax liability arises form goodwill for which amortization is not deductible for tax
purposes.
b) The deferred tax liability arises from the initial recognition of an asset or liability in a transaction
which:
i) Is not a business combination
ii) At the time of the transaction affects neither accounting profit nor taxable profit.
Timing differences:
Some TD are often called timing differences, when income or expense is included in accounting profit in
one period, but is included in taxable profit in a different period. The main types of TTD which are timing
differences and which result in deferred tax liabilities.
a) Interest received which is accounted for on an accruals basis, but which for tax purposes is included
on a cash basis.
b) Accelerated depreciation for tax purposes
c) Capitalized and amortized development costs

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Financial Reporting (PIPFA)

Deductible temporary differences

All deductible temporary difference gives rise to a deferred tax asset.
Transaction that affect the statement of comprehensive income under DTD
a) Retirement benefit cost (pension costs)
b) Accumulated depreciation of an asset
c) The cost of inventories sold before the end of the reporting period
d) The NRV of inventory, or the recoverable amount of an item of PPE
e) Research costs or organization/ other start-up costs
f) Income is deferred in the statement of financial position
g) A government grant
Fair value adjustments and revaluations
Current investments or financial instruments may be carried at fair value which is less than cost, but no
equivalent adjustment is made for tax purposes.
Reasoning behind the recognition of deferred tax assets arising from DTD:
a) When a liability is recognized, it is assumed that its carrying amount will be settled in the form of out
flows of economic benefits form the entity in future period.
b) When these resources flow from the entity, part or all may be deductible in determining taxable
profit of a period later than that in which the liability is recognized.
c) A temporary tax difference then exists between the carrying amount of the liability and its tax base.
d) A deferred tax asset therefore arises, representing the income taxes that will be recoverable in
future periods when that part of the liability is allowed as deduction form taxable profit.
e) Similarly, when the carrying amount of an asset is less than its tax base, the difference gives rise to a
deferred tax asset in respect of the income taxes that will be recoverable in future periods.
Taxable profit in future period
When can we be sure that sufficient taxable profit will be available against which a DTD can be utilized?
IAS 12 states that this will be assumed when sufficient TTD exist which relate to the same taxation
authority and the same taxable entity. These should be expected to reverse:
a) In the same period as the expected reversal of the DTD
b) In periods into which a tax loss arising from the deferred tax asset can be carried back or forward.
Only in these circumstances is the deferred tax asset recognized, in the period in which the DTD arise.
When there are insufficient TTD? It may still be possible to recognize the deferred tax asset, but only to
the extent that:

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Financial Reporting (PIPFA)

a) Taxable profits are sufficient in the same period as the reversal of the DTD or in the periods into
which a tax loss arising form the deferred tax asset can be carried forward or backward, ignoring
taxable amount arising form DTD arises in future periods.
b) Tax planning opportunities exist that will allow the entity to create taxable profit in the appropriate
period.
Unused tax losses and unused tax credits
An entity may have unused tax losses or credits, which it can offset against taxable profit at the end of a
period. Should a deferred tax asset be recognized in relation to such amounts? IAS 12 states that a
deferred tax asset may be recognised in such circumstances to the extent that its probable future
taxable profit will available against which the unused tax losses/credits can be utilized.
The criteria for recognition of deferred tax assets here is the same as for recognizing deferred tax assets
arising form DTD. The existence of unused tax losses is strong evidence, however, that future taxable
profit may not be available. So where an entity has a history of recent tax losses, a deferred tax asset
arising from unused tax losses or credits should be recognised only the extent that the entity has
sufficient TTD or there is other convincing evidence that sufficient taxable profit will be available against
which the unused losses/credits can be utilized by the entity.
Summary
a) Deferred tax is an accounting device. It does not represent tax payable to the tax authorities.
b) The tax base of an asset or liability is the value of that asset or liability for tax purposes.
c) You should understand the difference between permanent and temporary differences.
d) Deferred tax is the tax attributable to temporary differences.
e) With one or two exceptions, all TTD give rise to a deferred tax liability.
f) Many TTD are timing differences.
g) Timing differences arise when income or an expense is included in accounting profit in one
period, but in taxable profit in a different period.
h) DTD give rise to a deferred tax asset.
i) Prudence dictates that deferred tax assets can only be recognised when sufficient future taxable
profits exist against which they can be utilized.
Calculation of TTD & DTD
CV

TB

TD

TTD

DTD

Assets
Furniture
Plant
R&D
prepaid exp

90,000
70,000
20,000

80,000
60,000
100,000
-

10,000
10,000
(100,000)
20,000

10,000
10,000
20,000

Liabilities
Accrued salary
provision for debt

10,000
2,000

2,000

(10,000)
-

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(100,000)

(10,000)
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Financial Reporting (PIPFA)

Accrued Interest

5,000

(5,000)

(5,000)

40,000

(115,000)

if tax rate is 35% then calculate deferred tax

Deferred tax liability
40000 * 35%
Deferred tax assets
115000 * 35%
CFUTL
net deferred tax Exp/income
Less: opening deferred tax
Tax adjustment
Revaluation adjustment

14,000
(40,250)
(26,250)
-

deferred tax Exp/income

(26,250)

Calculate taxable profit and current tax. If accounting profit is Rs. 50,000/Accounting profit
50,000
Add:
PD
DTD
115,000
Less:
TTD
(40,000)
taxable profit
125,000
tax rate
35%
current tax
43,750
Taxation Disclosure
Current Tax
Prior tax
Deferred tax

43,750
(26,250)
17,500

There two methods for calculating taxable profit Direct method (above use) and indirect method
indirect method you can find in text book

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Financial Reporting (PIPFA)

IAS 16: Property, Plant & Equipment

Nature of non current assets
Non- current assets are those which are not held for conversion into cash within a short period, such as
goods and services as are currently useful. These are the assets held by an entity have a limited useful
life to that entity.
With the exception of land held on freehold or very long leasehold, every non-current asset eventually
wears out over time. Machines, cars and other vehicles, fixtures and fittings, and even buildings do not
last for ever. When a business acquires a non-current asset, it will have some idea about how long its
useful life will be, and it might decide what to do with it.
a) Keep on using the non-current asset until it becomes completely worn out, useless, and
worthless.
b) Sell off the non-current asset at the end of its useful life, either by selling it as a second-hand
item or as scrap.
Since a non-current asset has a cost, and a limited useful life, and its value eventually declines, it follows
that a charge should be made in the statement of comprehensive income to reflect the use that is made
of the asset by the business. In such a case it is necessary to apportion the value of an asset used in a
period against the revenue it has helped to create. Allocation of costs for the use of an asset to an
accounting period is termed as depreciation.
1) Depreciation is the result of systematic allocation of the depreciable amount of an asset over its
estimated useful life. Depreciation for the accounting period is charged to net profit or loss for the
period either directly or indirectly.
2) Depreciable assets are assets which:
a) Are expected to be used during more than one accounting period?
b) Have a limited useful life.
c) Are held by an entity for use in the production or supply of goods and service, for rental to
others, or for administrative purposes?
3) Useful life is one of two things:
a) The period over which a depreciable asset is expected to be used by the entity.
b) The number of production or similar units expected to be obtained from the asset by the entity.
4) Depreciable amount of a depreciable asset is the historical cost or other amount substituted for cost
in the financial statements, less the estimated residual value.
Definitions of PPE
PPE are equipment are tangible assets that:

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Financial Reporting (PIPFA)

i)

Are held by an entity for use in the production or supply of goods or services for rental to
others, or for administrative purposes;
ii) Are expected to be used during more than on period
Cost is the amount of cash or cash equivalents paid or the fair value of the other consideration given
to acquire an asset at the time of its acquisition or construction.
Residual value is the net amount which the entity expects to obtain for an asset at the end of its
useful life after deducting the expected costs of disposal.
Entity specific value is the present value of the cash flows an entity expects to arise from the
continuing use of an asset and from its disposal at the end of its useful life, or expects to incur when
settling a liability.
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing
parties in an arms length transaction.
Carrying amount is the amount at which an asset is recognised in the statement of financial position
after deducting any accumulated depreciation and accumulated impairment losses.
An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable
amount.

Disclosure
The standard has a long list of disclosure requirements, for each class of PPE:
1) Measurement bases for determining the gross carrying amount
2) Depreciation methods used
3) Useful life or depreciation rates used
4) Gross carrying amount and accumulated depreciation at the beginning and end of the period
5) Reconciliation of the carrying amount at the beginning and end of the period showing:
i) Additions
ii) Disposals
iii) Acquisitions through business combinations
iv) Increases/decreases during the period from revaluations and from impairment losses
v) Impairment losses reversed in the statement of comprehensive income
vi) Depreciation
vii) Net exchange differences
viii) Any other movements
The financial statements should also disclose the following
a) Any recoverable amounts of PPE
b) Existence and amounts of restriction on title, and items pledged as security for liabilities
c) Accounting policy for the estimated costs of restoring the site
d) Amount of expenditures on account of items in the course of construction
e) Amount of commitments to acquisitions
Revalued assets require further disclosures:
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Financial Reporting (PIPFA)

a)
b)
c)
d)
e)
f)

Basis used to revalue the assets

Effective date of the revaluation
Whether an independent value was involved
Nature of any indices used to determine replacement cost
Carrying amount of each class of PPE that would have been included in the financial statements has
the assets been carried at cost less accumulated deprecation and accumulated impairment losses
Revaluation surplus, indicating the movement for the period and any restrictions on the distribution
of the balance to shareholders

The standard also encourages disclosure of additional information, which the users of financial
statements may find useful.
a) The carrying amount of temporarily idle PPE
b) The gross carrying amount of any fully depreciated PPE that is still in use
c) The carry amount of PPE retired from active use and held for disposal
d) The fair value of PPE when this is materially different from the carrying amount

Property, Plant & Equipment

Element of cost

Revaluation

1. Cost of purchase: (list price + import duty + non refundable tax + handling charges +
transportation charges Less trade discount)
2. Directly attributable cost (Wages & salaries, professional fee, assembly cost, installation cost,
cost of testing net of sale proceeds)
3. Initial estimated cost of dismantling, removing & restoration

Following costs will not be added in an asset value:

1.
2.
3.
4.
5.
6.

Admin cost
Cost of opening new facility
Cost of conducting business with new customer
Redeploying cost
Abnormal loss of material, labor & overhead
Internal profit

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Financial Reporting (PIPFA)

7. Incidental income

IAS 17: Leases

Lease: An agreement whereby the lessor conveys to the lessee in return for a payment or series of
payments the right to use an asset for an agreed period of time.
Finance lease: A lease that transfers substantially all the risks and rewards incidental to ownership of an
asset. Title may or may not eventually be transferred.
Operating lease: A lease other than a finance lease

Other definitions
Minimum lease payments: The payments over the lease term that the lessee is or can be required
to make, excluding contingent rent, costs for services and taxes to be paid by and be reimbursable
to the lessor, together with:
b) In the case of the lessee, any amounts guaranteed by the lessee or by a party related to the
lessee;
c) In the case of the lessor, any residual value guaranteed to the lessor by either:
i) The lessee;
ii) A party related to the lessee;
iii) An independent third party financially capable of meeting this guarantee
However, if the lessee has the option to purchase the asset at a price which is expected to be
sufficiently lower than the fair value at the date the option becomes exercisable for it to be
reasonably certain, at the inception of the lease, that the option will be exercised, the minimum
lease payments comprise the minimum payments payable over the lease term to the expected date
of exercise of this purchase option and payment required to exercise it.
Interest rate implicit in the lease: The discount rate that, at the inception of the lease, causes the
aggregate present value of:
a) The minimum lease payments;
b) The unguaranteed residual value.
To be equal to the sum of:
i) The fair value of the leased asset;
ii) Any initial direct cost

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Financial Reporting (PIPFA)

Initial direct costs are incremental costs that are directly attributable to negotiating and arranging a
lease, expect for such costs incurred by manufacturer or dealer lessors. Examples of initial direct
costs include amounts such as commissions, legal fees and relevant internal costs.
Lease term: The non-cancellable period for which the lessee has contracted to lease the asset
together with any further terms for which the lessee has the option to continue to lease the asset,
with or without further payments, which option at the inception of the lease it is reasonably certain
that the lessee will exercise.
A non- cancellable lease is a lease that is cancellable only in one of the following situation.
a) Upon the occurrence of some remote contingency;
b) With the permission of the lessor;
c) If the lessee enters into a new lease for the same or an equivalent asset with the same lessor;
d) Upon payment by the lessee of an additional amount such that, at inception, continuation of the
lease is reasonably certain.
The inception of the lease is the earlier of the date of the lease agreement or of a commitment by
the parties to the principal provisions of the lease. As at this date:
a) A lease is classified as either an operating lease or a finance lease;
b) In the case of finance lease, the amounts to be recognised at the lease term are determined.
Economic life is either:
a) The period over which an asset is expected to be economically usable by one or more users;
b) The number of production or similar units expected to be obtained from the asset by one or
more users.
Useful life is the estimated remaining period, from the beginning of the lease term, over which the
economic benefits embodied in the asset are expected to be consumed by the entity.
Guaranteed residual value is:
a) In the case of the lessee, that part of the residual value which is guaranteed by the lessee or by a
party related to the lessee (the amount of the guarantee being the maximum amount that
could, in any event, become payable);
b) In the case of the lessor, that part of the residual value which is guaranteed by the lessee or by a
third party unrelated to the lessor who is financially capable of discharging the obligations under
the guarantee.
Unguaranteed residual value is that portion of the residual value of the leased asset, the realization
of which by the lessor is not assured or is guaranteed solely by a party related to the lessor.
Gross investment in the lease is the aggregate of:
a) The minimum lease payments receivable by the lessor under a finance lease;
b) Any unguaranteed residual value accruing to the lessor
Unearned finance income is the difference between:
a) The aggregate of the minimum lease payments under a finance lease from the standpoint of the
lessor and any unguaranteed residual value accruing to the lessor;
b) The present value of (a) above, at the interest rate implicit in the lease.

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Financial Reporting (PIPFA)

Net investment in the lease is the gross investment in the lease discounted at the interest rate
implicit in the lease.
The lessees incremental borrowing rate of interest is the rate of interest the lessee would have to
pay on a similar lease or, if that is not determinable, the rate that, at the inception of the lease, the
lessee would incur to borrow over a similar term, and with a similar security, the funds necessary to
purchase the asset.
Contingent rent is that portion of the lease payments that is not fixed in amount but is based on a
factor other than just the passage of time (for example percentage of sales, amount of usage, price
indices, market rates of interest)
There are three types of leases
1. Direct finance lease
2. Sale type lease / Manufacture lease / Dealer lease
3. Sale & lease back

Direct finance lease

Finance lease

Operating lease

Yes

No

Is ownership transferred by the end of the lease term?

Does the lease contain a bargain purchase option?
Is the lease term for a major part of the asset useful life?
Is the present value of minimum lease payments greater than or substantially
equal to the asset fair value?

There are two methods, which are as follows:

1. At the start of lease=

amount to be recovered / 1 + PVIFAr,(n-1)

2. At the end of Lease= amount to be recovered / PVIFAr,(n)

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Financial Reporting (PIPFA)

Amount to be recovered = FV + IDC D/P PV of RV
MLP = D/P + total lease rent + GRV
Lease rental:
MLP (Lessee) = D/P + total lease rental + GRV
MLP (Lessor) = MLP (Lessee) + GRV
GRV = MLP (Lessor) + UGRV
UFI (unearned finance income) = GI NI (gross investment net investment)
Lease amortization table;
C.P
Purchase
D/P
Balance
Year - 1
Interest 10%
Balance

200,000
(20,000)
-----------180,000
(12,000)
------------168,000

Interest

P.A

Lease rental

20,000

20,000

18,000

12,000

30,000

Accounting general entries

Lessor
lease receivable
To

Asset
UFI
D/P

Cash
to Lease receivable
Interest
UFI
to FI
1st installment
Cash
to Lease receivable
Depreciation
Muhammad Naseem

Lessee
Dr
Cr
Cr

Asset subject to FL

Dr
Cr

To Obligation in FL
D/P

Dr
Cr

Obligation to FL

Dr
Cr

interest expense

Dr
Cr

to Cash
interest

Dr
Cr

to Accrued interest
1st installment
Asset subject to FL
Dr
Accrued interest
Dr
to Cash
Cr
Depreciation

Dr
Cr

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Financial Reporting (PIPFA)

Dep. Expense
NIL

to Acc. Depreciation

Balance Sheet Entries

non- CA
Xxx
Asset subject to FL
Less: Acc. Dep

non- CA
lease receivable

xxx
(xxx)
xxx

C.A
C/M of lease receivable

Xxx

non- C.L
UFI

Xxx

C.L
C/M UFI

Xxx

2.

Dr
Cr

non - C.L
obligation under FL
C/M of obligation

xxx
xxx
xxx

Manufacture or Dealer Lease

To find this type of lease just check that sale price & cost given or not in the question. If given then it is
MDL. Initial direct cost (IDC) will be charge to P & L account.
3. Sale & Lease Back

Finance lease

FV > CV

FV < CV

Profit deferred
& amortize over
Lease terms

Loss
immediately recognize

Operating lease

SP = FV

SP > FV

SP < FV

When implicit rate is given then fair value will be equal to PVMLP
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Financial Reporting (PIPFA)

Example for journal entries of Sale & Lease back as follow:

Lessee Book of accounts
SP
1
2
3
4
5
1

FV

10,000
10,000
15,000

10,000
8,000
10,000
15,000
10,000

Cash
to Asset
Deferred profit
Asset sub. To FL
OUFL

2000/5 = 400
Deferred profit
P&L a/c
2

Cash
P&L a/c
Assets
Asset sub. To FL
UFI

Cash
Asset
P&L a/c

Cash
Deferred loss
Asset
P&L a/c
Def. loss

Cash
Asset
Def. profit

Muhammad Naseem

CV
8,000

Finance Lease

10,000
8,000
12,000
8,000

Operating
lease

10,000
8,000
2,000

Dr
Cr
Cr

10,000
10,000

Dr
Cr

400
400
8,000
2,000
10,000

Dr
Cr
Dr
Dr
Cr

8,000
8,000
10,000
8,000
2,000
10,000
2,000
12,000

Dr
Cr
Dr
Cr
Cr
Dr
Dr
Cr

2,000
2,000
15,000
8,000
5,000

Dr
Cr
Dr
Cr
Cr
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Financial Reporting (PIPFA)

P&L a/c

2,000

Cr

IAS 18: Revenue Recognition

Definition of Recognition:
Recognition is the process of incorporation in the statement of financial position or statement of
comprehensive income an item that meets the definition of an element and satisfies the criteria for
recognition.
To understand the meaning of recognition, if is necessary to understand;
a) The definition of an element;
b) The criteria for recognition
Definition of an element
1. Financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These broad classes are
termed the elements of financial statements.
2. The elements which directly measure and reflect the financial position of the entity are included
in the balance sheet. These elements are called assets, liabilities & equity.

Revenue recognition

1. Sale of goods

2. Rendering of services

3. Interest, dividend & Royalties

Sale of goods: (Paragraph 14 of IFRS)

1.
2.
3.
4.
5.

Transfer of risk & rewards

No managerial involvement
Revenue can be measure reliably
Cost can be measure reliably
Economic benefit flow to entity

Rendering of services: (Paragraph 20 of IFRS)

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Financial Reporting (PIPFA)

1.
2.
3.
4.

Revenue can be measure reliably

Cost can be measure reliably
Economic benefit flow to entity
Stage of completion

Interest, Dividend & Royalties: (Paragraph 29 of IFRS)

1. Revenue can be measure reliably
2. Economic benefit flow to entity
General recognition:
1. Dispatching goods
2. Services have been rendered
3. Accrued basis (when right to receive is established)
If entity retain significant risk of ownership, then transaction is not sale & revenue will not be recognize.
Risk & Rewards:
1. Transfer of legal title
2. Possession of goods
Risk retain by entity:
1. When entity retain an obligation or ownership then unsatisfactory performance not cover by
normal warranty provision.
2. When receipt of sale is particular contingent
3. When the good are shift subject to installation and installation is major part of contract
4. When the buyer have right to return the goods

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IAS 23: Borrowing Cost

Borrowing cost:
Interest finance charges in respect of finance leases and exchange difference arising from foreign
currency borrowings and other costs incurred by an entity in connection with the borrowing of funds.
Qualifying asset:
An asset that necessarily takes a substantial period of time to get ready for its intended use or sale
The standard lists what may be included in borrowing costs.
1. Interest on bank overdrafts and short-term and long-term borrowings
2. Interest on debentures
3. Amortization of discounts or premiums relating to borrowings
4. Amortization of ancillary costs incurred in connection with the arrangement of borrowings
5. Finance charges in respect of finance leases recognised in accordance with IAS 17
6. Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
The standard also gives examples of qualifying assets
1. Inventories that require a substantial period of time to bring them to a saleable condition
2. Manufacturing plants
3. Power generation facilities
4. Investment properties
5. Intangible assets
For capitalization
a) Borrowing costs are part of the total cost of bringing an asset into use
b) Capitalization gives greater comparability between companies: a purchase price includes
interest incurred by the seller, so a construction cost should also include interest.
Against capitalization
a) Finance costs are not the most direct of costs and may relate to the business as a whole
b) There will still be a lack of comparability due to different financing policies: businesses with loan
financing will have higher values for assets than equity backed businesses
Disclosure
The following should be disclosed in the financial statements in relation to borrowing costs
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Financial Reporting (PIPFA)

a) Accounting policy adopted
b) Amount of borrowing costs capitalized during the period
c) Capitalization rate use to determine the amount of borrowing costs eligible for capitalization

Two type of borrowing costs

General funds

Specific funds

Calculate capitalization rate:

Borrowing cost / borrowing outstanding x 100%
Calculate weighted average expenditure (WAE)
Apply capitalization rate on WAE
Comments

Actual cost of borrowing

Less: investment income
(If any)
Borrowing cost to be capitalize

xxx
(xxx)
---------xxxx
----------

When borrowing cost will be capitalize:

a) Expenditures have been incurred
b) Borrowing cost have been incurred
c) Activity is in progress

Stop (when activity have been complete)

Suspend

Suspend (controllable)

unsuspended (not controllable)

Loan interest will be charge to asset (capitalize) and remaining will be charge to P&L account

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IAS 24: Related Parties

Related party:
A person or a close member of that persons family is related to a reporting entity if that person:
i) Has control or joint control over the reporting entity
ii) Has significant influence over the reporting entity
iii) Is a member of the key management personnel of the reporting entity or of a parent of the
reporting entity?
An entity is related to a reporting entity if any of the following conditions applies:
i) The entity and the reporting entity are members of the same group (which means that each
parent, subsidiary and fellow subsidiary is related to the others).
ii) One entity is an associate or joint venture of the other entity (or an associate or joint
venture of a member of a group of which the other entity is a member).
iii) Both entities are joint ventures of the same third party.
iv) One entity is a joint venture of a third entity and the other entity is an associate of the third
entity
v) The entity is a post-employment defined benefit plan for the benefit of employees of either
the reporting entity or an entity related to the reporting entity. If the reporting entity is its
self such a plan, the sponsoring employers are also related to the reporting entity.
vi) The entity is controlled or jointly controlled by a person identified in (a)
vii) A person identified in (a) (i) has significant influence over the entity or is a member of the
key management personnel of the entity (or of a parent of the entity).
Related party transaction: A transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.
Control is the power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.
Significant influence is the power to participate in the financial and operating policy decisions of an
entity, but is not control over these policies. Significant ownership may be gained by share
ownership, statue or agreement.
Joint control is the contractually agreed sharing of control over an economic activity.
Key management personnel are those persons having authority and responsibility for planning,
directing and controlling the activities of the entity, directly or indirectly, including and director
(whether executive or otherwise) of that entity.
Close members of the family of an individual are those family members who may be expected to
influence, or be influenced by, that individual in their dealings with the entity. They may include:
a) The individuals domestic partner and children
b) Children of the domestic partner
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c) Dependants of the individual or the domestic partner
The most important point to remember here is that, when considering each possible related party
relationship, attention must be paid to the substance of the relationship, not merely the legal form.

Related parties are as follows:

1. Parent
> 50%
2. Subsidiary
3. Associate
>20% & <50%
4. Joint venture
5. Close family members
6. Key management personnel
7. Other related parties
Transaction with related parties: (Paragraph 21 of IAS 24)
1. Sale & purchase of goods / services
2. Sale / purchase of property & other assets
3. Rendering / receiving services
4. Leasing
5. R & D
6. Provision of guarantees and collateral security
7. Transfer under licence agreements
8. Settlement of liabilities on behalf of the entity or by the entity on behalf of another party
Transactions, which are not related parties: (paragraph 11 of IAS 24)
1. Common director ship
2. Provider of finance
3. Trade unions
4. Public utilities
5. Customer, supplier, distributor etc.
Disclosure:
Relation
Subsidiary

Joint venture

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Transactions
sale of good
Lease
R&D
rendering of service
Purchase of good

Amount
xxxx
xxxx
xxxx
xxxx
xxxx

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Financial Reporting (PIPFA)

IAS 36: Impairment of Losses

Impairment: A fall in the value of an asset, so that its recoverable amount is now less than its carrying
value in the statement of financial position.
Carrying amount: Is the net value at which the asset is included in the statement of financial position.
Recoverable amount of an asset should be measured as the higher value of:
i.
The assets fair value less costs to sell
ii.
Its value in use
The value in use of an asset is measured as the present value of estimated future cash flows (inflows
minus outflows) generated by the asset, including its estimated net disposal value (if any) at the end of
its expected useful life.
Indication of impairment
Internal sources of information:
i.
Evidence of obsolescence or physical damage
ii.
Adverse changes in the use to which the asset is put
iii.
Reducing the asset economic performance
External sources of information:
i.
Decrease in asset market value
ii.
A significant change in the technological, market, legal or economic environment of the business
in which the assets are employed
iii.
Changes in interest rate
iv.
The carrying amount of the entitys net assets being more than its market capitalization
Even if there are no indications of impairment, the following assets must always be tested for
impairment annually.
i.
An intangible asset with an indefinite useful life
ii.
Goodwill acquired in a business combination
iii.
Intangible asset not ready for used
Recognition and measurement of an impairment loss
If the recoverable amount of an asset is lower than the carrying amount, the carrying amount should be
reduced by the difference as impairment loss, which should be charged as an expense in the statement
of comprehensive income.
The impairment loss is to be treaded as a revaluation decrease under the relevant IAS
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Financial Reporting (PIPFA)

A cash generating unit is the smallest identifiable group of assets for which independent cash flows can
be identified and measured.
No asset will be impair more than its fair value or recoverable amount

IAS 37: Provision, Contingent Liabilities, Contingent Assets

IAS 37 Provision, contingent liabilities, contingent assets aims 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 statement to enable users to
understand their nature, timing and amount.
Provisions
A provision is a liability of uncertain timing or amount
A liability is an obligation of an entity to transfer economic benefits as a result of past transactions or
events.
Meaning of obligation:
It is fairly clear what a legal obligation is. However, you may not know what a constructive obligation is.
IAS 37 defines a constructive obligation as
An obligation that derives from an entitys actions where;
I.
By an established pattern of past practice, published policies or a sufficiently specific current
statement the entity has indicated to other parties that it will accept certain responsibilities;
II.
As a result, the entity has created a valid expectation on the part of those other parties that it
will discharge those responsibilities.
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 end of the reporting period.
Transactions, for which provision can be book, are as follows:
I.
Warranties
II.
Guarantee
III.
Major repairs
IV.
Self insurance
V.
Environmental contamination
VI.
Restructuring
VII.
Onerous contract (loss making contract)

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Financial Reporting (PIPFA)

Transactions, for which provision cannot be book, are as follows:
I.
Taxation
II.
Debenture & redemption funds
III.
Future operating losses
IV.
Litigation
V.
Smoke filers
VI.
Pension & gratuity
IAS 37 defines a contingent liability as:
A possible obligation 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 entitys
control;
A present obligation that arises from past events but is not recognised because:
It is not probable that a transfer of economic benefits will be required to settle the obligation
The amount of the obligation cannot be measured with sufficient reliability
IAS 37 defines a contingent asset as:
A possible asset that arise from past events and whose existence will be confirmed by the occurrence of
one or more uncertain future events not wholly within the entitys control
Start

Present
obligation

No

Possible
obligation

Yes
Probable
outflow

Yes
No

Yes
Reliable
estimate

No

Remote

Yes

No
No (rare)

Yes
Provide
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Disclose
contingent
liability

Do nothing
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IAS 37

Provisions

Recognition criteria
Present obligation
Probable outflow
Reliable estimate
Obligation
Legal
Constructive
Measurement
Expected values
Best estimate
Specific scenarios
Guarantee, warranty, onerous contract,
Restructuring, environments etc

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Contingencies

Contingent liability

Contingent asset

Contingent
liability
provide

Contingent
assets
Recognised

Probable

provide

Disclosed

Possible

disclosed

Ignore

Remote

ignore

Ignore

Flow
Virtually certain

Remote: Less then 5% chance

Possible: 50 /50 % chance
Probable: more then 50% chance
Virtually certain: more then 95% chance

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IAS 38: Intangible Assets

Definition:
An intangible asset is an identifiable non monetary asset without physical substance: the asset must
be:
a) Controlled by the entity as a result of events in the past
b) Something from which the entity expects future economic benefits to flow
The critical attributes of an intangible asset are the:
I.
Identifiably
II.
Exercising control
III.
To obtain future economic benefits
Must be identifiable
An intangible asset must be identifiable in order to distinguish it from goodwill. With non physical
items, there may be a problem with identifiability
a) If an intangible asset is acquired separately through purchase, there may be a transfer of a legal
right that would help to make an asset identifiable
b) An intangible asset may be identifiable if it is separable, ie if it could be rented or sold
separately. However, separability is not an essential feature of an intangible asset.
Control by entity
Another element of the definition of an intangible asset is that it must be under the control of the entity
as a result of a past event. The entity must therefore be able to enjoy the future economic benefits from
the asset, and prevent the access of others to those benefits. A legally enforceable right is evidence of
such control, but is not always a necessary condition.
a) Control over technical knowledge or know how only exists if it is protected by a legal right.
b) The skill of employees, arising out of the benefits of training costs, are most unlikely to be
recognizable as an intangible asset, because an entity does not control the future actions of its
staff.
c) Similarly, market share and customer loyalty cannot normally be intangible assets, since an
entity cannot control the actions of its customers.
Expected future economic benefits
The third element of definition is that the benefits are expected to flow in the future from ownership of
the asset. Economic benefits may come from the sale of products or services, or from a reduction in
expenditures

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Recognition criteria
The standard requires recognizing an intangible asset whether acquired externally or generated
internally. It should be recognised if, and only if both the following occur;
a) It is probable that the future economic benefits that are attributable to the asset will flow to the
entity
b) The cost can be measured reliable
If the above conditions are not met the expenditure incurred on an intangible asset will be recognised as
an expense. Such expenditure cannot be re-instated as intangible asset at a later stage
Exchanges of assets
If one intangible asset is exchanged for other, the cost of the intangible asset is measured at fair value
unless:
a) The exchange transaction lacks commercial substance
b) The fair value of neither the asset received nor the asset given up can be measured reliably.
Otherwise, its cost is measured at the carrying amount of the asset given up.
Internally generated goodwill may not be recognised as an asset.
Research and development costs
Research activities by definition do not meet the criteria for recognition under IAS 38. This is because, at
the research stage of a project, is cannot be certain that future economic benefits will probably flow to
the entity from the project. There is too much uncertainty about the likely success or otherwise of the
project. Research costs should therefore be written off as an expense as they are incurred.
Development costs may qualify for recognition as intangible assets provided that the following strict
criteria are met.
SECTOR: separate project, economically, commercially, technically & feasible risk, overall profitable,
resources are available
Amortization:
a) An intangible asset with a finite useful life should be amortized over its expected useful life
b) An intangible asset with an indefinite useful life should not be amortized, that such an asset is
tested for impairment at least annually.
Goodwill
a) Good will is created by good relationships between a business and its customers.
b) By building up a reputation for high quality products or high standards of services
c) By responding promptly and helpfully to queries and complaints from customers
d) Through the personality of the staff and their attitudes to customers
Two part of good will purchase and inherent good will
Recognition of good will
Two type of good will be create by purchase positive & negative
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Positive goodwill will be capitalized, do not amortize and test for impairment but negative goodwill will
be shown in financial comprehensive statement as other income.

IAS 40: Investments

Definitions:
Investment property is property (land or building or part of building or both) held (by the owner or by
the lessee under a finance lease) to earn rentals or for capital appreciation or both, rather than for:
Use in production or supply of goods or services or for administrative purposes
Sale in the ordinary course of business
Fair value is the amount for which an asset could be exchanged between knowledgeable, willing parties
in an arms length transaction.
Cost is the amount of cash or cash equivalents paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition or construction.
Carrying amount is the amount at which an asset is recognised in the statement of financial position.
A property interest that is held by a lessee under an operating lease may be classified and accounted for
at an investment property, if and only if, the property would otherwise meet the definition of an
investment property and lessee uses the IAS 40 fair value model. This classification is available on a
property by property basis.
Recognition
Investment property should be recognised as an asset when two conditions are met.
1. It is probable that the future economic benefits that are associated with the investment
property will flow to the entity
2. The cost of the investment property can be measured reliably
Initial measurement
I.
II.

An investment property should be measured initially at its cost, including transaction costs
A property interest held under a lease and classified as an investment property shall be
accounted for as if it were a finance lease. The asset is recognised at the lower of the fair value
of the property and the present value of the minimum lease payments. An equivalent amount is
recognised as a liability.

Measurement subsequent to initial recognition

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IAS 40 requires an entity to choose between two models.
I.
The fair value model
II.
The cost model
Fair value model
a) After initial recognition, an entity that chooses the fair value model should measure all of its
investment property at fair value, except in the extremely rare cases where this cannot be
measured reliably.
b) A gain or loss arising from a change in the fair value of an investment property should be
recognised profit or loss for the period in which it arises.
c) The fair value of investment property should reflect that actual market conditions at the end of
the reporting period.
Cost model
The cost model is the cost model is IAS 16. Investment property should be measured at depreciated cost
less any accumulated impairment losses. An entity that chooses the cost model should disclose the fair
value of its investment property.
Disclosure requirements
I.
II.
III.
IV.
V.
VI.
VII.

Choice of fair value or cost model

Whether property interests held as operating leases are included in investment property
Criteria for classification as investment property
Assumptions in determining fair value
Use of independent professional valuer (encouraged but not required)
Rental income and expenses
Any restrictions or obligations

Fair value model additional disclosure

An entity that adopts this must also disclose a reconciliation of the carrying amount of the investment
property at the beginning and end of the period.
Cost model additional disclosure
These relate mainly to the depreciation method. In addition, an entity which adopts the cost model
must disclose the fair value of the investment property.

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Partnership
Definition
Partnership can be defined as the relationship which exists between persons carrying on a business in
common with a view of profit. In other words, a partnership is an arrangement between two or more
individuals in which they undertake to share the risks and rewards of a joint business operation
The partnership agreement is a written agreement in which the terms of the partnership are set out and
in particular the financial arrangements as between partners such as:
I.
Capital
II.
Profit sharing ratios
III.
Interest on capital
IV.
Partners salaries
V.
Withdrawals against profit
In addition to a capital account, each partner normally has:
I.
A current account
II.
A withdrawals account
III.
A current account is used to record the profits retained in the business by the partner
A partnership statement of financial position consists of:
I.
II.

The capital accounts of each partner

The current account of each partner, net of withdrawals on account

The net profit of a partnership is shared out between partners according to the terms of their
agreement. This sharing out is shown in an appropriation account, which follows on from the statement
of comprehensive income.
Various methods are used to calculate the goodwill of a firm at a particular date. Some of the commonly
used methods are:
I.
Average profits basis
II.
Super profit basis
III.
Capitalization methods
The formation of partnership by amalgamation

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When two or more businesses decide to combine their operations (to expand their range of operations,
achieve some economies of scale etc) the problems of accounting for the amalgamation will arise. In
respect of partnership accounts typical problems are concerned with any of the following
a) Two or more sole traders amalgamating to form a partnership
b) A sole trader amalgamating with an existing partnership
c) Two partnerships amalgamating to form a new partnership
What ever the type of amalgamation, the accounting problems are very much the same, where a
partner retires from, or a new partner is admitted to, a partnership, problems arise in respect of
revaluing assets, valuing goodwill, establishing new profit shares, ascertaining new capital introduced,
and so on. All these problems of establishing and evaluating assets which are to be brought in, and
liabilities which are to be taken over by the new partnership, are relevant to amalgamations.
Step 1: The old firms assets and liabilities are realised by sale to the new firm, not for cash, but for a
share in the capital of the new business, the amount of capital being determined by the value of net
assets contributed.
Step 2: A revaluation account is used in each of the old firms existing set of books to account for and
apportion to the sole traders their share of the profit or loss on revaluation of assets and liabilities. A
goodwill account is used to introduce or increase the good will, and to credit the sole traders with their
share.
Step 3: Once both firms have adjusted their asset, liability and capital accounts to take into account the
agreed values, the separate books may be merged. The traders agreed capital balances are transferred
to the new firm capital accounts and goodwill written off in new profit sharing ratio (if necessary)
Further problems in amalgamations
a) Certain old firm assets may be sold fro cash, while other assets and liabilities may be taken over
by the individual partners at agree valuations. Care must be taken to ensure that the profits or
losses on the realizations are apportioned to the relevant partners.
b) An alternative to transferring the profit on transfers directly to partners accounts is to transfer
it to the revaluation account.
c) Where current accounts are given in a question they should be closed off to the partners capital
accounts. As a new firm is being constituted there is little point in transferring current accounts
to the new firm.
d) Sometimes, the capitals in the new firm are fixed in profit sharing ratio. This generally requires
cash adjustment in the old partnership capital accounts.
e) All the assets and liabilities other than cash must be brought into the realization account at book
values thereby closing the ledger accounts. The realization account is then credited with the

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transfer of assets to the new firm (at agreed valuations), any transfers to partners (taking over
certain assets or liabilities) and any proceeds of sale for cash.

Conversion of a partnership to a limited liability company

When a partnership is completely dissolved, its assets are dispersed and it ceases to exist both as a
trading and a legal entity. A partnership may, however, be sold to another firm which continues the
partnership trading activities but under a different legal umbrella. The new firm may be another
partnership, or a sole trader, or as often happens a limited liability company.
The acquisition of the partnership business may be achieved in one of two ways.
a) A completely independent limited liability company taking over the firm for cash consideration
b) A limited liability company formed especially for the purpose of acquiring the business of the
partnership. This may occur when a successful partnership or sole trader has reached the stage
where incorporation is desirable because of:
i) The benefits of limited liability
ii) The need to obtain capital through issues of ordinary shares to outsiders
iii) Possible taxation advantages
The accounting entries for the sale of the partnership to the limited liability company record:
a) The cessation of the partnership and the realization of its net assets
b) The purchase by the newly created company of the business and net assets of the partnership
The sale price, normally referred to as the purchase consideration, is usually paid to the partners in the
form of:
a) Shares in the limited liability company or
b) Debentures in the limited liability company
If the company has already been in existence or has incurred outside borrowings, cash may form part of
the purchase consideration, if only to settle any balances due to the partners.
Closing the partnership books
The accounting procedures usually adopted to close off the partnership books are similar to those on
the complete dissolution of a partnership.
Step 1: All assets (expect cash) and liabilities are transferred to a realization account at their book value
Step 2: Each partners current account is cleared to his capital account, as the distinction between the
two is irrelevant at this stage.
Step 3: if any liabilities are not being taken over by the company, but are settled directly, the entries
needed are to credit bank and debit realization account.
Step 4: If any assets are being taken over by the partners, the agreed values should be credited to the
realization account and debited to the partners account.
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Step 5: The purchase consideration to be paid by the company should be credited to the realization
account and debited to a personal account specially opened up for the purchasing company
Step 6: Close the realization account by transferring any balance to the partners accounts in their profit
sharing ratios.
Step 7: Close the purchasing companys personal account by crediting it with shares, debentures or cash
as appropriate.
Step 8: Close the partners accounts by debiting them with shares, debentures or cash in the agreed
proportions.
The purchasing company books
The following entries are made in the purchase of business account.
It is credited with assets to be taken over, individual ledger accounts being debited. Although the values
at which assets are introduced into the new books may often be the same as those found in the old
books, there is no general rule that this should be the case. It is important to read the question carefully
to ascertain which values are to be used in the companys books.
It is debited with the liabilities in amount and form assumed by the company, individual ledger accounts
being credited.
It is debited with the purchase consideration appropriate accounts being credited. If shares are valued
at greater than nominal value a share premium account must be credited.
If thee purchase consideration exceeds the tangible net assets acquired it will be necessary to balance
the purchase of business account by a transfer crediting that account and debiting goodwill. Conversely,
a credit balance may be regarded as a capital reserve.
Allocation of profits
A problem arises when a partnership converts to a limited liability company, not on a end of the
reporting period, but part way through an accounting period. The partners make no closing entries at all
and you are confronted with a list of account balances at the end of the year and asked to produce:
a) The statement of comprehensive income for the year
b) Closing entries for the partnership
c) The statement of financial position of the company at the end of the year
A single column trading account and a two column statement of comprehensive income must be
prepared, both gross profit and expenses being apportioned by item or by any other method indicated.
The profit for the first period is debited to the partners accounts, whilst that for the remaining period is
dealt with by the company
To close off the partnership records all that are necessary is to make appropriate entries in the partners
capital accounts:
a) Credit the partners with their shares of profit
b) Debit the partners with shares and other consideration received

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To complicate matters further and interval sometimes emerges between the date of the companys
acquisition of the business and its incorporation. In this case a three column statement of
comprehensive income should be prepared and any profit allocated to the company in its preincorporation period must be regarded as a capital reserve, or be deducted from goodwill, if this arises.

IAS - 27: Consolidated Accounts

Many large companies actually consist of several companies controlled by one central or administrative
company. Together these companies are called a group. The controlling company, called the parent or
holding company, will own some or all of the shares in the other companies, called subsidiary and
associated companies. There are many reasons for businesses to operate as groups:
a) For the goodwill associated with the names of the subsidiaries
b) For tax or legal purposes
A group consists of a parent entity and one or more subsidiary entities. There may also be associates or
joint ventures in a group.
Control of parent company in the following:

Parent

More then 50%

>20% & <50%

Subsidiary

Associates

5% or less then 5%
Joint Ventures

Key definitions IAS 27

Consolidated financial statements: the financial statements of a group presented as those of a single
economic entity.
a) Parent: An entity that has one or more subsidiaries
b) Subsidiary: An entity, including an unincorporated entity such as a partnership, that is
controlled by another entity (know as the parent)
c) Control: The power to govern the financial and operating policies of an entity so as to obtain
benefits from its activities.

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Preparing a consolidated statement of financial position, you have to follow the below five steps:
Step 1: Group structure
% of investment & date of acquisition
Step 2: Cost of investment
Cash (if paid)
Share capital
Deferred liability
Cost of invest.

xxx
xxx
xxx
-------------Xxx

journal entry will be as follow

share capital
CR
deferred liability
CR
cost of investment
DR
cash transaction will not be consider under entry

Step 2: Net asset of subsidiary

At acquisition
xxx
xxx
xxx
xxx

Share capital
Share premium
Retain earning
Fair value adjustment:
(Assets & liabilities both)
Depreciation on fair value
Provision for unrealized profit (S P)
-----------Total net assets
xxxx

At end / reporting
xxx
xxx
xxx
xxx
(xxx)
(xxx)
----------xxxx

Difference between total net assets is post acquisition profit

Step 3: Good will (two methods to calculate goodwill)
Proportion method
Cost of investment
Less: % of P in net asset at Acq.
Good will
Impairment loss
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xxx
(xxx)
------------xxx
(xxx)

Fair value method

Cost of investment
Fair value of NCI

less: net assets at Acq.

xxx
xxx
--------------xxx
(xxx)
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Net good will

-------------xxxx

Good will
Impairment loss

Net good will

Step 4: Non controlling interest (two methods to calculate NCI)
Proportion method
% of NCI in net asset at acq.
xxx
Add: % of NCI at post acq. Profit
xxx
Less: % of NCI in impairment loss
(xxx)
-------------Net NCI
xxxx

---------------xxx
(xxx)
---------------xxx

Fair value method

Fair value of NCI
% of NCI at post acq. Profit
% of NCI in impairment loss
net NCI

xxx
xxx
(xxx)
-----------xxxx

Step 5: Group reserve/ Retain earning

Closing balance of retain earning of P
% of P in post acquisition profit
% of P in impairment loss
Provision of unrealized profit (P S)
(PURP)
Net group reserve

xxx
xxx
(xxx)
(xxx)
-------------------xxxx

Some time a subsidiary has reserves other than retained earnings. The same basic rules apply. If a
reserve existed at the acquisition date, it is included in the goodwill calculation and treated in the same
way as pre-acquisition profits. If a reserve arose after the acquisition date, it is treated in the same way
as post-acquisition profits.
Preparing a consolidated statement of comprehensive income
A consolidated statement of comprehensive income brings together the sales revenue, income and
expenses of the parent and the sales revenue, income and expenses of its subsidiaries.
Pre- and post-acquisition profits
When a parent acquires a subsidiary during a financial year, the profits of the subsidiary have to be
divided into pre-acquisition and post-acquisition profits.

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For the purpose of the consolidated statement of comprehensive income, we need to calculate the preand post-acquisition profit in the current year.
a) The pre-acquisition profit is used to calculate the goodwill
b) The post-acquisition profit (or loss) is included in the consolidated profit or loss for the year, in
the consolidated statement of comprehensive income.
Unless you are given information that suggests a alternative, assume that in the year of acquisition, the
profits of the subsidiary occur at an even rate throughout the course of the year. The division of the
annual profit of the subsidiary into pre-acquisition and post-acquisition elements can be done on a time
basis.
Non controlling interest in the consolidated statement of comprehensive income
When there is a non-controlling interest in a subsidiary, the consolidated statement of comprehensive
income should show:
a) The post-acquisition profit or loss for the year for the group as a whole, including all the postacquisition profit of the subsidiary;
b) The amount of this total profit that is attributable to the parents equity shareholders and the
amount that is attributable to the non-controlling interest in the subsidiary
For the purpose of preparing the consolidated statement of comprehensive income, all the preacquisition profits of the subsidiary are excluded. The final lines of a consolidated statement of
comprehensive income should therefore be as follows:
Attributable to:
Owner of the parent
Non-controlling interest
Profit for the period

xxx
xxx
--------------------xxxx

Other adjustments to the consolidated statement of comprehensive income: impairment of good will
One such adjustment is impairment of goodwill. When purchased goodwill is impaired, the impairment
does not affect the individual financial statement of the parent company or the subsidiary. The effect of
the impairment applies exclusively to the consolidated statement of financial position and the
consolidated statement of comprehensive income.
If good will is impaired:
a) It is written down in value in the consolidated SFP
b) The amount of the write-down is charged as an expense in the consolidated statement of
comprehensive income, usually as an administration expense.
A write-down in goodwill affects the parent entity only not the non-controlling interest. It should
therefore be deducted from the profit attributable to the owners in the parent.
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Intra group transactions and their adjustments
In many groups, business and financial transactions take place between entities within the group. These
intra group transactions might be:
a) The sale of goods or services between the parent and a subsidiary, or between two subsidiaries
in the group
b) Loans by one entity in the group to another and the payment of interest on intra group loans
Intra-group transactions should be eliminated on consolidation. The purpose of consolidated accounts is
to show the financial position and the financial performance of the group as a whole, as if it is a single
operating unit. If intra-group transactions are included in the consolidated financial statement, the
statements will show too many assets, liabilities, income and expenses for the group as a single
operating unit.
Intra group sales
The consolidated statement of comprehensive income shows the total sales and the total cost of sales
for the group as a whole during a financial period. If entities within the same group sell goods or services
to each other, these intra group transactions will be included:
a) In the revenue of the entity making the sale
b) As a cost of sale of the entity making the purchase
Looking at the group as a single operating unit, however, there has been no sale and no purchase. The
intra-group sale, for the group as a unit, is simply a transfer of goods or services within the group.
The revenue from intra-group sales and the cost of intra-group purchases must therefore be eliminated
from the consolidated statement of comprehensive income.
No inventories of intra group sales items
Provided that the items sold and bought internally have been used to make a sale outside the group, so
that there are no inventories of intra-group sales items, the adjustment is made in the consolidated
statement of comprehensive income by:
a) Deducting the revenue from intra-group sales from the total revenue for the group
b) Deducting the same amount from the cost of sales
When there are inventories of intra-group sales items
A slightly different situation arises when, at the end of the financial year, some intra-group sales items
are still held as inventory by the group entity that bought them. This is because the inventory includes
some unrealized profit.
Intra group balances

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When entities within a group sell goods to other entities in the same group, the terms of trading are
normally similar to those for sales to external customers. The selling group company will expect
payment in cash for the goods sold, but will give credit terms to the buying group company.
When this happens, group entities will include other group entities within their trade receivable (sale)
and trade payables (purchase)
The trade receivables of the selling group entity should equal the trade payables of the buying group
entity. These intra-group balances must be eliminated on consolidation and excluded from the
consolidated balance sheet.
Items in transit (cash or goods)
At the year end, there might be a difference in the intra-group balances, due to goods in transit or cash
in transit. When cash or goods are in transit, they are in the process of being transferred from one group
entity to another. The entity sending the cash or goods will have recorded the transaction in its ledger
accounts. However, the entity receiving the cash or goods has not yet received anything, and so has not
yet recorded the transaction in its accounts.
If the goods are in transit, the entity making the purchase will not yet have recorded the purchase, the
inventory received or the trade payable in its ledger accounts.
If the cash in transit, the entity might not yet have received the payment and so will not have recorded
the cash received or the reduction in its total trade receivables.
Difference in the intra-group balances caused by items in transit must be removed for the purpose of
consolidation.
If cash in transit from the parent to a subsidiary, the following adjustment should be made to the
statement of financial position of the parent:
Cash

Dr
Amount payable to the subsidiary

CR

The parent therefore reverses the transaction for the cash in transit, as though the payment has not yet
been made.
If cash is in transit from a subsidiary to the parent, in the statement of financial position of the parent:
Cash

DR
Amount receivable from the subsidiary

CR

The parent therefore records the receipt of the cash payment from the subsidiary, even though the cash
has not yet been received.
Unrealized profit in inventory

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When intra-group sales are still held as inventory:
a) The entity that made the sale has recorded a profit on the sale, but
b) This profit is included within the inventory valuation of the entity that made the purchase,
because inventory is valued at the purchase cost to the buying entity.
The inventory is still held within the group, so the group as a unit has not made an external sale. The
profit made by the selling entity is included in the cost of the closing inventory of the buying entity. The
profit on the sale of this inventory must be eliminated on consolidation. It is unrealized profit.
Unrealized profit is eliminated from the consolidated statement of financial position by:
a) Reducing the consolidated accumulated profit by the amount of the unrealized profit
b) Reducing the valuation of the inventory by the amount of the unrealized profit
In the consolidated statement of comprehensive income:
a) Reduce consolidated revenue by the amount of the intra-group sales (R)
b) Reduce the consolidated cost of goods sold by the intra-group sales (R) minus the amount of
unrealized profit in the closing inventory (P)
Revenue from intra-group sales
R
Unrealized profit in closing inventory of intra-group sales
P
-------------------Reduction in consolidated cost of goods sold
(R P)
This has the effect of reducing the consolidated profit or loss for the year by the unrealized profit in the
closing inventory.
When unrealized profit is stated as percentage mark up on cost, it is calculated as:
Unrealized profit = sales value X mark up% / mark-up% + 100%
Intra group loans and interest
It is quite common for group entities to lend money to other group entities, and to charge interest on
the loan.
If one group entity makes a loan to another group entity, the asset of the lender is matched by the
liability of the borrowers, and the asset and liability should both be eliminated on consolidation.
Any non-controlling interest in the subsidiary will be calculated taking the loan into account in
calculating the net assets of the subsidiary.
When one group entity makes a loan to another group entity, there may be accrued interest payable in
the statement of financial position of the borrower at the year end. This should be matched by interest
receivable by the lender. The current liability (interest payable) and the current asset (interest
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receivable) should therefore be self cancelling on consolidation, and both the asset and the liability
should be excluded from the consolidated balance sheet.
Note: if one of the entities has failed to record the accrued interest in its accounts, you should correct
this omission and record the transaction in the accounts of the entity where it is missing. Having
recorded the missing transaction, you can then cancel the matching asset and liability.
Non controlling interest and loans
The non-controlling interest in the equity of a subsidiary and the subsidiarys profit or loss for the year is
calculated on the assumption that the non-controlling interest is the relevant proportions of:
a) The subsidiarys net assets including the intra-group loan as an asset or liability
b) The subsidiarys profit or loss for the year including the interest as an expense or as income,
depending on whether the subsidiary is the borrower or the lender.
Consolidation for associates
An associate is defined by IAS 28 as: an entity over which the investor has significant influence that is
neither a subsidiary nor an interest in a joint venture.
Significant influence is defined as the power to participate in the financial and operating policy decisions
of the entity, but is not control or joint control.
a) IAS 28 state that if an entity hold 20% or more of the voting power of another entity, is
presumed that significant influence exists, and the investment should be treated as an associate.
b) If an entity owns less than 20% of the equity of other entity, the normal presumption is that
significant influence does not exist.
Accounting for associates and joint ventures
IAS 28 states that associates must be accounted for in consolidated financial statements using the equity
method of accounting. This rule applies whether or not the entity also has subsidiaries and prepares
consolidated financial statements.
The only exceptions to the requirement to use the equity method to account for investments in
associates are:
a) When the reposting entity presents separate financial statements in accordance with IAS 27
b) When the associate is acquired and held with a view to disposal within 12 months of acquisition
Statement of financial position: investment in the associate
In the statement of financial position of the reporting entity, an investment in an associate is valued at:
a) Cost
b) Plus the investors share of the retained post-acquisition profits of the associate or minus the
investors share of any post-acquisition losses
c) Minus any impairment in the value of the investment since acquisition
Muhammad Naseem

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Financial Reporting (PIPFA)

There is no separately recognised goodwill on acquisition of an investment in an associate. However, the
investment in the associate should be subject to an annual impairment review in accordance with IAS
36. Any impairment in the investment is deducted from the carrying value of the investment in the
statement of financial position and deducted from the reporting entitys retained earnings.
Statement of financial position: retained earnings
The retained earnings of the reporting entity, or the consolidated accumulated reserves when
consolidated accounts are prepared, should include;
a) The investors share of the post-acquisition retained profits of the associate
b) Minus any impairment in the value of the investment since acquisition
Statement of comprehensive income
In the statement of comprehensive income, there should be a separate line for:
Share of profits of associates
This is the share of the associates profits attributable to the owners of the associate. It is therefore a
share of the associates profits after tax and after any non-controlling interests in the equity of the
associate, where the associate has partly owned subsidiaries.
Unrealized profit in closing inventory
When the investor entity trades with an associate
a) The investor entity might owe money to the associate at the end of the reporting period, or be
owed money by the associate
b) Closing inventory might be held by the investor entity or by the associate that includes some
unrealized profit on sales between the investor entity and the associate
Inter entity balances should be included in the current liabilities or current assets in the consolidated
statement of financial position. In other words, inter-entity balances are not self canceling
Unrealized inter-group profit, however, any unrealized profit in closing inventory must be removed.
There should also be a reduction in the post-acquisition profits of the associate, and the investor entitys
share of those profits. This will reduce the retained earnings in the balance sheet.

Muhammad Naseem

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Financial Reporting (PIPFA)

Pass Papers
Summer paper 2011
Question # 07
Step 1:
Group structure
J : Parent
date of acquisition: 1st July 2009
F : subsidiary
shares are in million
8000/10000 * 100
80%
Step: 2

Net Assets
at acquisition
10,000
4,000
7,800

S. Capital
S. premium
R/E
Fair value adj:
Land 8000 *50%
Build. 8000 * 50%
Dep. on build.4000/10
Deferred tax
Inventory
Cost of investment
S. Capital
Deferred liability
Step: 3

4,000
4,000

4,000
4,000
(400)
(3,000)
nil
27,900

(3,000)
200
27,000
8000/4*3*5

Goodwill
cost of investment
Fair value of NCI

Less:

Net asset at acquisition date

Step: 4

NCI
Fair value of NCI
% of post acq. Profit (900 * 20%)

Step: 5

at end
10,000
4,000
9,300

30,000
6,500
36,500
36,500
4,500
41,000
(27,000)
14,000
4,500
180
4,680

Group reserve

Muhammad Naseem

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Financial Reporting (PIPFA)

closing balance of R/E of J
% of post acq. Profit (900 * 80%)

24,000
720
24,720

Consolidated Balance Sheet

Non CA
PPE (45000+18000+8000-400)
Franchise right
Financial assets
Good will

W. 2

70,600
2,000
21,000
14,000
107,600

W. 3

C.A
Inventory (18000+10000)
Trade receivable (15000+9000)

28,000
24,000
52,000
159,600

Net assets
Equity and liabilities
S. Capital (25000+6000)
S. Premium (10000+24000)
R/E & other reserves
NCI

W. 5
W. 4

31,000
34,000
24,720
4,680
94,400

Non C.L
Interest bearing borrowings
Deferred tax (2000+1500+3000) W. 2
C.L
Trade payable
Tax payable
Bank overdraft
provision
Deferred liability
W. 2

24,000
6,500
30,500
16,000
3,000
8,000
1,200
6,500
34,700
159,600

Question # 02 IAS 36 impairment

Good will
Cost of investment
F.V NCI
Net asset F.V at Acq
Good will

Muhammad Naseem

Impairment: carrying value less recoverable amount

270
75
345
(300)
45

CV: 420 + 45 = 465

impair loss 35 Dr
then impair will be
good will 35 Cr
465 - 430 = 35
remaining good will Rs. 10 m will be shown in B/S

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Financial Reporting (PIPFA)

Question # 3
For answer see IAS 1 of notes
Question # 4
For answer see IAS 10 of notes
Question # 06 IAS 02 inventory
Rs.000
785.00
735.00
404.60
1,924.60
(250.00)
1,674.60

Direct material
Direct labor
FOH
Total factory cost
Op. WIP
C/S WIP
Cost of goods production

Cost of production per unit = 1,674,600/ 8000 = 209.33

Closing stock value
5000 * 209 = 1,046,650/-

Winter paper 2011

Question # 2
Working
1. Cost of investment
5000 shares * 80% = 4000 shares
4000/2 * 1 * 100 = Rs. 200,000
2. Net assets
S. capital
R/E
F.V adjustment:
Plant
Dep. On plant

at acq.
50,000
250,000

at end
50,000
275,000

10,000

10,000
(2,500)
332,500

310,000

3. Good will
cost of investment
Fair value of NCI
net asset at acq
good will

200,000
70,000
270,000
(310,000)
(40,000)

Negative goodwill will not be impair & charge to P/L account (only parent %)
4. Fair value of NCI
1000 share * 70 = 70,000/-

Muhammad Naseem

5. Interim dividend
25000 * 2% = 500/-

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Financial Reporting (PIPFA)

6. Interest
20000 * 30% * 10% = 600/-

7. Profit of SL
30000 *100/120 = 25000
30000 - 25000 = 5,000/-

Consolidated income statement of PL group

Revenue
Cost of sale
Gross profit
Distribution exp
Admin exp
Finance cost
Other income
Profit before tax
Tax exp
Negative good will
Profit for the year

W. 7
W. 2 & 7

W. 5 & 6
W. 5 & 6

W. 3

Rs.
270,000
(138,000)
132,000
(35,000)
(21,000)
(2,400)
600
74,200
(16,700)
32,000
89,500

Question # 4 Partnership
All figures are in Rs. 000
1. Realization A/C
16,000
note payable
5,000
T. Payable
16,000
Bank O/D
26,000
P. C
19,800
10,320
6,880
100,000

Freehold premises
Plant & machinery
Inventory
T. Receivable
Cash received
Profit:
3/5 of K
2/5 of J

share in styles
cash

K
28,800
1,520
30,320

Freehold premises
Plant & machinery
Muhammad Naseem

2. Capital A/C
J
19,200
B/D
Profit
Cash
19,200

3. Balance Sheet
25,000
S. capital
5,000
cash

10,000
20,000
10,000
60,000

100,000

K
20,000
10,320
30,320

J
10,000
6,880
2,320
19,200

48,000
12,000
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Financial Reporting (PIPFA)

Inventory
T. Receivable
good will

16,000
26,000
8,000
80,000

T. Payable

20,000

80,000

Question # 5
For answer see IAS 1 of notes
Question # 6
It is finance lease under sale and lease back
Under IAS 17 rule is that if fair value is grater than the carrying value
Then deferred profit will be there and it will amortize over lease terms
Sold
Cost
Profit

FV > CV

215
200
15

This will be amortized over lease terms mean over 5 years

Cash

215 Dr
Asset
200 Cr
Deferred profit
15 Cr

asset sub to FL
OUFL

215
215

Dr
Cr

1 year will be charge

15/5 = 3
Deferred profit
P&L a/c

3 Dr
3 Cr

Summer paper 2010

Question # 01
Step 1- Group structure
80%
Acquisition date 1st Jan 2007
Step 2- Net Asset
At acq.
S. capital
100,000
R/E
20,000
Fair value adjustment:
Muhammad Naseem

At end
100,000
40,000

Step 4 - NCI
Fair value of NCI
30,000
% of NCI post acq. Profit 13,000 * 20% 2,600
% of NCI impairment 20,000 * 20%
(4,000)
28,600
Step 5 - Group Reserve
O/B
100,000
% of P in Post Acq. Profit 13000 * 80% 10,400
% of P in impairment 20000 * 80%
(16,000)
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Financial Reporting (PIPFA)

Intangible asset
PPE
Depreciation

(15,000)
5,000
110,000

(30,000)
15,000
(2,000)
123,000

PURP 12,000 * 1/3 * 25%

(1,000)
93,400

Note: the intangible assets of S are all of a type where recognition would not be permitted under IAS
38 that's why all intangible assets will be zero.
Step 3 - Goodwill
Consolidated Balance Sheet
Total asset
Cost of investment
100,000
PPE
150,000
Fair value of NCI
30,000
adj. of fair value (w-2)
13,000
130,000
net current assets (w-5)
79,000
Net asset at acquisition date (110,000)
242,000
20,000
Equity & liability
Impairment loss
(20,000)
share capital
120,000
Nil
R/E
w-5
93,400
NCI
w-4
28,600
242,000

Question # 2
Part 1 under IAS 37 provision should be provided
Because
Present obligation
court fee
100,000
Probable out flow
replaced cost 400,000 * 70%
280,000
Measurement reliable
repair cost 15000 * 30%
4,500
Provision should be
384,500
Part 2
Under IAS 37 provision should be provided
Because
Present obligation
repair cost 12000 * 5% *1/3 * 1000
200,000
Probable out flow
replaced cost 12000*5%*2/3*10000 4,000,000
Measurement reliable
Provision should be
4,200,000
Part 3
Option # 1
Option # 2
Cost 3,000 +1,000 = 4,000
If 3,500 4,000 = 500
15,000 + 150,000 = 300,000/Cost will be 500 * 1,000 = 500,000/Provision should be option # 2 Rs. 300,000/-

Question # 3
Goodwill
Cost of investment
2,200,000
Fair values 1.85 * 90% (1,665,000)
535,000
Carrying value 1,300 +200+250+535
Muhammad Naseem

Allocation of impairment loss

G.W
C.D.E
CV
535
200
Allocation
(347) (200)
188
-

PPE
1,300
(178)
1,122

NCA
250
250

2,285,000
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Financial Reporting (PIPFA)

Recoverable amount
Impairment loss

(1,550,000)
735,000

Question # 4
Statement of comprehensive income
2009
2008
Sale
104,000
73,500
Cost of good sold (80,000)
(60,000)
Gross profit
24,000
13,500
Tax 30%
(7,200)
(4,050)
PAT
16,800
9,450
Statement of financial position
2009
NCA
40,000
CA
22,000
62,000
S.Capital
R/E
CL

Statement of changes in equity

Opening R/E
20,000
adj of fraud in 2008 (10,000)
Restated R/E
10,000
profit of 2008
9,450
19,450
profit of 2009
16,800
36,250
2008
30,000
7,500
37,500

5,000
36,250
20,750
62,000

5,000
19,450
13,050
37,500

(15,000 + 4,050 6,000)

For 2009 CL will be (20750 + 7200 5250 (6500 * 30%))

Question # 7
Contract price
Cost to date
Further cost
Less: rectification cost
Total cost
Estimated G.P/loss
Attributable profit/loss

A
5,000
1,000
3,000
4,000
(100)

B
4,000
800
2,200
3,000
-

3,900
1,100

G
4,500
3,000
3,000
6,000
-

3,000
1,000

900/3,900*100 800/3,000*100
23.08%
26.67%

C
10,000
4,500
4,500
-

6,000
(1,500)
3,000/6,000*100
50%

4,500
5,500
-

Income statement
Revenue (%)
cost
G.P/Loss

Muhammad Naseem

A
1,154
(900)
254

B
1,067
(800)
267

G
2,250
(3,000)
(750)

C
10,000
(4,500)
5,500

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Financial Reporting (PIPFA)

Balance Sheet
A
900
(2,500)
254
(1,346)

cost to date
Prog. Billing
profit/loss

Question # 8

B
800
(1,500)
267
(433)

G
3,000
(2,000)
(750)
250

C
4,500
(2,000)
5,500
8,000

(All figures are Rs 000)

1-Jan-08
Land
60 DR
Revaluation 60 CR
Building
Revaluation
31-Dec-08
Land
Revaluation

33 DR
33 CR
20 DR
20 CR

Building
2 DR
Revaluation 2 CR

Build. Dep
Acc. Dep

4 DR
4 CR

revaluation
R/E

1 DR
1 CR

120/40 = 3
99 -132 = 33

80 -60 = 20
132 - 4 = 128
130 - 128 = 2
132 / 33 = 4

Extract income statement

dep
R.S

Extract Balance sheet

NCA
land
building

Muhammad Naseem

3 x 7 = 21 - 120 = 99

extra dep 4 - 3 = 1 will charge to I/S

4
(1)
3

160
130
290

equity & liability

revaluation surplus
R/E

114
3
117

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Financial Reporting (PIPFA)

Winter paper 2010

Question # 5
Cash flow statement
CF Operating activities
Net profit
w-1
Adjustments:
Add: Dep. Exp
w-2
Amortization exp of GW
Provision of tax
Gain on disposal
Net CF from Operating. Act
BWC item change
Increase in debtors
Increase in stock
Increase in creditors
Tax paid
w-3
Interest paid

Rs. 000
115

Rs. 000

275
150
50
(55)
535
(200)
(100)
30
(45)
(33)
187

CF from investing Act.

Sale of Fixed asset
w-4
Purchase of FA
w-5

140
(1,030)
(890)

CF from financing Act.

Issue of S. capital
Increase in S.P
Increase in LTL
Dividend paid
w-6
Cash & Cash equitant
Opening balance
Closing balance of cash

500
250
100
(90)
760
57
57

Working
1-

Retained earning

Muhammad Naseem

4-

Disposal of Plant
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Financial Reporting (PIPFA)

Dividend 170

O/B

460

o/b

130

Acc. Dep

45

c/b

b/d

115

profit

55

sale

140

405
575

2-

510

185

Depreciation a/c

5-

185
Fixed assets

Disposal

45

O/B

470

o/b

2,000

plant

130

c/b

700

b/d

275

cash

1,030

c/b

2,900

745
3-

745

3,030

Tax a/c

6-

3,030
Dividend

P&L a/c

50

o/b def

150

cash

90

o/b

120

c/b def

100

o/b C.T

200

c/b

200

for year

170

c/b C.T

245

cash

45

395

290

290

395

Check cash flow question with your teacher

Question # 6
Year 2009

Rs. (000)

Asset
PPE
Prepaid Exp
R&D
Liability
Adv. Income
Loan
Accrued Exp

CV
150,000
3,500
5,000

TB
109,000
-

TD
41,000
3,500
5,000

TTD
41,000
3,500
5,000

(2,000)
-

(2,000)
-

49,500

Deferred tax liability

TTD (49500 x 35%)
Deferred tax asset
DTD (2000 x 35%)
C/F unused loss (250000 x 35%)
Net deferred tax
O/B deferred tax
Deferred tax income
Muhammad Naseem

DTD
(2,000)
(2,000)

17,325
(700)
(87,500)
(70,875)
(70,875)
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Financial Reporting (PIPFA)

Deferred tax asset
To deferred tax income

70,875
70,875

Year 2010

Rs. (000)

Asset
PPE
Prepaid Exp
R&D
Liability
Adv. Income
Loan
Accrued Exp

CV
135,000
4,000

TB
92,650
-

(9,100)
(1,500)

(10,000)
-

Def. tax liability

TTD (47250 x 35%)
Deferred tax asset
DTD (1500 x 35%)
Net deferred tax
Less: O/B 2009
Def. tax exp

Dr
Cr

109000 x 15% = 92650/TD

42,350
4,000

TTD
42,350
4,000

900
(1,500)

900
47,250

DTD
(1,500)
(1,500)

16,538
(525)
16,013
(70,875)
86,888

it add as it is income

Deferred tax
---------------------------------------------------------------------------------------------O/B
70,875
Exp
86,888
C/B
16,013
86,888
86,888

Accounting profit
Add: DTD (2000 - 1500)
Less: TTD (49500 - 47250)

450,000
(500)
2,250
451,750
(250,000)
201,750
70,613

CFUTL
Taxable profit
Current tax (201750 x 35%)

Current tax exp.

To C.T provision
Muhammad Naseem

70,613
70,613

Dr
Cr
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Financial Reporting (PIPFA)

Question # 7
Loan

500 x 15% x 5/12 = 31.25

500 x 17.5% x 3/12 = 21.88
Actual cost of borrowing
53.13
Less: investment income
(12 -5)
(7.00)
Net borrowing cost to
Capitalized
46.13
Add: cost incurred
350.00
Cost of W.I.P
396.13

Best of luck for your studies and exam

Muhammad Naseem

Page 71