Chapter 10 : Share Based Payment

Type of share-based payment

1. Share-based payment transactions are awards of shares or options to key management
personnel;
 They are of particular interest to investor and other stakeholders
2. Share option is a contract which gives the holder the right to purchase a share for a
defined price at some point in future.
 Holder can purchase a share below market price.
#Example
Company A issues 100 shares option to each of its employees as part of their remuneration
package. Each share option gives the employee the right to purchase on share in Company A
in two years time for $2.50, subject to the employee remaining in employment with Company
A until then.

Suppose that Company A’s current share price is $4.50. The share option is clearly valuable
to the employee because of it stands, the employee could purchase a share for $2.50 which is
much less than current market price of $4.50. The share option is said to be ‘in the money’

However, suppose that Company A’s share price falls to $2.00. The share option is now
effectively worthless because the employee would be better to purchase Company A’s shares
on the stock market for less than the option price. This share option is said to be ‘out of
money’

Definition
1. Share based payment transaction
 Transaction which entity receives goods or services as consideration for equity
instrument of the entity
 Acquires good or service by incurring liabilities to supplier that based on the price
of entity shares.
2. Share based payment arrangement
 Agreement between entity and another party to enter into a share based payment
transaction.
3. Equity instrument granted.
 Right to an equity instrument of the entity conferred by the entity on another party
based on share based payment arrangement.
4. Fair value
 Amount which asset could be exchanges, liability to be settled or equity
instrument granted could be exchanges.
5. Grant date
 Date entity confer equity instrument to other party.
6. Vest
 Specified vesting conditions for the another party to have right to received cash,
asset or equity instrument.
7. Vesting condition
 Condition that must be satisfied by counterparty to become entitled to received
cash, asset or equity instrument.
8. Vesting period
 Period that all specified vesting condition of share-based payment arrangement to
be satisfied
Type of share-based transaction
1. Equity settles share-based payment
 Entity received good / service as consideration for equity instrument of the entity
 Settles the amount set by provide equity instrument (issuing shares)
 Price fix
2. Cash settles share-based payment
 Entity acquires good or service by incurring liabilities to the supplier for amount
that based on the price of the entity shares or other instrument.
 Settle the amount based on the equity instrument that mentioned in contract.
 Non price fix.
3. Transaction with a choice of settlement
 Entity receives or acquires good or service and the term of the arrangement
provide either the entity or the supplier with a choice whether the entity settles the
transaction in cash or by issuing equity instrument.

Share based payments among group entities

1. Payment for goods or service by subsidiary may be made by granting equity
instrument of its parent company of another group company
2. Transaction are within the scope of IFRS 2.
Recognition
1. Entity should recognised good or service received or acquired in share based payment
transaction when:
 Entity obtains good
 Service are received.
2. Good and service acquired or received in share based transaction should recognised
as expenses.
 Equity- settled => increase in equity
- Dt Expenses ; Ct Equity
 Cash – settled => increase in liability
- Dt Expenses ; Ct Liability
3. Recognise transaction which services are received.
 If granted equity instrument vest (satisfy)immediately – presumed service already
been received – full expense recognised on grant date.
 Still in vesting condition not yet satisfy – expenses spread over the vesting
period.
# example, Employee may be required to complete three years of service before becoming
unconditionally entitled to a share-based payment. Expenses is spread over this three year.

Measurement
1. Measure the expenses
2. Direct Method
 Use fair value of goods or service received.
3. Indirect Method
 By reference to the fair value of the equity instrument (share option) granted.
 Equity settles => use fair value at grant date and do not update for subsequent
change in fair value
 Cash settles => update the fair value at each year with changes recognised in
profit or loss
4. Indirect usually used for employee service => not possible to measure directly the
service received.
5. Fair value of equity instrument should based on market price.
6. Any changes in estimated of the expected number of employees being entitled to
receive share-based payment treated as change in accounting estimate and
recognised in period of change.
Transaction with Employees
1. Share based payment should spread over vesting period and measured using
indirect method.
2. First year of share based payment, expense is equal to the equity or liability balance at
year end.

3. Subsequent year, expenses calculated as the movement in equity and liability:

Accounting for equity settled share based payment

1. 1st years
 Total employees – employee estimated leave
 Share option per employee * share option value
 1st year / vesting period
2. 2nd years
 Total employees – employee estimated leave (change)
 Share option per employee * share option value
 2nd year / vesting period
3. 3rd years
 Total employee – actual employee leave
 Share option / employee * share option value
 3rd year / vesting period.

1. Accounting entry
 Dt expenses
 Ct equity

Accounting for cash settled share based payment transaction

1. Example of cash settles share based payment transaction
 Share appreciation right to employee – employee entitled to future cash payment
based on increase in share price
 Right of shares that are redeemable – entity grant to its employees a right to
receive future cash payment by granting to them a right to shares that are
redeemable.
Entity choice to settlement
1. Entity has choice
 Whether to settle the share based payment in cash or by issuing shares.
 Whether there is a present obligation to settle the transaction in cash.
2. If there is present obligation to settle in cash
 Treat as cash settled share based payment
3. If there is NO present obligation to settle in cash
 Treat as equity settled share based payment

Counterparty to settlement
1. Counterparty has choice
 Whether the share based payment settled in cash or shares.
 Granted compound financial instrument
2. Debt Component
 Cash settled transaction
3. Equity component
 Measure as residual value at grant date

Choice to settlement
1. Entity choice – performance obligation
2. Counterparty choice – granted compound financial instrument
 Debt component
 Equity component
Vesting Condition
1. Condition must be satisfied for the counterparty to entitle to receive payment under a
share based payment
2. Type of vesting condition
 Service condition
 Performance condition
 Market Condition

Service Condition
1. Counterparty required to complete a specified period of service
2. Employee to be on job for a time period.

Performance Condition
1. Example
 Achieve a specific growth in profit or earnings per share.
2. Amount recognised based on best available estimates of number of equity instrument
to vest.
3. Vesting period may vary.
 Cannot have a reliable estimate period to estimate the growth.
4. Share based payment equity is accrued over the period based on most likely outcome
of which target will be met, revised at each period.

Market Condition
1. Market condition – acheve target share price are not taken into consideration.
2. Entity recognise share based payment from a counterparty who satisfies all other
vesting condition (employee service period) of whether a target share price has been
achieved.
Deferred tax implication
1. Entity may receive tax deduction that differs from related cumulative remuneration
expense which arise in later accounting period.
2. Example
 Entity recognise expenses for share option granted under IFRS 2, but does not
receive a tax deduction until the options are exercised and receives the tax
deduction based on the share price on the exercise date.
Measurement

1. If amount tax deduction exceed amount of cumulative expenses, this indicates that the
tax deduction relates also to an equity item
2. This excess therefore recognised directly in equity (not in OCI)
Chapter 11: Basic Groups
Consolidated Financial Statement
1. Requires parent to present consolidated financial statement which combine parent and
subsidiaries and presented as single economic entity.
2. Individual financial statement of parent, subsidiaries should prepared in same
reporting date.
 Difference of reporting date not greater than 3 month
 Adjustment are made for the effect of significant transactions in the intervening
period
 The length of reporting periods and any difference in the reporting dates must be
the same from period to period.

Exemption (parent need not present consolidated financial statement)

1. Parent is a wholly owned subsidiary of other entity.
2. Debt or equity instrument are not publicly traded.
3. Parent did not file or is not in the process of filling its financial statement with a
regulatory for the purpose of publicly issuing financial instrument.
4. The ultimate or any intermediate parent produces financial statements available for
public use that comply with IFRS including all subsidiaries.

Accounting treatment in separate financial statement of the investor.

1. IAS 27: Separate Financial statement sin investment in a subsidiary, associate or joint
venture can be carried in the investor’s separate financial statement either:
 At cost
 At fair value
 Using equity method. – apply in individual financial statements of investor when
entity has investment in associate or joint venture but does not prepare
consolidated financial statements as it has no investment in subsidiaries.
Subsidiaries
1. When an entity has control on another entity, the another entity is subsidiary.
2. Control
 Power to direct relevant activities
- Voting right, right to appoint management, right to involve in decision making
- Direct good to sales or purchase, selecting & acquiring asset
 Right to variable returns
- Dividend, interest from debt, change in value of investment
 Ability to use power to affect amount of return
- Have ability to direct investee.

Exclusion of a subsidiary from the consolidated financial statements

1. IFRS 10 NOT permit entity meeting the definition of subsidiary to be excluded from
consolidated financial statement.
Reason director not want to consolidate IFRS Treatment
Subsidiary activities not similar to rest of Should be consolidated. Adequate
the group disaggregated information is provided by
disclosures under IFRS 8 Operating
Segments

Control is temporary as the subsidiary was Should be consolidated. Principles in IFRS

purchased for re-sale 5 Non current asset held for sale and
discontinued operations should be applied.

Reduce apparent gearing by not Should be consolidated. Excluding the

consolidating subsidiary’s loan subsidiary would be manipulating the
Subsidiary is loss-making group’s results and would not give a true
and fair view.

Severe long-term restriction limit the Consider parent ability to control the
parent’s ability to run the subsidiary subsidiary; if not controlled – not
consolidated.

2. When parent is investment entity – investment in subsidiaries are not consolidated

& held at fair value through profit or loss.
 Investment entity account all of its investment at fair value through profit or loss.
Definition of investment entity
 Obtain fund from one or more investor for the purpose of providing those investor
with investment management service.
 Commits to its investor that its business purpose is to investment fund solely for
return from capital appreciation, investment income or both
 Measures and evaluate the performance of substantially all of its investment on a
fair value basis.
Adjustment for intragroup transactions with subsidiaries.
IFRS 3 Business Combination
1. Business Combination
 Transaction or other event in which an acquirer obtains control of one or more
business.
2. Definition of Business
 Input + Substantive Process = Ability to contribute to the creation of outputs

3. Meet definition of business

 Meet definition – Business Combination apply acquisition accounting
 Not meet definition – Account for as asset acquisition
Acquisition Method
1. Identify acquirer: parent
2. Determining acquisition date
3. Recognised and measure identifiable asset acquired, liabilities assumed and any non-
controlling interest in subsidiary
4. Recognise and measuring goodwill or a gain from a bargain purchase.

# Identify Acquirer
Measure non-controlling interest at acquisition
1. Non-controlling interest measured at acquisition date through
 Proportionate share of fair value of net asset
 Fair value
Measure NCI at acquisition date at Impairment of goodwill
proportionate share of the fair value of  Deduct all cumulative impairment
the net asset losses from goodwill
 Post all of cumulative impairment
losses to retained earnings working

Measure NCI at acquisition date at fair Impairment of goodwill

value (number of share owned by NCI *  Deduct all of cumulative impairment
share price) losses from goodwill
 Post the group share of cumulative
impairment losses to the retained
earning working and the NCI share
of impairment losses to NCI
working

Consolidated statement of financial position

Purpose Show the asset and liabilities which the parent controls and the
ownership of those asset and liabilities

Asset & Liabilities Always 100% of parent + 100% of subsidiary

Goodwill Consideration transferred + non controlling interest – fair value

of net asset at acquisition date

Share Capital Parent Only

Reserve 100% of parent + group share of post acquisition retained

earning of subsidiary + consolidation adjustment.

Non Controlling Interest NCI at acquisition + NCI share of post acquisition in changes
in equity
Working
1. Goodwill

2. Retained Earning

3. Non controlling Interest

Consolidated Statement of profit or loss and other comprehensive income
Associates
1. Associate
 Entity over which the investor has significant influence
2. Significant influence is the power to participate in the financial and operating policy
decisions of the investee but is not control or joint control over those policies.
 Representation on BOD
 Participate in policy making process
 Material transaction between entity and investee
 Interchange of managerial personnel
 Provision of essential technical information
3. Investor hold 20% or more voting power.

Equity Method
1. Only group share of associates profit for the year and other comprehensive
income included in conso.
2. Consolidated statement of financial position should show a non-current asset
(investment in associates)

3. Intra group transaction

 Intragroup transaction and balance NOT eliminated.
 Unrealised profit depend on whether parent or associate made the sale
Fair Value
Goodwill
1. Calculation

2. Both the consideration transferred and the net asset at acquisition must be measured at
fair value.
3. Negative goodwill = bargain purchase
 Recognized as gain in profit or loss
 Recognized in retained earnings
4. Goodwill only adjusted for the correction of errors.
 Adjustment made when acquirer receives all the necessary information
 Measurement period cannot exceed one year from the acquisition date.

Fair Value of consideration transferred

1. Consideration include
 Asset transferred to buy another entity
 Liabilities incurred to buy another entity
 Equity issued
Deferred Consideration Discounted to present value to measure its fair value

Contingent Consideration Initial Measure – measure at fair value at acquisition date

(to be settled in cash or
shares) Subsequent Measure
1. If the change is due to additional information obtained
that affects the position at acquisition date, goodwill
should be remeasured
2. If the change is due to any other change, Exp meeting
earning targets
 Consideration is equity instrument – no remeasure
 Consideration is cash – remeasure to fair value
with gain or loss through profit or loss
 Consideration is financial instrument – account for
under IFRS 9

Transaction Cost Not include in goodwill calculation.

Recognize as expenses
Fair Value of identifiable asset acquires and liabilities assumed
1. General rule
 Subsidiary’s Asset and liabilities must measured at acquisition date fair value
except in limited case
2. Criteria to measured at acquisition ate fair value
 Meet definition of asset and liabilities
 Be part of what acquirer and acquiree exchanged in the business combination.
3. EXCEPTION to recognition or measurement in IFRS 3
Item Valuation Basis
Contingent liabilities Recognized when:
 Present obligation
 Fair value can measured reliably
(not normally recognized but only disclosed)

Deferred tax asset / Measurement based on IAS 12 values

liabilities

Employee benefit asset/ Measurement based on IAS 19 values

liabilities

Indemnification asset Valuation is the same as the valuation of contingent liability

(amount recoverable related indemnified less an allowance for any uncollectable
to a contingent liability) amounts.

Reacquired rights (license Fair value based on remaining term, ignoring the likelihood
granted to subsidiary before of renewal.
it became a subsidiary)

Share-based payment Measurement based on IFRS 2

Asset held for sale Measurement at fair value less cost to sell
IFRS 5
Chapter 12: Changes in group structure: step acquisition
Step Acquisition
1. Parent may build up shareholding with several successive share purchase rather than
purchasing the shares all on the same day.
2. IFRS 3 Business Combination refer to controlling interest built up over time period.
 Business combination achieved in stages
 Step acquisition

 Investment to subsidiary (10% holding to 80% holding)

 Associate to subsidiary (30% holding to 80% holding)

3. Change in group structure

 Entity’s status during the year will determine the accounting treatment of SOPL
 Entity status at year end determine accounting treatment in SOFP.
Step Acquisition where control is achieved
Accounting Concept
1. An investment or associate has been sold
 Investment previously held is remeasured to fair value at date of control and a
gain or loss reported
2. A subsidiary has been purchased
 Goodwill is calculated including the fair value of the investment previously held

Treatment in group account

1. Investment to subsidiary (10% holding to 80% holding)
 CSOPL – Remeasure investment at fair value at date achieve control ; Conso
when achieve control
 CSOFP – Calculate goodwill at the date the parent achieve control; conso at year
end.
2. Associate to subsidiary (30% holding to 80% holding)
 CSOPL – Equity account as an associate to the date parent achieve control;
remeasure the investment in associate to fair value at date achieve control;
consolidate when obtain control
 CSOFP – Calculate goodwill when obtain control; Conso at year end

Step acquisition where significant influence is achieved

Investment to associate (10% holding to 40% holding)
1. Accounting treatment
 Investment measured either cost or fair value is treated as part of cost of
associate
 CSOPL – equity account as an associate from the date significant influence is
gained
 CSOFP – equity account as an associate
Step acquisition where control is retained
Subsidiary to Subsidiary (60% to 70% holding)
1. Step acquisition where control is retained = increase in controlling interest
2. Concept
 No acquisition because entity still a subsidiary
 Is transaction between group shareholders
3. Recorded in equity
 Decrease of non controlling interest in consolidated SOFP
 Recognize difference between the consideration paid and the decrease in NCI as
an adjustment to equity (post to parent’s column in the consolidated retained
earning)

Accounting Treatment in group financial statement

1. Statement of profit or loss and other comprehensive income
 Consolidate as subsidiary in full for the whole period
 Time apportion non-controlling interest based on percentage before and after the
additional acquisition.
2. Statement of financial position
 Consolidate as subsidiary at year end.
 Calculate Non controlling interest

 Calculate adjustment to equity

3. Double Entry
Chapter 13: Changes in group structures: Disposal
Disposal
1. Parent sell some or all of its shareholding in a group company
 Full disposal – sell all
 Partial disposal – sell some
2. Outcomes
 Control retained – Subsidiary to subsidiary
 Control lost – Full disposal (subsidiary to shareholding)
 Control lost – Subsidiary to associates
 Control lost – subsidiary to investment
3. Entity status (investment, subsidiary, associate) during the year will determine the
accounting treatmenet in SOPL
4. Entity status at the end of the year determine the accounting treatment in SOFP

Subsidiaries: Disposal where control is lost

Accounting Treatment
1. Full disposal
a. SOPL –
- Conso the result & NCI to date of disposal;
- Show group profit or loss on disposal
b. SOFP –
- Former subsidiary is not consolidated as parent not control at reporting date;
- if parent has no other subsidiaries, then no consolidation after disposal.
2. Partial disposal – Subsidiary to Assiaociate
a. SOPL –
- Conso as subsidiary to date of disposal;
- show group profit or loss on disposal;
- treat as associate thereafter
b. SOFP –
- Remeasure investment retained at fair value at date of disposal;
- equity account thereafter (fair value at date of control lost = cost of associate)
3. Partial Disposal – subsidiary to investment
a. SOPL
- Conso as subsidiary to date of disposal
- Show group profit or loss on disposal
- Treat as investment in equity instrument thereafter (show fair value changes in
P/L or OCI)
b. SOFP
- Remeasure the investment retained to fair value at date of disposal
- Investment in equity instrument (IFRS 9)

Calculation of group profit or loss on disposal

Treatment of amount previously recognized in other comprehensive income
1. IFRS 10
 If parent loses control of subsidiary, parent shall account for all amount previously
recognized in other comprehensive income in relation to that subsidiary on the
same basis as would be required if the parent had directly disposed of the related
asset or liabilities.
Treatment if parent Example Treatment in group
disposed of related asset & financial statements on
liabilities loss of control of
subsidiary
Items that are reclassified Investment in debt Reclassify previous
from OCI to P&L instruments held to collect remeasurement gains or lose
cash flow and sell where the on the investment in debt
cash flows are solely the instrument from OCI to
principal and interest. P&L (as part of group profit
on disposal)

Items that will never be Revaluation surplus on PPE, Reclassify revaluation

reclassified to P/L but where where parent elects to surplus to retained earning.
a transfer within equity is transfer the revaluation
permitted on disposal surplus to equity to retained
earning on disposal.

Accounting Treatment in parent separate financial statements

1. The treatment in parent’s separate financial statements follows the legal form of the
transaction. Treatment in parent’s separate financial statements is the same
whether or not control is lost.
2. Profit or loss on disposal difference from group profit or loss on disposal:
Subsidiaries: Disposal where control is retained
1. Disposal where control is retained
 Decrease in parent shareholding in an existing subsidiary
2. Treatment
 No disposal because entity still a subsidiary
 No profit on disposal recognized.
3. Transaction between equity holders of the group:
 Increase non controlling interest in SOFP
 Recognize difference between consideration received and the increase in NCI as
an adjustment to equity
Accounting Treatment

Non Controlling Interest

Adjustment to Equity

Increase in NCI***

Journal Entry
Deemed Disposal
1. Deemed disposal
 Occur when subsidiary issues new shares and parent does not take up all of it
rights such that its holding is reduced
2. This is disposal and is accounted:
 Percentages owned by parent before and after must be calculated.
 When control lost, group profit on disposal must be calculated.
3. Exercise

Associate
Significant Influence Lost
1. Associate to investment
a. SOPL
- Equity account as an associate to date of disposal
- Show group profit or loss on disposal
- Show fair value changes (any dividend income)
b. SOFP
- Remeasure investment remaining to fair value at date of disposal
- Investment in equity instrument (IFRS 9)

Group Profit or Loss on disposal where significant influence lost

Chapter 14: Non current Asset held for sale and discontinued operation
IFRS 5 Npn Current Asset held for sale and discontinued operation
1. IFRS 5 Cover
 Measurement, presentation and disclosure of non-current asset and disposal
groups of an entity;
 Presentation and disclosure of discontinued operations.
2. IFRS 5 recognised non-current asset and disposal group. Except
 Deferred tax asset
 Asset arise from employee benefits
 Financial Asset within the scope of IFRS 9
 Investment properties accounted for under the fair value model
 Biological assets measured at fair value
 Contractual rights under insurance contract.
3. Disposal Group
 A group of asset to be disposed of, by sale together as a group in a single
transaction and liabilities directly associated with those assets that will be
transferred in the transaction.

Classification of non current asset held for sale

1. Entity shall classify a non-current asset as held for sale if its carrying amount will be
recovered through a sale transaction rather than through continuing use.
2. Criteria to be classified as held for sale:
 Asset available for immediate sale in its present condition, subject to usual and
customary sale terms.
 High probable of sales: (PUMAS)
- Price of asset is actively marketed for sale must be reasonable to its current
fair value.
- Unlikely that significant changes will be made to the plan.
- Management has committed to a plan to sell.
- Active programmed to locate a buyer and complete the plan must be initiated.
- Sale expected to qualify for recognition as a completed sale within one year
from the date of classification as held for sale.
1. Asset available for immediate sale in its present condition
2. PUMAS
 Price Reasonable
 Unlikely to significant change
 Management committed to sell
 Active programmed to locate buyer
 Sale recognition as completed sale within one year.
Measurement and Presentation of Non-current asset classified as held for sale
1. Step 1: Asset measured in accordance with applicable IFRS accounting standard (PPE
held under IAS 16 revaluation model)
2. Step 2: Classification as NCA held for sale, written down fair value less cost to sell
(if less than carrying amount)
 Any impairment loss charged to profit or loss and the credit allocated to asset of a
disposal group using the IAS 36 rules.
 Example: First to goodwill then to other asset pro rate based on carrying amount
3. Step 3: No depreciation on NCA held for sale
4. Step 4: Subsequent changes in fair value cost to sell are recognized as further
impairment loss.
 Gain recognized cannot exceed cumulative impairment losses.
5. Presented:
 Single amount
 On the face of SOFP
 Separately from other asset and liabilities
 Normally as current asset and liabilities

IFRS 5 Inconsistent with other accounting standard

1. Step 2: impairment loss is allocated using IAS 36 rules.
 IAS 36 restrict impairment losses allocated to asset by requiring that an asset is
not written down to less than higher of its fair value less cost of disposal, its value
in use and zero.
 However, in disposal group, there may be instances in which a decrease in value
necessitates that a non-current asset within the group falls below the lower of its
fair value less cost of disposal or value in use.
 IFRS Interpretations Committee stated that IAS 36 not apply when allocating
impairment loss for a disposal group to the non-current asset. That within the
scope of the measurements requirements of IFRS 5.
2. Step 4: further impairment loss on the initial and subsequent measurement of held for
sale asset are accounted in profit or loss even if the asset had previously revalued.
 Inconsistent with the treatment of revalued assets under IAS 16 and IAS 38 which
require subsequent decrease on revaluation to reduce any revaluation surplus first.
 IFRS 5 – further change in fair value recognized as impairment loss
 IAS 16 / 38 – Further change in fair value recognized to reduce any revaluation
surplus first.
Disclosure
1. Separate presentation of non current asset held for sale and liabilities directly
associated with asset held for sale in the statement of financial position,
2. Any cumulative income or expense recognized in other comprehensive income
relating to a non current asset held for sale presented separately in reserves section of
statement of financial position.
3. To disclosed in notes
 Description of NCA
 Description of the fact of the sale. (expected manner and timing to dispose)
 Gain or loss recognized on asset classified held for sale
 Operating segment in which non-current asset is presented in accordance with
IFRS 8 Operating segments

Format
Non Current Asset to be abandoned 放弃 b
1. Not classified as held for sale – as carrying amount will be recovered principally
through continuing use.
 Asset used to end of economic life
 Asset going to closed.
2. However, if the disposal group meet the definition of a discontinued operation, it is
presented as such at date it ceased to be used.

Discontinued Operations
1. Component of entity that either has been disposed of or is classified as held for sale
 Represent a separate major line of business or geographical area of operation
 Is part of a single coordinated plan to dispose of a separate major line of business
or geographical area of operations.
 Is a subsidiary acquired exclusively with a view to resale.
2. Component Entity
 Part that has operations and cash flow that can be clearly distinguished,
operationally and for financial reporting purposes from the rest of entity.

Presentation and Disclosure

1. Statement of profit or loss and other comprehensive income
 Single amount comprising the total of:
- Post tax profit or loss of discontinued operations
- Post tax gain or loss recognized on the remeasurement to fair value less cost to
sell or on the disposal of asset comprising the discontinued operations.
2. Financial Statement
 Revenue, expenses and pre tax profit or loss of discontinued operation and the
related income tax expense.
 Gain or loss recognized on the measurement to fair value less cost to sell or on the
disposal of asset comprising the discontinued operation and related income tax
expense.
 The net cash flow attributable to the operating, investing, and financing activities
of discontinued operations.
Format of SOPL
Subsidiaries Held for Sale
1. When entity is committed to sale plan involving loss of control, but a retention of a
non controlling interest, the asset and liabilities of the subsidiary are still classified as
held for sale and disclosed as discontinued operation, when the respective criteria met.

Subsidiaries acquired exclusively with a view to resale

1. Not exempted from consolidation
OR
2. Still classified as discontinued operation
3. If resale expect to take place within one year and high probable that criteria met
presented as disposal group held for sale.
4. Assume criteria for held for sale met
 Asset & liabilities of subsidiary remeasured to the lower of cost and fair value less
cost to sell
 Present separately from other assets and liabilities as held for sale in consolidated
statement of financial position.
 Single amount comprised of subsidiary post tax profit or loss for period plus the
profit or loss on remeasurement to Fair value less cost of disposal (profit from
discontinued operations)
#Example
Alberta Co acquires a subsidiary Shallot Co. Shallot Co is acquired exclusively with a view
to sale and meets the IFRS 5 criteria to be classified as held for sale. Shallot Co is also a
discontinued operation. Alberta Co is not an investment entity.

The fair value less cost to sell of Shallot is $135 m. Alberta Co should account for Shallot
Co:

1. Initial recognition, Alberta measure identifiable liabilities of Shallot at fair value of

$40 million.
2. Alberto measures the acquired asset as fair value less cost of sell (135m) plus the fair
value of liabilities (40m).
3. At end of reporting period, Alberta Co remeasures Shallot Co at lower of its cost and
fair value less cost to sell. (Exp: 130)
4. Alberto should present the asset and liability separately from other asset and liabilities
5. In SOPL, Alberta present the total profit after tax of Shallot and gain or loss on
remeasurement (135-130).
Chapter 15: Joint Arrangement
Joint Arrangement
1. Arrangement in which two or more parties have joint control.
2. Characteristic
 Parties are bound by a contractual arrangement
 Give two or more parties joint control of the arrangement

Contractual Arrangement
1. Existence of contractual agreement distinguish a joint arrangement from an
investment in an associate. If there is no contractual arrangement then a joint
arrangement does not exist.
2. Contractual arrangement deals with:
 Purpose, activity and duration of the joint arrangement
 How the members of BOD, are appointed.
 Decision making process: the matter requiring decision from the parties, the
voting rights of the parties and the required level of support.
 The capital or other contribution required of the parties.
 How the parties share asset, liabilities, revenues, expenses or profit or loss.
3. Term in contractual arrangement distinguish joint venture and joint operation.

Joint Operation Joint Venture

Term of the The parties to the joint Parties to joint arrangement
contractual arrangement have rights to the have rights to the net asset of
arrangement asset, and obligations for the the arrangement (ie. It is the
liabilities relating to the separate vehicle, not the parties
arrangement. that has right to asset and
obligation to liabilities.)

Rights to asset The parties to joint arrangement The asset brought into the
share all interest (right, title) in arrangement or subsequently
the asset relating to the acquired by the joint
arrangement in a specified arrangement are the
proportion arrangement’s asset. The parties
Right of asset = parties have no interest in the asset of
the arrangement.
Right of parties = joint venture
not the parties.
Obligations for Parties share all liabilities, cost, The joint arrangement is liable
liabilities obligation and expense in a for the debt and obligation of
specified proportion. the arrangement.

Party only liable up to:

 Their investment in
arrangement
 Their respective
obligation to contribute
any unpaid to the
arrangement
 Both
Revenues, expense, The contractual arrangement The contractual arrangement
profit or loss establishes the allocation of establishes each party’s share in
revenue and expenses on the basis the profit or loss relating to the
of the relative performance of activities of the arrangement.
each party to the joint (allocated base on proportion)
arrangement. For example: the
contractual arrangement might
establish that revenue and
expenses are allocated on the
basis of the capacity that each
party uses in a plant operated
jointly.
(allocate based on performance of
each party)
Guarantee The parties to joint arrangement are often required to provide
guarantees to 3rd parties for example receive a service form or
provide financing to the joint arrangement. The provision of
guarantees to 3rd party or the commitment by the parties to provide
them does not determine the joint arrangement is a joint operation.

Type of Joint Arrangement

1. Joint operation
 A joint arrangement whereby the parties that have joint control of the arrangement
have the rights to assets and obligation for the liabilities.
2. Joint venture
 Joint arrangement whereby the parties have joint control of the arrangement and
have right to the net asset.
Joint Operation
Accounting for joint operation
1. In separate financial statements a joint operator recognize
 Own asset, liabilities and expense
 Its share of asset held and expense and liability incurred jointly
 Its revenue from sale of its share of the output arising from joint operation.
 Its share of revenue from the sale of output by the joint operation itself.

Joint Venture
Accounting for Joint Venture
1. Parent’s separate financial statement
 Investment in subsidiaries, associate and joint venture – cost, fair value, equity
method
Chapter 16: Foreign transaction and entities
Currency Concepts
Objective
1. Translation of foreign currency transactions and financial statement should:
 Product result which are generally compatible with the effects of rate changes on a
company’s cash flow and its equity
 Ensure financial statement present a true and fair view of the results of
management action.
2. Functional Currency
 Currency of primary economic environment which entity operates
 Currency used for measurement in the financial statements
 Other currencies treated as a foreign currency
3. Presentation Currency
 Currency in which financial statements are presented
 Can be any currency
 Special rules apply to translation from functional to presentation
 Same rule used for translating foreign operation.

Functional Currency
1. Functional Currency
 Currency of primary economic environment which entity operates
2. Monetary items
 Units of currency held and asset and liabilities to be received or paid in a fixed
and determinable number of units of currency.
3. Spot exchange rate
 The exchange rate for immediate delivery.
4. Closing rate
 Spot exchange rate at the end of the reporting period.

Determine an entity’s functional currency

1. Factor determine functional currency
 Currency mainly influence sales price for goods and service (currency in which
sales price for its good and services are settled.)
 Currency of the country whose competitive force and regulation mainly determine
the sales price of its good and services.
 Currency that mainly influences labor, material and other cost of providing goods
or service.
2. Other factors determine functional currency
 Currency which funds from financing activities
 Currency which receipt from operating activities are retained.
Change in an entity’s functional currency
1. Once functional currency is determined, it cannot be changed unless there is a change
to those underlying transactions, events and condition.
 For example, change in currency that mainly influence the sale price lead to
change in functional currency
2. Change in functional currency is accounted prospectively.
 Translate items into new functional currency using exchange rate at the date of the
change.
 The resulting translated amounts for non-monetary items are treated as their
historical cost.
 Exchange difference arise from the translation of a foreign operation previously
recognized in other comprehensive income are not reclassified from equity to
profit or loss until the disposal of the operation.

Reporting Foreign Currency Transaction in the functional currency

1. Initial recognition
 Translate transaction apply spot exchange rate between functional currency and
foreign currency at date of transaction.
 Average rate may be used if the rate no fluctuate significantly.
2. At the end of the reporting period
Monetary asset and liabilities Restated at the closing rate

Non-monetary assets measured in terms of Not restated (remain at historical rate at the
historical cost (non current asset) date of the original transaction)

Non-monetary asset measured at fair value Translate using the exchange rate at the date
when fair value was measured.

Recognition of exchange difference

1. Exchange difference are recognized in profit or loss for the period which they arise.
 If non monetary asset under revaluation model, exchange difference recognized in
other comprehensive income.
Presentation Currency
1. Currency which the financial statements are presented.
Translation Rules
Asset & Liabilities Translated at closing rate of SOFP

Income & Expenses Translated at actual exchange rates at the dates of

transaction
Translated at average rate for the period if exchange rate not
fluctuate significantly.

All result in exchange difference – recognized in other comprehensive income

Foreign Operations
1. Foreign operation
 An entity that is subsidiary, associate, joint arrangement or branch of reporting
entity, the activities of which are based or conducted in a country or currency
other than those of the reporting entity.

Determining the functional currency of foreign operation

1. Whether activities of foreign operation are carried out as an extension of reporting
entity(sell good imported from parent), rather than being carried out with a
significant degree of autonomy (expense, income generated from local currency).
2. Whether transaction with reporting entity are high or low proportion of the foreign
operation activities.
3. Whether cash flow from activities of the foreign operation directly affect the cash
flow of the reporting entity and are readily available for remittance to it.
4. Whether cash flow from the activities of the foreign operation are sufficient to service
existing and normally expected debt obligations without fund being made available by
the reporting entity.
# After consider these factor, management should apply judgement to determine the
functional currency that most faithfully represent the economic effect of the underlying
transactions, events and conditions.
Translating financial statements of a foreign operation that is subsidiary
Statement of financial Position
Asset & Liabilities Closing Rate

Share Capital and pre- Historical Rate at date of control achieved.

acquisition reserves

Profit / OCI for each year Actual rate or Average rate

Dividend Actual rate at date of payment

Exchange difference on Balancing Figure
net asset

Statement of profit or loss and other comprehensive income

All item translated actual rate at date of transaction

Exchange Difference
All Exchange difference on translation of a foreign operation recognized in other
comprehensive income.
Calculation of Exchange Differences
Exchange Difference 1. Translating income and expenses at the exchange rate
relating to subsidiary in at the date of transactions and asset and liabilities at
foreign operation arise closing rate.
from: 2. Translating the opening net asset at a closing rate that
differs from the previous closing rate.
3. Translating goodwill on consolidation at closing rate
each year.

Calculation of goodwill for foreign operation

Translation of foreign operation that is equity accounted
IAS 21 requirement should be applied.
1. On initial recognition, the investment in Iris Co should be translated at the spot rate on
the date of acquisition.
2. Subsequently, investment in Iris Co (initial cost plus share of profit) translated at
closing rate at the date of SOFP.
3. Core Co’s share of Iris Co’s profit for the year should be translated using the average
rate.
4. The exchange differences resulting from translation should be recorded in other
comprehensive income and accumulated in equity.
investment in associate Spot rate (rate on acquisition)
(opening)
Investment in associate Closing Rate
(closing)
Share of profit Average rate
Exchange loss Recorded in other comprehensive income and accumulated
in equity

#Exercise

Disposal of foreign operation

1. Cumulative amount of exchange difference accumulated in equity relating to foreign
operation is reclassified to profit or loss.
Monetary items forming part of a net investment in foreign operation
1. Net investment in a foreign operation
 Amount of the reporting entity’s interest in the net asset of a foreign operation.
2. Entity may have a monetary item that is receivable from or payable to a foreign
operation for which settlement is neither planned or nor likely occur in foreseeable
future.
 Include long term receivable or loan.
 Not include trade receivables or trade payables.
3. Separate financial statements
 Exchange difference recognized in profit or loss in separate financial
statement of reporting entity or foreign operation as normal.
(when denominated in function currency of reporting entity)
 Exchange difference recognized in profit or loss in separate financial
statement of both parties. (when denominated in currency other than functional
currency
4. Consolidated financial statements
 Any exchange difference recognized initially in other comprehensive income.
 And reclassified from equity to profit or loss on disposal of net investment.
Chapter 17: Group Statement of Cash Flow
Definition & Format
1. Cash
 Comprise cash on hand and demand deposits
2. Cash equivalent
 Short term, high liquidity investment that readily convertible into known amount
of cash and are subject to an insignificant risk of changes in value.
3. Cash flow
 Inflow and outflow of cash and cash equivalents
Format
Indirect method
Direct Method

# Direct method is encouraged when necessary information is not too costly but IAS 7 does
not require it.
 Could argued that companies ought to monitor their cash flow carefully enough on an
ongoing basis to be able to use the direct method at minimal extra cost.
Consolidated Statement of Cash flow
1. Only deal with flow of cash external to the group
2. Cash flow that internal to group should be eliminated
3. Additional Consideration
 Dividend paid to non controlling interest
 Dividend received from joint venture or associate
 Cash flow on acquisition or disposal of associates
 Removing group share of profit or loss and joint venture from group profit before
tax
 Cash flow on acquisition or disposal of subsidiaries
 Effect of asset and liabilities of subsidiaries acquired or disposed of on the
calculation of working capital adjustment and cash flow.
 Impairment losses on goodwill.

Dividend paid to non-controlling interest

1. Calculated from NCI figures in consolidated financial statement :

Dividend Received from associate / Joint Venture

1. Calculated from the investment in associate

Acquisition and disposal of associates and joint venture

1. When associate or joint venture is purchased or sold, the cash paid to acquire the
shares or the cash received from selling the shares must be recorded in the cash flow
from investing activities.

Adjustment required under indirect method for associate and joint venture
1. Group share of associate profit must be removed from group profit before tax as an
adjustment in the cash flow from operating activities.
Cash Flow on acquisition or disposal of a subsidiary
1. Cash paid to buy the shares (acquisition)or cash received from selling the shares
(disposal).
2. Cash or overdraft balance consolidated for the first time (acquisition) or
deconsolidated (disposal)

Effect on asset and liabilities if subsidiaries are acquires or disposed of

Subsidiary acquired + The subsidiary’s property, Reason: the new subsidiary
in the period plant and equipment, asset and liabilities have been
inventories, payables, consolidated for the first time
receivables etc at the date of in the period. We need to
acquisition could be added in take account of that when we
the relevant cash flow working. look at the movement in
group assets and liabilities in
the relevant cash flow
working.

Subsidiary disposed - The subsidiary’s property, Reason: the asset and

of in the period plant and equipment, liabilities of the sold
inventories, payables, subsidiary have been
receivable at the date of deconsolidated in the period.
disposal should be deducted in We need to take account of
the relevant cash flow working. that when we look at the
movement in group asset and
liabilities in the relevant cash
flow working.

Impairment Losses under indirect method

1. Impairment loss (on goodwill, investment) like depreciation and amortization are
accounting expenses rather than cash outflow
2. Add back to profit before tax when calculate cash generated from operations.
Analysis and interpretation of group statement of cash flow.
Overall Cash 1. Is there an overall increase or decrease in cash?
Balance 2. Investor - Increase in cash could come under pressure from
investor to invest back the cash into business or make
higher dividend.
3. Employee – demand increase in wages or expect a higher
bonus.
4. Bank lender – not view increase in cash positively. Entity
with positive cash balance seem not require further finance.
Which bank not likely to see

Cash Flow from 1. Cash inflow or outflow? This give indication of how good
operating activities entity turning profit into cash.
2. Is the operation profit or loss making? If profit made, but
not cash generated, has profit manipulated?
3. Is there any profit or loss on the sale of PPE? Why the
entity sold PPE?
4. Is there gain or loss on investment and any investment
income? Does entity have weak or strong treasury
management?
5. Are there increase or decrease in receivable, payable or
inventories? Weak or strong on business management of
working capital.
6. Has any interest paid? Have any borrowing been repaid or
taken out in the year?

1. Difference stakeholder will have alternative view

 Supplier focus on efficiency of working capital
management which indicate the credit risk. Impose more
strict on credit term.
 Bank or lender – see opportunity to provide loan to help any
working deficits.
2. Consider Impact of acquiring a subsidiary in different
industry and what might be normal in that industry.
 What subsidiary will bring to entity.
3. Not meaningful to creditors who focus on ability to pay
debts
 Entity could be insolvent or have declining working capital
position, but that cannot seen from the consolidated
statement of cash flow.

Cash Flow from 1. Is there cash inflow or outflow?

investing activity  Indication of business growth
2. Any acquisition of PPE or investment in the year? How
were they funded? What impact to entity in future?
3. Any disposal of PPE or investment in the year? Were they
at profit or loss?
 Reason sold, impact of investment sold in future, has old
PPE replaced by new,
4. Has any interest or dividend received?
 Assess return on investment and treasury management.

1. Employee will be encouraged by cash outflow from

investing activities as this indicates job security and
potentially expanded operation.

Cash Flow from 1. Is there cash inflow or outflow.

financing activities 2. Has new finance been raised in the year?
 Debt or equity
 Why it has been raised
 Impact in future

1. Lender – interested in this. They able to assess whether

finance has been obtained from alternative source and what
implication.
 Example: finance used could indicate liquidity issues.
2. Has any finance been repaid in the year? How entity
afforded to repay it?
 Example: if cash is used to pay off a lease or loan, it will
have a positive impact on future profit and cash flow.
3. Have any dividends been paid in the year? What proportion
of profit before tax has been paid out compared to the
proportion reinvested? Assess the generosity of the
directors’ dividend policy.

Ratio Analysis It is helpful to analysis to calculate some or all of these ratios

1. Cash return on capital Employed
 Cash generated from operation / Capital Employed *100%

2. Cash generated from operation to total debt

 Cash generated from operation / long term borrowings

3. Net Cash from operating activities to capital expenditure

 Net cash from operating activities / capital expenditure
*100%
Criticisms of IAS 7
Presentation
1. Cash flow from operating activities can be presented using the direct method or
indirect method.
2. Direct method
 Preferred by IAS 7
 More likely to be understood by user
 Rarely used in practices. Company often not collect this type of date.
3. Difficult for user to compare cash flow from operating activities of entities which
use different method.
#Example
During December 2015, Smith Group obtained a new bank loan which will be used to
purchase asset in the first quarter of 2016. The interest paid on the loan will be included as an
operating cash outflow in the consolidated statement of cash flow for the year ended 31
December 2015. The director of Smith Group also want to include the loan proceeds and loan
interest together will be more useful for users of the accounts. The director also wish to
present the consolidated statement of cash flow using the indirect method because they
believe that the indirect method is more useful and informative to users of financial
statements than the direct method. The director of Smith will each receive a bonus if Smith
Group’s operating cash flow for the year exceeds a certain amount.

Comment on director’s view that the indirect method of preparing statement of cash flow is
more useful and informative to the primary users of financial statements than the direct
method, providing specific reference to the treatment of the loan proceed.
The direct method of preparing cash flow statements disclose major classes of gross cash
receipts and gross cash payments. It shows the items that affected cash flow and the size of
those cash flow. Cash received from and cash paid to specific resources such as customers
and suppliers are presented. This contrast with the indirect method, where accrual basis net
income loss is converted to cash flow information by means of add-back and deductions.

The conceptual Framework identifies the primary users as present and potential investor,
lenders and other creditors. Primary users need information that will allow them to assess an
entity’s prospect for future net cash inflow and how management are using the resources
available to them. The statement of cash flow is essential in providing this information.

From this point of view of primary user, an impotant advantage of direct method is that
primary user can see and understand the actual cash flow, and how they relate to items of
income or expense. In this way, the user is able to better understand the cash receipt and
payment for the period. Additionally, the direct method disclose information not available
elsewhere in the financial statements, which could be use in estimating future cash flow.

The indirect method involve adjusting the net profit or loss for the period for:
1. Changes during the period in inventories, receivable and payable
2. Non cash items, depreciation, provision, profit or loss on sale of asset,
3. Other items, which should classified under investing or financing.

Indirect method is less easily understood as it requires level of accounting knowledge to

understand. It is therefore generally considered to be less. Useful to primary user than the
direct method.
From the point of view of the preparer of accounts, the indirect method is easier to prepare,
and nearly all companies use it in practice. The main argument companies have for using the
indirect method is that the direct method is too costly as it requires information to be prepared
that is not available. However, as the indirect method is less well understood by primary user,
it is perhaps more open to manipulation. This is particularly true with regard to classification
of specific cash flow.

The director wish to inappropriately classify the loan proceeds as an operating cash inflow
(rather than a financing cash inflow required by IAS7) on the basis that this will be more
useful to user. This be due to a misunderstanding of the requirement of IAS7. Alternatively, it
may be an attempt by the directors to manipulate the statement of cash flow by improving the
net cash from operating activities which will improve their bonus prospects. Although this
misclassification could also take place using the direct method, it is arguably easier to hide
when using indirect method, because user find it more difficult to understood.

Therefore, the indirect method would not claimed by the directors be more useful and
informative to users than the direct method. IAS 7 allow both method, so the indirect method
would still be permissible.

Inconsistency of Classification
1. Loan repayment
 Interest classified as cash outflow in operating or financing activities
 Principal will classified as financing activity
2. Dividend and interest paid
 Classified either operating or financing activities
 User have to make adjustment when comparing different entities.
3. Lease payment
 Principal portion classified in financing activities
 Interest portion classified within operating or financing activities.
#Concern on lack of comparability under IFRS because the choice of treatment
currently allowed.

Purpose of Cash Flow

1. Classification of certain cash flow may be inconsistent with the purpose of cash flow.
 Example: research expenditure classified as cash outflow from operating activities
but often considered to be a long term investment.
 As such some stakeholders believe the related cash flow should be presented
within investing activities but this is not permitted under IAS 7.
Chapter 18: Interpreting Financial statement for different stakeholders
Stakeholders
Group Reason Further Reason
Management Management are often set Management may use financial
performance targets and use the statements to aid them in important
financial statements to compare strategic decision.
company performance to the targets
set, with a view a achieving bonus.

Employee Employee are concerned with job Employee want to feel proud of the
stability and may use corporate company that they work for and
reports to better understand the positive financial statements can
future prospects of their employer. indicate a job well done.

Present and Existing investor will assess Investor will want to understand
potential whether their investment is sound more about the types of products the
investor and generate acceptable returns. company is involved (segment
Potential investor will use the report will help this) and the way
financial statement to help them which the company does business,
decide whether or not to buy shares which will help them make ethical
in that company. investment decision.

Lenders & Lenders and suppliers are Lenders and suppliers interested in
Supplier concerned with the credit the future direction of a business to
worthiness of an entity and the help them plan whether it is likely
likelihood that they will be repaid that they will continue to be a
amounts owing. business partner of the entity going
forward.

Customers Consumers may want to know that Customer typically want to feel that
products and services provided by they are getting good value for
an entity are consistent with their money in the products and services
ethical and moral expectations. they buy.

Government Government often use financial Government uses financial statement

statements to ensure that the to collect information and statistic
company is paying a reasonable on different industries to help inform
amount of tax relative to the profit policy making.
that it earns.

The Local Local community wish to know Local community interested in

Community about local employment company social and environmental
opportunities. credentials such as how well
employees are treated and the
company’s environmental footprint.
Performance Measure
1. Performance difference to different stakeholder.
2. Performance Measure increase focus:
 Alternative performance measure (Economic Value Added)
 Non Financial measures (employee well-being & environmental impact)

Financial Performance Measure

1. Financial indicators of performance useful for comparing result:
 Prior year
 Other companies
 Industry average
 Benchmarks
 Budget
2. Ratio analysis

Earning Per Share

1. Objective of IAS 33
 Improve comparison of the performance of different entities in the same period
and of the same entity in different accounting periods. It is a measure of the
amount of profits (after tax, NCI and preference dividend) earned by company for
each ordinary shares.
2. Basic EPS
 Net profit or loss for the period attribute to parent / weighted average number of
ordinary shares outstanding
 Dividing
3. Diluted EPS
 Adjusting net profit or loss and weighted average number of ordinary shares that
are used in basic EPS calculation to reflect the impact of potential ordinary shares.
4. EPS is important in assessing the stewardship and management role performed by
company directors and managers.
 Remuneration could linked with the EPS performance
 Risk of manipulation EPS.
#Exercise
Alternative Performance Measures (APM)
1. Financial measure of historical or future financial performance, financial position,
cash flow other than a financial measure defined in applicable financial reporting
framework.
2. Example
 Facebook report revenue excluding foreign exchange effect, advertising revenue
excluding foreign exchange effect and free cash flow as non GAAP measure that
it considers useful to investor in understanding the performance of its business.
3. Example
 EBITDA (Earning before interest, tax, depreciation and amortization)
 EVA (Economic Value Added)

EBITDA
1. Indicator of earning potential of a business. Used to analyze and compare
profitability between companies because it eliminates the effect of financing,
taxation and accounting decision.
2. Advantages
 Give indication of management performance
 Represent earning that management has most control over
3. Disadvantages
 Subject to manipulation. Director can change what is included.
 Misconception of EBITDA represent cash earning.

EVA (Economic Value Added)

1. Measure of entity’s financial performance based on its residual wealth by deducting
its cost of capital from operating profit adjusted for taxes on cash basis.
 Profit after tax – finance charge (cost of capital invested)
2. Show amount by which earning exceed or fall short of the minimum rate of return
that investor could achieve by investing elsewhere.
 Residual Wealth – cost incur to finance operation (cost of borrowing, equity
financing + required rate of return by investor)
3. Advantage
 Show real wealth of shareholders.
 Less distorted by accounting policies selected as the measure is based on figures
that are closer to cash flow than accounting profits.
 Focus on efficient use of capital
4. Disadvantage
 Encourage managers focus on short-term performance
 Based on historical account – limited use as guide to future
 Large number of adjustment required to calculate net operating profit after tax
and economic value of net asset.
4. Advantage of APM
 Enhance understanding of users
 Giver management more freedom and flexibility to tailor measure to entity
 Allow user to evaluate the entity performance through eyes of management.
5. Disadvantage
 User not easily understand what is being reported
 Management bias. Choose to report some APS or manipulate calculation
 No standard governing use of APM

Improve usefulness to investor of APMs

1. ESMA issued guideline for preparer to improve comparability, reliability and
comprehensibility of APMs.
 Define APM in clear and readable way
 Reconcile APM to the closet IFRS line item and explain the main reconciling item
 Explain why on APM has been included. Why it is useful?
 Do not present APMs more prominently 显眼 than IFRS measure
 Provide comparative information.
 If no longer present APM, explain why APM is no longer considered useful.
Non Financial Performance Indicator
1. Employee wellbeing and environment impact.
2. Measures of performance based on non-financial information which used by operating
department to monitor and control their activities without any accounting input.
3. Effective NPFI
 Specific
 Measurable
Area Assessed Example of Performance Measures
Employees  Employee satisfaction score
 Employee turnover rates
 Absence rate
 Remuneration gap between upper and lower earning employee
 Working conditions
 Gender pay gap and gender equality measures

Customer  Average delivery time

 Average product review
 After sales service policy (return and warranties)
 Number of repeat purchase
 Number of new account
 Number of visit

Productivity  Capacity utilization

 Number of unit produced
 Average set up time for new production

Social  Frequency of brand name mentioned in key media

 Percentage change in awareness of brand
 Level of charitable work
 Tax and involvement in tax avoidance schemes

Environment  Level of emissions and commitments to reduce emissions

 Energy usage and investment in renewable sources
 Resource usage
 Impact on business on biodiversity
 Environmental fines and expenditure
Balance Scorecard
1. Balance scorecard to assess performance
 Focus on both financial and non-financial perspective
Perspective Question Explanation
Customer What do existing and new Give rise to target that matter to
customer value about us? customer (cost, quality, delivery,
inspection, handling, response to
need)

Internal What processes must we excel at Aim to improve internal processes

to achieve our financial and and decision making.
customer objectives?

Innovation & Can we continue to improve and Considers the business’s capacity to
Learning create future value? maintain its competitive position
through the acquisition of new skills
and the development of new
products.

Financial How doe we create value for our Covers traditional measures such as
shareholders? growth, profitability and shareholder
value but set through talking to the
shareholder directly.

Expectation for different business structure

1. When analyzing corporate report, it is important that your expectation for how the
entity should perform and the conclusion drawn are relevant for the entity in question
and industry which it operates.
2. Example
 Heavy manufacturing company = produce and sell machinery
 Service-related company = sell times and expertise.
3. Digital business
 Business use internet technologies for its key business process.
 Use technology engage with customer differently and do business in innovative
way.
Sustainability Reporting
1. Sustainability
 Limit the use of depleting resources to a level that can be replenished.
2. Sustainable development
 Development that meet the needs of present without comprising the ability of
future generation to meet their own needs.

Sustainable Development Goals

1. Related to issues such as poverty, inequality, climate, environmental degradation and
peace and justice.
2. Aid business
 Know how they can create social, environmental and economic value for both
investor and stakeholders.
 Whether their resource is used in responsible way.

Sustainability Reporting

1. Sustainability reporting
 Integrates environmental, social and governance issues.
 Key part of company dialogue with its stakeholder.
2. Why disclose sustainability report?
 Grow awareness in sustainable development lead to stakeholder expectations.
3. Guideline on sustainability reporting
 Global Reporting Initiative (GRI) in 2000
 IFRS Foundation formed International Sustainability Standard Board (ISSB) in
2021
 GRI and ISSB worked together
Environmental Accountability
1. Stakeholder expect business to environmentally friendly.
 Not only aware of activities on environment and mitigate them
 Develop business strategy that is environmentally sustainable. (do something good
to environmental)
2. Climate-related disclosure
 Identify risk and opportunities on climate change.
 Comply with regulation on climate-related issues
 Example: Reduce Carbon Emission.

Social Accountability
1. How business address issue such as human rights and modern salary.
2. Aim
 Measure and disclose social impact of business activities.
3. Example of social measures
 Philanthropic donation
 Employee satisfaction
 Community support
 Stakeholder consultation information

Benefit of sustainability reporting

1. Internal benefit
 Increase understanding of risk and opportunities faced by business
 Benchmarking and assessing sustainability performance with respect to laws,
norms. Codes, performance standard and voluntary initiatives
 Avoiding adverse reputation on environmental and social
2. External benefit
 Reduce negative environmental, social and governance impact.
 Allow external stakeholder to understand organization value.
 Communicate sustainable development to public.
Integrated Reporting
1. Combine financial reporting and sustainability reporting with the aim to help readers
to understand three discrete element of the value of business:
 Business as usual – current shape and performance of business
 Potential impact of management’s plan, external issues and opportunities
 Long term value of business.
2. Aim
 Demonstrate the linkage between strategy, governance and financial performance
and the social, environmental & economic context within which the business
operates.
3. Connection with strategy, governance & financial performance and social, economic
& environment
 Able to make sustainable decision
 Effective allocation of resources
 Improve investor and other stakeholder understanding of business perform.

Definition
1. Integrated reporting
 Process founded on integrated thinking that results in a periodic integrated report
by an organization about value creation over time and related communication
regarding of value creation.
2. Integrated report
 Communication about how strategy, governance, performance lead to creation
value over short, medium and long term.

Fundamental Concept
1. Value Creation
 Value created when increase, decrease or transformation of entity capital caused
by business activities and output.
 Value created for the entity itself for external stakeholders.
2. Capital
 Stock of value that increase, decreased or transformed through activities and
output of organization
 Financial, human, manufactured, intangible, social, environmental
3. Value creation process
 Process which entity use its capital as input and convert them to output.
 Output include product, service, by-product and waste.

Capital
1. Financial Capital (source of fund, loans, share capital)
2. Manufactured capital (equipment & tools)
3. Intellectual capital (R&D, knowledge)
4. Natural capital (resource in nature)
5. Social capital (entity and external stakeholder such as supplier, customer)
6. Human capital (employee skills, education, training)
Guiding Principle
Strategic focus and Provide insight into strategy and plans for the future.
future orientation

Connectivity of Show a picture of combination, interrelatedness and dependencies

information of factor that affect ability to create value.

Stakeholder Provide insight to key stakeholders & how entity respond to their
relationship needs

Materiality Matter is material = could affect ability to create value

Conciseness Provide enough information for understanding. But don’t obscure

important information with less relevant information.

Reliability and Free from material error.

Completeness

Consistency & Provide info consistently over time and allow comparison
Comparability

Content Element
1. No prescribed format for integrated report.
2. Below describe what integrated report should include.
Organizational What entity do and what circumstances under which it operates.
overview & external
environment

Governance How entity governance structure support its ability to create

value.

Business model What entity business model.

Risk & opportunities What risk & opportunities affect organization ability to create
value.
How organization dealing with those risk and opportunities.

Strategy & Resource What organization want to go and how does it intend to get there?
Allocation

Performance What extent has the entity achieved its objective and what are its
outcome in term of effect on the capitals?

Outlook What challenges & uncertainties is entity going to met & what are
the future performance

Basic preparation and How entity determine what things include in integrated report and
presentation what is the assumption used to evaluate the things.
IAS 1 Materiality to Integrated Reporting

Stakeholder’s consideration on IR

#Exercise
Management Commentary
1. Definition
 A narrative report that relates to financial statements that have been prepared in
accordance with IFRS.
 Management commentary provide users with historical explanation of amounts
presented in financial statements, specifically the entity’s financial position,
financial performance and cash flow.
 It also provides commentary on an entity’s prospect and other information not
presented in the financial statements. (management view)
 Management commentary also serve as a basis for understanding management’s
objectives and its strategies for achieving those objectives.
2. Include forward-looking information that is useful to primary users.

IFRS Practice Statement 1: Management Commentary

1. Presentation
 Form and content will vary between entities reflecting their nature, strategies and
regulatory environment
2. Element
 Nature of business
 Management’s objective and strategies for meeting those objectives.
 Entity’s significant resources, risk and relationships
 Result of operations and prospect.
 Performance measures indicator use to evaluate performance against objectives.
Segment Reporting
1. Large entities have wide range of product & service & operate in diverse range of
locations => aggregated of these info result in limited use of financial statement.
 Certain entities required to provide segment information which disclose revenues,
profits and assets.
2. IFRS 8 Operating Segments only compulsory for entities whose debt or equity
instrument are traded in public market to make decision about resources allocated and
asses performance
3. Operating segment is a component of entity:
 Engages in business activity which it may earn revenues and incur expenses
 Whose operating results are regularly reviewed by the entity’s chief operating
decision maker to make decision about resources allocated and asses performance
 For which discrete financial statement is available

Reportable Segments
1. Criteria Operating segment should reported on separately in financial statement
 Revenue is more than 10% of total revenue
 Its reported profit or loss is 10% or more of all segments in profit
 Asset more than 10% of total asset.
2. Segments should reported until at least 75% of the entity’s external revenue has been
disclosed.
 If all segment satisfying the 10% criteria have been disclosed and they do not
amount to 75% of total external revenue, additional operating segment should be
disclosed (even not meet criteria)
3. 2 or more operating segments may be aggregated if operating segment have similar
economic characteristic: (depend on management choice)
 Nature of product
 Nature of production process
 Type of class of customer
 Method use to distribute product
 Nature of regulatory environment
4. Aggregation can be done before or after the quantitative threshold.
 If before quantitative threshold – all aggregation criteria must be met
 If after quantitative threshold – majority of aggregation criteria met
Disclosures
1. Key item to be disclosed
 Factor used to identify entity reportable segments
 Type of product and service which each reportable segment derive its revenue
 Reportable segment revenue, profits or loss, asset, liabilities and other material
item.
Reporting of a measure of profit or loss by segment is compulsory. Other items
are disclosed if included in the figures reviewed by or regularly provided to the
chief operating decision maker.
 External revenue by each product and service
 Geographical information
 Information about reliance on major customer (customer more 10% external
revenue)

Interpreting reportable segment disclosure

1. Growing segment vs Declining segments
2. Loss-making segments
3. Return by segments
4. Proportion of cost or asset that have remained unallocated.
5. Any additional segment information required
6. Any segment that a company has elected to disclose rather than being required to
disclose.

Benefit of segment reporting

1. Help stakeholders make informed decision – better understand on entity past
performance & better assess of management effectiveness
2. Reliability – segment data reflect operational strategy of business (required by IFRS
8)

Limitation of segment reporting

1. Management may report segment which are not consistent for internal reporting and
control purposes.
2. Segment determination to include in report is based on director and can be subjective.
3. Management approach may mean that the financial statement of different entities are
not comparable; example, there is no defined measure of segment profit or loss.
Chapter 19: Reporting requirements of small and medium size entities
The IFRS and SMEs Accounting Standard

Small Medium Size Entities

1. Small or medium size entities characteristic
 Owner-managed with a small, close shareholder base
 Relatively small number of employees and other key stakeholders.
 Less subject to external attention and scrutiny
 Generate less revenue, control fewer assets and have smaller liabilities
 Undertake less complex transaction.
2. Challenge for SME to apply IFRS
Relevance Some IFRS standard are not relevant to SME.
 IAS 33 Earning Per share

Cost to Prepare Principles of financial reporting – cost and effort should not
exceed the benefit to owners.

Materiality IFRS accounting standard apply to material items.

 Amount considered material item in SME could be small.
 Not disclose those item could be material as it would
mislead investor.
 Even the amount is small, SME still need to disclose.

Scope
1. SMEs Accounting Standard for small companies that:
 Do not have public accountability (not issue share in public market)
 Do publish general purpose financial statement for external users.

Transition to SMEs Accounting Standard

1. Transition to SMEs Accounting Standard from previous GAAP is made
retrospectively as a prior period adjustment at the beginning of the earliest
comparative period presented.
 Allow all exemption in IFRS 1 First time adoption of IFRS.
 Contain impracticability exemption for comparative information and restatement
of opening statement of financial position.
Key Difference in accounting treatment between full IFRS and SMEs Accounting
standard
Key Omission from SMEs Accounting Standard
1. Omit standard due to standard not being relevant or cost of reporting exceed
perceived value.
Earning Per Share IAS 33 requires calculation and presentation of EPS and diluted EPS
(EPS) for all reported period.

Interim Reporting IAS 34 Interim financial reporting applies when an entity prepares
interim reports. (report for a quarter)

Segmental IFRS 8 Operating Segments require listed entities to report info on

Reporting different types of operation they involved.
 SME unlikely to have such diverse operation.

Asset held for sale IFRS 5 Non current asset held for sale and discontinued operation
 Cost of reporting in this way expected to exceed benefit for
SMEs
Different accounting treatment under SMEs Accounting Standard
Area SME Accounting Standard IFRS Accounting Standard
Investment Fair value through profit or loss must Make choice between fair value
Property be used if fair value can be model or cost model.
measured.
Second Choice => Cost model

Intangible Revaluation model not permitted. Revaluation permitted where active

Asset Intangible Asset must held at cost – market exist.
accumulated amortization.

Government Recognized income when grant is Grant relating to income

Grants receivable. recognized in profit or loss over
 When no future performance period to match related asset.
condition
Recognize as income when future Grant relating to asset, either.
performance condition met.  Present as deferred income
 Deducted in arriving at the
carrying amount of asset.

Borrowing Expensed when incurred. Capitalized (when relate to qualify

Cost asset)

Development Recognized as expenses Capitalized when met IAS 38

Cost
Pension Adjustment to estimate pension: Remeasurement in OCI only
Actuarial Recognized in profit or loss and OCI.  Projected unit credit
Gain  Simple calculation. Permit if method must be used.
not able to use projected unit
credit method
Financial Classified at cost or amortized cost Investment in Debt instrument
Instrument or fair value through profit or loss. Business model: held to collect
contractual cash flow only
Debt instrument  Amortized cost
 Amortized cost – investment
in shares (exclude preference Business model held to collect
shares) contractual cash flow and sell
 Fair Value through profit or  Fair value through OCI
loss
 Cost less impairment Investment in equity instrument
not held for trading
Other financial instrument  Fair value through OCI (if
 Fair value through profit or recoverable election made)
loss
All other financial asset
 FV through profit or loss

Financial Liabilities
 Amortized cost (most
liability)
 FV through profit or loss
(held for trading,
derivatives that are liability,
accounting mismatch,
group managed and
evaluated on FV basis)
Simplification introduced by SMEs Accounting Standard
Presentation & Disclosure
Area SMEs Accounting Standard IFRS Accounting Standard
Presentation & Combined SOPL & OCI and Combine SOPL & changes in
Disclosure SOCIE permitted. equity not permitted.

Segment disclosure and earning Segment disclosures and EPS

per share not required required.
Other disclosures reduced by 90%
from IFRS full standard

Recognition & measurement

Area SMEs Accounting Standard IFRS Accounting Standard
Revenue Good When performance obligation
 When significant risk and satisfied.
reward of ownership
transferred.
Service
 Stage of completion

Intangible asset All intangible are amortized. Only amortized if finite useful
 Useful life cannot exceed life.
ten years if cannot be  No specific limit of
established reliably. useful life.

Impairment test required only Annual impairment test is

there is an indication of required for goodwill,
impairment. intangible asset.

Separate Financial Investment in subsidiaries, Cost

statement of investor associates and joint venture can be
 held at cost or Under IFRS 9 Financial
 fair value through profit or instrument
loss  fair value through
 using equity method. profit or loss or fair
value through OCI

Equity method
Consolidated Investment in associates and joint Associate and joint venture
Financial statement venture remain at same value in equity accounted.
separate financial statement.
Choice of full or partial
Only partial goodwill allowed goodwill
 NCI only can measured at  NCI fair value method
proportionate or proportionate
 Goodwill amortized  Impairment test

Exchange difference Exchange Difference

 Recognized in other recognized in OCI and
comprehensive income reclassified to profit on loss
and not subsequent when disposal of the foreign
reclassified to profit or operation.
loss
Subsidiaries with intention to
Subsidiaries acquired and held sell within one year
with intention of selling within  Consolidated
one year  IFRS 5 held for sale.
 not consolidated.
Chapter 20: Impact of changes and potential changes in accounting regulation
Development in sustainability reporting and sustainability standard
1. Different approaches provided to company to take to report information on
sustainability such as issued by Global Reporting Initiative or choosing to prepare an
integrated report.
 Increase difficulties to compare
 Not investor want.
2. At 2021, IFRS foundation create the International Sustainability Standard Board
 Aim to develop standard result in high quality, comprehensive global baseline of
sustainability disclosure
 Focus on need of investor and financial market
 Develop standard cover topic that investor want.
 Focus initially on climate-related information.
 Build on work based on existing reporting initiative 基础 include Task Force for
climate-related Financial disclosure and integrated Reporting Framework.
3. ISSB issued two exposure draft
 IFRS S1 General Requirement for Disclosure of Sustainability-related Financial
Information
 IFRS S2 Climate-related Disclosures
Contemporary 当代 Issues
Cryptocurrencies
1. Disruptive effect on traditional banking system as they are not controlled by central
bank.
 Lack of control lead to dramatic fluctuation in value as they traded and exchanged
around the world.
2. Work similar with conventional currency.
 Used to pay for good and service
 Increasing number of vendor accept this form of payment.
3. Transaction using cryptocurrencies make use of blockchain technology
 Ensure transaction are verified and recorded.

Accounting for cryptocurrencies

1. No accounting standard specifically deals with cryptocurrency.
 Require accountant to develop an accounting policy.
2. IAS 8 Accounting policies, Accounting Estimates and Error requires director consider
in following hierarchy when develop standard:
 IFRS Accounting Standard dealing with similar issues
 Conceptual Framework
 Most recent pronouncement of other national GAAP

Current Practice
1. Not meet definition of cash
 NOT IAS 32 Financial Instrument, Presentation – not widely accepted of medium
of exchange as they are not legal tender.
 NOT IAS 7 Statement of cash flow – not subject to insignificant risk of changes in
value’ due to volatility price.
2. Not have physical substance and therefore cannot be any form of tangible asset.
3. Most closely to IAS 38 Intangible Asset
 Cryto are identifiable, non-monetary and not have physical substance.
 Initially measured – cost
 Subsequent measure – cost less acc amortization / revalued amount

IFRS Interpretations Committee Agenda Decision

1. Define cryptocurrency as:
 Digital money recorded on distributed ledger
 Not issued by jurisdictional authority or other party
 Not give rise to contract between holder and another party.
2. Cryptocurrency should accounted for intangible asset because:
 Capable of being separated from holder and sold or transferred individually
 Not give holder right to receive a number units of currency.
3. Holding cryptocurrency hold for sale in ordinary course of business should accounted
for under IAS 2 Inventories.
Initial Coin Offering (ICO)
1. Initial coin offering
 Entity raise fund through issues of cryptoasset in exchange for fiat currency(gold)
or established cryptocurrency.
2. To undertaken ICO, entity issues white paper
 Detail why fund are being raise
 Required level of fund need
 Length of time ICO remain open
 Type of currency that can be used to support ICO (cryptocurrencies or fiat
currencies)
 Detail number of ICO to issue.
3. Cryptoasset issued to supporters of ICO are usually either:
 New cryptocurrency – supporter expect the new cryptocurrency to increase value.
 Token with promise on share of profit or access to free product of entity.

Accounting for ICOs

1. Entity issued of equity instrument if supporter is entitled to receive pad by the entity.
 Apply IAS 32.
2. Entity issued financial liability if it obligated to deliver cash to supporter in specific
circumstances.
 Apply IAS 32
3. Entity issued non financial liability – entity have obligation arise from issuing the
cryptoasset. (construct exchange center for supporter to trade the cryptoasset)
 Apply IAS 37 Provision, Contingent liabilities and Contingent Asset
4. Entity should recognize the proceed from issuing the cryptocurrencies as revenue
 IFRS 15 Revenue from contract with customer.
5. If cryptocurrencies not in scope of any existing standard. Accountant require to
develop standard based on IAS 8:
 IFRS Accounting Standard dealing with similar issues
 Conceptual Framework
 Most recent pronouncement of other national GAAP
6. Entity should applied IAS 1 Presentation of financial statement
 Description of the transaction
 Description of the term attached to any cryptoasset issued in the ICO including
any rights or obligation provided to the holders.
 Description of how the entity has accounted for the crytocurrecies issued in ICO
applying IFRS Accounting Standard.

Security Token Offering (STO)

1. Security Token Offering
 Process whereby a financial security is issued in the form of digital asset.
(digital representation of financial security)
 Typically the digital asset represent ownership rights in an underlying company
and it asset.
2. Security token
 Security token is defined as an instrument that provides a right of ownership and
an entitlement to a share of future profits or cash flows.
Natural Disaster issues
1. Event after reporting period
 Disaster happened after reporting period and before financial statement issued.
 Apply IAS 10 Events after reporting period.
 Non adjusting event – event occur after year end.
 Adjusting event – event occur before year end.
2. Impairment of asset
 Tangible non current asset
 Intangible asset and goodwill (affect future profitability) IAS 36
 Financial asset (collectability of receivable affected) IFRS 9
 Inventories – (IAS 2 inventories)
3. Compensation (insurance or from government)
 IAS 16 PPE - Recognized when become receivable
 IAS 37 Provision, Contingent liabilities & asset – disclose contingent asset when
virtually certain (confirmation)
 Best practice – do not net off asset impairment and related insurance pay out.
 Government grant – recognize when the grant term met the natural disaster event.
4. Onerous Contract
 Lease and supply contract with clause of unforeseeable circumstances that prevent
someone to fulfill a contract is allowed terminated without penalty.
5. Future loss and clean up cost
 Not recognize. Not meet definition of a liability under IAS 37.
6. Going Concern
 Assess ability of entity to continue as going concern.
7. Effect on debt covenants.
 Issues of classification of debt as current or non current
8. Additional Disclosure
 All of the area listed above require significant judgement .
 IAS 1 consider whether disclosure is require to enable user to understand.
Global Event on financial reporting
1. Ability of business continue as going concern.
2. Impairment of non-financial asset.
 Decrease demand in product
3. Rent concession or negotiated the term of lease
4. Change to classification of financial asset that are debt instrument.
 Amend of business model
5. Impairment of financial asset
 Economic activity reduce affect on future credit loss.
6. Government grant
 IAS 20
7. Revenue Recognition
 Estimates of variable consideration affected (decrease in demand lead to increase
in expected product return)
 IFRS 15 require variable consideration recognized only when it is highly probable
that amounts will not reversed.

Climate Change
1. Climate change
 Limit on carbon emission policy affect the business operation
 Pressure from investor to take climate change into account.
2. Narrative reporting on Climate-related financial disclosure
 Investor demand.
3. Accounting
 Follow disclosure recommendation developed by Task Force on Climate-related
Financial Disclosure

Going Concern
1. IAS 1 Presentation of financial statement requires management to make an
assessment of whether the company is a going concern.
 Entity FS prepared on basis of going concern unless management intend to
liquidate entity.
2. Management apply judgement to determine whether the company is going concern.
 Judgement involve become greater if economic situation is difficult (covid-19)

Key point
1. IAS 1 requires management to look out at least 12 months from the reporting date
when assessing going concern. This is the minimum time frame management should
consider not a cap on timeframe.
2. The assessment of going concern must include the effect of events occurring after the
reporting date up to date of financial statement are authorized for issue
3. Management must assess whether disclosure about significant judgement made as part
of the assessment of going concern should be disclosed under the general disclosure
requirement of IAS 1.
4. In a stressed economic environment, investor and user of FS are likely to be very
interested in disclosures about going concern.