Category Archives: Accounting

Financial Instrument [IAS32; IAS 39; IFRS 9; IFRS 7]


Basic Idea:

Financial instrument :

Any contract that gives rise to both a financial asset of one entity and a financial liability or equity instrument of another entity.

Financial asset:

This is a contract if a party is holding then it can give benefit to the holder.

Financial liability:

This is a contract if a party is holding then it will deliver cash to other party or cost us something when exchanging financial instrument.

Eg, Debt; redeemable preference shares.


Equity instrument

Something not for cash or any other assets but they are settled in shares.

Eg, Shares; irredeemable preference shares.

IFRS 8 Operating Segments

Basic idea:

The aim of the IFRS8 is to give more information to the users of FS to make their economic decision.

Think about it in this way, if you have a company which is operating in many industries such as retail, mineral, financial services & education etc. If there’s a rise in price due to increase in transportation fees then which industry will be mostly affected?

Well to some extent, the retail industry will be mostly affected and the financial service and education will be least affected. So when investors try to invest their money into these industries they want to know these segments (companies in different industries) are operating effectively so we come to IFRS8.

Another example would be if a company has many subsidiaries all round the world such as in Asia, America, Canada, Singapore etc. and if you want to invest your money into these companies say in China and you want to know whether the company operating in China will be good and maybe you will then take into account of political reasons etc.



So IFRS8 here just gives us some guidance of when trying to show the results of different companies, how to do that?
Firstly, we should decide whether this is an operating segment?

An operating segment would have the following features:

  1. It has business activities earning revenue and incurring expenses.
  2. The operating results will be reviewed by CEO to make economic decisions.
  3. There’s separate financial information for each segments showing assets, liabilities, revenue, expenses and profits etc.

Secondly, once it fulfills the definition of operating segment then you will need to decide whether this would be reportable?

An operating segment would be reportable if:

  1. It’s more than 10%of revenue, profits or assets of all segments;
  2. If there’s a loss then we need to decide whether the loss is higher than the higher of total profits and loss and if no then it doesn’t fulfill this criteria.

Only one of the criteria needs to be fulfilled.


Thirdly, once the operating segments are classified but they do not add up to 75% in total then we need to break the other operating segments down in order to make the total up to 75%.

  • If other operating segments doesn’t fulfill the definition of operating segement then we can bring them together if they have similar products/types of customers/distribution methods or regulatory environment.


Fourthly, we need to decide how to disclose the operating segements.

  • Revenue, total assets&liabilities, interest income&expense, tax&depreciation should be disclosed.

IFRS 5 Non-current Assets Held for Sale and Discontinued Operations

Non-current assets held for sale:

When the non-current asset within your company is about to be sold to the 3rd party maybe because its falling in value then if some criteria are fulfilled then you can reclassify this non-current asset into current asset as “NCA HFS and discontinued operations” under IFRS5.


The idea behind the criteria is that you should prove that this sale is probable:

  • Selling purposes by management
  • Available for sale under current condition
  • Locate a buyer actively
  • Expected to complete within 12 months from the year end

If the above criteria are proved then company can reclassify the non-current asset into non-current asset held for sale under current asset.


Initial measurement:

  • Write down to net realizable value of the asset if it’s a non-current asset held for sale.

    Same idea behind inventory (lower of cost and NRV)-impaired!

    Trick: pick up the lower figure

    Double entry: (NRV<CV)

    • DR non-current asset held for sale (current asset) (statement of financial position)
    • DR I/S(balancing figure)                      (statement of comprehensive income)
    • CR PPE                                            (statement of financial position)

    Double entry: (NRV>CV)

    • DR non-current asset held for sale (current asset) (statement of financial position)
    • CR PPE                                            (statement of financial position)


Subsequent measurement:

  1. no depreciation or amortization (because we are not consuming the asset any more-not for continued use but for sale.)
  2. further impairment losses
  3. DR I/S

    CR non-current asset held for sale


Discontinued operations

A discontinued operation is an operation if it’s closed or sold during the year or held for sale at the year end.

A discontinued operation should:

  1. Dispose of or plan to dispose of a separate major line of business or geographical area of operations;
  2. (Major line of business: eg, financial service industry; supermarket. geographical area: Canada division)

  3. A subsidiary acquired exclusively with a view to resale.
  4. Note: it should be subject to impairment as well same as above. But the key to discontinued operations is about “DISCLOSURE”. (to help users predict future performance based on continuous operations.)


    Net cash flow detailing operating, investing and financing activities.

    Single line in the statement of comprehensive income showing post tax profit or loss on discontinued operation.


    Analysis of the profit or loss above in the note detailing how to arrive this figure showing detailed:

    Revenue $1,000
    expense $50
    Pre-tax profit $950
    Income tax

      Current tax

      Deferred tax





    Gains/losses on measurement to NRV


IFRS 2 Share Based Payment

Basic idea:

Share based payment really covers a lot of areas.

Senario1: If you are going to purchase something but you are not paying cash but instead you are paying in shares or share options and you can use IFRS2.

Senario2: If you are going to give some incentive to the management of your company saying to them if you work for me for the next 10 years then I will give you shares/share options then you can also use IFRS2 to account for it.

The issue with senario1 is about measurement of the value. Because you are going to pay in shares/options and if you can establish the fair value of the item you bought(usually in selling price) then you should use the fair value of the item you bought otherwise you can use the fair value of the shares.

The issue with senario2 is about recognition and measurement of the expense.


If you think about it that you are trying to give incentive to management by offering them shares at the end of 5(say) years they have worked for you, the shares you are going to give to them actually cost you nothing because you’re just giving shares to them so does the company have to recognize the related expense to the financial statement?


Well, IFRS2 says because management has worked for the company and the company is going to give shares usually at a low price to the management but otherwise they could trade it in the stock market at a higher price so company should recognize an expense relating to it.

Some companies may also argue that recognizing the share based payment expense will double hit the EPS because as expenses are recognized and shares are issued then EPS will be twice lower. But as long as management has provided the service for you and you earn the revenue then you should recognize the expense and also you are going to give them shares and of course you have to take them into account into the FS as well for PRUDENCE concept.


The question is how can we measure the expense?


Step1: identify the type of scheme. Pay (settle) in shares or cash?


Step2: follow the formula:

Obligation= number of rights expected to vest X FV X timing ratio



The total expense we should recognize at the end of the vesting period.

There may be changes in the expense we recognize each year because of our estimates and any changes in them would be a change in accounting estimate and this would be accounted for under IAS8 by just using prospective adjusting method. In order words, just provide for it.


number of rights expected to vest:

number of people left the company+no of people expected to leave next year


Fair value (FV)

If it’s settled in shares then FV should use the value at grant date because it has been written into the contract.

If it’s settled in cash which means the company will pay cash to the employees based on the future share price. So if the share price at the end of the vesting period(the end that employee has worked for the company)is $50m then CR liability 50m. so the Fair value here will be the FV of options at the end of each year.

Timing ratio=year end / vesting period


IAS 40 investment property

Basic Idea:

If you are going to not invest your money into buying shares but instead investing your money into some land and buildings to earn capital gain(non-cash item) or let it out to earn rental income(cash item), well this is investment property.

Classification of investment property:

Investment purpose (earns capital gain or let it out to earn rental income and if not:

Use by company: IAS 16; held for sale: IAS2)

Complete(asset has been completed and if not, IAS 16 until it’s finished)


And they should be recognized at cost initially.


Subsequent measurement:

  1. Fair value model (widely used)

    Get the fair value:

    • From Price
    • From Similar asset within the area
    • From Value from institution for similar assets
    • From Discount future cash flow


    Then any gain/losses should be recognized into the Income statement.

    Gain: DR Investment property(NCA)

    CR I/S

    Loss: DR I/S

    CR investment property(NCA)

    If the fair value cannot be obtained by the company then it can use cost model(IAS16)


  2. Cost Model (Rarely used)

    Recognized the investment property at cost and depreciate over its useful economic life.



    Fair value model

    An entity that adopts this must also disclose a reconciliation of the carrying amount of the investment property at the beginning and end of the period.


    Opening IP value 100


    Closing IP value150

    Cost model

    These relate mainly to the depreciation method. In addition, an entity which adopts the cost model must disclose the fair value of the investment property.

IAS 37 provisions, contingent liabilities and contingent assets

  1. Provision:
    A provision is an uncertain future obligation that the business may or may not have to settle.

    You can only recognize the provision if these 3 criteria are met: (mnemonics: POR)

    P: probable that resources will be transferred to settle the liability(asset/other resources);
    O: present obligation whether it’s legal (law) or constructive (published information) from past event;
    R: reliable estimate of the amount of payment can be made.

    Double entry:

    DR Relevant expense a/c       (Statement of profit or loss and other comprehensive income)

    CR Provision                    (Statement of financial position)

  1. Disclosure: (to show how the opening provision may be reconciled to the closing provision)


    Opening provision     $55m


    Closing provision      $75m


  1. contingent liabilities

    A contingent liability exists when:


    A possible obligation that arises from past events and existence will only be confirmed by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.



    A present obligation that arises from past events but it fails criteria P and R (above) of a provision.



    1. nature of contingent liability
    2. likely financial effect
    3. uncertainty of the amount and timing

  3. contingent assets

    A contingent asset arises from probable future income.


    It is a probable/possible asset that arises from past events whose existence in confirmed by the occurrence or non occurrence of uncertain future events not wholly within the control of the entity.


    If it becomes virtually certain(>95%) that the company can receive the asset rather than just a contingent asset so that they can recognize the asset in the financial statements rather than disclose it.


    Disclosure: (when it’s probable)

    1. nature of contingent liability
    2. likely financial effect


    To sum up:

      Liability (outflow) Asset  (inflow)
    Probable(>50%) Provide (provision) Disclose
    Possible(20%-50%) Disclose Ignore
    Remote(<20%) Ignore Ignore


IAS 36 impairment of assets

Impairment means decrease. According to prudence concept we cannot overstate the asset value. And in order to ensure that amount is prudent we can use a test called impairment test.

This standard sets out that when the carrying value of an asset in the FS is greater than its recoverable amount (company can recover money from the asset at the end of its useful life) then the carrying value is reduced to its recoverable amount. (choose the lower amount).

Reduction in carrying value is called impairment loss. Defined by IAS 36:

The amount by which the carrying amount of an asset or cash-generating unit exceeds its recoverable amount.

The question is when do we do the impairment test and how can we do that?


  1. Indication of impairment at the reporting date
  1. Internal:

    • Asset obsolete or damage;
    • Operating losses for the current period;
    • Loss of key employees;
    • Reconstructions.


    • Adverse change in the commercial environment(decrease demand for the asset)
  1. Test annually for certain assets:
    • Intangible assets with an infinite useful life;
    • Goodwill acquired in a business combination.


    1. Steps for individual asset:


      Step1: Compare CV with RV*(higher-step2)

      Step2: Take the higher of VIU*(future cashflow discounted) and NRV(price-cost to sell)

      Step3: CV-RV=impairment loss

      *RV=recoverable amount:how much money can I get if I’m going to sell it(NRV) or use it(VIU).

      *VIU=value in use(using this asset then it will generate into future cash flow)

      And in the real practice this is from the most recent budget and a maximum of 5 years.


    3. Accounting entries:
    4. Asset at historical cost Revalued asset
      DR I/S

      CR NCA

      DR revaluation reserve

      DR I/S(balancing figure with any excess impairment)

      CR NCA


    5. Impairment for cash generating units (CGU)
    6. What CGU actually means is that we cannot estimate how much cash flow that a component can generate but if we were to put all these components all together then they will generate into cash flows.

      The steps to measure impairment in CGU:

      Step1: Specific assets

      Step2: Goodwill

      Step3: Remaining

      Note: we can’t allocate impairment expenses to montary assets such as cash, receivable and payables.

IAS 24 Related Party Disclosures

The IAS 24 related party disclosures is just to do with disclosure of the related parties not the accounting treatment of it.

IAS 24 just discloses there is a possibility that results may be affected by buying or selling things from/to related parties.


  • Parties are related if one party has control or significant influence over the other party.
  • Related party transactions are transactions between related parties.


  • If A controls(>50%) or joint controls(=50%) B and have significant influence over C then A&B are related parties, A&C are related parties as well. Also B&C are related parties because A could have power to force one sub to do something against another.
  • If A have significant influence over B&C then A&B, A&C are related parties but B&C are not related parties because A can’t control over B or C to do something.

  • If a person has significant influence or control over A then this person&A are related parties. (particularly if this person is a member of the key management team in A or close family)
  • IAS 24 states there are particularly some situations which may be related parties transactions:
    • Associate and subsidiary
    • Key management
    • Post-employment benefit: pension plan
    • Close family
  • So what should we disclose under IAS 24 related party disclosures?
    • Transaction: purchase/sale of goods?
    • Parties: X Company; Y Company.
    • Relationship: eg, parent and subsidiary
    • Value: $
    • Date

IAS 23 borrowing costs

When you’re trying to build a building then you may borrow money from the bank and the bank may charge you interest. Maybe you should expense them in the I/S? or you can capitalise them as cost to the building and depreciate them over the useful life?

Well IAS 23 borrowing costs specifies that in some circumstances that these interest expense can be capitalised as cost to the building.

  1. it should be a qualifying asset:

    the asset takes a substantial period of time to get ready for its intended use or sale.


    • Inventories that require a substantial period of time to bring them to a saleable condition, eg, a big ship
    • Manufacturing plants
    • Power generation facilities
    • Investment properties

  1. The amount to capitalise?
    • Borrowing costs – temporary investement income
    • General funds raised not specific for the asset? (use weighted average borrowing costXasset value)

  3. when to capitalise?
    1. Start capititalisation:

      Later of:

      • activity begins (start building)
      • Borrowing costs incurred (take loan)
      • Buy something(buy the land)
    2. Pause to be capitalised
      • When the activity is disruppted, eg, strike
    3. Ceased to be capitalised
      • When the asset is intented for use not necessarily actually for use.
  4. Disclosure:
    • Amount of borrowing cost capitalised during the period
    • Capitalisation rate used