Category Archives: Accounting

IAS 21 The effects of changes in foreign exchange rates

(i) Single transaction:

When you purchase/sell goods from/to other company in other countries

Step1: You need to firstly translate this transaction in functional currency at spot rate.

Step2: You need to retranslate the monetary item (Bank, receivable, payable,NCL,CL) at the year end and leave non-monetary items(NCA, CA).


How to determine your functional currency?

Mainly this is the currency that when you’re trying to prepare your trial balance.

Factors to consider:

  1. Which currency you use to determine selling price and costs?
  2. Which currency is your competitor use to determine selling price or costs?
  3. Which currency you use to finance your business?
(ii) group consolidation

Statement of financial position:       closing rate

Statement of comprehensive income: average rate


IAS 20 Government grants

What is government grant?

Government grant is the cash or asset given by government to help company if it fulfills the conditions set by government.


This may be categorized as:

Capital grants- grants which are made to contribute towards the acquisition of asset

Revenue grants- grants which are made for other purposes like paying wages.


When recognized?

A grant can be recognized in the FS when:

  1. entity complies with the condition set by government
  2. the grants will be received.

Usually we will use the deferred income method to reverse the deferred income over the useful life of asset.

And this is based on “Accrual” concept or Matching principle.



Accounting policy adopted, including method of presentation(net off or separate method?)

Nature and extent of government grants recognised and other forms of assistance received

(eg, buy a machine?)

Unfulfilled conditions and other contingencies attached to recognised government assistance

(eg, repayment?)


Accounting treatment:

Capital grant:

2 treatments both acceptable in IAS but treatment 1 is banned in UK

treatment1, (net off method)

Step1: Decrease grant from NCA which becomes net cost

DR cash

CR non-current asset


Step2: Depreciate the net cost

DR I/S-depreciation expense

CR accumulated depreciation



treatment2, (separate method)

Step1: Treat the grant separately

DR cash

CR deferred income


Step2: Release deferred income matched with depreciation expense of asset:

DR deferred income (over life of asset)

CR I/S(revenue)




Revenue grant


DR cash

CR deferred income


And subsequently release the deferred income matched with expenses as it is occurred.


IAS 19 Employee Benefits

Some companies will offer benefit to its employees. These benefits may include:

  1. Short term benefit:(accounting: expense and liability )
  2. Monetary benefit:
    • Wages and salary
    • Paid sick leave
    • Compensated absence.
  3. Non-monetary salary: 
    • Medical care, housing, cars etc
  4. Long term benefit:shares (IFRS2), bonus, etc. (Accounting: easier than pension accounting. Only to show costs, asset and liability if company has invested their money in other instrument before paying for cash)
  5. Termination benefit:redundancy payments; early retirement payments etc. (accounting: expense and liability )
  6. Post-employment benefit: pensions etc.
Talking about pensions there’re two types of pensions.

They are defined contribution scheme and defined benefit scheme(we’ll talk about those below)

  1. Defined contribution scheme
    • The company doesn’t guarantee the final payment to employees.
    • Company and employee will put the money into the scheme run by the trustee each year and when employees retire then they get the money which is not fixed(defined).
    • If the trustee did a bad job, eg, invest money into shares and suffered a loss then company didn’t have enough money to pay off to the employee then company will have no further obligation for those money.
    • Risk is not born by the company but by the employee.
    • The accounting for this is to DR I/S CR cash each year.
    • Accounting: DR I/S CR Cash(income statement charge would equal to cash paid.)
    • Company does not recognize the asset and liability in their account because they have transferred all the risks and rewards of these to the trustee or agent.

  3. Define benefit scheme
    • The company will guarantee the amount of money paid to employees when they retire and this will be based on number of years that employee has worked for company and the their final salary as well.
    • The company will put money into the pension scheme each year to create pension asset(eg, buying shares etc) to be paid off to employees(settle pension liability) when employees get retired.
    • The question is whether company will have sufficient pension asset to pay off the pension liability? So the company will employ an actuary to value the pension asset and liability each money and any deficit occurred would require the company to put money into it again.
    • Dose the company recognize the asset and liability in its financial statements? Well the answer is yes because the company hasn’t transferred the risks and rewards to the trustee because company has to paid off to settle the pension liability even if the trustee has done a bad job (eg,lose money into its assets.)

And this is according to substance over form.


The actuary would value the pension asset and liability based on a number of assumptions:

  • Level of investment return from pension assets
  • Number of income/outgoing employees etc.

The accounting for this is to separate assets and liabilities. (remain in company’s account)




Asset Liability
b/f bal b/f bal
Return on asset Interest cost
Contributions in Service cost
Benefits out Benefits out
Actuarial gains/losses Actuarial gains/losses
c/f bal c/f bal




  • b/f bal (c/f from last year by actuary)
  • Return on asset(discount rate X b/f): DR asset CR I/S
  • Interest cost (discount rate X b/f): DR I/S CR liability
  • Contributions in (company putting money in): DR asset CR cash (only cash item)
  • Service cost (including current&past service cost: employees work for you and you have to pay for them): DR I/S CR liability
  • Benefits out (money paid to those retired): DR liability CR asset
  • c/f(by actuary then b/f to next year)
  • Actuarial gains/losses:

Gain: DR liability CR OCI  
Loss: DR OCI CR liability

IAS 18 Revenue Recognition

IAS18 revenue recognition

When do we actually recognize the sales revenue during a transaction?

Mnemonics: [SIRRR]


  • S: Stage of completion-(refer to service rendering)
  • I: Managerial Involvement
  • R&R: risks and rewards has been transferred from seller to buyer
  • R: revenue and expense can be reliably measured

IAS 17 leases


You want to have a photocopier and you have two choices:

  1. you can buy it and then you become the owner of the photocopier;
  2. you can lease it from the lessor and then you would become the lessee.


IAS 17 leases describes two types (forms) of leases:

*Finance lease: lease that transfers the risks and rewards of the asset from the lessor to the lessee.

*Operating lease: any leases other than finance lease.


5 senarios

So the substance over form concept behind it can be summarized as follows:

IAS 17 prescribes there are 5 common scenarios that the lease is a finance lese. (one of them fulfilled then it’s a finance lease and if none of them fulfills then it’s an operating lease.)

  1. ownership of asset has been transferred from lessor to lessee.
  2. lessee has the option to purchase asset at a price which is sufficiently lower than its FV.
  3. lease term is almost the same as the major part of economic life of asset.
  4. (IFRS doesn’t specify the period but US GAAP has given us guidance of >75%.)

  5. at the start of the lease, PV of minimum lease payment is close to FV of asset.
  6. (again, IFRS doesn’t specify the percentage but US GAAP has given us a guidance of >90%.)

  7. leased assets are specified nature and can only be used by lessee and they can be used by others if any significant modification to assets occurs.


Risks and rewards

But the idea behind it is when the majority risks and rewards has been transferred from the lessor to lessee then it’s considered to be a finance lease.

So the typical risks and rewards may include:


  • costs of repairing, maintaining and insuring the assets.
  • Risk of obsolescence
  • Risks of losses from idle capacity of the asset (if machine breaks down then lessee bears the loss)


  • Use of assets for almost all of its useful life.
  • Use of the assets is not disrupted.


Accounting Treatment:


  Lessee(F7) Lessor(P2)
Finance lease:
Initial measurement DR PPECR lease liability DR lease receivableCR lease asset
Subsequent measurement PPE: DR I/S-depre expense

CR accumulated depreciation


Lease liability:

DR lease liability

DR I/S-finance cost

CR cash






DR cash (from lessee)

CR lease receivable

CR I/S-interest income

Operating lease:
Expense the lease payment on a straight line basis 


CR cash

Expense the lease revenue received on a straight line basisDR cash


Keep the assets in FS and depreciates it.

DR I/S-depreciation expense

CR accumulated depreciation


IAS16 property, plant &equipment

Initial measurement:

Capital expenditure

Capital expenditure is the costs of acquiring non-current assets.

According to IAS 16 the following costs may be capitalised in the statement of financial position on acquisition of a non-current asset:

(Mnemonic: IIIID)

Initial cost (purchase price)

Import duty not refundable(if asset is bought from other country)

Installation costs

Intended use relating costs (lawyer, surveyor costs)

Delivery costs

Finance cost

Revenue expenditure

Revenue expenditure is expenditure on maintaining the capacity of noncurrent assets. Costs that are regarded as revenue expenditure should be  expensed in the statement of profit or loss and other comprehensive income and may not be capitalised according to IAS 16 are:

(Mnemonic: RIM)

Repairs expenses

Insurance expenses

Maintenance expense

After we’ve purchased the non current asset the accountant needs to record that non current asset into the non- current asset register.

A non-current asset register is generally maintained in the finance department.

Companies can purchase specifically designed packages or a register can simply be maintained on an Excel spreadsheet.

And this is used to reconcile the NCA in the NCA register to the individual asset in place, ie, an example of control procedure by company.
Sample of Non-current asset register:

Asset type Date purchased Description Cost Depreciation Carrying value Disposal proceeds Disposal date
Machine 1 July 2013 Drink machine $7m        
  Year ended 31 DEC 2013     $700,000 $6.3m    
  Year ended 31 DEC 2014         $3m Jan-2014


Subsequent measurement

Cost model : cost-accumulated depreciation*=carrying value

Depreciation method should be reviewed each year to see whether or not it is reasonable. A change in depreciation method should be treated as a change in accounting estimate and prospective adjusting method according to IAS 8 should be applied. Ie, disclose the depreciation method in the note of the financial statements.

Revaluation Model: revalued amount

  • Depreciation
  • Revaluation
  • Disposal
  • Impairment [IAS 36] (see F7 & P2)
  • Non-current asset held for sale & discontinued operations[IFRS5] (see F7 & P2)


IAS 16 the test was whether the expenditure was Capital or Revenue e.g. an improvement could be capitalised but maintenance or repair could not be capitalized.

The following circumstances should be capitalized:

  • Life extension
  • major overhaul cost
  • separate component, eg, new enguine for an aircraft
  • energy saving, eg, improving production capacity


Methods of depreciation

  1. straight line basis depreciation:
    Idea: An equal amount is charged in every accounting period over the life of the asset.


    Depreciation per year = original cost – estimated residual value

    Estimated useful life

    Or = % X cost

  2. reducing balance basis depreciation
    Idea: at the start of year we charge more depreciation and at the end of the year we charge less depreciation given the fact that machine will be less efficient at the end of its life, ie, less revenue can be earned so less expenses matched against with it.


    Depreciation per year = % X carrying value


    Dr Depreciation expense            (Statement of profit or loss and other comprehensive income)

    Cr Accumulated depreciation          (Statement of financial position)
    Financial statements

    Non–current assets $
    Property, plant & equipment(note1) 184,490



      Cost Accumulated depreciation Carrying value
    Non-current assets:      
    Property 150,000 (12,000) 138,000
    Motor vehicles 45,000 (11,250) 33,750
    Plant & Machinery 26,000 (13,260) 12,740
      221,000 (36,510) 184,490


    2, revaluation


    Basic Idea:

    As time goes by initial costs of asset may be very different from their market value.

    Eg, if a company purchased a property 35 years ago and therefore subsequently charged depreciation for 35 years, it would be safe to assume that the carrying value of the asset would be significantly different from today’s market value.

    If revaluation policy per IAS 16 may be adopted (i.e. the business has a choice), and if so the following rules must be applied per the standard:

    1. No Cherry picking(If a company chooses to revalue an asset they must revalue all assets in that category.)
    2. Regular (Revaluations must be regular but IAS 16 doesn’t specify how often)
    3. Revalued amount(Subsequent depreciation must be based on the revalued amounts.)
    4. Revaluation Reserve (Gains from revaluations are taken to revaluation reserve rather than retained earnings unless they are sold)



    Revalued amount X
    CV of asset on revaluation date (X)
    Revaluation gain/(loss) X/(X)




    DR Asset cost                    (Statement of financial position)

    DR Accumulated depreciation    (Statement of financial position)

    CR Revaluation reserve          (Statement of financial position)


    3, Disposal

    Basic Idea

    An asset should be removed from the statement of financial position on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal


    Cash sale/part exchange X
    CV of asset at disposal date (X)
    Profit/(loss) on disposal X/(X)



    1. Cost Removal
      • DR Disposals
      • CR Non-current asset Cost
    2. Accumulated Depreciation Removal
      • DR Accumulated Depreciation
      • CR Disposals
    3. Proceeds to be dealt with in cash/part exchange

      In cash:

      • DR Bank
      • CR Disposals

      Part exchange:

      • DR Asset Cost
      • CR Bank
      • CR disposals

IAS 12 Income taxes

Current tax:

Companies have to pay tax on taxable profits. The tax charge is normally ESTIMATED at the end of the financial year and charged to the statement of profit or loss and other comprehensive income, and paid in the following year.

The double entry for taxation would be:

DR Taxation expense       (Statement of profit or loss and other comprehensive income)

CR Taxation liability         (Statement of financial position)


The double entry for when the tax is paid a few months later:

DR Taxation liability        (Statement of financial position)

CR Bank                    (Statement of financial position)


Since the amount paid is likely to differ from the estimated tax charge originally recognized, a balance will be left on the taxation liability account being an under or over provision of the tax charge.


Deferred tax


So we know that deferred tax is a future obligation to be settled by company depending on the future tax law. So deferred tax does not necessarily fulfill the liability definition (present obligation).

Deferred tax arises because of temporary differences (TD). Temporary difference is the difference between CV and TB.



TD:Temporary difference between carrying value and tax base

CV:  Carrying value of asset/liability.

TB:tax base in the tax man’s book.(in real practice we will try to refer to different tax regulations to calculate the tax base)

DT:Deferred tax liability/asset

CT%: Corporation tax rate

Deferred tax is a future liability recognized today. And deferred tax is based on temporary difference (timing difference between accounting and tax law). So the amount we owe to the tax authority will be finally paid back to them in the subsequent years.

IAS 11 construction contract

IAS 11 construction contract



1,When you’re trying to build this tower it may take you more than 1 year to finish. After finishing off this tower and you may try to sell off to the client.

So before finishing off this tower will you keep it as a inventory?(IAS2)

The answer is no! Remember inventory is current asset which is less than 1 accounting year.


2,Next question is because the contractor is building this tower so he may have to pay for material, labor costs etc. So when is the cost being recognized?

The contractor can get the sales revenue only when after selling off this tower to client. So before selling off this tower, the contractor gets no cash from the client. So does the contractor recognize no revenue at all?


To answer this question:

According to Prudence concept, the sales revenue should be recognized after this tower has been sold off to the client.

According to Accruals concept, the expenses relating to the building of the tower should be matched with the revenue from the tower.

So one is contradict with another. But here in this case, Accruals concept wins.


3,But how much does the revenue and expenses should be recognized?

IAS 11 Construction Contract gives us the guidance.




Guidance by IAS 11 construction contract (Diagram)




5, Stage of completion


Sales basis method (work certified method):

work certified to date

contract price


Cost method:

costs incurred to date

total contract costs



IAS 8 Accounting policies, changes in accounting estimates and errors

Accounting policies:

  1. Measurement basis of the figure, eg, value the inventory using FIFO but now use weighted average method; use replacement cost rather than historic cost.
  2. Recognition basis of the figure, eg, recognize as an expense before but now for asset(eg,IAS 23 borrowing costs)
  3. Presentation basis of the figure, eg, recognize the depreciation expense into cost of sales now rather than in administrative expenses before.


Accounting estimate:

Something relating to your experience

  1. Allowance for receivables;
  2. Useful life/ depreciation method of the non-current assets;
  3. Warranty provision relating to return of goods from customers.



Retrospective adjusting Prospective adjusting
change in accounting policies Change in accounting estimate
Error found in last year’s account



IAS 2 Inventory

  1. initial recognition
    • How to establish the cost of inventory initially?
  2. subsequent measurement
    • Basic idea: The lower of cost and net realizable value (prudence concept)
    • Cost: FIFO; Weighted average method
    • Net realizable value
  3. where does it fit into the financial statements?
    • Statement of financial position-closing inventory
    • Statement of profit or loss and other comprehensive income-cost of sales
    • Accruals concept (matching principle)-closing inventory adjustment
  4. Disclosures

1 Initial measurement

Inventory= quality X value

            (Number of inventory purchased X historical cost)*


*Historical cost:

  1. Cost of purchase: purchase price, import duties but excluding discounts
  2. Cost of conversion relating to production(direct/variable overheads)
  3. Eg, labour costs in factory; (but labor costs relating to marketing department is not) machinery depreciation

  4. Other costs happened necessary to bring the inventory to its intended location and condition

Eg, Carriage inwards can be cost. But carriage outwards is expense


2 Subsequent Measurement (valuing closing inventory)

Inventory= quality X value

           (Closing inventory X    (using FIFO, WAC))


Lower of cost and net realizable value

 Aim: not to overstate the asset(inventory) figure, ie, be prudent.


For statement of financial position, closing inventory will appear under current assets and if there’s more closing inventory then it will make statement of financial position look better.

For statement of profit or loss and other comprehensive income, if there’s more closing inventory, then there’ll be less cost of sales then overstate the profit.

1 What is “and”?

Inventory number Cost NRV Lower of cost or NRV
*1 5 3 3
*2 5 2 2
*3 3 5 3
*4 2 3 2
15 13 10


No netting off.

-inventory 3,4 have risen in value and it will be net off by inventory1,2 if we choose NRV=13.

-so we should choose 10.


2, Cost


What comes in first then goes out first;

Used for perish goods such as meat


Weighted Average Cost: used when inventory movement is unknown and price is not consistent. Think about petrol




LIFO(banned): what comes in last then goes out first. Think about technology companies. In USA, this is allowed.


3 Net realizable value (NRV)   (Example 3 Jonny ltd)

=estimated selling price-estimated cost to sell


3 Where does inventory fit into?


Statement of financial position as at 31 DEC 2014 for Manny company:

Current assets $
Inventory 8,990


Statement of profit or loss and other comprehensive income (extract) for the year ended 31 DEC 2014 for Manny company:

  $ $
Sales revenue $78,559
Cost of sales
Opening inventory 8,009
Purchase 5,889
-closing inventory (8,990)
Gross profit 73,651



4 disclosures


1, Accounting policy for inventories:


     -Weighted average method?


2, Carrying amount of any inventories at fair value less costs to sell (NRV).


3, Total carrying amount of inventories and each type of inventories:


Raw materials        1,000

Work in progress     2,000

Finished goods        1,000

Total                4,000