International Accounting Standards

Last Revised

IAS 1-Presentation of Financial Statements

June 2005

IAS 2-Inventories

December 2003

IAS 3 – Consolidated Financial Statements. Originally issued 1976, effective 1 Jan 1977. No longer effective. Superseded in 1989 by IAS 27 and IAS 28

IAS 4 – Depreciation Accounting. Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which were issued or revised in 1998.

IAS 5 –  Information to Be Disclosed in Financial Statements. Originally issued October 1976, effective 1 January 1997. No longer effective. Superseded by IAS 1 in 1997.

IAS 6 – Accounting Responses to Changing Prices. Superseded by IAS 15.

IAS 7 – Cash Flow Statements

1992

IAS 8 – Accounting Policies, Changes in Accounting Estimates, and Errors

December 2003

IAS 9 – Accounting for Research and Development Activities. Superseded by IAS 38 effective 1.7.99.

IAS 10 – Events After the Balance Sheet Date

1999

IAS 11 – Construction Contracts

1993

IAS 12 – Income Taxes

2000

IAS 13 – Presentation of Current Assets and Current Liabilities. Superseded by IAS 1.

IAS 14 – Segment Reporting

1997

IAS 15 – Information Reflecting the Effects of Changing Prices

Withdrawn December 2003

IAS 16 – Property, Plant and Equipment

December 2003

IAS 17 – Leases

December 2003

IAS 18 – Revenue

1993

IAS 19 – Employee Benefits

December 2004

IAS 20 – Accounting for Government Grants and Disclosure of Government Assistance

1983

IAS 21- The Effects of Changes in Foreign Exchange Rates

December 2003

IAS 22 – Business Combinations. Superseded by IFRS 3 effective 31 March 2004.

1998

IAS 23 – Borrowing Costs

1993

IAS 24 – Related Party Disclosures

December 2003

IAS 25 – Accounting for Investments. Superseded by IAS 39 and IAS 40 effective 2001.

IAS 26 – Accounting and Reporting by Retirement Benefit Plans

1987

IAS 27 – Consolidated and Separate Financial Statements

December 2003

IAS 28 – Investments in Associates

December 2003

IAS 29 – Financial Reporting in Hyperinflationary Economies

1989

IAS 30 – Disclosures in the Financial Statements of Banks and Similar Financial Institutions. Superseded by IFRS 7 effective 2007.

1990

IAS 31 – Interests In Joint Ventures

December 2003

IAS 32 – Financial Instruments: Disclosure and Presentation. Disclosure provisions superseded by IFRS 7 effective 2007.

August 2005

IAS 33 – Earnings Per Share

December 2003

IAS 34 – Interim Financial Reporting

1998

IAS 35 – Discontinuing Operations. Superseded by IFRS 5 effective 2005.

1998

IAS 36 – Impairment of Assets

March 2004

IAS 37 – Provisions, Contingent Liabilities and Contingent Assets

1998

IAS 38 – Intangible Assets

March 2004

IAS 39 – Financial Instruments: Recognition and Measurement

August 2005

IAS 40 – Investment Property

March 2004

IAS 41 – Agriculture

2001

SUMMARY OF IAS 1

Objective of IAS 1

The objective of IAS 1 (2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure comparability both with the entity’s financial statements of previous periods and with the financial statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial statements, guidelines for their structure and minimum requirements for their content. [IAS 1.1] Standards for recognising, measuring, and disclosing specific transactions are addressed in other Standards and Interpretations. [IAS 1.3]

Scope

Applies to all general purpose financial statements based on International Financial Reporting Standards. [IAS 1.2]

General purpose financial statements are those intended to serve users who are not in a position to require financial reports tailored to their particular information needs. [IAS 1.7]

Objective of Financial Statements

The objective of general purpose financial statements is to provide information about the financial position, financial performance, and cash flows of an entity that is useful to a wide range of users in making economic decisions. To meet that objective, financial statements provide information about an entity’s: [IAS 1.9]

• assets
• liabilities
• equity
• income and expenses, including gains and losses
• contributions by and distributions to owners
• cash flows

That information, along with other information in the notes, assists users of financial statements in predicting the entity’s future cash flows and, in particular, their timing and certainty.

Components of Financial Statements

A complete set of financial statements should include: [IAS 1.10]

• a statement of financial position (balance sheet) at the end of the period
• a statement of comprehensive income for the period (or an income statement and a statement of comprehensive income)
• a statement of changes in equity for the period
• a statement of cash flows for the period
• notes, comprising a summary of accounting policies and other explanatory notes

When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements, it must also present a statement of financial position (balance sheet) as at the beginning of the earliest comparative period.

An entity may use titles for the statements other than those stated above.

Reports that are presented outside of the financial statements – including financial reviews by management, environmental reports, and value added statements – are outside the scope of IFRSs. [IAS 1.14]

Fair Presentation and Compliance with IFRSs

The financial statements must “present fairly” the financial position, financial performance and cash flows of an entity. Fair presentation requires the faithful representation of the effects of transactions, other events, and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the Framework. The application of IFRSs, with additional disclosure when necessary, is presumed to result in financial statements that achieve a fair presentation. [IAS 1.15]

IAS 1 requires that an entity whose financial statements comply with IFRSs make an explicit and unreserved statement of such compliance in the notes. Financial statements shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs (including Interpretations). [IAS 1.16]

Inappropriate accounting policies are not rectified either by disclosure of the accounting policies used or by notes or explanatory material. [IAS 1.16]

IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that compliance with an IFRS requirement would be so misleading that it would conflict with the objective of financial statements set out in the Framework. In such a case, the entity is required to depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of the departure. [IAS 1.19-20]

Going Concern

An entity preparing IFRS financial statements is presumed to be a going concern. If management has significant concerns about the entity’s ability to continue as a going concern, the uncertainties must be disclosed. If management concludes that the entity is not a going concern, the financial statements should not be prepared on a going concern basis, in which case IAS 1 requires a series of disclosures. [IAS 1.25]

Accrual Basis of Accounting

IAS 1 requires that an entity prepare its financial statements, except for cash flow information, using the accrual basis of accounting. [IAS 1.27]

Consistency of Presentation

The presentation and classification of items in the financial statements shall be retained from one period to the next unless a change is justified either by a change in circumstances or a requirement of a new IFRS. [IAS 1.45]

Materiality and Aggregation

Each material class of similar items must be presented separately in the financial statements. Dissimilar items may be aggregated only if the are individually immaterial. [IAS 1.29]

Offsetting> Assets and liabilities, and income and expenses, may not be offset unless required or permitted by an IFRS. [IAS 1.32]

Comparative Information

IAS 1 requires that comparative information shall be disclosed in respect of the previous period for all amounts reported in the financial statements, both face of financial statements and notes, unless another Standard requires otherwise. [IAS 1.38]

If comparative amounts are changed or reclassified, various disclosures are required. [IAS 1.41]

Structure and Content of Financial Statements in General

Clearly identify: [IAS 1.50]

• the financial statements
• the reporting enterprise
• whether the statements are for the enterprise or for a group
• the date or period covered
• the presentation currency
• the level of precision (thousands, millions, etc.)

Reporting Period

There is a presumption that financial statements will be prepared at least annually. If the annual reporting period changes and financial statements are prepared for a different period, the entity must disclose the reason for the change and a warning about problems of comparability. [IAS 1.36]

Statement of Financial Position (Balance Sheet)

An entity must normally present a classified statement of financial position, separating current and noncurrent assets and liabilities. Only if a presentation based on liquidity provides information that is reliable and more relevant may the current/noncurrent split be omitted. [IAS 1.60] In either case, if an asset (liability) category combines amounts that will be received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12 months, note disclosure is required that separates the longer-term amounts from the 12-month amounts. [IAS 1.61]

Current assets are cash; cash equivalent; assets held for collection, sale, or consumption within the entity’s normal operating cycle; or assets held for trading within the next 12 months. All other assets are noncurrent. [IAS 1.66]

Current liabilities are those expected to be settled within the entity’s normal operating cycle or due within 12 months, or those held for trading, or those for which the entity does not have an unconditional right to defer payment beyond 12 months. Other liabilities are noncurrent. [IAS 1.69]

When a long-term debt is expected to be refinanced under an existing loan facility and the entity has the discretion the debt is classified as non-current, even if due within 12 months. [IAS 1.73]

If a liability has become payable on demand because an entity has breached an undertaking under a long-term loan agreement on or before the reporting date, the liability is current, even if the lender has agreed, after the reporting date and before the authorisation of the financial statements for issue, not to demand payment as a consequence of the breach. [IAS 1.74] However, the liability is classified as non-current if the lender agreed by the reporting date to provide a period of grace ending at least 12 months after the end of the reporting period, within which the entity can rectify the breach and during which the lender cannot demand immediate repayment. [IAS 1.75]

Minimum items on the face of the statement of financial position [IAS 1.54]

Additional line items may be needed to fairly present the entity’s financial position. [IAS 1.54]

IAS 1 does not prescribe the format of the balance sheet. Assets can be presented current then noncurrent, or vice versa, and liabilities and equity can be presented current then noncurrent then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed. The long-term financing approach used in UK and elsewhere – fixed assets + current assets – short term payables = long-term debt plus equity – is also acceptable.

Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.79]

• numbers of shares authorised, issued and fully paid, and issued but not fully paid
• par value
• reconciliation of shares outstanding at the beginning and the end of the period
• description of rights, preferences, and restrictions
• treasury shares, including shares held by subsidiaries and associates
• shares reserved for issuance under options and contracts
• a description of the nature and purpose of each reserve within equity

Statement of Comprehensive Income

Comprehensive income for a period includes profit or loss for that period plus other comprehensive income recognised in that period. As a result of the 2003 revision to IAS 1, the Standard is now using ‘profit or loss’ rather than ‘net profit or loss’ as the descriptive term for the bottom line of the income statement.

All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. [IAS 1.89]

The components of other comprehensive income include:

• changes in revaluation surplus (IAS 16 and IAS 38)
• actuarial gains and losses on defined benefit plans recognised in accordance with IAS 19
• gains and losses arising from translating the financial statements of a foreign operation (IAS 21)
• gains and losses on remeasuring available-for-sale financial assets (IAS 39)
• the effective portion of gains and losses on hedging instruments in a cash flow hedge (IAS 39).

An entity has a choice of presenting:

• a single statement of comprehensive income or
• two statements:
  • an income statement displaying components of profit or loss and
  • a statement of comprehensive income that begins with profit or loss (bottom line of the income statement) and displays components of other comprehensive income [IAS 1.81]

Minimum items on the face of the statement of comprehensive income should include: [IAS 1.82]

• revenue
• finance costs
• share of the profit or loss of associates and joint ventures accounted for using the equity method
• tax expense
• a single amount comprising the total of (i) the post-tax profit or loss of discontinued operations and (ii) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation
• profit or loss
• each component of other comprehensive income classified by nature
• share of the other comprehensive income of associates and joint ventures accounted for using the equity method
• total comprehensive income

The following items must also be disclosed in the statement of comprehensive income as allocations for the period: [IAS 1.83]

• profit or loss for the period attributable to non-controlling interests and owners of the parent
• total comprehensive income attributable to non-controlling interests and owners of the parent

Additional line items may be needed to fairly present the entity’s results of operations. [IAS 1.85]

No items may be presented in the statement of comprehensive income (or in the income statement, if separately presented) or in the notes as ‘extraordinary items’. [IAS 1.87]

Certain items must be disclosed separately either in the statement of comprehensive income or in the notes, if material, including: [IAS 1.98]

• write-downs of inventories to net realisable value or of property, plant and equipment to recoverable amount, as well as reversals of such write-downs
• restructurings of the activities of an entity and reversals of any provisions for the costs of restructuring
• disposals of items of property, plant and equipment
• disposals of investments
• discontinuing operations
• litigation settlements
• other reversals of provisions

Expenses recognised in profit or loss should be analysed either by nature (raw materials, staffing costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). [IAS 1.99] If an entity categorises by function, then additional information on the nature of expenses – at a minimum depreciation, amortisation and employee benefits expense – must be disclosed. [IAS 1.104]

Statement of Cash Flows

Rather than setting out separate standards for presenting the cash flow statement, IAS 1.111 refers to IAS 7 Statement of Cash Flows

Statement of Changes in Equity

IAS 1 requires an entity to present a statement of changes in equity as a separate component of the financial statements. The statement must show: [IAS 1.106]

• total comprehensive income for the period, showing separately amounts attributable to owners of the parent and to non-controlling interests
• the effects of retrospective application, when applicable, for each component
• reconciliations between the carrying amounts at the beginning and the end of the period for each component of equity, separately disclosing:
  • profit or loss
  • each item of other comprehensive income
  • transactions with owners, showing separately contributions by and distributions to owners and changes in ownership interests in subsidiaries that do not result in a loss of control

The following amounts may also be presented on the face of the statement of changes in equity, or they may be presented in the notes: [IAS 1.107]

• amount of dividends recognised as distributions, and
• the related amount per share

Notes to the Financial Statements

The notes must: [IAS 1.112]

• present information about the basis of preparation of the financial statements and the specific accounting policies used
• disclose any information required by IFRSs that is not presented elsewhere in the financial statements and
• provide additional information that is not presented elsewhere in the financial statements but is relevant to an understanding of any of them

Notes should be cross-referenced from the face of the financial statements to the relevant note. [IAS 1.113]

IAS 1.114 suggests that the notes should normally be presented in the following order:

• a statement of compliance with IFRSs
• a summary of significant accounting policies applied, including: [IAS 1.117]
  • the measurement basis (or bases) used in preparing the financial statements
  • the other accounting policies used that are relevant to an understanding of the financial statements
• supporting information for items presented on the face of the statement of financial position (balance sheet), statement of comprehensive income (and income statement, if presented), statement of changes in equity and statement of cash flows, in the order in which each statement and each line item is presented
• other disclosures, including:
  • contingent liabilities (see IAS 37) and unrecognised contractual commitments
  • non-financial disclosures, such as the entity’s financial risk management objectives and policies (see IFRS 7)

Disclosure of judgements. New in the 2003 revision to IAS 1, an entity must disclose, in the summary of significant accounting policies or other notes, the judgements, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies that have the most significant effect on the amounts recognised in the financial statements. [IAS 1.122]

Examples cited in IAS 1.123 include management’s judgements in determining:

• whether financial assets are held-to-maturity investments
• when substantially all the significant risks and rewards of ownership of financial assets and lease assets are transferred to other entities
• whether, in substance, particular sales of goods are financing arrangements and therefore do not give rise to revenue; and
• whether the substance of the relationship between the entity and a special purpose entity indicates control

Disclosure of key sources of estimation uncertainty. Also new in the 2003 revision to IAS 1, an entity must disclose, in the notes, information about the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year. [IAS 1.125] These disclosures do not involve disclosing budgets or forecasts. [IAS 1.130]

The following other note disclosures are required by IAS 1.126 if not disclosed elsewhere in information published with the financial statements:

• domicile and legal form of the entity
• country of incorporation
• address of registered office or principal place of business
• description of the entity’s operations and principal activities
• if it is part of a group, the name of its parent and the ultimate parent of the group
• if it is a limited life entity, information regarding the length of the life

Other Disclosures

Disclosures about Dividends

In addition to the distributions information in the statement of changes in equity (see above), the following must be disclosed in the notes: [IAS 1.137] ” the amount of dividends proposed or declared before the financial statements were authorised for issue but not recognised as a distribution to owners during the period, and the related amount per share and ” the amount of any cumulative preference dividends not recognised.

Capital Disclosures

An entity should disclose information about its objectives, policies and processes for managing capital. [IASA 1.134] To comply with this, the disclosures include: [IAS1.135]

• qualitative information about the entity’s objectives, policies and processes for managing capital, including
  • description of capital it manages
  • nature of external capital requirements, if any
  • how it is meeting its objectives
• quantitative data about what the entity regards as capital
• changes from one period to another
• whether the entity has complied with any external capital requirements and
• if it has not complied, the consequences of such non-compliance.

Disclosures about Puttable Financial Instruments

IAS 1.136A requires the following additional disclosures if an entity has a puttable instrument that is classified as an equity instrument:

• summary quantitative data about the amount classified as equity
• the entity’s objectives, policies and processes for managing its obligation to repurchase or redeem the instruments when required to do so by the instrument holders, including any changes from the previous period
• the expected cash outflow on redemption or repurchase of that class of financial instruments and
• information about how the expected cash outflow on redemption or repurchase was determined.

Summary of IAS 2

IAS 2 (Inventories) (International Accounting Standard) deals with inventory and stock in trade. Summary of IAS 2 (Inventories) is provided here in order to enable students and professionals to grasp spirit of IAS 2 (Inventories) in a short span of time. We shall start with definitions as these are very frequently used in our explanation of IAS 2 (Inventories) and very important too.

Inventories are assets that are:

• Held for sale in the ordinary course of business
• In the process of production for such sale
• In the form of materials or supplies to be consumed in the production process or in the rendering of services.

Net realizable value (NRV) is:

• Estimated selling price in the ordinary course of business
• Less estimated cost of completion
• Less estimated cost to sell

Fair value is:

• The amount for which an asset could be exchanged, or a liability settled,
• Between knowledgeable willing parties, in an arm’s length transaction.

If the entity runs a retail business, then the inventory is generally called merchandise. A manufacturing business will generally call its inventory finished goods, work in process and raw materials. Inventory movement may be recognized either by using perpetual or periodic system. Both of them are allowed treatments by IAS 2 (Inventories).

Recording Inventory Movements: Periodic v/s Perpetual System

To compute cost of sales in periodic system purchases are recorded in the purchase account. Opening balance of inventory is added to that amount and an inventory count is performed at year end. This inventory count gives an amount of closing inventory. This closing inventory is reduced from accumulated balance of opening inventory and purchases during the year to compute stock in trade. However, in periodic system, accountant does not have any idea about stock in trade so it is difficult, almost impossible to detect stock theft when using periodic system.

In perpetual system accountant updates the balance of closing inventory after every transaction involving inventory. It means after every purchase and sales accountant get to know about the inventory balance. So at year end, accountant will not only have accurate information about stock in trade but he will also be able to detect any theft. Closing balance in the books of account shows the closing inventory that should be there in the godowns of the company. Any difference between these amounts is obviously due to theft.

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Summary of IAS 10

Summary of IAS 10 (Events after Reporting Period) is provided here in order to enable students and professionals to grasp spirit of IAS 10 (Events after Reporting Period) in a short span of time. Events after the reporting period are defined in IAS 10 (Events after Reporting Period) as the events that occur between the end of the reporting period and the date when the financial statements are authorized for issue. There are two types of events after the reporting period i.e. adjusting and non-adjusting events. The period between the year end (31st December, 2009) and the date when the financial statements are authorized for issue (25^th March 2010) is called post reporting date period.

Adjusting Events are defined in IAS 10 (Events after Reporting Period) as those that provide evidence of conditions that existed at the end of the reporting period. Important thing is that condition must have been in existence at the year end. Many estimates are made at the year end e.g. impairment losses, doubtful debts, provision for legal expenses etc. If new information is discovered in the post reporting date period, these estimates need to be changed accordingly.

For example, a debtor was treated as a normal debtor till the year end (31^st December 2009) and normal provision of 2% of doubtful debts was made at year end. Fire occurred in a debtor’s factory on 15^th December 2009 and he filed for insolvency but you had no knowledge about it when you were preparing financial statements at year end. Debtor’s lawyer informed you that debtor will be able to pay only 30% of the balance on 20^th February 2010. Financial statements are authorized for issue on 25^th March 2010. Since the events was occurred before year end, so this event is categorized as Adjusting Event and current year’s financial statements need to be changed accordingly. So an addition of 67% of the amount of that particular debtor will be provided in the doubtful debts and debtors will be reduced accordingly with that amount.

Non-Adjusting Events after the reporting period are defined in IAS 10 (Events after Reporting Period) as the events that indicate the conditions arose after the post reporting date period. These events are not adjusted in the current year’s financial statements. However, if these events are material, they need to be disclosed in the financial statements.

For example, a debtor was treated as a normal debtor till the year (31^st December 2009) end and normal provision of 2% of doubtful debts was made at year end. Fire occurred in a debtor’s factory on 5^th January 2010 and he filed for insolvency. Debtor’s lawyer informed you that debtor will be able to pay only 30% of the balance on 20^th February 2010. Financial statements are authorized for issue on 25^th March 2010. Since the events was occurred after year end, so this event is categorized as Non-Adjusting Event and current year’s financial statements need not to be changed. However, if the amount receivable from debtor is material, it needs to be disclosed in the financial statements.

Dividends are declared in the post reporting period, so the liability to pay off the dividend also arises after the reporting date. This is why IAS 10 (Events after Reporting Period) prohibits the recognition of dividend in the financial statements until it is not declared.

SUMMARY OF IAS 16

Objective of IAS 16

The objective of IAS 16 is to prescribe the accounting treatment for property, plant, and equipment. The principal issues are the recognition of assets, the determination of their carrying amounts, and the depreciation charges and impairment losses to be recognised in relation to them.

Scope

IAS 16 does not apply to

• assets classified as held for sale in accordance with IFRS 5
• exploration and evaluation assets (IFRS 6)
• biological assets related to agricultural activity (see IAS 41) or
• mineral rights and mineral reserves such as oil, natural gas and similar non-regenerative resources

The standard does apply to property, plant, and equipment used to develop or maintain the last two categories of assets. [IAS 16.3]

Recognition

Items of property, plant, and equipment should be recognised as assets when it is probable that: [IAS 16.7]

• it is probable that the future economic benefits associated with the asset will flow to the entity, and
• the cost of the asset can be measured reliably.

This recognition principle is applied to all property, plant, and equipment costs at the time they are incurred. These costs include costs incurred initially to acquire or construct an item of property, plant and equipment and costs incurred subsequently to add to, replace part of, or service it.

IAS 16 does not prescribe the unit of measure for recognition – what constitutes an item of property, plant, and equipment. [IAS 16.9] Note, however, that if the cost model is used (see below) each part of an item of property, plant, and equipment with a cost that is significant in relation to the total cost of the item must be depreciated separately. [IAS 16.43]

IAS 16 recognises that parts of some items of property, plant, and equipment may require replacement at regular intervals. The carrying amount of an item of property, plant, and equipment will include the cost of replacing the part of such an item when that cost is incurred if the recognition criteria (future benefits and measurement reliability) are met. The carrying amount of those parts that are replaced is derecognised in accordance with the derecognition provisions of IAS 16.67-72. [IAS 16.13]

Also, continued operation of an item of property, plant, and equipment (for example, an aircraft) may require regular major inspections for faults regardless of whether parts of the item are replaced. When each major inspection is performed, its cost is recognised in the carrying amount of the item of property, plant, and equipment as a replacement if the recognition criteria are satisfied. If necessary, the estimated cost of a future similar inspection may be used as an indication of what the cost of the existing inspection component was when the item was acquired or constructed. [IAS 16.14]

Initial Measurement

An item of property, plant and equipment should initially be recorded at cost. [IAS 16.15] Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site (see IAS 37, Provisions, Contingent Liabilities and Contingent Assets). [IAS 16.16-17]

If payment for an item of property, plant, and equipment is deferred, interest at a market rate must be recognised or imputed. [IAS 16.23]

If an asset is acquired in exchange for another asset (whether similar or dissimilar in nature), the cost will be measured at the fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable. If the acquired item is not measured at fair value, its cost is measured at the carrying amount of the asset given up. [IAS 16.24]

Measurement Subsequent to Initial Recognition

IAS 16 permits two accounting models:

• Cost Model. The asset is carried at cost less accumulated depreciation and impairment. [IAS 16.30]
• Revaluation Model. The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation and impairment, provided that fair value can be measured reliably. [IAS 16.31]

The Revaluation Model

Under the revaluation model, revaluations should be carried out regularly, so that the carrying amount of an asset does not differ materially from its fair value at the balance sheet date. [IAS 16.31]

If an item is revalued, the entire class of assets to which that asset belongs should be revalued. [IAS 16.36]

Revalued assets are depreciated in the same way as under the cost model (see below).

If a revaluation results in an increase in value, it should be credited to other comprehensive income and accumulated in equity under the heading “revaluation surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognised as an expense, in which case it should be recognised as income. [IAS 16.39]

A decrease arising as a result of a revaluation should be recognised as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset. [IAS 16.40]

When a revalued asset is disposed of, any revaluation surplus may be transferred directly to retained earnings, or it may be left in equity under the heading revaluation surplus. The transfer to retained earnings should not be made through the income statement (that is, no “recycling” through profit or loss). [IAS 16.41]

Depreciation (Cost and Revaluation Models)

For all depreciable assets:

The depreciable amount (cost less residual value) should be allocated on a systematic basis over the asset’s useful life [IAS 16.50].

The residual value and the useful life of an asset should be reviewed at least at each financial year-end and, if expectations differ from previous estimates, any change is accounted for prospectively as a change in estimate under IAS 8. [IAS 16.51]

The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the entity [IAS 16.60];

The depreciation method should be reviewed at least annually and, if the pattern of consumption of benefits has changed, the depreciation method should be changed prospectively as a change in estimate under IAS 8. [IAS 16.61]

Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset [IAS 16.48].

Depreciation begins when the asset is available for use and continues until the asset is derecognised, even if it is idle. [IAS 16.55]

Recoverability of the Carrying Amount

IAS 36 requires impairment testing and, if necessary, recognition for property, plant, and equipment. An item of property, plant, or equipment shall not be carried at more than recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use.

Any claim for compensation from third parties for impairment is included in profit or loss when the claim becomes receivable. [IAS 16.65]

Derecogniton (Retirements and Disposals)

An asset should be removed from the balance sheet on disposal or when it is withdrawn from use and no future economic benefits are expected from its disposal. The gain or loss on disposal is the difference between the proceeds and the carrying amount and should be recognised in the income statement. [IAS 16.67-71]

If an entity rents some assets and then ceases to rent them, the assets should be transferred to inventories at their carrying amounts as they become held for sale in the ordinary course of business. [IAS 16.68A]

Disclosure

For each class of property, plant, and equipment, disclose: [IAS 16.73]

• basis for measuring carrying amount
• depreciation method(s) used
• useful lives or depreciation rates
• gross carrying amount and accumulated depreciation and impairment losses
• reconciliation of the carrying amount at the beginning and the end of the period, showing:
  • additions
  • disposals
  • acquisitions through business combinations
  • revaluation increases or decreases
  • impairment losses
  • reversals of impairment losses
  • depreciation
  • net foreign exchange differences on translation
  • other movements

SUMMARY OF IAS 7

Objective of IAS 7

The objective of IAS 7 is to require the presentation of information about the historical changes in cash and cash equivalents of an entity by means of a statement of cash flows, which classifies cash flows during the period according to operating, investing, and financing activities.

Fundamental Principle in IAS 7

All entities that prepare financial statements in conformity with IFRSs are required to present a statement of cash flows. [IAS 7.1]

The statement of cash flows analyses changes in cash and cash equivalents during a period. Cash and cash equivalents comprise cash on hand and demand deposits, together with short-term, highly liquid investments that are readily convertible to a known amount of cash, and that are subject to an insignificant risk of changes in value. Guidance notes indicate that an investment normally meets the definition of a cash equivalent when it has a maturity of three months or less from the date of acquisition. Equity investments are normally excluded, unless they are in substance a cash equivalent (e.g. preferred shares acquired within three months of their specified redemption date). Bank overdrafts which are repayable on demand and which form an integral part of an entity’s cash management are also included as a component of cash and cash equivalents. [IAS 7.7-8]

Presentation of the Statement of Cash Flows

Cash flows must be analysed between operating, investing and financing activities. [IAS 7.10]

Key principles specified by IAS 7 for the preparation of a statement of cash flows are as follows:

• operating activities are the main revenue-producing activities of the entity that are not investing or financing activities, so operating cash flows include cash received from customers and cash paid to suppliers and employees [IAS 7.14]
• investing activities are the acquisition and disposal of long-term assets and other investments that are not considered to be cash equivalents [IAS 7.6]
• financing activities are activities that alter the equity capital and borrowing structure of the entity [IAS 7.6]
• interest and dividends received and paid may be classified as operating, investing, or financing cash flows, provided that they are classified consistently from period to period [IAS 7.31]
• cash flows arising from taxes on income are normally classified as operating, unless they can be specifically identified with financing or investing activities [IAS 7.35]
• for operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable [IAS 7.18]

The direct method shows each major class of gross cash receipts and gross cash payments. The operating cash flows section of the statement of cash flows under the direct method would appear something like this:

The indirect method adjusts accrual basis net profit or loss for the effects of non-cash transactions. The operating cash flows section of the statement of cash flows under the indirect method would appear something like this:

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• the exchange rate used for translation of transactions denominated in a foreign currency should be the rate in effect at the date of the cash flows [IAS 7.25]
• cash flows of foreign subsidiaries should be translated at the exchange rates prevailing when the cash flows took place [IAS 7.26]
• as regards the cash flows of associates and joint ventures, where the equity method is used, the statementof cash flows should report only cash flows between the investor and the investee; where proportionate consolidation is used, the cash flow statement should include the venturer’s share of the cash flows of the investee [IAS 7.37-38]
• aggregate cash flows relating to acquisitions and disposals of subsidiaries and other business units should be presented separately and classified as investing activities, with specified additional disclosures. [IAS 7.39] The aggregate cash paid or received as consideration should be reported net of cash and cash equivalents acquired or disposed of [IAS 7.42]
• cash flows from investing and financing activities should be reported gross by major class of cash receipts and major class of cash payments except for the following cases, which may be reported on a net basis: [IAS 7.22-24]
  • cash receipts and payments on behalf of customers (for example, receipt and repayment of demand deposits by banks, and receipts collected on behalf of and paid over to the owner of a property)
  • cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short, generally less than three months (for example, charges and collections from credit card customers, and purchase and sale of investments)
  • cash receipts and payments relating to deposits by financial institutions
  • cash advances and loans made to customers and repayments thereof
• investing and financing transactions which do not require the use of cash should be excluded from the statementof cash flows, but they should be separately disclosed elsewhere in the financial statements [IAS 7.43]
• the components of cash and cash equivalents should be disclosed, and a reconciliation presented to amounts reported in the statement of financial position [IAS 7.45]
• the amount of cash and cash equivalents held by the entity that is not available for use by the group should be disclosed, together with a commentary by management [IAS 7.48]

SUMMARY OF IAS 8
Key Definitions [IAS 8.5]

• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.
• A change in accounting estimate is an adjustment of the carrying amount of an asset or liability, or related expense, resulting from reassessing the expected future benefits and obligations associated with that asset or liability.
• International Financial Reporting Standards are standards and interpretations adopted by the International Accounting Standards Board (IASB). They comprise:
  • International Financial Reporting Standards (IFRSs);
  • International Accounting Standards (IASs); and
  • Interpretations developed by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC) and approved by the IASB.
• Materiality. Omissions or misstatements of items are material if they could, by their size or nature, individually or collectively, influence the economic decisions of users taken on the basis of the financial statements.
• Prior period errors are omissions from, and misstatements in, an entity’s financial statements for one or more prior periods arising from a failure to use, or misuse of, reliable information that was available and could reasonably be expected to have been obtained and taken into account in preparing those statements. Such errors result from mathematical mistakes, mistakes in applying accounting policies, oversights or misinterpretations of facts, and fraud.

Selection and Application of Accounting Policies

When a Standard or an Interpretation specifically applies to a transaction, other event or condition, the accounting policy or policies applied to that item must be determined by applying the Standard or Interpretation and considering any relevant Implementation Guidance issued by the IASB for the Standard or Interpretation. [IAS 8.7]

In the absence of a Standard or an Interpretation that specifically applies to a transaction, other event or condition, management must use its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. [IAS 8.10]. In making that judgement, management must refer to, and consider the applicability of, the following sources in descending order:

• the requirements and guidance in IASB standards and interpretations dealing with similar and related issues; and
• the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Framework. [IAS 8.11]

Management may also consider the most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature and accepted industry practices, to the extent that these do not conflict with the sources in paragraph 11. [IAS 8.12]

Consistency of Accounting Policies

An entity shall select and apply its accounting policies consistently for similar transactions, other events and conditions, unless a Standard or an Interpretation specifically requires or permits categorisation of items for which different policies may be appropriate. If a Standard or an Interpretation requires or permits such categorisation, an appropriate accounting policy shall be selected and applied consistently to each category. [IAS 8.13]

Changes in Accounting Policies

An entity is permitted to change an accounting policy only if the change:

• is required by a standard or interpretation; or
• results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, financial performance, or cash flows. [IAS 8.14]

Note that changes in accounting policies do not include applying an accounting policy to a kind of transaction or event that did not occur previously or were immaterial. [IAS 8.16]

If a change in accounting policy is required by a new IASB standard or interpretation, the change is accounted for as required by that new pronouncement or, if the new pronouncement does not include specific transition provisions, then the change in accounting policy is applied retrospectively. [IAS 8.19]

Retrospective application means adjusting the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied. [IAS 8.22]

• However, if it is impracticable to determine either the period-specific effects or the cumulative effect of the change for one or more prior periods presented, the entity shall apply the new accounting policy to the carrying amounts of assets and liabilities as at the beginning of the earliest period for which retrospective application is practicable, which may be the current period, and shall make a corresponding adjustment to the opening balance of each affected component of equity for that period. [IAS 8.24]
• Also, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of applying a new accounting policy to all prior periods, the entity shall adjust the comparative information to apply the new accounting policy prospectively from the earliest date practicable. [IAS 8.25]

Disclosures Relating to Changes in Accounting Policies

Disclosures relating to changes in accounting policy caused by a new standard or interpretation include: [IAS 8.28]

• the title of the standard or interpretation causing the change
• the nature of the change in accounting policy
• a description of the transitional provisions, including those that might have an effect on future periods
• for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
  • for each financial statement line item affected, and
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the adjustment relating to periods before those presented, to the extent practicable
• if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.

Financial statements of subsequent periods need not repeat these disclosures.

Disclosures relating to voluntary changes in accounting policy include: [IAS 8.29]

• the nature of the change in accounting policy
• the reasons why applying the new accounting policy provides reliable and more relevant information
• for the current period and each prior period presented, to the extent practicable, the amount of the adjustment:
  • for each financial statement line item affected, and
  • for basic and diluted earnings per share (only if the entity is applying IAS 33)
• the amount of the adjustment relating to periods before those presented, to the extent practicable
• if retrospective application is impracticable, an explanation and description of how the change in accounting policy was applied.

Financial statements of subsequent periods need not repeat these disclosures.

If an entity has not applied a new standard or interpretation that has been issued but is not yet effective, the entity must disclose that fact and any and known or reasonably estimable information relevant to assessing the possible impact that the new pronouncement will have in the year it is applied. [IAS 8.30]

Changes in Accounting Estimate

The effect of a change in an accounting estimate shall be recognised prospectively by including it in profit or loss in: [IAS 8.36]

• the period of the change, if the change affects that period only, or
• the period of the change and future periods, if the change affects both.

However, to the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or relates to an item of equity, it is recognised by adjusting the carrying amount of the related asset, liability, or equity item in the period of the change. [IAS 8.37]

Disclosures Relating to Changes in Accounting Estimate

Disclose:

• the nature and amount of a change in an accounting estimate that has an effect in the current period or is expected to have an effect in future periods
• if the amount of the effect in future periods is not disclosed because estimating it is impracticable, an entity shall disclose that fact. [IAS 8.39-40]

Errors

The general principle in IAS 8 is that an entity must correct all material prior period errors retrospectively in the first set of financial statements authorised for issue after their discovery by: [IAS 8.42]

• restating the comparative amounts for the prior period(s) presented in which the error occurred; or
• if the error occurred before the earliest prior period presented, restating the opening balances of assets, liabilities and equity for the earliest prior period presented.

However, if it is impracticable to determine the period-specific effects of an error on comparative information for one or more prior periods presented, the entity must restate the opening balances of assets, liabilities, and equity for the earliest period for which retrospective restatement is practicable (which may be the current period). [IAS 8.44]

Further, if it is impracticable to determine the cumulative effect, at the beginning of the current period, of an error on all prior periods, the entity must restate the comparative information to correct the error prospectively from the earliest date practicable. [IAS 8.45]

Disclosures Relating to Prior Period Errors

Disclosures relating to prior period errors include: [IAS 8.49]

• the nature of the prior period error