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ate on December 31, 20X9 is $1 = €1.3. The net asset value of the subsidiary at the date of disposal was $34 million. What is the profit or loss on the sale of the subsidiary that will appear in the group statement of comprehensive income? a. $5 million b. $8 million c. $13 million d. $14 million
Chapter 16 BORROWING COSTS (IAS 23) BACKGROUND IAS 23, Borrowing Costs, prescribes the criteria for determining whether borrowing costs can be capitalized as part of the cost of acquiring, constructing, or producing a “qualifying asset.” The Standard prescribes the capitalization of borrowing costs into the cost of a qualifying asset. IAS 23 has been revised to eliminate the option available hitherto to recognize borrowing costs as an expense. This amendment to the standard was made as part of the efforts of the IASB and the US FASB towards convergence of their standards. SCOPE The Standard is to be applied in accounting for (i.e., recognizing) borrowing costs. Not all kinds of borrowing costs are to be capitalized. Borrowing costs that are directly attributable to the acquisition, construction, or production of a qualifying asset are to be capitalized as part of the cost of that asset. The Standard applies only to borrowing costs relating to external borrowings and not to equity. Therefore, the Standard does not deal with the imputed or actual cost of equity, including preferred capital not classified as equity. (in accordance with IAS 23) DEFINITIONS OF KEY TERMS Borrowing costs. Include interest and other costs incurred by an entity in relation to borrowing of funds. Qualifying asset. An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. PRACTICAL INSIGHT The concept of “qualifying asset” is difficult to understand and comprehend in the spirit of the Standard. Some entities inadvertently apply (or at least insist on applying) this Standard to borrowing costs relating to assets that are expensive to purchase. These entities get confused because to them the quantum of the borrowing costs relating to the cost of the asset probably justifies such accounting treatment. For instance, if an expensive machine is bought (as opposed to being built by the entity) and the cost of the machine is quite substantial, entities inadvertently apply the Standard and argue that it is appropriate to capitalize borrowing costs along with the cost of the plant. Their justification is that since the machine is very expensive, the borrowing costs relating to the purchase of the machine are also quite significant. Thus it would not be right on their part to expense these costs. These entities further argue that in expensing such borrowing costs, they are able to capture only part of the cost of the asset. The cost of financing is to be included in the cost of the purchase of the asset because without incurring that cost, the entity would not have been in a position to purchase such an expensive asset. In practice, auditors face such situations quite often, especially in developing countries, where the costs of borrowing are quite high compared to other economies. BORROWING COSTS Borrowing costs, as understood generally, refer to interest costs. However, borrowing costs as envisaged by the Standard are not just interest costs on short-term borrowings, such as bank overdrafts and notes payable, or long-term borrowings, such as term loans and real estate mortgages. Rather, borrowing costs also include other related costs, such as • Amortization of discounts or premiums relating to borrowings • Amortization of ancillary costs incurred in connection with the arrangement or borrowings • Exchange differences arising from foreign currency borrowings to the extent that they are regarded as an adjustment to interest costs • Finance charges in respect of finance leases recognized in accordance with IAS 17, Leases Facts CASE STUDY 1
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Title Page Copyright Page Foreword
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DIVIDENDS DISCLOSURE: KEY ELEMENTS
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CONSOLIDATED FINANCIAL STATEMENTS A
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ELABORATION AND INTERPRETATION OF T
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MULTIPLE-CHOICE QUESTIONS Chapter 3
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FOREWORD TO THE FIRST EDITION by th
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PREFACE Achieving consistency in fi
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ABOUT THE AUTHORS Abbas Ali Mirza i
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ecognition and use of IFRS. A major
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SIC 12, Consolidation—Special-Pur
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The IFRS Advisory Council shall com
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Chapter 2 IASB FRAMEWORK INTRODUCTI
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ELEMENTS OF FINANCIAL STATEMENTS Th
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Chapter 3 PRESENTATION OF FINANCIAL
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XYZ Inc. is a manufacturer of telev
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Statement of Comprehensive Income I
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Available-for-sale financial assets
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Notes The notes should disclose the
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equired by the counterparty to sett
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The costs of purchase constitute al
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Based on the FIFO cost flow assumpt
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• Accounting policies adopted for
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f. Choices a and c. g. Choices a, b
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1. They should be “short term”
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2. Proceeds from disposal of debt i
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1. Cash collections from customers
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3. Placements and withdrawals of de
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Additional Information Retained ear
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c. Indirect Method Cash paid to sup
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Notes to the Consolidated Cash Flow
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Chapter 6 ACCOUNTING POLICIES, CHAN
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een applied. The impact of the new
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• For current and each prior peri
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An entity should disclose amounts a
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Notes to the Financial Statements (
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d. The entity would find the determ
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Given these facts, what is the “a
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existed at the end of the reporting
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Chapter 8 CONSTRUCTION CONTRACTS (I
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2. Costs that are attributable to c
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4. Revenue, costs, and profits to b
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Facts 34 Construction contracts Mil
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ecognized as revenue. Therefore, $7
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The Standard Applies to the Account
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ACCOUNTING FOR DEFERRED TAX To acco
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TEMPORARY DIFFERENCES NOT RECOGNIZE
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Required Show the impact on the fin
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Solution Zero. There is no temporar
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Solution Facts CASE STUDY 13 East i
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Since 20X4, Frontier has incurred s
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calculated that the liability and e
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Chapter 10 PROPERTY, PLANT, AND EQU
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Required 2. Initial delivery and ha
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disposal. Any gain on disposal is t
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financing liability and the financi
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Chapter 11 LEASES (IAS 17) BACKGROU
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the fair value of the asset. During
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Page 120 and 121: Discuss how this transaction should
Page 122 and 123: The basic lease accounting model ha
Page 124 and 125: 6. The lease of land and buildings
Page 126 and 127: Chapter 12 REVENUE (IAS 18) BACKGRO
Page 128 and 129: • Do not involve the same counter
Page 130 and 131: • The costs incurred and the cost
Page 132 and 133: Up to March 31, 20X9, the value of
Page 134 and 135: e that the real estate developer as
Page 136 and 137: Turnover is recognized when the ris
Page 138 and 139: Chapter 13 EMPLOYEE BENEFITS (IAS 1
Page 140 and 141: The accounting for a defined contri
Page 142 and 143: The amount of the expense or income
Page 144 and 145: • Fair value of plan assets: $50
Page 146 and 147: 8. Past service cost: $115 million.
Page 148 and 149: Pensions Employee costs Employee co
Page 150 and 151: 9. An entity operates a defined ben
Page 152 and 153: For quite some time, it has been un
Page 154 and 155: Solution Citimart Inc. would need t
Page 156 and 157: The Standard does not favor either
Page 158 and 159: Chapter 15 THE EFFECTS OF CHANGES I
Page 160 and 161: Facts An entity purchases equipment
Page 162 and 163: The exchange difference is calculat
Page 164 and 165: disposal was recognized. The same a
Page 166 and 167: Difference 7 Total 89.5 (say 90m) T
Page 170 and 171: On December 1, 2009, Compassionate
Page 172 and 173: 1. In order to capitalize the borro
Page 174 and 175: Chapter 17 RELATED-PARTY DISCLOSURE
Page 176 and 177: Solution Yes, under IAS 24 (revised
Page 178 and 179: warrant disclosure because it may n
Page 180 and 181: Facts Zeeba Inc. is part of a major
Page 182 and 183: The Used Equipment Co (Pty) Limited
Page 184 and 185: Key management personnel are define
Page 186 and 187: Chapter 18 ACCOUNTING AND REPORTING
Page 188 and 189: Total accounts payable 41,000 Accru
Page 190 and 191: Employee contributions 50,000 Total
Page 192 and 193: Chapter 19 CONSOLIDATED AND SEPARAT
Page 194 and 195: 2. Noncontrolling interests in the
Page 196 and 197: When an entity loses control of a s
Page 198 and 199: Initially, the fair value of the as
Page 200 and 201: c. The ultimate parent entity produ
Page 202 and 203: EQUITY METHOD Under the equity meth
Page 204 and 205: What is the relationship between Co
Page 206 and 207: What amount should be shown in A’
Page 208 and 209: (f) (g) (h) December 31 60 73 Assoc
Page 210 and 211: . The carrying value of the associa
Page 212 and 213: PRACTICAL INSIGHT Turkiye Petrol Ra
Page 214 and 215: Cash 5,150 Share capital (300/100
Page 216 and 217: Chapter 22 INTERESTS IN JOINT VENTU
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Facts Three entities decide to form
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current period (IFRIC 1.5). Thus in
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Methods of valuation techniques use
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of impairment exists, the carrying
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Chapter 23 FINANCIAL INSTRUMENTS: P
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Contracts for contingent considerat
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has the unconditional right to refu
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principal and interest cash flows)
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On January 15, 20X5, Entity A issue
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instruments. A financial instrument
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The major components of market risk
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Credit risk is the risk that a cust
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1. Are there any circumstances when
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• A purchased put option to sell
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• Sales that are so close to matu
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eceived nothing on entering into th
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price plus interest. In this case,
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CASE STUDY 4 This case illustrates
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financial liabilities measured at f
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Example If Entity A receives a cash
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If the reporting period does not co
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cash flow pattern, credit quality,
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of the cash flows. 2. Entity A purc
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PRACTICAL INSIGHT IAS 39 does not p
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This case illustrates how to accoun
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This case illustrates how to accoun
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This case illustrates when to separ
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change in fair value of the derivat
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A cash flow hedge is a hedge of the
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This case illustrates the accountin
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PRACTICAL INSIGHT It is often possi
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Derivatives are measured on the bal
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15. Which of the following is not o
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• As amounts attributable to the
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The theoretical ex-rights fair valu
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Diluted earnings per share Adjusted
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Earnings: diluted earnings per shar
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• Basic and diluted earnings per
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The numbers of shares included in t
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Chapter 26 INTERIM FINANCIAL REPORT
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should be applied and previously re
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Consolidated balance sheet at June
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1. Under IAS 34, interim financial
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was $5 million. It was planned at t
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development costs. An impairment lo
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The fair value less cost to sell of
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can be reasonably allocated. 3. Thi
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PRACTICAL INSIGHT Austrian Airlines
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Impairments charge in the year Ther
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. Loss on goodwill. c. Loss on a bu
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Recognition of Provisions Those lia
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An onerous contract is an agreement
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In order to recognize a provision (
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A Singapore-based shipping company
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c. Because Amazon Inc. can avoid th
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In order to meet the definition of
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Examples of activities that may fai
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• These costs can be measured rel
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Entities are to apply the provision
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Future changes in expected cash flo
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Chapter 30 INVESTMENT PROPERTY (IAS
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If, on acquisition, it is not possi
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pool in which the fair value model
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Chapter 31 AGRICULTURE (IAS 41) BAC
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Required Value of biological asset
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2-year-old animal at November 1, 20
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Notes to Group Financial Statements
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d. There is no requirement in the S
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Financial statements presented by a
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Solution In order to prepare the op
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• Identification of assets acquir
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2. No journal entry is required as
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IFRS 1 discusses exemptions under t
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Solution In valuing the shares of V
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• Unilever was an early adopter (
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Chapter 33 SHARE-BASED PAYMENTS (IF
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date of the cancelation is deducted
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party, to satisfy its obligations t
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Playful has ordered an amount of in
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May 31, 20X8 August 1, 20X8 5,000
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Should the plans be valued at fair
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4. An entity issues fully paid shar
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Chapter 34 BUSINESS COMBINATIONS (I
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Future losses or other costs that a
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93 Interest (13) Profit before tax
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This choice of method of accounting
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The error in 20X9, regarding the om
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This makes a total NCI of $554m. c)
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$m J retained earnings 360 Share of
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Intercompany transactions and the r
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11. The “excess of the acquirer
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Chapter 35 INSURANCE CONTRACTS (IFR
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Required Discuss how the reinsuranc
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Guaranteed residual values Guarante
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Chapter 36 NONCURRENT ASSETS HELD F
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SUNDRY POINTS Exchanges of noncurre
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Before classification of the item a
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Noncurrent assets Current assets No
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c. At carrying value. d. In accorda
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IAS 8 specifies a hierarchy of crit
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fuel used, rig costs, delay rentals
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Chapter 38 FINANCIAL INSTRUMENTS: D
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other than credit risk (i.e., chang
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2. Whether fair values are determin
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d. Transfers into or out of Level 3
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equires that any derivative that do
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The amount recognized in the income
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a. To provide presentation and disc
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amongst the top management personne
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Recreational clubs $ 50 million vs
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Chapter 40 FINANCIAL INSTRUMENTS (I
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Discussion The entity’s objective
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The following are indicators of whe
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However as IFRS 9 eliminates the av
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Facts CASE STUDY 6 Hant has an equi
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Chapter 41 IFRS FOR SMEs INTRODUCTI
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the IFRS for SMEs, if an entity can
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2. The subsidiary’s business acti
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All grants are measured at the fair
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The present value of the fine will
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3. If SMEs choose to follow the Sta
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1. b 2. a 3. a 4. c 5. a 1. a 2. c*
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1. b 2. a 3. b 1. d 2. b 3. c 4. c
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2. b 3. b 4. a 5. a 6. b 7. b 8. b
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18. d* 19. b 20. b 21. a 22. b 23.
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INDEX Abandonment Accounting compou
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Control business combinations conso
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interests. See IAS 32, Financial In
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events after the reporting period G
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gross basis versus net basis indire
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IAS 18, Revenue amendment to backgr
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net assets available for benefits n
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fair value per share financial stat
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initial measurement interest income
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scope of share-based payment transa
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credit risk effective date fair val
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property, plant, and equipment Impa
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Market risk Materiality Measurement
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Recoverable amount, impairment loss
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usiness combinations financial inst
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