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. Loss on goodwill. c. Loss on a business segment. d. Loss on inventory.
Chapter 28 PROVISIONS, CONTINGENT LIABILITIES, AND CONTINGENT ASSETS (IAS 37) BACKGROUND AND INTRODUCTION This Standard prescribes rules regarding the recognition and measurement of provisions, contingent liabilities, and contingent assets, and also mandates disclosures in footnotes that would enable users of financial statements to comprehend their nature, timing, and amount. Prior to the promulgation of IAS 37, in the absence of clear-cut rules of recognition and measurement, entities could charge huge provisions to profit or loss (often referred to as big bath provisions) and thereby manipulate earnings or financial performance. It is worth noting that previously the term “provisions” was used very loosely in financial reporting. With the enactment of IAS 37, rules with respect to recognition and measurement of provisions, contingent liabilities, and contingent assets have been codified. Since then, entities preparing financial statements in accordance with International Financial Reporting Standards (IFRS) used these terms strictly based on their prescribed definitions under IAS 37. Furthermore, IAS 37 also has clarified certain misconceptions about the term “provision.” For instance, “provisions” that are envisioned by this Standard are now “liabilities” (of uncertain timing or amount). The “provision for depreciation” and the “provision for doubtful debts” are really not provisions according to this Standard but are contra accounts or adjustments to the carrying value of assets. SCOPE The requirements of IAS 37 are applicable to recognition and measurement of all provisions, contingent liabilities, and contingent assets except 1. Those resulting from executory contracts, other than onerous contracts 2. Those covered by other Standards In other words, when provisions, contingent liabilities, and contingent assets are specifically addressed by other Standards, then they are not within the scope of this Standard. Standards that specifically deal with provisions that are not covered by IAS 37 are • Construction contracts (IAS 11) • Income taxes (IAS 12) • Leases (IAS 17) (However, onerous leases are covered by IAS 37.) • Employee benefits (IAS 19) • Insurance contracts (IFRS 4) (However, IAS 37 still applies to provisions, contingent liabilities, and contingent assets of an insurer, other than those arising from its contractual obligations and rights under insurance contracts within the scope of IFRS 4.) The Standard also does not apply to financial instruments (including guarantees) that are within the scope of IAS 39. (in accordance with IAS 37) Provision. A liability of uncertain timing or amount. DEFINITIONS OF KEY TERMS Liability. A present obligation of an entity arising from past events, the settlement of which is expected to result in an outflow of resources embodying economic benefits. Contingent liability. 1. A possible obligation arising from past events whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events that are not completely within the control of the entity. 2. A present obligation that arises from past events but is not recognized because either it is not possible to measure the amount of the obligation with sufficient reliability or it is not probable that an outflow of resources will be required to settle the obligation. Contingent asset. A possible asset arising from past events and whose existence will be confirmed only by the occurrence or nonoccurrence of one or more uncertain future events that are not completely within the control of the entity. Executory contract. A contract under which neither party (to the contract) has performed its obligations or both the parties (to the contract) have performed their obligations partially to an equal extent. Onerous contract. A contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under the contract. Restructuring. A program that is planned and controlled by the management and materially changes either the scope of a business undertaking by an entity or the manner in which that business is conducted. PROVISIONS
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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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ate in the lease is 9.3% (approxima
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Discuss how this transaction should
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The basic lease accounting model ha
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6. The lease of land and buildings
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Chapter 12 REVENUE (IAS 18) BACKGRO
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• Do not involve the same counter
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• The costs incurred and the cost
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Up to March 31, 20X9, the value of
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e that the real estate developer as
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Turnover is recognized when the ris
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Chapter 13 EMPLOYEE BENEFITS (IAS 1
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The accounting for a defined contri
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The amount of the expense or income
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• Fair value of plan assets: $50
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8. Past service cost: $115 million.
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Pensions Employee costs Employee co
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9. An entity operates a defined ben
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For quite some time, it has been un
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Solution Citimart Inc. would need t
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The Standard does not favor either
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Chapter 15 THE EFFECTS OF CHANGES I
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Facts An entity purchases equipment
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The exchange difference is calculat
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disposal was recognized. The same a
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Difference 7 Total 89.5 (say 90m) T
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ate on December 31, 20X9 is $1 =
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On December 1, 2009, Compassionate
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1. In order to capitalize the borro
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Chapter 17 RELATED-PARTY DISCLOSURE
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Solution Yes, under IAS 24 (revised
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warrant disclosure because it may n
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Facts Zeeba Inc. is part of a major
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The Used Equipment Co (Pty) Limited
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Key management personnel are define
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Chapter 18 ACCOUNTING AND REPORTING
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Total accounts payable 41,000 Accru
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Employee contributions 50,000 Total
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Chapter 19 CONSOLIDATED AND SEPARAT
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2. Noncontrolling interests in the
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When an entity loses control of a s
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Initially, the fair value of the as
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c. The ultimate parent entity produ
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EQUITY METHOD Under the equity meth
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What is the relationship between Co
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What amount should be shown in A’
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(f) (g) (h) December 31 60 73 Assoc
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. The carrying value of the associa
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PRACTICAL INSIGHT Turkiye Petrol Ra
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Cash 5,150 Share capital (300/100
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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
Page 266 and 267: This case illustrates how to accoun
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Page 272 and 273: change in fair value of the derivat
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Page 276 and 277: This case illustrates the accountin
Page 278 and 279: PRACTICAL INSIGHT It is often possi
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Page 288 and 289: Diluted earnings per share Adjusted
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Page 292 and 293: • Basic and diluted earnings per
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Page 296 and 297: Chapter 26 INTERIM FINANCIAL REPORT
Page 298 and 299: should be applied and previously re
Page 300 and 301: Consolidated balance sheet at June
Page 302 and 303: 1. Under IAS 34, interim financial
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Page 306 and 307: development costs. An impairment lo
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Page 310 and 311: can be reasonably allocated. 3. Thi
Page 312 and 313: PRACTICAL INSIGHT Austrian Airlines
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Page 318 and 319: Recognition of Provisions Those lia
Page 320 and 321: An onerous contract is an agreement
Page 322 and 323: In order to recognize a provision (
Page 324 and 325: A Singapore-based shipping company
Page 326 and 327: c. Because Amazon Inc. can avoid th
Page 328 and 329: In order to meet the definition of
Page 330 and 331: Examples of activities that may fai
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Page 334 and 335: Entities are to apply the provision
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Page 356 and 357: Solution In order to prepare the op
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Page 362 and 363: IFRS 1 discusses exemptions under t
Page 364 and 365: 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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