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IAS 33 Earnings per share Study Text
Download the free IAS 33 Earnings per share Study Text
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IAS 23 Borrowing Costs Study Text
Download the free IAS 23 Borrowing Costs Study Text
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IAS 17 Leases Study Text
Download the free IAS 17 Leases Study Text
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IAS 12 Income Taxes Study Text
Download the free IAS 12 Income Taxes Study Text
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IAS 17 Leases – Summary with Examples – PDF
IAS Standards
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS Standards
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IAS 17 Leases Overview
IAS 17 full text prescribe, for lessees and lessors, the appropriate accounting policies and IAS 17 disclosures to apply in relation to finance and operating leases.
Understanding IAS 17 Leases
Key IAS 17 Leases Definition
- Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. The type of lease is identified at the date of inception.
- Interest rate implicit in lease: That makes present value of lease payment and UN-guaranteed value equal to fair value and ( any ) initial direct costs of lessor.
- Economic and Useful life:
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- Economic life is the total life of an asset excepted to be economically usable by one or more users.
- Useful life is the Period over which an asset is expected to be available for use by an entity.
- Residual Value: this may be Guaranteed or UN-guaranteed ;
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- Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the value of an asset at the end of lease will be at least a specified amount.
- UN-Guaranteed: is that portion of residual value of asset, the realization of which is not assured by a party related to the lessor.
- Lease Receipts and Payments: The term lease Payments refer to the payments that a lessee expects to make over a lease term or the Receipts that a lessor expects over the economic life of the asset. Payment by a lessee to lessor during a lease term may comprises of ;
- fixed payments (less) any lease incentives.
- variable lease payments.
- purchase option price.
- payment of penalties for terminating the lease.
- Lease Classification:
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- Finance lease where it transfers substantially all the risks and rewards incidental to ownership.
- Operating lease where it does not transfers substantially all the risk and rewards incidental to ownership.
The following IAS 17 guide explains the IAS 17 standard with IAS 17 journal entries.
Accounting for IAS 17 Finance Lease
- In Finance Lease substantially all the risks and rewards of ownership are transferred to Lessee by Lessor.
- Records assets and liabilities in financial statements (at LOWER of; Fair value and Present value) of Lease payments;
Asset Debit
Finance Lease Credit- Charge Initial direct costs to Asset.
Subsequent Measurement:
- Apportion lease payments; as finance charge and reduction in liability;
Finance charge Debit
Finance lease Debit
Cash/Bank Credit- Depreciate the Asset.
Dep. Expense Debit
Acc. depreciation Credit- In finance lease the lessor does not record the leased asset in its financial statements ,as its has transferred the risks and reward. Instead, he records the amount as Receivable.
- Receivable is described as :
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- Net investment(N.I) = Present valve of Gross investment or;
- Net investment (N.I) = Fair value + Initial direct cost.
Subsequent Measurement:
- Record payments received during the year by making;
Cash/Bank Debit
Net Investment Credit- Record finance income, adding a period return to the N.I and other side as income in P/L:
Net Investment Debit
Finance Income CreditAccounting for IAS 17 Operating Lease
- The lessee does not records the leased asset in its financial statements.
- Instead, Lessee records the Rental Payments as EXPENSE on straight line basis over the lease term.
- The lessor records the leased asset in its financial statement, as he has not transferred the risk and reward of ownership.
- At commencement the lessor adds initial direct costs incurred by lessor.
Subsequent measurement:
- Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
- Account for any impairment loss.
- Records Rental Income on a straight-line basis over lease term.
Accounting for Manufacturer Dealer LESSOR
- A manufacturer or dealer often offers to customers to the choice of either buying or leasing an asset.
- As these are Lessors, therefore lessors accounting treatment are applied.
A finance lease gives rise to two types of income:
- Profit or loss (difference between sales and cost)
- Finance income.
Initial Measurement
- Record Sales as:
Lease receivable Debit
Sales Credit (lower of fair value or Present of Lease payments)- Record cost of Sales:
Cost Debit
Inventory (Asset) Credit - Transfer Present value of UN-Guaranteed value of Net Investment:
Lease Receivable Debit
Inventory (Asset) Credit- Expense-out initial direct costs:
Income Statement Debit
Cash/Bank Credit- Record finance income subsequently
- Does not Record Sales.
- Record Asset:
Asset Debit
Inventory Credit- Record depreciation
- Record impairment
- Record Rental income
Sale and Lease Back (Finance Lease)
Sale and Lease Back
For Lessee
Sale of Asset
- Remove the asset from Financial Statements.
- Defer and amortize any Surplus/Gain over lease term.
- If loss , then immediately recognize.
Lease back of Asset
- Recognize asset under finance lease.
- Create an obligation under finance lease.
- Depreciate Asset and amortize liability subsequently.
Purchase of Asset
- Does not records the asset.
- As the asset is not transferred physically nor risk and reward are.
Leased the Asset
- Record Lessee as Receivable.
- Record Lease receipts during the period.
- Record Finance Income.
Sale and Lease Back (Operating Lease)
Sale and Lease Back
For Lessee
Sale of Asset
- Remove asset from financial statements.
- Record Gain/Loss, where;
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- sale at fair value: gain/loss is recognized immediately on disposal.
- sale at less than fair value: gain/loss is recognized immediately on disposal (if lease payments are not compensated at below market price). If NOT so,any loss is deferred over expected use of asset.
- sale at more than fair value:
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- normal gain/loss (Fair value – carrying amount) is recognized immediately.
- excess profit (actual sale – fair value) is deferred and amortized over expected use of asset.
Lease Back of Asset
- Record normal Rental payments as Expense.
Purchase of Asset
- The lessor records the leased asset in its financial statement.
Subsequent measurement:
- Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
- Account for any impairment loss.
Lease Back of Asset
- At commencement the lessor add initial direct costs incurred by lessor.
- Records Rental Income on a straight-line basis over lease term.
IAS 17 pdf (IAS 17 download)
The above IAS 17 summary is the most simplified. Moreover, Click here to Download IAS 17 leases pdf
External Resources
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IAS 12 Income Taxes – Deferred tax examples – PDF
IAS Standards
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS Standards
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IAS 12 Income Taxes Overview
IAS 12 full text prescribes the accounting treatment for income taxes. Which recognizes both the current tax and the future tax (Deferred Tax) consequences of the future recovery or settlement of the carrying amount of an entity’s assets and liabilities.
Understanding IAS 12 Income Taxes
By looking at Statement of Comprehensive Income;
Tax Expense
=
+
Its the Income taxes Payable (i.e. payable for the current period) in respect of the taxable profit/loss to the tax authorities.
The income taxes that would be payable (i.e. in future period) in respect of the taxable profit/loss to the tax authorities.
Current Tax
Calculation and Accounting for Current Tax
- Accounting for current tax is simple forward calculation.
- Tax is paid on Taxable profit/ Income.
- When the financial statements are prepared, the tax charge on accounting profits for the year is likely to be an estimate, which is therefore not the amount of tax that will eventually be payable. The actual tax charge ( based on Taxable Profit ), agreed with the tax authorities is likely to be different.
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- Accounting Profit is the profit/loss for a period before deducting tax expense. A series of adjustments is made against a company’s accounting profit to arrive at its Taxable profit, adjustments involve:
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- Adding back inadmissible deductions.
- Deducting admissible deductions.
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- Then, current tax is calculated by applying a Tax rate provided by tax authorities on taxable profit/income.
- Current tax is an Expense (a Debit) in statement of profit/loss, with the other side a tax payable (a Credit, under current liabilities) in statement of Financial Position.
The following section explains IAS 12 deferred tax examples with other IAS 12 disclosure requirements.
IAS 12 Deferred Tax
Calculation and Accounting for Deferred Tax
IAS 12 deferred tax
Accounting for deferred tax is based on the principle that tax consequence of an item should be recognized in the same period as the item is recognized i.e. matching concept.
Accounting for deferred tax is based on the identification of Temporary differences, which is the difference between carrying amount of an asset or liability in statement of financial position and its Tax Base.
The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes in accordance with tax authorities.
Charge to P/L
- Tax base is the total amount of expense that will be allowed as expense in future.
- For example PPE will be charge in profit/loss as expense over the period.
Convertible into Cash/other asset
- The amount that would be received in future but not taxable by tax authorities.
- For example for Receivables; are taxed on received basis. So the tax base is Zero (nil) for today, as there would be ‘zero amount’ to be received in future but not taxable.
Charge to P/L
- The tax base is its carrying amount less the amount on which no tax will be imposed in future.
- For example Revenue received in advance.
Other Liability
- The tax base is its carrying amount less the amount that will be allowed as Expense in future.
- Payment to Account payable.
Differences
Temporary Differences
Taxable Temporary Differences
- The difference which results in taxable amounts in determining taxable profit/loss of future periods.
- They caused by Debit balance in carrying amount of asset/liability as compared to tax base.
- They lead to deferred tax liabilities.
Deduct able Temporary Differences
- The differences which results in deductible amounts in determining taxable profit/loss of future periods.
- They are caused by a Credit balance in carrying amount of asset/liability in financial statement compared to tax base.
- They lead to deferred tax assets.
- Permanent differences arise from items of income and expenditures;
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- that have been included in the calculation of accounting profit But will NEVER be included in calculation of taxable profit. So NO deferred tax should be recognized.
Deferred Tax Recognition and Measurement rules
Deferred tax is recognized as either;
Deferred Tax Liability
- These are the amounts of income taxes payable in future periods.
- It must be recognized for ALL taxable temporary difference, except;
Deferred Tax Asset
- These are the amounts of income taxes recoverable in future periods in respect of all deduct able temporary differences:
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- A deferred tax asset must be recognized for carry forward unused tax losses and credits.
Double Entry for Deferred Tax:
Deferred Tax Expense/Credit
Charged to Profit and Loss.
Deferred Tax Liability/Asset
Charged as Balance sheet item.
IAS 12 pdf
The above IAS 12 summary is the most simplified version. Moreover, Click here to Download IAS 12 income taxes pdf
External Resources
-
IAS 33 Earnings per share – Examples – PDF
IAS Standards
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS Standards
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IAS 33 Earnings per share Overview
IAS 33 Earnings per share prescribes the principles for Calculating and Presenting earnings per share (EPS) amounts, which is used to improve performance. By comparisons between different entities in the same reporting period and between different reporting periods for the same entity.
Tackle IAS in TWO simple steps:
- Understanding IAS 33
- Accounting treatment for IAS 33
Step 1: Understanding IAS 33 Earnings Per Share
- Earnings are Profits available for equity (ordinary share holders).
- Earnings Per Share (EPS) is a measure of the amount of earnings in a financial period, for each equity share.
- EPS is calculated as reported earnings (adjusted for a few things) and divided by the weighted average number of ordinary shares on that year.
- IAS 33 specifies the Profit figure that should be used and explains how to calculate the appropriate no. of shares, when there have been changes in share capital during the period under review; and
also describes the concept in dilution ( NOT covered here ), which is caused by the existence of Potential ordinary shares.
The following IAS 33 notes are prepared with illustrative examples.
Step 2: Accounting treatment for EPS (Basic)
Basic EPS is calculated by dividing the Profit or loss (Total Earning) on Continuing Operations by the weighted average no. of ordinary shares in issue during the period.
- It is the Profit/loss from the continuing operations after deducting tax and preference dividend.
- In case of consolidated financial statement, after excluding the earnings attributed to Non controlling Interest.
- Total earnings include any income from associates.
- where there is a net loss, total earnings and EPS are Negative.
Total earnings must be adjusted for:
- Preference Share:
Must be classified as equity or liability;
- Equity any dividend relating to the share is recognize in equity. Any dividend must be deducted from P/L from continuing operations.
- Liability (redeemable pre. share) any dividend relating to that share is recognized as a finance cost in P/L . It is already deducted from the P/L from continuing operations and NO further adjustment needs to be made.
2. Cumulative Preference shares:
- where a company fails to declare a preference dividend in a period, the holders are entitled to receive the missed dividend sometimes in future . The dividend accumulates when not declared.
- if there are cumulative preference shares in issue , the dividend must be deducted from P/L from continuing operations, regardless of whether the dividend has been declared or not.
- for Non-cumulative the dividend would have been deducted only in case of declaration.
3. Increasing rate Preference share:
- The amount that arises on discounting the proceeds that will be received in future are amortized using the interest rate and treated as preference dividend for calculation of EPS. Other elements such as transaction cost may also be amortized.
4. Early conversion of Preference share:
- where there is early conversion of Convertible preference share, the excess amount transferred is treated as a return to preference share holders and must be deducted for EPS.
Deduction = Fair value of ordinary shares issued (paid dated) minus Fair value under original terms.
5. Re-Purchase of Preference share:
- where the fair value of the consideration paid to pref. shareholder exceeds the carrying value of the pref. share repurchased, the excess is a return to the pref. shareholders and must be deducted from the profit.
- where the carrying value of pref. share repurchased exceeds the fair value of consideration paid, the excess is added in profit.
- where pref. share are treated as liabilities, NO adjustment is needed.
6. Participating securities and two-class ordinary shares:
The equity of some entities includes;
- instruments that participate in dividends with ordinary shares according to a predetermined formula.
- a class of ordinary shares with a different dividend rate from that of another class of ordinary share.
- Profit or loss (Distributable) is allocated to the two-class shareholders in accordance with their dividend rights.
- the Undistributed Profit [Total profit minus (ordinary plus pref. dividend)] is allocated to the two-class using calculated rates.
Weighted average no. of Shares
There are different ways in which the no. of share may change;
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- issue for full consideration.
- issued for no consideration.
IAS 33 earnings per share examples (issued for no consideration)
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- Bonus shares
- Shares splits
- Reverse share Splits
- Bonus elements in other issue
iii. Right issue.
Weighted average no. of Shares must be adjusted for:
- Issue at the full market price:
These are included from the date of issue.
- Partly paid shares:
- The no. of ordinary shares is calculated based on the number of fully paid shares. The partly paid shares are included as an equivalent no. of fully paid shares to the extent they are entitled to participation in dividends.
- Bonus issue new shares issued ‘ free of charge ‘ to existing share holders, often by converting equity reserves ( share premium a/c ) into ordinary share capital.
- NO CASH is raised , therefore no earnings boost from the issue. The new no. of shares is found by multiplying the no. of shares before the bonus issue by the bonus issue fraction (i.e = share after bonus issue divide by share before issue).
- bonus issue are treated as if they always been in issue. Therefore multiply every issue before bonus issue with bonus fraction.
- Comparative figures; it would be misleading , as there are no earnings boost due to bonus issue. Therefore , previous year’s EPS is restated by multiplying it with inverse of bonus fraction.
- Rights issue of shares
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- It is an issue of new shares for cash, where the issue price is always below the current market price. This means that they include a bonus element which must be taken into account for calculation of weighted average no. of shares.
- just like Bonus issue , any comparative figure must be restated by multiplying previous year’s EPS by inverse of the ‘Right issue bonus fraction’ (Actual cum right price divide by Theoretical ex-right price).
- Actual cum right price is the market price before the right issue
Theoretical ex-rights is the price entity issued that shares.
IAS 33 full standard pdf (IAS 33 earnings per share pdf)
The above ias 33 summary is the most simplified version. Moreover, Click here to Download IAS 33 pdf
External Resources
-
IFRS 16 Leases – Summary with examples – PDF
IAS Standards
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS Standards
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IFRS 16 Leases Overview
IFRS 16 full text establishes principles for the recognition measurement presentation and disclosure of leases, with the objective of ensuring that lessee and lessor provide relevant information that faithfully represents those transactions. (Effective from 2019: see IFRS 16 changes 2019 below)
Understanding IFRS 16 Leases
- The previous version IAS-17 (Leases) was criticized because it did not required Lessees to recognize assets and liabilities arising from Operating lease.
- IFRS 16 introduces a single lessee accounting model and requires a lessee to recognize assets (right-of-use) and liabilities for All leases with a term of more than 12 months ( unless the underlying asset is of low value ).
Key IFRS 16 Definition
- Inception date of lease: The earlier of lease agreement and the date of commitment by the parties. The type of lease is identified at the date of inception.
- Interest rate implicit in lease: That makes present value of lease payment and UN-guaranteed value equal to fair value and ( any ) initial direct costs of lessor.
- Economic and Useful life:
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- Economic life is the total life of an asset excepted to be economically usable by one or more users.
- Useful life is the Period over which an asset is expected to be available for use by an entity.
- Residual Value: this may be Guaranteed or UN-guaranteed ;
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- Guaranteed: A guarantee made to a lessor by a party unrelated to lessor that the value of an asset at the end of lease will be at least a specified amount.
- UN-Guaranteed: is that portion of residual value of asset, the realization of which is not assured by a party related to the lessor.
- Lease Receipts and Payments: The term lease Payments refer to the payments that a lessee expects to make over a lease term or the Receipts that a lessor expects over the economic life of the asset. Payment by a lessee to lessor during a lease term may comprises of ;
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- fixed payments (less) any lease incentives.
- variable lease payments.
- purchase option price.
- payment of penalties for terminating the lease.
- Lease Classification:
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- Finance lease where it transfers substantially all the risks and rewards incidental to ownership.
- Operating lease where it does not transfers substantially all the risk and rewards incidental to ownership.
The following IFRS 16 presentation explain IFRS 16 calculation example.
IFRS 16 Lessee accounting: Accounting for lease By Lessee
Accounting for lease by Lessee
IFRS 16 introduces a Single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months unless leases for which underlying asset is of low value.
Recognition and Measurement at commencement date
Right-of-use (Asset)
At commencement date, a lessee should measure the right of use asset at cost.
Cost comprises;
- present value of lease payments.
- any lease payment made at or before the commencement date (less) any lease incentives received.
- any initial direct cost incurred by lessee.
- any disposal/dismantling costs, incurred by lessee.
Subsequent measurement
- Account for any depreciation expense and accumulated impairment losses ( if any ).
- If asset is owned at the end of lease term:
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- Depreciate on useful life.
- If asset is not owned at the end of lease term:
- depreciate, Earlier of: useful life or lease term.
At commencement date, a lessee should measure the lease liability at the Present valve of the lease payments, that are not paid at that date.
Subsequent measurement
- After the initial recognition the lease liability is measured at amortized cost using the effective interest method.
- Each lease payment consists of TWO elements:
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- Finance charge on the liability to the lessor, by adding a periodic charge to lease liability, with other side of entry as an expense to P/L.
- Partial repayment of liability.
- Total liability must be divided between:
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- current liability.
- non-current liability.
Reassessment, Re-measurement of lease liability
- After the commencement date, a lessee should remeasure the lease liability (IF ANY CHANGE OCCURS) using either unchanged discount rate or revised discount rate to reflect changes in lease payments.
- A lessee should account for re-measurement of lease liability as an adjustment to the right-of-use asset to the extent covered by right-of-use asset and remaining amount is recognized in P/L.
Recognition and Measurement Exemption to lessee
- A lessee may ELECT not to apply the recognition and measurement of right-of-use asset and liability to:
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- short term lease (12 months or less).
- asset of low value:
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- Examples include; office furniture, laptops, tables, telephones.
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- Expense these out on straight line basis or any other method.
IFRS 16 Lessor accounting: Accounting for lease By Lessor
Accounting for lease by lessor
Initial measurement at commencement
Finance lease
- In finance lease the lessor does not record the leased asset in its financial statements ,as its has transferred the risks and reward. Instead, he records the amount as Receivable.
- Receivable is described as :
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- Net investment( N.I ) = Present value of Gross investment or;
- Net investment (N.I) = Fair value + Initial direct cost.
Subsequent measurement
- Record payments received during the year by making;
Cash/Bank Debit
Net Investment Credit- Record finance income, adding a period return to the N.I and other side as income in P/L:
Net Investment Debit
Finance Income CreditIFRS 16 operating lease
- The lessor records the leased asset in its financial statement , as he has not transferred the risk and reward of ownership.
- At commencement the lessor add initial direct costs incurred by lessor.
Subsequent measurement
- Lessor records the depreciation expense, the policy must be consistent with lessor’s policy.
- Account for any impairment loss.
- Records Rental Income on a straight-line basis over lease term.
Accounting for lease By Lessor (Manufacturer Dealer LESSOR)
- A manufacturer or dealer often offers to customers to the choice of either buying or leasing an asset.
- As these are Lessors, therefore lessors accounting treatment are applied.
A finance lease gives rise to two types of income:
- Profit or loss (difference between sales and cost)
- Finance income.
Initial Measurement
- Record Sales as:
Lease receivable Debit
Sales Credit (lower of fair valve or Present of Lease payments)- Record cost of Sales:
Cost Debit
Inventory (Asset)Credit- Transfer Present valve of UN-Guaranteed valve of Net Investment:
Lease Receivable Debit
Inventory (Asset) Credit- Expense-out initial direct costs:
Income Statement Debit
Cash/Bank Credit- Record finance income subsequently
Initial Measurement
- Does not Record Sales
- Record Asset:
Asset Debit
Inventory Credit- Record depreciation.
- Record impairment.
- Record Rental income.
Sale and Lease Back
- Sale and lease back transactions involve one entity selling an asset to another entity and then immediately leasing it back.
- The main purpose is to allow the entity to release cash, that is ‘ tied up ‘ in the asset.
- Accounting for sale and lease back depends on whether Transfer is sale or not a sale.
Transfer is a sale
For seller-lessee
If the transfer of an asset by seller lessee satisfies the requirement of IFRS 15 then the lessee shall:
Sale at Fair value:
- De-recognize the carrying value of the asset.
- Recognize the Gain/Loss [ = (fair value – carrying value) * (f.v – p.v) divide by fair value]
Sale Above Fair value:
- If the sales proceeds are above F.V, the difference between sales proceeds and F.V shall be treated as Additional financing provided by the buyer lessor (additional financing= sales – F.V) and to be deducted from lease payments (NPV) for calculation of ” Right of use ” & ” Gain/Loss “.
- The entity should make following adjustments, others remaining same as above:
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- Record lease liability at present value of lease payments including additional financing.
- Right of use asset: = [carrying value * NPV (i.e. is lease payments net off additional financing)] divide by fair value (F.V).
- Gain/Loss: = (F.V – C.V) * (F.V – NPV) divide by F.V.
Sale Below Fair value:
- If the sales proceeds are below F.V, the difference between sales proceeds and F.V shall be treated as prepayments of lease payments. It is added to the lease payments ( to make it Total lease payments ) for calculation of “Right of use” & “Gain/Loss”.
- The entity shall make following adjustments, others remaining the same;
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- Record lease liability (at P.V of lease payment).
- Record right-of-use (C.V * Total P.V of lease payments) divide by F.V.
- Gain/Loss: [=(F.V – C.V)* (F.V – Total P.V of lease payments)] divide by F.V.
If the transfer of an asset by seller lessee satisfies the requirements of IFRS 15, then the lessor shall;
- Account for Purchase of asset according to IAS 16 and treat it as operating lease according to IFRS 16. Make following entries;
Asset Debit
Cash/Bank CreditDep. expense Debit
Acc. dep. credit (over remaining useful life)Cash Debit
Rental Income Credit (over straight line)- Account for any initial direct investment.
Transfer is not a sale
For seller-lessee
If the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the lessor shall;
- continue to recognize the transferred asset.
- shall recognize a Financial liability equal to the transferred proceed, in accordance with IFRS 9.
Cash Debit
Financial liability Credit- Lease amortization schedule will be needed for principal and interest charge over the lease term;
Interest charge Debit
Financial liability Debit
Cash CreditIf the transfer of an asset by seller lessee does not satisfies the requirements of IFRS 15, then the lessor shall;
- Not recognize the transfer of asset.
- Recognize a Financial Asset, equal to the transferred proceed in accordance with IFRS 9;
Financial asset Debit
Cash Credit- Lease amortization schedule will be needed for principal and interest income over the lease term;
Cash Debit
Interest income Credit
Financial asset CreditIFRS 16 pdf
The above IFRS 16 summary is the most simplified version. Moreover, Click here to Download IFRS 16 standard pdf
External Resources
-
IAS 7 Statement of Cash Flows – Summary – PDF
IAS Standards
IAS 2 Inventories
IAS 7 Statements of cash flows
IAS 7 Statement of cash flows – Revisited
IAS 8 Accounting policies, changes in accounting estimates, and errors
IAS 10 Events after the reporting period
IAS 16 Property, plant and equipment
IAS 20 Accounting for government grants and disclosure of government assistance
IAS 21 The effects of changes in foreign exchange rates
IAS 24 Related party disclosures
IAS 27 Consolidated and separate financial statements
IAS 28 Investments in associates and joint ventures
IAS 32 Financial instruments: presentation
IAS 33 Earnings per share – Revisited
IAS 37 Provisions, contingent liabilities and contingent assets
IFRS Standards
IFRS 5 Non-current assets held for sale and discontinued operations
IFRS 7 Financial instruments: disclosures
IFRS 10 Consolidated financial statements
IFRS 12 Disclosure of interests in other entities
IFRS 13 Fair value measurement
IFRS 15 Revenues from contracts with customers
IAS 17 VS IFRS 16 Lease – Differences
IAS 7 Full text Overview
IAS 7 statement of cash flows 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. Cash flows during the period are classified according to operating, investing, and financing activities.
Presentation of the IAS 7 Statement of Cash Flows
- Cash flows must be analyzed between operating, investing and financing activities.
- For operating cash flows, the direct method of presentation is encouraged, but the indirect method is acceptable.
- The following section will make you understand IAS 7 format with ias 7 amendment illustrative examples.
Starts with:
- Cash Flows from Operating activities:
-
- Profit before tax
- Adjustment for:
- non-cash items
- remove impact of accruals
- relocate some figures to other position.
- Cash Flows from Investing activities:
-
- purchase of non-current assets
- sale/disposal of non-current assets
- interest received/dividend received on investment.
Cash Flows from Financing activities:
-
- purchase of share
- cash from shares
- take loan/issue bonds
- payment under finance lease agreement.
- Cash Flows from Operating activities:
-
- Receipts from customers
- Less Payments to:
- suppliers
- employees
- operating expenses
- taxation
- interest charges.
- Cash Flows from Investing activities:
-
- Same as indirect method.
- Cash Flows from Financing activities:
-
- Same as indirect method.
Accruals Based figures
Interest
- Paid shown in Operating.
- Received shown in Investing.
Dividend
- Paid shown in Financing.
- Received shown in Investing.
Taxation
- Includes Tax expense.
- Includes Deferred Tax.
Presentation Methods: Detailed Explanation
Statement of Cash Flows
Indirect Method
Starts with:
Cash Flows from Operating activities:
- Operating Profit after deducting interest but before tax.
- Adjustment for:
-
- non-cash items
- depreciation/amortization (add back to profit)
- gain on disposal of NCA (deduct)
- Loss in disposal of NCA (add back)
- remove impact of accruals
- Interest expense (add back)
- Interest income (deduct and relocate to Investing activities)
- Movement on working capital item
-
- Receivables (deduct increase, add decrease)
- Payable (add increase, deduct decrease)
- Inventory (deduct increase, add decrease)
- Interest paid (deduct)
- Taxation (deduct).
Cash Flows from Investing activities:
- Purchase of non-current assets (deduct)
- sale/disposal of non-current assets (add)
- Payment for Investment (deduct)
- Proceed from disposal of Investment (add)
- interest received/dividend received on investment (add).
Cash Flows from Financing activities:
- Purchase of share (deduct)
- cash from shares (add)
- take loan/issue bonds (add)
- payment under finance lease agreement (deduct)
- dividends payments (deduct).
Cash Flows from Operating activities:
- Receipts from customers.
- LESS: Payments to:
-
- suppliers
- employees
- operating expenses
- taxation
- interest charges.
Cash Flows from Investing activities:
- Same as indirect method.
Cash Flows from Financing activities:
- Same as indirect method.
IAS 7 pdf (IAS 7 download)
The above IAS 7 summary is the most simplified version. Moreover, Click here to Download IAS 7 statement of cash flows pdf
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