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  • IAS 20 Government grants and disclosure

    IAS 20 Government grants and disclosure


    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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    IAS 20 Overview

    In many countries the government provides grants to industry. The most common form of such grants is cash from local or national government, other examples may include subsidies, premium etc. They may receive other types of assistance which may be in many forms. The IAS 20 government grants IFRS with summary is as follows:

    Definitions

    Government grants – Assistance by government in the form of transfer of resources to an entity in return for past or future compliance with certain conditions relating to the operating activities of the entity. They exclude those forms of government assistance which cannot reasonably have a value placed upon them and transactions with government which cannot be distinguished from the normal trading transactions of the entity.

    Government assistance – Action by government designed to provide an economic benefit specific to an entity or range of entities qualifying under certain criteria.

    Grants related to assets – Government grants whose primary condition is that an entity qualifying for them should purchase, construct or otherwise acquire non-current assets. Subsidiary conditions may also be attached restricting the type or location of the assets or the periods during which they are to be acquired or held.

    Grants related to Income – Government grants other than those related to assets.

    Forgivable Loans – Loans for which the lender undertakes to waive repayment under certain prescribed conditions.

    Government grants

    Recognition of Government grants

    An entity should NOT recognize government grants (including non-monetary grants at fair value), until it has reasonable assurance that:

    1. The entity will comply with any conditions attached to the grant
    2. The entity will actually receive the grant

    It makes no difference in the treatment of the grant whether it is received in cash or given as a reduction in a liability to government.

    Any related contingency should be recognized under IAS 37, once the grant has been recognized.

    Accounting treatment of Government grants

    Grants related to Income

    For grants related to income, IAS 20 Government grants states that an ‘income approach’ should be used, and the grant should be taken to income over the periods necessary to match the grant with the costs that the grant is intended to compensate. IAS 20 allows two methods of doing this:

    • Method – 1 Include the grant for the period as ‘other income’ for inclusion in profit or loss for the period; or
    • Method – 2 Deduct the grant for the period from ‘related expense’

    Grants related to Assets

    For grants related to assets, IAS 20 allows two methods of doing this:

    • Method – 1 Deduct the grant from the cost of the related asset. The asset is included in the statement of financial position at cost minus the grant. Depreciate the net amount over the useful life of the asset.
    • Method – 2 Treat the grant as ‘Deferred Income’ and recognize it as income on a systematic basis over the useful life of the asset.

    Repayment of Government grants

    If a grant must be repaid it should be accounted for as a revision of an accounting estimate in accordance with IAS 8.

    1. Repayment of a grant related to Income – apply first against any unamortized deferred income set up in respect of the grant, any excess should be recognized as an expense.
    2. Repayment of a grant related to an asset – increase the carrying amount of the asset or reduce the deferred income balance by the amount repayable. The cumulative additional depreciation that would have been recognized to date in the absence of the grant should be immediately recognized as an expense.

    Government Assistance

    • Some forms of government assistance cannot reasonably have a value placed on them, for example free technical or marketing advice, provision of guarantees.
    • There are transactions with government which cannot be distinguished from the entity’s normal trading transaction, for example government procurement policy resulting in a portion of the entity’s sales.

    Therefore, Disclosure of such assistance may be necessary because of its significance. Its nature, extent and duration should be disclosed. Loans at low or zero interest rates are a form of government assistance.

    IAS 20 Government grants and disclosure of Government Assistance Disclosure Requirements

    Disclosure is required of the following.

    1. Accounting policy – adopted, including method of presentation
    2. Nature and extent – of government grants recognized and other forms of assistance received
    • Unfulfilled conditions and other contingencies – attached to recognized government assistance.

    IAS 20 PDF

    IAS Government grants with examples is available in PDF version. Moreover, click here to DOWNLOAD IAS 20 accounting for government grants and disclosure of government assistance PDF

    External Resources
  • IAS 16 Property Plant and Equipment | Examples | PDF

    IAS 16 Property Plant and Equipment | 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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis


    IAS 16 Overview

    The objective of IAS 16 property plant and equipment (PPE) is to prescribe the accounting treatment for property, plant and equipment. The principal issue is the timing of recognition of assets, the determination of their carrying amounts, and the depreciation charges to be recognized in relation to them. The following is the IAS 16 summary

    IAS 16 Property, Plant and Equipment

    IAS 16 Recognition criteria

    Items of property, plant and equipment should be recognized as assets when:

    • It is probable that the future economic benefits associated with the asset will flow to the enterprise.
    • The cost of the asset can be measured reliably.

    Initial Measurement

    Assets recognized under IAS 16 Property, Plant and Equipment must be initially recognized at cost. 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 and estimated cost of dismantling and removing the asset and restoring the site it the payment for an item of Property, Plant and Equipment is deferred, interest at a market rate must be recognized or imputed.

    Elements of cost (IAS 16 directly attributable costs examples)

    The cost of an item of property, plant and equipment consists of:

    1. Its purchase price less trade discount plus any import taxes; plus
    2. The directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. These directly attributable costs must include:
      1. Employee costs arising directly from the installation or construction of the asset
      2. The cost of site preparation
      3. Delivery costs
      4. Installation and assembly costs
      5. Testing costs to assess whether the asset is function properly (net of any sales proceeds of items produced during the testing phase).
      6. Professional fees
    • When the entity has an obligation to dismantle and remove the asset at end of its life, its initial cost should also include an estimate of the costs of dismantling and removing the asset and restoring the site where it is located.

    Subsequent expenditure IAS 16 on Asset

    Expenditure relating to non-current assets, after their initial acquisition, should be treated as expense unless it meets the criteria for recognizing an asset. In practice, this means that expenditure is capitalized if it improves the asset (for example, by enhancing its performance or extending its useful life).

    Measurement Subsequent to Initial Recognition

    IAS 16 Property, Plant and Equipment permits TWO accounting models:

    1. Cost Model – The asset is carried at cost less accumulated depreciation and impairment.
    2. Revaluation Model – The asset is carried at a revalued amount, being its fair value at the date of revaluation less subsequent depreciation, provided that fair value can be measured reliably.

    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.

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

    Revalued assets are depreciated in the way as under the cost model.

    • If a revaluation results in an increase in value, it should be credited to entity under the heading “Revaluation Surplus” unless it represents the reversal of a revaluation decrease of the same asset previously recognized as an expense, in which case it should be recognized as income.
    • A decrease arising as a result of a revaluation should be recognized as an expense to the extent that it exceeds any amount previously credited to the revaluation surplus relating to the same asset.
    • When a revalued asset is disposed-off, any revaluation surplus may be transferred directly to retained earnings.

    Depreciation (Cost and Revaluation Models)

    IFRS property plant and equipment

    For all depreciable assets:

    • The depreciable amount (cost less depreciation, impairment and residual value) should be allocated on a systematic basis over the asset’s useful life. 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.
    • The depreciation method used should reflect the pattern in which the asset’s economic benefits are consumed by the enterprise. 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.

    Depreciation should be charged to the income statement, unless it is included in the carrying amount of another asset. Depreciation begins when the asset is available for use and continues until the asset is derecognized, even if it is idle.

    Derecognition (Retirement and Disposal) of An Asset

    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 recognized in the income statement.

    IAS 16 PDf

    The International accounting standards 16 pdf is available to download. Moreover, click here to Download IAS 16 summary pdf

    External Resources

  • IFRS 16 Leases Study Text

    Download the free IFRS 16 Leases Study Text




  • IAS 38 Intangible Assets Study Text

    Download the free IAS 38 Intangible Assets Study Text




  • IAS 37 Provisions, Contingent liabilities, Contingent assets Study Text

    Download the free IAS 37 Provisions, Contingent liabilities, Contingent assets Study Text




  • IAS 36 Impairment of Assets Study Text

    Download the free IAS 36 Impairment of Assets Study Text




  • IAS 17 Leases – Summary with Examples – PDF

    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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    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


    IAS 17

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    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:
      • 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 ;
      • 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:
      • 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


    Finance Lease

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    For Lessee

    • 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


    For Lessor

    • 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 :
      • 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 Credit

    Accounting for IAS 17 Operating Lease


    Operating Lease

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    For Lessee

    • 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.


    For Lessor

    • 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


    Manufacturer Dealer LESSOR

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    • 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.

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    Finance Lease

    A finance lease gives rise to two types of income:

    1. Profit or loss (difference between sales and cost)
    2. 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


    Initial Measurement

    • 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

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    For Lessee

    Sale of Asset

    1. Remove the asset from Financial Statements.
    2. Defer and amortize any Surplus/Gain over lease term.
    3. If loss , then immediately recognize.

    Lease back of Asset

    1. Recognize asset under finance lease.
    2. Create an obligation under finance lease.
    3. Depreciate Asset and amortize liability subsequently.


    For Lessor

    Purchase of Asset

    1. Does not records the asset.
    2. As the asset is not transferred physically nor risk and reward are.

    Leased the Asset

    1. Record Lessee as Receivable.
    2. Record Lease receipts during the period.
    3. Record Finance Income.

    Sale and Lease Back (Operating Lease)


    Sale and Lease Back

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    For Lessee

    Sale of Asset

    1. Remove asset from financial statements.
    2. Record Gain/Loss, where;
      1. sale at fair value: gain/loss is recognized immediately on disposal.
      2. 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.
      3. sale at more than fair value:
      • 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.


    For Lessor

    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
  • IAS 12 Income Taxes – Deferred tax examples – PDF

    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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    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;

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    Tax Expense

    =


    Current Tax

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    +


    Deferred Tax Expense

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    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

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    • 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.
      • 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:
        • Adding back inadmissible deductions.
        • Deducting admissible deductions.
    • 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

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    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.


    Tax Base

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    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.

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    Of Asset

    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.


    Of Liability

    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

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    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 Difference

    • Permanent differences arise from items of income and expenditures;
      • 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

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    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:
      • 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 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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    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:

    1. Understanding IAS 33
    2. Accounting treatment for IAS 33

    Step 1: Understanding IAS 33 Earnings Per Share


    Earnings Per Share

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    • 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 Earnings Per Share

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    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.

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    Guidance on;

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    Total Earnings

    • 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:

    1. 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;

    1. instruments that participate in dividends with ordinary shares according to a predetermined formula.
    2. 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;

      1. issue for full consideration.
      2. issued for no consideration.

    IAS 33 earnings per share examples (issued for no consideration)

      • 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
      • 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

    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 12 Income taxes 

    IAS 16 Property, plant and equipment          

    IAS 17 Leases

    IAS 19 Employee benefits     

    IAS 20 Accounting for government grants and disclosure of government assistance          

    IAS 21 The effects of changes in foreign exchange rates     

    IAS 23 Borrowing costs        

    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

    IAS 33 Earnings per share – Revisited          

    IAS 36 Impairment of assets 

    IAS 37 Provisions, contingent liabilities and contingent assets        

    IAS 38 Intangible assets

    IAS 40 Investment property

    IFRS Standards

    IFRS 3 Business combinations    

    IFRS 5 Non-current assets held for sale and discontinued operations    

    IFRS 7 Financial instruments: disclosures          

    IFRS 8 Operating segments         

    IFRS 9 Financial instruments      

    IFRS 10 Consolidated financial statements        

    IFRS 11 Joint arrangements         

    IFRS 12 Disclosure of interests in other entities 

    IFRS 13 Fair value measurement 

    IFRS 15 Revenues from contracts with customers          

    IFRS 16 Leases

    IAS 17 VS IFRS 16 Lease – Differences

    Ratio Analysis

    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


    IFRS 16

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    • 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:
      • 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 ;
      • 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:
      • 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

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    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.

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    Recognition and Measurement at commencement date

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    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:
      • Depreciate on useful life.
    • If asset is not owned at the end of lease term:
      • depreciate, Earlier of: useful life or lease term.


    Liability

    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:
      1. 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.
      2. Partial repayment of liability.
    • Total liability must be divided between:
      • current liability.
      • non-current liability.


    Reassessment, Re-measurement of lease liability

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    • 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

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    • A lessee may ELECT not to apply the recognition and measurement of right-of-use asset and liability to:
      1. short term lease (12 months or less).
      2. asset of low value:
        • Examples include; office furniture, laptops, tables, telephones.
    • 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

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    Initial measurement at commencement

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    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 :
      • 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 Credit


    Operating lease

    IFRS 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)


    Manufacturer Dealer LESSOR

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    • 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.

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    Finance Lease

    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


    Operating Lease

    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

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    • 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.

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    Transfer is a sale

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    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:
      • 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;
      • 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.


    For Buyer-lessor

    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 Credit

    Dep. 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

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    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 Credit


    For Buyer-lessor

    If 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 Credit

    IFRS 16 pdf

    The above IFRS 16 summary is the most simplified version. Moreover, Click here to Download IFRS 16 standard pdf

    External Resources