Financial Reporting (IFRS)

Question 1

Non-Monetary Transactions

Answer 1

• Asset exchanged in a non-monetary transaction should be measured at the more reliably measurable of the fair value of the asset given up and the fair value of the asset received, unless the transaction lacks commercial substance or neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable, in which case, it should be measured at the carrying value of the asset given up
• A non-monetary transaction has commercial substance when the entity’s future cash flows are expected to change significantly as a result of the transaction, i.e.
  o the risk, timing and amount of the future cash flows of the asset received differ significantly from the risk, timing and amount of the cash flows of the asset given up; or
  o the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged

Reference: IAS 16.24-.26

Question 2

Impairment of Assets

Answer 2

• An entity is required to assess whether there are any indicators of impairment at the end of each reporting period. If an indication of impairment exists, the asset will need to be tested for impairment.
• To test for impairment, compare the asset’s recoverable amount to the carrying value. The extent to which the carrying value exceeds the recoverable amount (if any) is the impairment loss.
• Recoverable amount: Higher of the fair value less costs to sell and value in use
  o Fair value less costs to sell: price that would be received to sell an asset or paid to transfer a liability between market participants, less incremental costs directly attributable to the disposal of the asset (excluding finance cost and income tax expense)
  o Value in use: Present value of the future cash flows from the continuing use of the asset and its ultimate disposal
• Impairment can be reversed if the asset subsequently recovers in value, but not to more than the “would be” value had the impairment not been recognized.
  Reference: IAS 36

Question 3

Investments - Equity Method

Answer 3

• IAS 28: an entity with significant influence over an investee shall treat the investee as an associate and account for its investment in the associate using the equity method
• Significant influence can be demonstrated by owning (directly or indirectly) 20% or more of the voting power of the investee
• The entity may be able to demonstrate influence, even with less than 20% ownership. Evidence of influence can include:
  o Representation on the board of directors
  o Participation in policy-making processes
  o Material transactions between the entity and its investee
  o Provision of essential technical information
• Under the equity method, the investment is initially recognized at cost, and is adjusted for the post-acquisition change in the investor’s share of the investee’s net assets

Reference: IAS 28

Question 4

Internally Generated Intangible Assets

Answer 4

• Research is defined as original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding
• Development is defined as the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems, or services before the start of commercial production or use
• Research costs are always expensed
• Development costs must be capitalized if all of the following exist:
  o Technically feasible
  o Intention to complete it
  o Ability to use or sell it
  o Probable future economic benefits will be generated
  o Availability of adequate technical, financial and other resources
  o Ability to reliably measure the expenditures attributed
• Costs meeting the tangible asset criteria should not be capitalized as intangible

Reference: IAS 38.4, .8, .54, .57

Question 5

Intangible Assets - Definition & Recognition

Answer 5

• To meet the definition of an intangible asset the item must be: identifiable, the entity must have control over the future benefit and the item must meet the recognition criteria
• The asset is identifiable if it either:
  o It can be separated from the entity
  o Arises from contractual, legal right that allow it to be transferrable or separable
• The entity controls the asset if it has the power to obtain future economic benefits
• Recognition criteria:
  o Probable that the expected future economic benefits will flow to the entity
  o Cost of the asset can be measured reliably

Reference: IAS 38.12, .13, .17 .21

Question 6

Intangible Assets - Amortization

Answer 6

• Intangibles are to be amortized over their estimated useful lives unless they are considered to have an indefinite life
• Assets with indefinite lives are not to be amortized until the life is no longer considered indefinite, but they must be tested for impairment annually
• Assets with definite lives can be reported following either the cost model or the revaluation model
• Amortization method and useful life should be reviewed annually
• Consider expected use, life of related assets, contractual provisions, product life cycles and other economic factors

Reference: IAS 38.72, .88, .97, .104, .107, .109

Question 7

Discontinued Operations

Answer 7

• A component of an entity where its operations and cash flows can be clearly distinguished operationally and for financial reporting purposes, from the rest of the entity and it has been disposed of or classified as held for sale
• Report results of discontinued operations on the statement of comprehensive income for current and prior periods, net of tax, segregated as follows:
  o the post-tax profit or loss of discontinued operations
  o the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation.

Reference: IFRS 5.03, .31 - .33

Question 8

Borrowing Costs

Answer 8

• Interest and other costs that an entity incurs in connection with the borrowing of funds
• Capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset
• Possible qualifying assets:
  o Inventories
  o Manufacturing plants
  o Intangible assets
  o Investment properties

Reference: IAS 23.05, .07, .08

Question 9

Assets Held for Sale

Answer 9

• Non-current assets (or disposal group) to be disposed of other than by sale should continue to be classified as held and used until they are disposed of
• Non-current assets (or disposal group) to be sold should be classified as held for sale when all of the following are met:
  o Management commits to a plan to sell
  o Steps to locate a buyer and complete the sale have started
  o It is being actively marketed at a reasonable price
  o It is available for immediate sale in its present condition
  o The sale is probable and expected to occur within a year
  o Actions required to complete the sale indicate it’s unlikely significant changes to the plan will be made or that the plan will be withdrawn
• Non-current assets (or disposal group) held for sale should be measured at lower of carrying amount and fair value less costs to sell, and should not be amortized

Reference: IFRS 5.06 - .15, .25

Question 10

Share-Based Compensation

Answer 10

• For equity-settled share-based payment transactions, the entity shall measure the goods or services received, and the corresponding increase in equity, directly, at the fair value of the goods or services received, unless that fair value cannot be estimated reliably, in which case fair value of the equity instruments granted is used
• Transactions with employees and others providing similar services require use of the fair value of the equity instruments granted measured at grant date, because typically it is not possible to estimate reliably the fair value of the services received

Reference: IFRS 2.10, .11

Question 11

Accounting Policies, Changes & Errors

Answer 11

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements. Changes in accounting estimates result from new information or new developments and, accordingly, are not corrections of errors.

Only change a policy if:
* Standard/interpretation requires it, or
* Change will provide more relevant and reliable information to users
Apply changes to policy retrospectively unless it is impractical.

Changes to accounting estimates should be applied prospectively.

Corrections to errors should be applied retrospectively unless it is impractical

Reference: IAS 8

Question 11

Revenue Recognition

Answer 11

In a transaction involving the sale of goods or provision of services, the amount of revenue to recognize and how it is measured is determined by applying the following five steps:
* identify the contract with the customer
* identify separate performance obligations in the contract
* determine the overall transaction price
* allocate the transaction price to the separate performance obligations in the contract
* determine when the performance obligation(s) is satisfied, as revenue is recognized when (or as) the entity satisfies the performance obligation
o revenue is recognized as control is passed, either over time or at a point in time

Reference: IFRS 15

Question 12

PPE

Answer 12

Initial recognition if:
* The future economic benefits associated with the asset will flow to the entity, and
* The cost of the asset can be reliably measured.
Initial measure- recorded at cost.
Subsequent measurement
* Carried at cost less accumulated depreciation, and impairment losses, OR
* Carried at revalued amount, i.e. FV, less subsequent depreciation if FV can be reliably measured
o An increase in value is credited to OCI, unless it is a reversal of a revaluation decrease previously recognized as an expense
Significant components are required to be depreciated over their estimated useful life.

Reference: IAS 16

Question 13

Revenue Recognition – Identification of the Performance Obligations

Answer 13

Performance obligations are identified as each promise to transfer to the customer either:
* a good or service (or bundle of goods or services) that is distinct; or
* a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer
A good or service that is promised to a customer is distinct if:
* the customer can benefit from the good or service on its own or together with other resources readily available to the customer; and
* the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract
Two or more promises are not separately identifiable if the nature of the promise, within the context of the contract, is to transfer a combined item in which the promised goods or services are inputs.

If a promised good or service is not distinct, it is combined with other promised goods or services until the entity identifies a bundle of goods or services that is distinct.

Reference: IFRS 15.22-.30

Question 14

Warranties

Answer 14

• Two types of warranties:
  o those that provide a customer with assurance that the related product will function as the parties intended because it complies with agreed-upon specifications
  o those that provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications
• Warranty shall be accounted for in accordance with IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) if:
  o The customer does not have the option to purchase a warranty separately, and
  o The warranty does not provide the customer with a service in addition to the assurance that the product complies with agreed-upon specifications.

Reference: IFRS 15.B28 – B31

Question 14

Agriculture

Answer 14

This standard is intended to apply to the following which relates to agricultural activity
* Biological assets
* Agricultural produce at the point of harvest
* Government grants related to biological assets
Initial recognition if:
* The entity controls the asset as a result of a past event.
* The future economic benefits associated with the asset will flow to the entity, and
* The cost of the asset can be reliably measured.
Initial measurement at:
* FV, less estimated point of sale costs
* Cost, if no reliable measurement of FV is available.
Subsequent measurement
* FV, less estimated point of sale costs
* Cost, less accumulated depreciation if no reliable measurement of FV is available.
Reference: IAS 41

Question 15

Business Combinations

Answer 15

• For a business combination to occur, there must be:
  o an acquirer who has gained control, and
  o a business that has been purchased
   A business is defined as “an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing goods or services to customers, generating investment income (such as dividends or interest) or generating other income from ordinary activities.”
   “Determining whether a particular set of assets and activities is a business should be based on whether the integrated set is capable of being conducted and managed as a business by a market participant.”

Reference: IFRS 3

Question 15

Provisions, Contingent Liabilities, Contingent Assets

Answer 15

Provisions- a liability of uncertain timing or amount. May be recognized when:
* The entity has a present legal or constructive obligation as a result of a past event,
* It is probable that an outflow of economic benefits will be required to settle the obligation; and
* A reliable estimate can be made of the amount of the obligation
Contingent liabilities  NOT recognized:
* A possible obligation that arises from past events, whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly in the control of the entity;
* A present obligation that arises from past events is not recognised when an outflow of future economic benefits is not probable or the amount of the obligation cannot be measured reliably.
Contingent assets NOT recognized:
* – possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity.

Reference: IAS 37

Question 15

Earnings per Share (EPS)

Answer 15

• Basic EPS: Net earnings available to common shareholders / weighted average common shares outstanding (WACSO) during the year
• Diluted EPS: Hypothetical measure of company earnings attributable to each common shareholder assuming all dilutive securities have been converted to common shares; dilutive elements must be ranked from most to least dilutive in completing the diluted EPS calculation.
  o Stock options: the difference between the number of ordinary shares issued from exercising the options and the number of ordinary shares that would have been issued at the average market price during the period — difference is treated as an issue of ordinary shares for no consideration (no impact on the earnings in the EPS calculation).
  o Convertible bonds: dilutive impact if the after-tax interest per share that would be issued is less than the basic EPS — the after-tax interest on the bond increase earnings and the number of shares issued on conversion is added to the WACSO.

Reference: IAS 33

Question 16

Capital Lease Criteria – Lessee

Answer 16

• A lease is a contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration
• Expensing lease payments is only available for short-term leases or those with a low underlying asset value
• Recognition:
  o A right of use asset and a lease liability are recorded at the commencement date of the lease
• Initial measurement:
  o Lease liability is equal to the present value of future lease payments, discounted using the rate implicit in the lease (if unknown, use lessee’s incremental borrowing rate)
  o Right of use asset initially includes initial direct costs, dismantling costs, and value of the lease liability, less any lease incentives
• Subsequent measurement:
  o Lease liability increases to reflect interest and decreases to reflect payments
  o Right of use asset is amortized over its useful life (if asset is transferred to lessee at end of lease term or lessee is expected to exercise bargain purchase option) or the lease term

Reference: IFRS 16

Question 17

Foreign Currency Transactions

Answer 17

• Initial measurement:
  o At the functional currency, by applying to the foreign currency amount the spot exchange rate between the functional currency and the foreign currency at the date of the transaction.
• Subsequent measurement:
  o Monetary items should be translated at the closing rate on the financial reporting date.
  o Non-monetary items measured at historical cost should be translated using the exchange rate on the date of the transaction.
  o Non-monetary items measured at fair value should be translated using the exchange rate on the date when the fair value was measured.

Reference: IAS 21.21-23

Question 17

Capital Lease Criteria – Lessor

Answer 17

• Each lease is classified as financing or operating:
  o Financing — Substantially all of the risks and rewards incidental to ownership of the asset are transferred to the lessee
  o Operating — No substantial transfer of the risks and rewards incidental to ownership of the asset to the lessee
• Finance lease:
  o Initially measured as a receivable equal to the net investment in the lease, which is future lease payments discounted using the interest rate implicit in the lease
  o Finance income is recognized over the lease term at a constant rate of return
• Operating lease:
  o Lease payments received are recognized in income either on the straight-line basis or another systematic basis

Reference: IFRS 16