By Sarim

IFRS Standards
Below are personalised summaries of all the IFRS Standards relevant to
the ICAEW Financial Accounting and Reporting (FAR) exam.

IAS 2 Inventories
• Inventory is capitalised at the lower of cost and NRV.
• Costs include all directly attributable costs to producing the inventories.
• When goods are sold, the cost recognised in respect of them are expensed to the P&L as they
are linked to the revenue generated from their sale (“cost of sales”).
• Variable costs of inventory are allocated over the actual production, and fixed costs are
allocated over planned production.
• Remeasuring inventory to NRV is, essentially, an ‘impairment’ of inventory, and so is written
down in the SFP and charged to the P&L.
o Any reversals in NRV back to cost is recognised as income in the period the reversal is
made.
• For items that are interchangeable, FIFO or AVCO, as a valuation method, is allowed.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

• A change in accounting policy can only be made if either: a. it is required by IFRS, or b. it will
cause information in the financial statements to become more reliable and relevant.
• A change in accounting policy is applied retrospectively, ie. comparatives are restated.
• A change in accounting estimate is applied prospectively.
• Any errors (eg, prior period errors) are corrected retrospectively, ie. comparatives are restated.
• It is worth noting that:
o A change in PPE depreciation method is a change in accounting estimate – not policy.
o A change in PPE valuation model is excluded from IAS 8 and is dealt with under IAS 16.

IAS 10 Events after the Reporting Period

• Adjusting events are those events that provide additional evidence of conditions that existed
during the reporting period.
o Must be reflected in the financial statements.
o Cut-off date for consideration of events is until the date of the financial statements are
authorised for issue.
• Non-adjusting events are those events that reflect conditions that existed after the reporting
period.
o Cannot be reflected for this year’s financial statements.
o If the event is likely to influence the decisions of the users of the financial statements,
then this event must be disclosed separately including the
▪ Nature of the event
▪ Estimate of the financial effect
 By Sarim

IAS 16 Property, plant, and equipment

• Cost of an item of PPE includes all directly attributable costs in bringing it to ‘working use’ as
intended.
• Only once the asset is ready for use; capitalisation ceases, and depreciation commences.
• Assets under the cost model are valued at the original cost less accumulated depreciation
and/or any impairments.
• Assets under the revaluation model are valued at the fair value less accumulated depreciation
and/or any impairments.
o Any FV uplifts are unrealised gains. So, they are recognised in OCI (not P&L) and
accumulate in the revaluation surplus (not RE).
o Any FV losses or impairments are expensed in the P&L, unless first reversing any prior
FV uplifts.
o Depreciation is effectively reset due to a new valuation. When an asset is revalued,
part of the ‘increase’ ie. debit to PPE will be allocated to reversing the asset’s prior
accumulated depreciation, and the remaining amount to increasing the asset at cost.
o Excess depreciation caused from going from cost model to revaluation model can be
reversed for the purposes of determining distributable profits. This takes effect in the
SOCE by reducing revaluation surplus and reinstating RE by the excess depreciation.

IAS 23 Borrowing Costs

• Borrowing costs incurred on qualifying assets (ie. assets that take a ‘substantial’ amount of
time to complete) must be capitalised, once all the following has taken place:
o Expenditure incurred
o Interest incurred
o Activity undertaken into ‘ready’ the asset for use

• Capitalisation will cease once the asset is ready for use.

Borrowing costs to capitalise = interest pa % x the qualifying period

*Deduct any investment income from surplus funds invested (DR Cash, CR PPE)*
*Any interest incurred outside the qualifying period is a finance cost (DR P&L, CR Payables/Cash)*

• If the borrowings are funded by the entity’s general borrowings, then a weighted average cost
of borrowing must be used.
o So: the “interest %” will be an average instead, ie. total interest payable pa / total
cumulative borrowings

• It is worth noting IAS 23 requires significant judgement in areas such as:

o Is the asset a qualifying asset?
o Are the borrowing costs being incurred directly attributable to the asset?
o Are activities truly undertaken to ready the asset for use to commence capitalisation?
o Are activities truly substantially complete to cease capitalisation?
 By Sarim

IAS 24 Related Parties

• A related party can be a person (including a family member) who has:
o Control
o Significant influence
o Role of key management personnel

• A related party can also be a company, including:

o Parent / subsidiary / directors of parent
o Associate / company with significant influence
o Joint venture / owner of joint venture

• Related parties are material by nature, so must be disclosed as follows:

o Nature of the relationship
o Amounts transacted
o Amounts outstanding at year end
o Terms / guarantees / provisions on the amounts outstanding
o Compensation received by key management personnel
o Amounts written off

• It is worth noting that:

o It may also be disclosed whether the transactions were at an arm’s lengths basis – but
the directors would have to substantiate this claim.
o It is not necessary to disclose favourable credit terms offered to related parties.
o It is not necessary to disclose related parties by name.

IAS 28 Investment in Associates and Joint Ventures

• An entity acquires significant influence in an associate/joint venture if it owns, typically,
between 20-50% of the shares.

• To reflect this interest in the investee, the investor’s group accounts should account for the
associate or joint venture using the equity method of accounting.

• The equity method of accounting can be summarised as follows:

o Recognise the investment initially at cost; then
o Increase or decrease the investment at cost by the group’s share of the investee’s post-
acquisition change in net assets (ie. retained earnings)
o Additional adjustments typically include:
✓ Deducting any impairments to date on the investment (note that the
investment is not amortised, neither is any separate goodwill recognised).
✓ Deducting any PURP gained by the investee, only to the extent of the parent’s
shareholding.
✓ Deducting any dividends received (as we are already accruing the change in net
assets)
 By Sarim

✓ Deducting any additional depreciation as a result of assets in the investee’s

books that are above fair value (since this would

• Note that any losses cannot reduce the investment held to below 0, unless there is a
contractual obligation to make good the losses. Any subsequent increases in the investee’s net
assets are only recognised for the gains after equalling the sum of the prior unrecognised losses.

• In the group accounts, the investment in associate/joint venture is shown in a single line, as
follows:
o C-SFP: “Investment in associate/joint venture” – non-current asset
o C-SPL: “Share of profit of associate/joint venture” – above the tax expense line

• It is worth noting that this method is a superior approach, as opposed to full consolidation, as
there is simply not sufficient power (<50% shares) to direct the ‘relevant activities’ of the
investee, however, there still is a significant stake / interest in the investee.

• A joint venture is a joint arrangement where the parties with joint control have a right to the
net assets of the arrangement. The identifying factor of a joint venture is that a separate legal
entity is set up, with ownership shared between the owners.

• IFRS 12 Disclosure of Interest in Associates and Joint Ventures may be relevant here. Disclosure
requirements include:
o Nature, extent, and financial effect of the entity’s interest in the investee
o Risks associated with the investment
o Summarised financial information for material investees

IAS 32 Financial Instruments: Presentation

• A financial liability is defined as a contractual or legal obligation to deliver cash or other
financial assets to another party.
o Initially measured at fair value (FV) less costs directly attributable to issuing debt (eg,
broker fees).
o Subsequently measured under amortised cost model, where:
✓ The effective interest rate will ensure the liability is increased to the actual
amount payable each period. Each increase is a finance cost expense.
✓ Any payments made (or accrued) will offset the liability.

• Shares issued on which the dividend is mandatory should be presented as a financial liability
rather than equity, as there is an unavoidable obligation to deliver cash.

• A sale and repurchase agreement is a financial liability. It exists where an asset is intended to be
repurchased for a higher amount than its original cost, ie. it is not actually ‘truly’ sold under IFRS
15. All the proceeds are a liability, shown as “Other borrowings” and this amount is
subsequently further increased by effective interest.
 By Sarim

• Convertible options (eg, convertible bonds) are compound instruments. They contain both a
financial liability and equity component. The financial liability is initially measured at the PV of
future payments using an interest rate for a similar instrument without the equity option, then
subsequently measured under the amortised cost basis. The equity component is recognised
only once, upon the issue, as the difference between the total proceeds and the initial liability
recognised.

• A financial asset is defined as a right to receive cash, financial assets, or equity in another entity.
o Initially measured at fair value (FV), plus any costs directly attributable to acquiring the
asset (eg, brokers fees).
o Subsequently measured under amortised cost model, as follows:
✓ The effective interest rate will ensure the asset is increased to the actual
amount of cash paid. Each increase is a Finance Income in P&L.
✓ Any payments received (or accrued) will offset the financial asset.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

• A provision is defined as a liability of an uncertain timing or amount, only recognised if:
o There is a present obligation (legal or constructive) arising from a past event
o Payment is probable (ie. more likely than not; >50% in practical terms)
o The amount can be estimated reliably

• A provision is either legal or constructive. Legal obligations are derived from

legislation/contract/law. Constructive obligations are when there is a valid expectation that the
company will make payment.

• Provisions are inherently uncertain, so should be reviewed at the end of each reporting period
and adjusted to reflect the best estimate – or, reversed (as a change in accounting estimate) if it
is no longer probable.

• Provisions should be discounted where the time value of money can be deemed material.

• An onerous contract provision should be made where, as a result of some past event, it is
expected that the entity will incur unavoidable costs in fulfilling a contract that will exceed the
expected economic benefit to be received under it.
o Measured at lower of: PV of future costs, or the penalties payable.

• A dismantling provision should be recognised if the construction of an asset (past event) gives
rise to a legal or constructive obligation to incur restoration costs in the future.
o Initial liability: PV of future costs (subsequently unwound)
o Initial asset: PV of future costs (subsequently depreciated) – directly attributable

• A restructuring provision should be recognised as a constructive obligation if an announcement

(past event) rises a valid expectation in those affected that it would carry out the restructuring.
o Measured at: PV of future costs (subsequently unwound) – ignore ongoing costs
 By Sarim

• If reimbursements will be received to compensate a provision (with virtual certainty), then:

o It is an asset (ie. receivable) - SFP
o The amount may be net off against the provision expense – SPL
✓ This amount cannot exceed the original provision

If there is no 100% certainty of the reimbursement, it may simply be disclosed as a contingent

asset, assuming it is still ‘probable’.

• A contingent liability is either:

o A possible obligation, depending on whether some uncertain future event occurs.
o A present obligation, but payment is not probable, or the amount cannot be measured
reliably.

• Contingent liabilities are simply disclosed (see below). However, if payment is deemed remote,
no disclosure is required. IAS 37 provides no guidance on the cut off point between ‘possible’
and ‘remote’ – therefore it is a matter of judgement.

• A contingent asset is a possible asset, depending on whether some uncertain future event(s)
occurs, not wholly in the control of the entity.

• Contingent assets are simply disclosed (see below). Only once the future economic benefits are
virtually certain, the asset is no longer contingent and is recognised.

• It is worth appreciating how IAS 37 recognises assets only once an inflow is virtually certain,
whereas liabilities are recognised when an outflow is probable (ie. more likely than not).

• Disclosures per IAS 37:

o Brief description of the nature of the matter
o Estimate of the financial effect
o Indication of any uncertainties
o Possibility of any reimbursement

Note these disclosures apply to all items discussed above, except that the final two disclosure
points would not apply to contingent assets.

IAS 38 Intangible Assets

• An intangible asset is defined as an identifiable (ie. separable or arising from contractual/legal
rights), non-monetary asset without physical substance.

• Intangible assets, as defined, are only recognised if the item in question is:
o Entity controlled
o Giving rise to future economic benefits
o Reliably measurable
 By Sarim

• Intangible assets are initially measured at cost and subsequently under the cost or revaluation
model. Note that any revaluations can only be made if its fair value can be referenced to an
active market – which is rare, but if indeed the case, then the FV gain will go through OCI (not
P&L) as it is unrealised.

• Intangible assets are amortised if they are presumed to have a finite useful life, starting from
when the asset became ‘ready for use’.

• Internally generated assets are not recognised as they are not reliably measurable nor
identifiable.

• In the case of R&D expenditure:

o Any research costs, non-directly attributable costs, or pre-viable development costs
are expensed to the P&L. This is because future economic benefits are uncertain at this
stage.
o Any development costs incurred once the project is considered economically viable, is
capitalised. This is because future economic benefits are probable at this stage.
✓ Development phase commences when the project is considered viable, until
the asset is ‘ready for use’.
• Any depreciation incurred on assets used during this development
phase is also capitalised – it is directly attributable to
production/project in question.

IFRS 3 Business Combinations

• A business combination is a transaction (or other event) where an acquirer obtains control of
one or more businesses.

• All business combinations should be accounted for via the acquisition method:
o Identify acquirer
o Determine acquisition date
o Measure consideration received
✓ Should be at fair value at the date
o Recognise & measure: identifiable assets acquired, liabilities assumed, NCI in the
acquiree
o Recognise & measure: goodwill (or gain on a bargain purchase)

• On acquisition, any contingent consideration is capitalised, at fair value, as the ‘cost’ of the
acquisition (DR Investments, CR Liabilities). Any subsequent increases/decreases only affect
liability recognised and P&L.

• Goodwill and NCI arising on acquisition of a subsidiary can be calculated using the:
o Proportionate method (% of NA)
✓ Traditional approach to measuring NCI.
 By Sarim

✓ Goodwill is, in effect, difference between the cost of acquisition and its share of
the FV of net assets acquired.
✓ This results in only the parent’s share of GW recognised, while every other line
on the C-SFP consolidates 100% of the subsidiary’s figures.
✓ Rationale is that the market transaction only provides evidence of the parent’s
goodwill (no evidence for the NCI).

o Fair value method (FV of NCI)

✓ Consistent with IFRS 3, which requires both considerations transferred, and, net
assets, acquired to be measured at FV.
✓ Usually results in higher NCI, since they GW attributable to the NCI is factored
in.
✓ Any GW impairments are also additionally shared by the NCI.

IFRS 5 Assets Held for Sale and Discontinued Operations

• Assets that are intended to be sold should be classified as “assets held for sale”, if:
o Management is committed to sell the asset
o The sale is highly probable within 12 months
o It is unlikely that plans will change
o The asset is being actively marketed at a reasonable price

• Once the conditions are met, the asset is removed from PPE, and re-classified as an ‘asset held
for sale’, below current assets, at the lower of CA or FV-CtS. Any loss in value is therefore
expensed immediately to record an eventual loss on disposal that will be incurred.

• Depreciation ceases once the asset is held for sale.

IFRS 10 Consolidated Financial Statements

• An investor controls an investee if they have all of the following:
o Power (to direct the ‘relevant activities’ of the investee)
o Exposure to variable returns (eg, in the form of dividends)
o Ability to use power to influence the exposure to variable returns

• The consolidated financial statements should include all subsidiaries, other than those held for
sale in accordance with IFRS 5, or those under long term restrictions limiting control. An
investee should not be excluded from the CFS simply because it is making a loss or its
activities are dissimilar.

• Total comprehensive income is attributed to the parent and the NCI, even if this results in NCI
having a deficit balance – since NCI is a part of equity within the group.
 By Sarim

IFRS 11 Joint Arrangements

See: IAS 28

IFRS 15 Revenue from Contracts with Customers

• Revenue should be recognised as it is earned (ie. as the performance obligations are satisfied) –
not when cash is received.

• The 5-step approach to recognising revenue is as follows:

o Identify contract
o Identify performance obligations
o Determine price
o Allocate price to PO(s)
o Recognise revenue as PO(s) are satisfied

• If both goods and services are provided:

o Price is allocated to PO (step #4) based on standalone prices
o Overall discount is evenly applied to both the good and service

• A sale can be recognised when significant risk and rewards of ownership have passed on to the
customer. The amount must be reliably measurable. Economic benefits should flow into the
entity.

• Any deferred receivable is initially recognised at its PV in revenue. Subsequently, the effective
interest rate will reinstate receivable (DR) to the actual amount receivable each period, and
each increase is a Finance Income (CR).

• When goods are sold at an interest-free credit basis, the following approach is taken:
o Recognise, immediately, any deposit received as revenue.
o Recognise the PV of the future payments to be received as revenue.
o Subsequently adjust the receivables by the effective interest rate (DR Receivables, CR
Finance Income)

IFRS 16 Leases
• A lease arrangement is defined as the right to control use of an identifiable asset and obtain
economic benefits from it over a period of time.

• A lease arrangement gives rise to a lease liability, by virtue of the obligatory lease payments.
o Initial measurement: at PV of future lease payments.
o Subsequent measurement: under amortised cost model
✓ The effective interest rate will ensure the liability is increased up to the amount
actually payable each period
✓ Any lease payments will offset the liability
 By Sarim

• A lease arrangement gives rise to a right of use asset, by virtue of obtaining control over the
asset.
o Initial measurement: at PV of future lease payments, plus any advanced payments, less
any lease incentives received.
o Subsequent measurement: the asset will be depreciated over the lease term (or useful
life if shorter)

• A sale and leaseback arrangement is where an asset is sold but then immediately leased back.
Therefore, a lease (liability and asset) must be recognised, along with the gain on disposal to the
extent of the asset actually sold. The following approach is typically taken, initially:

o Derecognise the carrying amount of the transferred asset from PPE

o Recognise a right of use asset at the carrying amount x (PVFLP/FV) – this represents
the portion of the asset retained
o Recognise a lease liability at the PVFLP
o Recognise the gain on rights transferred

• Subsequently, the asset depreciated over the shorter of lease term or UEL. The lease liability is
measured under amortised cost.

• A sale and repurchase agreement is when an asset will be repurchased for a higher amount
than the original cost. All proceeds are a loan, presented as “Other borrowings” – and is further
increased subsequently by effective interest.

• Additional note(s):
o A lease does not exist where the lessor can substitute the asset for their own benefit:
there is no identifiable asset.
By Sarim