LOJERO, PRINCESS GLAIDINE C.

COA BLK 1C
CONCEPTUAL FRAMEWORK ACCOUNTING STANDARDS (AE 102)

CHAPTER 10 ANSWERS
1. A 9. B 17. C 25. C
2. D 10. C 18. C 26. C
3. C 11. D 19. C 27. D
4. D 12. D 20. D 28. D
5. D 13. A 21. A 29. B
6. B 14. B 22. D 30. C
7. A 15. C 23. B 31. A
8. A 16. D 24. B 32. A

CHAPTER 11 ANSWERS
1. B 11. A 21. C 31. A
2. B 12. D 22. A 32. C
3. D 13. C 23. B 33. C
4. C 14. A 24. B 34. D
5. C 15. D 25. B 35. B
6. A 16. D 26. D 36. A
7. D 17. B 27. A 37. B
8. C 18. A 28. D 38. A
9. B 19. A 29. D 39. D
10. D 20. B 30. A 40. D

CHAPTER 12 ANSWERS
1. C 11. B 21. D 31. D 41. C
2. D 12. A 22. D 32. D 42. C
3. D 13. C 23. A 33. B 43. B
4. B 14. C 24. B 34. C 44. B
5. B 15. B 25. D 35. A 45. C
6. B 16. C 26. C 36. A 46. B
7. B 17. C 27. B 37. B 47. B
8. D 18. D 28. C 38. A
9. D 19. D 29. B 39.
10. A 20. D 30. C 40. C
IAS 23 Borrowing costs
Objective
Borrowing costs are finance charges that are directly attributable to the acquisition, construction or
production of a qualifying asset that forms part of the cost of that asset, i.e. such costs are capitalized. All
other borrowing costs are recognized as an expense.

Scope
The Standard does not apply to the following:
(a) Actual or imputed cost of equity, including preferred capital not classified as a liability.
(b) a qualifying asset measured at fair value, for example a biological asset measured in accordance
with IAS 41 Agriculture; or
(c) Inventories that are manufactured, or otherwise produced, in large quantities on a repetitive basis.

Defined terms
 Borrowing costs is interest and other costs incurred by an entity in connection with the borrowing
of funds.
Examples may include:
(a) Interest expense calculated using the effective interest rate method as described in IAS 39
Financial Instruments: Recognition and Measurement;
(b) finance charges in respect of finance leases recognized in accordance with IAS 17 Leases (IFRS
16 Leases if early adopted or when it becomes effective); and
(c) Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs.
 A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its
intended use or sale.
Examples may include:
(a) Inventories
(b) Manufacturing plants
(c) Power generation facilities
(d) Intangible assets
(e) Investment property
(f) Bearer plants

Recognition
An entity shall capitalize borrowing costs that are directly attributable to the acquisition, construction
or production of a qualifying asset as part of the cost of that asset. An entity shall recognize other borrowing
costs as an expense in the period in which it is incurred.
Excess of the carrying amount of the qualifying asset over recoverable amount
When the carrying amount or the expected ultimate cost of the qualifying asset exceeds its
recoverable amount or net realizable value, the carrying amount is written down or written off in accordance
with the requirements of other IAS 36 Impairment of Assets or IAS 2 Inventories.
PAS 40 Investment Property
• Investment property is “property (land or a building – or a part of a building – or both) held (by the
owner or by the lessee under finance lease) to earn rentals or for capital appreciation or both, rather
than for:
a. use in the production or supply of goods or services or for administrative purposes; or
b. Sale in the ordinary course of business.”
Investment property Owner-occupied property

 Held to earn rentals or for capital  Held for use in the production or supply of
appreciation or both. goods or services or for administrative
purposes.

 Generates cash flows largely independently  Generates cash flows in conjunction with
of the other assets held by an entity the other assets held by an entity.

 Includes only land and building  May include assets other than land and
building

 Accounted for under PAS 40  Accounted for under PAS 16

Examples of investment property

a. Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of
business.
b. Land held for a currently undetermined future use.
c. A building owned by the entity (or held by the entity under a finance lease) and leased out under one
or more operating leases.
d. A building that is vacant but is held to be leased out under one or more operating leases.
e. Property that is being constructed or developed for future use as investment property.

Examples of items that are not investment property

a. Property intended for sale in the ordinary course of business or property acquired exclusively with a
view to subsequent disposal in the near future or for development and resale.
b. Property being constructed or developed on behalf of third parties (PFRS 15 Revenue from Contracts
with Customers).
c. Owner-occupied property (PAS 16) and owner-occupied property awaiting disposal.
d. Property that is leased to another entity under a finance lease.
Property that is partly investment property and partly owner-occupied
 • If the portions could be sold separately (or leased out separately under a finance lease), an entity
accounts for the portions separately. The portion being rented out under operating lease is classified
as investment property and the portion used as owner-occupied is classified as property, plant, and
equipment.
• If the portions could not be sold separately, the property is investment property only if an
insignificant portion is held for use in the production or supply of goods or services or for
administrative purposes. If the owner-occupied portion is significant, the entire property is classified
as property, plant, and equipment. 
Ancillary services to occupants
When ancillary services are provided to the occupants of a property held, the property is classified as
investment property if the services are insignificant to the arrangement as a whole.
Measurement
• Initial: Cost
• Subsequent: Either the Cost model or Fair value model

The following are excluded from the cost of investment property and are expensed immediately:
 Start-up costs (unless they are necessary to bring the property to the condition necessary for it to be
capable of operating in the manner intended by management)
 Operating losses incurred before the investment property achieves the planned level of occupancy
 Abnormal amounts of wasted material, labor or other resources incurred in constructing or
developing the property

Change in accounting policy

• A change from the cost model to the fair value is accounted for prospectively.
• A change from the fair value model to the cost model is not permitted.

Determining fair value

• PAS 40 requires all entities to determine the fair value of investment property whether it uses the
cost model or fair value model. Fair values determined are used for measurement and disclosure
purposes if the entity uses the fair value model and for disclosure purposes only if the entity uses the
cost model.

Fair value model

• After initial recognition, an entity that chooses the fair value model shall measure all of its
investment property at fair value, except in cases where the exemptions under PAS 40 applies.
• Changes in fair values are recognized in profit or loss.
• Depreciable assets classified as investment property measured under fair value model are not
depreciated.
• If the fair value of an item of investment property cannot be determined reliably on initial
recognition, such item is subsequently measured under the cost model.

Cost model
 • After initial recognition, an entity that chooses the cost model shall measure all of its investment
property at cost less any accumulated depreciation and impairment losses in accordance with PAS
16 Property, plant, and equipment.

Transfers
• Transfers to, or from, investment property shall be made when, and only when, there is a change in
use, evidenced by:
• Commencement of owner-occupation, for a transfer from investment property to owner-
occupied property;
• Commencement of development with a view to sale, for a transfer from investment property
to inventories;
• End of owner-occupation, for a transfer from owner-occupied property to investment
property; or
• Commencement of an operating lease to another party, for a transfer from inventories to
investment property.

PFRS 6 Exploration for and Evaluation of Mineral Resources

Exploration and evaluation expenditures
• Exploration for and evaluation of mineral resources is the search for mineral resources, including
minerals, oil, natural gas and similar non-regenerative resources after the entity has obtained legal
rights to explore in a specific area, as well as the determination of the technical feasibility and
commercial viability of extracting the mineral resource.
• Exploration and evaluation expenditures are expenditures incurred by an entity in connection with
the exploration for and evaluation of mineral resources before the technical feasibility and
commercial viability of extracting a mineral resource are demonstrable.

Accounting for exploration and evaluation expenditures

• PFRS 6 permits entities to develop their own accounting policy for exploration and evaluation assets
which results in relevant and reliable information based entirely on management’s judgment and
without the need to consider the hierarchy of standards in PAS 8.
• This means that the entity may recognize exploration and evaluation expenditures either as expense
or asset depending on the entity’s own accounting policy.

Measurement at recognition
• If the entity opts to capitalize exploration and evaluation expenditures as assets, it shall measure
them at cost.
• Subsequent to recognition, the exploration and evaluation assets shall be measured using the cost
model or the revaluation model.

PFRS 5 Non-current assets Held for Sale and Discontinued Operations

Core Principle
 • A noncurrent asset is presented in the classified statement of financial position as current asset only
when it qualifies to be classified as “held for sale” in accordance with PFRS 5.
Scope
• PFRS 5 applies to the following non-current assets:
1. Property, plant and equipment
2. Investment property measured under the Cost model
3. Investments in associate or subsidiary or joint venture
4. Intangible assets

Classification of non-current assets (or disposal groups) as Held for Sale

• A non-current asset (or disposal group) is classified as held for sale or held for distribution to owners
if its carrying amount will be recovered principally through a sale transaction rather than through
continuing use.
Conditions for classification as held for sale
• A non-current asset (or disposal group) is classified as “held for sale” if all of the following
conditions are met:
• The asset or disposal group is available for immediate sale in its present condition subject
only to terms that are usual and customary; and
• The sale is highly probable (i.e., significantly more likely than not).
• Management is committed to a plan to sell the asset;
• An active program to locate a buyer has been initiated;
• The sale price is reasonable in relation to its current fair value;
• The sale is expected to be completed within one year; and
• It is unlikely that the plan of sale will be withdrawn.

Exception to the one-year requirement

• An extension of the period required to complete a sale does not preclude an asset (or disposal group)
from being classified as held for sale if:
• the delay is attributable to events or circumstances beyond the entity’s control; and
• there is sufficient evidence that the entity remains committed to its plan to sell the asset (or
disposal group)
Event after reporting period
• If the criteria for classification as held for sale are met after the reporting period, an entity shall not
classify a non-current asset (or disposal group) as held for sale in those financial statements when
issued.
Non-current assets that are to be abandoned
• An entity shall not classify as held for sale a non-current asset (or disposal group) that is to be
abandoned since the asset’s carrying amount will be recovered through continuing use rather than
principally through a sale.
 • An entity shall not account for a non-current asset that has been temporarily taken out of use as if it
had been abandoned.

Initial and subsequent measurement

• Lower of carrying amount and fair value less cost to sell.
• A write-down to fair value less cost to sell, and related reversal thereof, is recognized in profit or
loss.
• Reversal of impairment is recognized as gain to the extent of cumulative impairment loss that has
been recognized.
• Depreciation (amortization) ceases during the period an asset is classified as held for sale.

Changes to a plan of sale

• A non-current asset that ceases to be classified as held for sale shall be measured at the lower of the
asset’s:
• Carrying amount before it was classified as held for sale, adjusted for any depreciation,
amortization or revaluation that would have been recognized had the asset not been classified
as held for sale, and
• Recoverable amount at the date of subsequent decision not to sell.

Discontinued operations
• A discontinued operation is a component of an entity that either has been disposed of or is classified
as held for sale, and
• Represents a major line of business or geographical area of operations;
• Is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations; or
• Is a subsidiary acquired exclusively with a view to resale
Component of an entity
• A component of an entity comprises operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity. It can be cash
generating unit or group of cash generating units.
Presentation of discontinued operations
• The results of operations of the discontinued operations, including impairment losses and actual gain
on disposal, is presented as a single amount, net of tax, after profit or loss from continuing
operations.
• If a component of an entity qualified as discontinued operation during the year, all of its results of
operations, before and after classification date, shall be classified as discontinued operations.

Direct costs associated to decision to dispose a component

• Costs or adjustments directly associated with the decision to dispose a component should be
recognized and shown as part of discontinued operations. Examples of such costs include:
• such items as severance pay or employee termination costs,
• additional pension costs,
• employee relocation expenses, and
• future rentals on long-term leases

Comparative information
• If, in the current year, a component of an entity is classified as discontinued operation, an entity shall
re-present the disclosures for prior periods presented in the financial statements so that the
disclosures relate to all operations that have been discontinued by the reporting period for the latest
period presented.

Events after the reporting period

• If the criteria for classification as discontinued operation are met after the reporting period but before
the financial statements are authorized for issue, the entity shall disclose the information in the notes
as non-adjusting event after the reporting period.

Cessation of classification as held for sale: Effect on comparative statement of financial position
 The cessation of classification as discontinued operation is accounted for retrospectively; while
 The cessation of classification as held for sale (non-current assets and disposal groups that are not
components of an entity) is accounted for prospectively.

Financial Statement presentation

 Non-current assets held for sale and assets and liabilities of disposal groups are presented as current
assets (current liabilities) but separately from the other assets and liabilities in the statement of
financial position.
 An entity shall not offset the assets and liabilities of a disposal group.

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors

Objective
 The objective of this Standard is to prescribe the criteria for selecting and changing accounting
policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in
accounting estimates and corrections of errors.

Scope
This Standard shall be applied in selecting and applying accounting policies, and accounting for
changes in accounting policies, changes in accounting estimates and corrections of prior period errors.

Definitions
• Accounting policies are the specific principles, bases, conventions, rules and practices applied by an
entity in preparing and presenting financial statements.
• Accounting Estimates refer to a change in an accounting estimate is an adjustment of the carrying
amount of an asset or liability, or related expense or the amount of the periodic consumption of an
asset, resulting from reassessing the present status of expected future benefits and obligations
associated with the asset or liability.
• Errors refer to prior period errors which are omissions from, and misstatements in, an entity’s
financial statements for one or more prior periods arising from failure to use/or from misuse of
reliable information:
(a) That was available when the financial statements for that period were issued; and (b) could have
been reasonably expected to be taken into account in in the preparation and presentation of those
financial statements
• Material Omissions or misstatements are items which are material if they could, individually or
collectively, influence the economic decisions that users make based on the financial statements.
• Materiality depends on the size and nature of the omission or misstatement judged in the
surrounding circumstances. The size or nature of the item, or a combination of both, could be the
determining factor.
• Retrospective application is applying a new accounting policy to transactions, other events and
conditions as if that policy had always been applied.
• Retrospective restatement is correcting the recognition, measurement and disclosure of amounts of
elements of financial statements as if a prior period error had never occurred.
• Impracticable means the entity cannot apply it after making every reasonable effort to do so. For a
particular prior period, it is impracticable to apply a change in an accounting policy retrospectively
or to make a retrospective restatement to correct an error if:
(a) The effects of the retrospective application or retrospective restatement are not determinable;
(b) The retrospective application or retrospective restatement requires assumptions about what
management’s intent would have been in that period; or
(c) The retrospective application or retrospective restatement requires significant estimates of
amounts and it is impossible to distinguish objectively information about those estimates that:
(i) provides evidence of circumstances that existed on the date(s) as at which those amounts are to be
recognized, measured or disclosed; and
(ii) Would have been available when the financial statements for that prior period were authorized
for issue from other information.
• Prospective application of a change in accounting policy and of recognizing the effect of a change in
an accounting estimate, respectively, are:
(a) applying the new accounting policy to transactions, other events and conditions occurring after
the date as at which the policy is changed; and
(b) recognizing the effect of the change in the accounting estimate in the current and future periods
affected by the change.

Accounting policies
1. Selection and application:
 When an IFRS specifically applies to a transaction, event or condition, the policy shall be determined
by applying the IFRS.
In the absence of an IFRS that specifically applies to a transaction, other event or condition, management
shall use its judgment in developing and applying an accounting policy that results in information that is:
(A) Relevant to the economic decision-making needs of users; and
(b) Reliable, in that the financial statements:
(i) represent faithfully the financial position, financial performance and cash flows of the entity; (ii) reflect
the economic substance of transactions, other events and conditions, and not merely the legal form;
(iii) Are neutral, i.e. free from bias;
(iv) Are prudent; and
(v) Are complete in all material respects.
 Consistency of accounting policies:
An entity shall apply its accounting policy consistently for similar transactions, other events or
conditions unless an IFRS states otherwise.
If an IFRS requires or permits such categorization of terms, or which different policies may be
appropriate, an appropriate accounting policy shall be selected and applied consistently to each category.
The following are not changes in accounting policies:
(a) The application of an accounting policy for transactions, other events or conditions that differ in
substance from those previously occurring; and
(b) The application of a new accounting policy for transactions, other events or conditions that did not occur
previously or were immaterial.
Changes in accounting policies only if:
(a) Required by IFRS; or
(b) Results in the financial statements providing reliable and more relevant information.

Application guidance
1. Accounting policy changes
If the change is resulting from a Standard; an entity shall apply transitional provisions and if no specific
transitional provisions exist, an entity shall apply the change retrospectively.
When a change in accounting policy is applied retrospectively, the entity shall adjust the opening
balance of each affected component of equity for the earliest prior period presented and the other
comparative amounts disclosed for each prior period presented as if the new accounting policy had always
been applied.
2. Accounting estimate changes
The change shall be recognized prospectively in profit and loss in the:
(a) Period of change, if the change affects that period only or;
(b) Period of change and future periods if the change affects both.
To the extent that a change in an accounting estimate gives rise to changes in assets and liabilities, or
relates to an item of equity, it shall be recognized by adjusting the carrying amount of the related asset,
liability or equity item in the period of the change.
3. Correction of errors
 An entity shall correct material prior period errors respectively in the first set of financial statements
authorized for issue after their discovery by:
(a) Restating the comparative amounts for prior period(s) in which error occurred, or
(b) If the error occurred before that date – restating the opening balance of assets, liabilities and equity
for earliest prior period presented.

IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

Objective
The objective of this Standard is to specify the accounting treatment and disclosure for government
grants and other forms of government assistance.
Government assistance takes many forms varying both in the nature of the assistance given and in
the conditions which are usually attached to it. The purpose of the assistance may be to encourage an entity
to embark on a course of action which it would not normally have taken if the assistance was not provided.
The receipt of government assistance by an entity may be significant for the preparation of the
financial statements for two reasons namely:
• If resources have been transferred, an appropriate method of accounting for the transfer must be
found; and
• It is desirable to give an indication of the extent to which the entity has benefited from such
assistance during the reporting period.
This facilitates comparison of an entity’s financial statements with those of prior periods and with
those of other entities.

Scope
This Standard shall be applied in accounting for, and in the disclosure of, government grants and in
the disclosure of other forms of government assistance.
This Standard does not deal with:
(a) The special problems arising in accounting for government grants in financial statements
reflecting the effects of changing prices or in supplementary information of a similar nature.
(b) Government assistance that is provided for an entity in the form of benefits that are available in
determining taxable profit or tax loss, or are determined or limited on the basis of income tax liability.
Examples of such benefits are income tax holidays, investment tax credits, accelerated depreciation
allowances and reduced income tax rates.
(c) Government participation in the ownership of the entity.
(d) Government grants covered by IAS 41 Agriculture.

Defined terms
• Government refers to government, government agencies and similar bodies whether local, national
or international.
• Government assistance is action by government designed to provide an economic benefit specific to
an entity or range of entities qualifying under certain criteria. Government assistance for the purpose
of this Standard does not include benefits provided only indirectly through action affecting general
 trading conditions, such as the provision of infrastructure in development areas or the imposition of
trading constraints on competitors.
• Government grants are assistance by government in the form of transfers 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.
• Grants related to assets are government grants whose primary condition is that an entity qualifying
for them should purchase, construct or otherwise acquire long-term 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 are government grants other than those related to assets.
• Forgivable loans are loans which the lender undertakes to waive repayment of under certain
prescribed conditions.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

Recognition of government grants

 Government grants, including non-monetary grants at fair value
Government grants, including non-monetary grants at fair value, shall be recognized when there is
reasonable assurance that:
(a) The entity will comply with the conditions attaching to them; and
(b) The grants will be received.
 Forgivable loan from government
A forgivable loan from government is treated as a government grant when there is reasonable assurance
that the entity will meet the terms for forgiveness of the loan.
 Government loan at a below-market rate of interest
The benefit of a government loan at a below-market rate of interest is treated as a government grant. The
loan shall be recognized and measured in accordance with IFRS 9 Financial Instruments. The benefit of the
below-market rate of interest shall be measured as the difference between the initial carrying value of the
loan and the proceeds received.
The benefit is accounted for in accordance with this Standard. The entity shall consider the conditions
and obligations that have been, or must be, met when identifying the costs for which the benefit of the loan
is intended to compensate.

Measurement of government grants

 Presentation of grants related to assets
Government grants related to assets, including non-monetary grants at fair value, shall be presented in
the statement of financial position either by setting up the grant as deferred income or by deducting the grant
in arriving at the carrying amount of the asset.
 Presentation of grants related to income
Grants related to income are presented as part of profit or loss, either separately or under a general
heading such as ‘Other income’; alternatively, they are deducted in reporting the related expense.
 Repayment of government grants
A government grant that becomes repayable shall be accounted for as a change in accounting estimate
(see IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).
Repayment of a grant related:
 (a) To income shall be applied first against any unamortized deferred credit recognized in respect of the
grant. To the extent that the repayment exceeds any such deferred credit, or when no deferred credit
exists, the repayment shall be recognized immediately in profit or loss.
(b) To an asset shall be recognized by increasing the carrying amount of the asset or reducing the
deferred income balance by the amount repayable. The cumulative additional depreciation that would
have been recognized in profit or loss to date in the absence of the grant shall be recognized immediately
in profit or loss.

Government assistance
Excluded from the definition of government grants are certain 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 does not include
the provision of infrastructure by improvement to the general transport and communication network and the
supply of improved facilities such as irrigation or water reticulation which is available on an ongoing
indeterminate basis for the benefit of an entire local community.

IAS 37 Provisions, Contingent Liabilities and Contingent Assets

Objective
This Standard sets out the required accounting treatment and disclosures for provisions, contingent
liabilities and contingent assets.

Scope
This Standard shall be applied by all entities in accounting for provisions, contingent liabilities and
contingent assets, except:
(a) Those resulting from executory contracts, except where the contract is onerous; and
(b) Those covered by another Standard.

When another Standard deal with a specific type of provision, contingent liability or contingent asset,
an entity applies that Standard instead of this Standard.
For example, some types of provisions are addressed in Standards on:
• Construction contracts (see IFRS 15 Revenue from Customer Contracts);
• Income taxes (see IAS 12 Income Taxes);
• Leases (see IAS 17 Leases);
• Employee benefits (see IAS 19 Employee Benefits);
• Insurance contracts (see IFRS 4 Insurance Contracts); and
• Contingent consideration of an acquirer in a business combination (see IFRS 3 Business Combinations).
Defined terms
• A liability is a present obligation of the entity arising from past events which is expected to be
settled by the outflow of economic benefits.
• A provision is a liability of uncertain timing or amount.
 • A contingent asset is a 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.
An obligating event gives rise to a present obligation. This Standard sets out the following guidance on
the identification of obligating events, the salient features of which include:
• A present obligation exists where the entity has no realistic alternative but to make the transfer of
economic benefits; or
• A present obligation may take the form of a legal obligation if, and only if, settlement of the obligation can
be enforced by the law; or • A present obligation may take the form of a constructive obligation.

A constructive obligation is an obligation that derives from an entity’s actions where:

• The entity has indicated to other parties (by a pattern of past practice, published policies or a current
statement) that it will accept certain responsibilities; and
• As a result, the entity has created in the other parties a valid expectation it will discharge those
responsibilities.

A contingent liability either a:

• Possible obligation arising from past events whose existence will be confirmed only by the occurrence or
non-occurrence of some uncertain future event not wholly within the entity’s control, or
• Present obligation that arises from a past event but is not recognized because either:
• it is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation, or
• The amount of the obligation cannot be measured with sufficient reliability.

Recognition
An entity must recognize a provision if, and only if:
(a) A present obligation (legal or constructive) has arisen as a result of a past event (the obligating event);
(b) An outflow of economic benefit to settle the obligation is probable (“more likely than not”); and
(c) The amount of the obligation can be estimated reliably.

A contingent liability, being a possible obligation, is not recognized but is disclosed unless the possibility
of an outflow of economic benefits is remote.

A contingent asset should not be recognized but should be disclosed where an inflow of economic benefits
is probable.
Measurement
• Best estimate
The amount recognized as a provision should be the best estimate of the expenditure required to settle
the present obligation at the financial reporting date, that is, the amount that an entity would rationally pay to
settle the obligation at the end of the financial reporting period or to transfer it to a third party.
• Present value
 When reimbursement of the amounts provided for is virtually certain (e.g. under an insurance contract),
a separate asset should be recognized. In the statement of comprehensive income, the expense relating to the
provision and the amount recognized as a reimbursement may be shown net. The discount rate(s) shall not
reflect risks for which future cash flow estimates have been adjusted.
• Reimbursement
Where the effect of the time value of money is material, the provisions should be discounted using a pre-
tax discount rate that reflects the current market assessments of the time value of money and the risks
specific to the liability.
• Changes in provisions
Provisions must be reviewed at each financial reporting date and the amount adjusted to reflect the
current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits
will be required to settle the obligation, the provision shall be reversed.
• Future events
Future events that may affect the amount required to settle an obligation shall be reflected in the amount
of a provision where there is sufficient objective evidence that they will occur.
• Risks and uncertainties
The risks and uncertainties that inevitably surround many events and circumstances shall be taken into
account in reaching the best estimate of a provision
• Use of provision
A provision shall be used only for expenditures for which the provision was originally recognized.

IFRS 15 Revenue from Contracts with Customers

Overview
IFRS 15 Revenue from Contracts with Customers was issued on 28 May 2014. It supersedes:
 IAS 18 Revenue;
 IAS 11 Construction contracts;
 IFRIC 13 Customer Loyalty Programmes;
 IFRIC 15 Agreements for the Construction of Real Estate;
 IFRIC 18 Transfers of Assets from Customers; and
 SIC-31 Revenue – Barter Transactions Involving Advertising Services.
IFRS 15 will improve comparability of reported revenue over a range of industries, companies and
geographical areas globally.

Objective
To establish principles that an entity shall apply to report useful information to users of financial
statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a
contract with a customer.

Scope
The new revenue model would apply to all contracts with customers except leases, insurance
contracts, financial instruments, guarantees and certain non-monetary exchanges. The sale of non-monetary
financial assets, such as property, plant and equipment, real estate or intangible assets will also be subject to
some of the requirements of the new model.
 A contract with a customer may be partially within the scope of IFRS 15 and partially within the
scope of another standard, in which case:
 If the other standards specify how to separate and/or initially measure one or more parts of the
contract, then an entity shall apply those separation and measurement requirements first. The transaction
price is then reduced by the amounts that are initially measured under other standards.
 If other standards do not provide guidance on how to separate and/or initially measure one or more
parts of the contract, then IFRS 15 will be applied.

Defined terms
IFRS 15 defines the following terms that form an integral part of this IFRS.
1. Contract – An agreement between two or more parties that creates enforceable rights and
obligations.
2. Customer – A party that has contracted with an entity to obtain goods or services that are an output
of the entity’s ordinary activities in exchange for consideration.
3. Income – Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in an increase in equity, other than those
relating to contributions from equity participants.
4. Performance obligation – A promise in a contract with a customer to transfer to the customer either:
a) A good or service (or a bundle of goods or services) that is distinct; or
b) A series of distinct goods or services that are substantially the same and that have the same pattern
of transfer to the customer.
5. Revenue – Income arising in the course of an entity’s ordinary activities.
6. Transaction price (for a contract with a customer) – The amount of consideration to which an entity
expects to be entitled in exchange for transferring promised goods or services to a customer,
excluding amounts collected on behalf of third parties.

The revenue model

The standard introduces a revenue model in which the core principle is that an entity should
recognize revenue to depict the transfer of promised goods or services to the customer in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
To recognize revenue the following five steps should be applied:
Step 1: Identify the contract(s) with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price
Step 5: Recognize revenue when a performance obligation is satisfied

Contract cost
1. Incremental costs of obtaining a contract
If the entity expects to recover incremental costs of obtaining a contract with a customer, the entity shall
recognize those costs as an asset. The incremental costs are those costs that an entity incurs to obtain a
contract that it would not have incurred if the contract had not been successfully obtained, for example, a
sales commission. A practical expedient however exists, allowing the incremental costs of obtaining a
contract to be expensed if the amortization period would be one year or less.
2. Costs to fulfil a contract
Costs incurred to fulfil a contract with a customer are recognized as an asset only if all the following
criteria are met:
 The costs relate directly to a contract or to an anticipated contract that the entity can specifically
identify;
 The costs generate or enhance resources of the entity that will be used in satisfying performance
obligations in the future; and
 The costs are expected to be recovered.
An asset recognized with regard to the above cost shall be amortized on a systematic basis that is
consistent with the pattern of transfer of the goods or services to which the asset relates.

Examples of the type of costs that may be incurred to fulfil a contract

 Direct labor
 Direct materials
 Allocation of overheads that relate directly to the contract
 Cost that are explicitly chargeable to the customer under the contract
 Other costs that are incurred only because an entity entered into the contract

Presentation
An entity shall present the performance of a contract in the statement of financial position as a
contract asset or contract liability, depending on the relationship between the entity’s performance and the
customer’s payment. Any unconditional rights to consideration shall be presented separately as a receivable.

IAS 36 Impairment of Assets

Objective
To prescribe the procedures that an entity applies to ensure that its assets are carried at no more than its
recoverable amount.

Scope
This Standard shall be applied in accounting for the impairment of all assets, other than:
(a) Inventories;
(b) Assets arising from construction contracts;
(c) Deferred tax assets;
(d) Assets arising from employee benefits;
(e) Financial assets within the scope of IAS 39 Financial Instruments: Recognition and
Measurement;
(f) Investment property that is measured at fair value;
(g) Biological assets related to agricultural activity within the scope of IAS 41 Agriculture that are
measured at fair value less costs to sell;
 (h) Deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights
under insurance contracts within the scope of IFRS 4 Insurance Contracts; and
(i) Non-current assets (or disposal groups) classified as held for sale in accordance with IFRS 5 Non-
current Assets Held for Sale and Discontinued Operations.

Defined terms
• An impairment loss is the amount by which the carrying amount of an asset or a cash generating unit
exceeds its recoverable amount.
• A cash generating unit is the smallest identifiable group of assets that generates cash inflows that
are largely independent of the cash inflows from other assets or group of assets.
• The carrying amount is the amount at which an asset is recognized after deducting any accumulated
depreciation (amortization) and accumulated impairment losses thereon.
• The recoverable amount is the higher of an asset’s or cash generating unit fair value less costs of
disposal and its value in use.
• An assets value in use is the present value of the future cash flows expected to be derived from an
asset or cash generating unit.
• Fair value is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.
• Useful life is: (a) the period of time over which an asset is expected to be used by an entity; or (b) the
number of production or similar units expected to be obtained from the asset by an entity.

Identifying when as asset may be impaired

An entity shall assess at the end of each reporting period whether there is any indication that an asset
may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
Irrespective of whether there is any indication of impairment, an entity shall also:
(a) Test an intangible asset with an indefinite useful life or an intangible asset not yet available for
use for impairment annually by comparing its carrying amount with its recoverable amount
(b) Test goodwill acquired in a business combination for impairment annually.
As a minimum, the following indicators shall be considered:
 Internal sources
• Obsolescence or physical damage of an asset.
• Current or future adverse changes in the extent to which, or manner in which, an asset is used.
• Economic performance of an asset is, or will be, worse than expected.
 External sources
• Significant decline in asset’s market value.
• Changes in technological, market, economic or legal environment.
• Changes in market interest rates.
• Low market capitalization (the carrying amount of the net assets exceed the entity’s market capitalization.
 Dividend from a subsidiary, joint venture or associate
The investor recognizes a dividend from the investment and evidence is available that:
• The carrying amount of the investment in the separate financial statements exceeds the carrying amounts in
the consolidated financial statements of the investee’s net assets, including associated goodwill; or
• The dividend exceeds the total comprehensive income of the subsidiary, joint venture or associate in the
period the dividend is declared

Measuring recoverable amount

As stated, the recoverable amount is the higher of an asset’s or cash-generating unit’s fair value less
costs of disposals and its value in use.
It is not always necessary to determine both an asset’s fair value less costs of disposal and its value
in use. If either of these amounts exceeds the asset’s carrying amount, the asset is not impaired and it is not
necessary to estimate the other amount.
The recoverable amount is determined for an individual asset, unless the asset does not generate cash
inflows that are largely independent of those from other assets or groups of assets. If this is the case,
recoverable amount is determined for the cash-generating unit to which the asset belongs unless either:
(a) The asset’s fair value less costs of disposal is higher than its carrying amount; or
(b) The asset’s value in use can be estimated to be close to its fair value less costs of disposal and fair
value less costs of disposal can be measured.

Fair value less costs of disposal

This is the amount obtainable from the sale of an asset or cash generating unit (CGU) in an arm’s
length transaction between knowledgeable, willing parties, less the cost of disposal.
Cost of disposals include legal costs, stamp duty and similar transaction taxes, costs of removing the
asset and direct incremental costs to bring an asset into condition for its sale.

Value in use
Estimate the future cash inflows and outflows to be derived from continuing use of the asset and
from its ultimate disposal and apply the appropriate discount rate to those future cash flows:
 Composition of estimates of future cash flows
Estimates of future cash flows shall include:
(a) Projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to generate the cash inflows from continuing
use of the asset (including cash outflows to prepare the asset for use) and can be directly attributed, or
allocated on a reasonable and consistent basis, to the asset; and
(c) Net cash flows, if any, to be received (or paid) for the disposal of the asset at the end of its useful life.
 Basis for estimates of future cash flows
In measuring value in use an entity shall:
(a) Base cash flow projections on reasonable and supportable assumptions that represent management’s best
estimate of the range of economic conditions
(b) Base cash flow projections on the most recent financial budgets/forecasts approved by management.
(c) Estimate cash flow projections beyond the period covered by the most recent budgets/forecasts by
extrapolating the projections based on the budgets/forecasts using a steady or declining growth rate for
subsequent years.
The discount rate(s) shall be a pre-tax rate(s) that reflect(s) current market assessments of:
(a) The time value of money; and
(b) The risks specific to the asset for which the future cash flow estimates have not been adjusted.

Recognizing an impairment loss

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying
amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
An impairment loss shall be recognized immediately in profit or loss, unless the asset is carried at
revalued amount in accordance with another Standard.
Any impairment loss of a revalued asset shall be treated as a revaluation decrease in accordance with
that other Standard.
When the amount estimated for an impairment loss is greater than the carrying amount of the asset to
which it relates, an entity shall recognize a liability if, and only if, that is required by another Standard.
After the recognition of an impairment loss, the depreciation (amortization) charge for the asset shall
be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.

Measuring recoverable amount of an intangible asset with an indefinite useful life

The recoverable amount of an intangible asset with an indefinite useful life or an intangible asset not
yet available for use should be estimated annually irrespective of whether there is any indication of
impairment in order to test the affected intangible asset for impairment.

Reversing an impairment loss

An entity shall assess at the end of each reporting period whether there is any indication that an
impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may
have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset as
follows:
(a) Reversing an impairment loss for an individual asset The increased carrying amount of an asset
other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that
would have been determined (net of amortization or depreciation) had no impairment loss been recognized
for the asset in prior years.
(b) Reversing an impairment loss for a cash-generating unit a reversal of an impairment loss for a
cash-generating unit shall be allocated to the assets of the unit, except for goodwill, pro rata with the
carrying amounts of those assets. These increases in carrying amounts shall be treated as reversals of
impairment losses for the individual assets within the cash-generating unit. In allocating the reversal of the
impairment, the carrying amount of an asset shall not be increased above the lower of:
(i) Its recoverable amount (if determinable); and
(ii) The carrying amount that would have been determined (net of amortizations or depreciation) had
no impairment loss been recognized for the asset in prior periods.
(c) Reversing an impairment loss for goodwill – An impairment loss recognized for goodwill shall
not be reversed in a subsequent period.