ACC 109 – CFE REVIEWER ➢ When a company issues shares for the first time, it records the cash

hares for the first time, it records the cash or other

consideration received and credits its equity accounts accordingly.
Shareholders’ Equity – residual interest in the assets of a corporation after deducting all its ➢ The accounting treatment depends on whether the shares have a par value, are
liabilities. issued above par (at a premium), or are no-par value shares.

COMPONENTS OF SHAREHOLDER’S EQUITY Issuance of Shares at Par Value

1. Contributed Capital Par value is a nominal amount assigned to shares and stated in the corporate charter.
a. Share Capital - portion of the authorized share capital that is already issued. Issuance of Shares Above Par Value (At a Premium)
• Ordinary (Common) Stock If shares are issued at a price above their par value, the excess is recorded in an
• Preference (Preferred) Stock Additional Paid-in Capital (APIC) or Share Premium account.
➢ Authorized Share Capital – maximum number of shares that can be subscribed and Issuance of No-Par Value Shares
issued to shareholders If shares do not have a par value, the full amount received is credited to the Common
➢ Unissued Share Capital – authorized share capital not yet issued and is still available Stock account.
for subscription and issuance.
Issuance of Shares for Non-Cash Consideration
b. Share Premium / Additional paid-in capital
Sometimes, shares are issued in exchange for assets or services instead of cash. The fair
c. Subscribed Share Capital - authorized share capital that is subscribed but not yet
value of the asset or service is used to determine the transaction value.
issued.
d. Subscription Receivable - unpaid portion of the subscription price. (Deduction from Issuance of Shares on a Subscription Basis
the related subscribed share capital). In some cases, shares are issued on a subscription basis, meaning shareholders pay for
the shares over time.
2. Other Comprehensive Income
a. Changes in revaluation surplus The company receives cash (or other assets) in exchange for issuing shares.
b. Unrealized gain/loss on change in fair value of investment in FVOCI Common Stock is recorded at par value (if applicable).
c. Actuarial gain/loss / Remeasurement Any amount received above par value is recorded as Additional Paid-in Capital
d. Gain or loss on translation (APIC).
e. Unrealized gain/loss on forward contracts If shares are issued without par value, the full amount is credited to Common Stock.
Shares issued in exchange for assets/services are recorded at fair value.
3. Retained Earnings
a. Appropriated/Restricted – not allowed to be declared and issued as dividends
Shares issued at discount (below par or stated value)
b. Unappropriated/Unrestricted – can be declared and issued as dividends
➢ Shareholder concerned it held liable (discount liability) to the corporation for the
✓ Note: They both form part SHE
discount; otherwise, deemed illegal.
➢ Discount on share capital is a receivable from the shareholder concerned but
4. Treasury Stocks / Shares
presented in the fs as contra-equity account (deduction from shareholders’ equity).
a. Excess over par
➢ Prohibited only on original issuance. Thus, treasury shares may be reissued below
b. Resale of treasury shares more than cost
par or stated value
c. Donated capital
d. Issuance of share warrants
Watered Stocks
e. Issuance of convertible bonds payable
➢ Shares issued for non-cash consideration with fair value that is below par or stated
f. Distribution of small stock dividends
value.
g. Quasi-reorganization / Recapitalization
➢ Both shareholders concerned and the director or officer consenting the issuance are
held liable for the discount liability.
ACCOUNT FOR THE INITIAL ISSUANCES OF SHARES OF STOCK
Accounting for the Initial Issuance of Shares of Stocks
Secret Reserve
 ➢ Arises when shares are issued for non-cash consideration with fair value that is (a)Share Premium–Treasury Shares xx
above par or stated value. It understates assets and equity (b)Retained Earnings xx
Treasury Shares xx
Accounting for the Reacquisition and Retirement of Shares of Stock
When a company reacquires its own shares, the shares become treasury shares (treasury Retained Earnings - unrestricted xx
stock) unless they are immediately retired. Retained Earnings – appropriated xx

Treasury Shares Note: Treasury Shares subsequently reissued at below the reacquisition cost, the excess of
➢ Entity’s own shares that were previously issued but are subsequently reacquired but the cost over the issuance price is debited to the following order of priority:
not retired. (Allowed only if it has sufficient unrestricted retained earnings). a. Share premium – treasury shares
b. Retained Earnings
Accounting for Treasury Shares
➢ Accounted using the cost method (the reacquisition and subsequent reissuance of Effects:
treasury shares are recorded at cost) • Reacquisition of treasury shares is a decrease in total shareholders’ equity equal to
➢ Presented as deduction in the shareholders’ equity the cost of the reacquired treasury shares.
• Reissuance of treasury shares is an increase in total shareholders’ equity equal to
Reacquisition the reissuance price.
Treasury Shares xx
Cash xx Retirement of Shares
➢ Retired if they have been reacquired and cancelled in accordance with SEC
Retained Earnings - unrestricted xx regulations.
Retained Earnings – appropriated xx ➢ Retired shares cannot be reissued anymore unlike treasury shares.
➢ Total par value and the related share premium of the retired shares are removed
Reissuance at cost from the books of accounts. Difference is accounted for as follows:
Cash xx Par value and related share premium of the retired shares exceed the retirement cost,
Treasury Shares xx the difference is credited to “Share Premium – Retirement”.
Share Capital xx
Retained Earnings - appropriated xx Share Premium – Original Issuance xx
Retained Earnings – unrestricted xx Treasury Shares xx
Share Premium – retirement xx
Reissuance at more than cost Par value and related share premium of the retired shares are less than the retirement
Cash xx cost, the difference is debited to the following in the order of priority:
Treasury Shares xx a. Share Premium – Treasury Shares
Share Premium-Treasury Shares xx b. Retained Earnings
Share Capital xx
Retained Earnings - unrestricted xx Share Premium – Original Issuance xx
Retained Earnings – appropriated xx (a)Share Premium -Treasury Sh. xx
(b)Retained Earnings (bal. figure) xx
General Rule: Transactions with owners do not give rise to income or expense. “No gain or Cash xx
loss shall be recognized in profit or loss on the purchase, sale, issue or cancellation of an
entity’s own equity instruments.” Note: When shares are reacquired and immediately retired, there is no need to set up a
treasury account. Par value and related share premium of the retired shares are immediately
Reissuance at below cost debited, with a corresponding credit to “Cash”. Par value method of accounting for Treasury
Cash xx Shares (not acceptable for financial reporting)
 ➢ Reacquired Treasury Shares are accounted for as if they are retired. Preference Shares convertible to ordinary shares (no separate accounting is required upon
issuance because both the principal instrument (PS) and the conversion option is presented
Stock Rights in SHE. (1) Equity instrument, but of different classes
➢ Issued to existing ordinary shareholders in relation to their pre-emptive rights.
➢ Enable existing shareholders to protect their current ownership interest by acquiring Bonds with detachable warrants
new shares (at a price lower than the shares’ market value) issued by the corporation The entity has in effect issued a compound instrument having two components (segregated
before such offers are offered to new investors. and accounted for separately) (1) Financial liability for bonds (2) Equity instrument for the
➢ Evidenced by share warrants (certificates that entitle the holder thereof to acquire detachable warrants.
shares at a certain price within a stated period). Issued in conjunction with the ff:
a. Issuance of stock rights in relation to shareholders’ right of preemption. Preference Shares with detachable warrants
b. Issuance of detachable warrants with other securities as “sweetener” or “equity kicker” to ➢ Detachable warrants are capable of being transferred or sold separately.
make the principal instrument more attractive to investors. ➢ Issue price should be allocated to the preference shares and the detachable
c. Issuance of share options to employees as additional compensation. warrants based on their relative fair values on issuance date.
➢ When both preference shares and the warrants do not have available fair values, the
Note: Share warrants are exercisable only within a definite period of time and shall expire allocation of the issue price is based on the intrinsic value of the warrants computed
thereafter. Share warrants issued for stock rights normally have a shorter duration compared as the difference between the fair value of the ordinary shares and the subscription
to share warrants issued with other securities. price.

Accounting for Stock Rights Donated Capital

➢ Recorded through memo entry only because stock rights are issued to existing Gifts received by the corporation from nonreciprocal transactions.
shareholders without consideration. (1) Donations from shareholders – credited to share premium
➢ Entry is made only when the rights are exercised or recalled. If the stock rights are (2) Donations from the government recognized as government grants.
subsequently recalled, any consideration paid is debited to share premium. No entry (3) Donations from other sources recognized as income when
is made if the stock rights expire but not recalled. (a) conditions attached to the donation are fulfilled or are reasonably expected to be fulfilled,
(b) donation becomes receivable, and
Stock Rights are issued (c) criteria for asset recognition are met.
Cash xx ➢ Cash – amount of cash
Ordinary Share Capital xx ➢ Noncash Assets – fair value
Share Premium – Ordinary Share xx ➢ Entity’s own shares – initially recorded through memo entry.
➢ Donated capital is recognized only when the donated shares are subsequently
Stock Rights were recalled reissued
Share Premium – Ordinary Share xx
Cash xx Accounting for Distributions to Owners
Distributions to owners refer to payments made by a company to its shareholders, reducing
the company’s equity. These distributions can take several forms, including cash dividends,
Stock Rights expires but not recalled
stock dividends, property dividends, and share buybacks (treasury stock
Memo Entry
transactions).
Convertible Bonds and Convertible Preference Shares
Dividends
Convertible Bonds (components are segregated and accounted separately)
(1) Cash Dividends – form of cash
(1) Financial Liability for the bonds
(2) Property Dividends – noncash assets
(2) Equity instrument for the conversion feature
(3) Share Dividends – entity’s own shares

Dates relevant to the accounting for dividends

(a) Date of declaration – BOD formally announces the distribution of dividends
(b) Date of record – only those who are listed as of this date shall be entitled to receive a. FVLCD > CA – loss
dividends. No entry is made on this date, except when there are adjustments to the initially b. Subsequent increase of FVLCD recognized as gain but only to the extent of the
recognized amount of dividends on the date of declaration. cumulative losses recognized in previous periods.
(c) Date of distribution
Accounting for Share Dividends
Recognition of liability for dividends ➢ Stock dividends involve the issuance of additional shares to shareholders instead of
When the dividend is appropriately authorized and is no longer at the discretion of the entity, cash.
which is: a. Small – less than 20% of the outstanding shares, share dividends are accounted for at fair
a. Date when the dividend declared by management is approved by a relevant authority, if value. Retained earnings is debited for the fair value of the share dividends on declaration
further approval is required, or date. Difference between FV and par value is credited to share premium.
b. Date when management declared dividends, further approval is not required. b. Large – 20% or more of the outstanding shares, shares are accounted for at par value.
Retained earnings is debited for the par value. No share premium arises.
Accounting for cash dividends
➢ Only outstanding shares are entitled to dividends. Treasury Shares declared as dividends
Shares issued xx ➢ Cost method is used.
Shares subscribed xx ➢ Retained earnings is debited for the cost of the treasury shares declared.
Treasury Shares (xx) ➢ No share premium arises.
Outstanding Shares xx ➢ Accounting for “small” or “large” share dividends do not apply.

Declaration of Dividend (on declaration date) Fractional Shares

• The company records a liability when the board of directors declares a dividend Corporations may:
Retained Earnings (dividends) xx 1. Issue fractional share rights (evidenced by share warrants) and give the holders thereof
Cash Dividends Payable xx ample time to accumulate sufficient warrants for a full share.
Date of Record (no entry) 2. Pay cash in lieu of fractional share rights but only if the share dividends were declared out
of retained earnings.
Payment of Dividend (on payment date)
• The company settles its liability by distributing cash to shareholders.
Share dividends of different class
Cash Dividends Payable xx
Accounted for at fair value.
Cash xx
Preference Shares
1. Preference in the distribution of assets in case of corporate liquidation (preferred as
Accounting for property dividends
to assets)
➢ A company may distribute non-cash assets (e.g., investments or inventory) to
2. Preference in the distribution of dividends (preferred as to dividends).
shareholders. The asset is remeasured at fair value before distribution.
a. Noncumulative – dividend entitlement for a year is forfeited when dividends are not
1. Property dividends payable is initially measured at the fair value of the non-cash assets at
declared in that year.
date of declaration. May be declared:
b. Cumulative – dividend entitlement accumulates each year until paid. Accumulated
a. Out of unrestricted retained earnings (return on capital); or
unpaid dividends are disclosed as dividends in arrears but not accrued as liability
b. Out of capital (return of capital)
unless the dividends are declared.
2. At the end of each reporting period and also on the settlement date, the property
c. Nonparticipating – entitled only to fixed amount of dividends.
dividends payable is adjusted for changes in fair value. (gain or loss, directly in retained
d. Participating – entitled to an amount in excess of the fixed amount of dividends.
earnings).
3. On settlement (distribution) date, difference between the CA of the dividends payable and Amount of participation is computed after both the preference and ordinary shares are
the asset distributed is recognized in profit or loss. allocated their basic dividends.
Basic dividends of ordinary shareholders is equal to the aggregate par value of the
Accounting for non-cash assets declared as property dividends outstanding ordinary shares multiplied by the preference shares. If there is more than one
Noncurrent - lower of its carrying amount and fair value less cost to distribute
class of preference shares with different preference shares, the lowest preference rate is establish a “fresh start” in accounting sense. (1) Revaluation of PPE; and/or (2)
used to compute for the basic dividends of ordinary shareholders. Recapitalization
a. Fully Participating – pro rata basis • Objectives of Quasi-Reorganization:
b. Partially Participating – certain amount or percentage. ➢ Eliminate retained earnings deficit to allow future dividend payments.
Dividend entitlement of preference shares may be expressed as: ➢ Restate assets and liabilities at fair value.
a. Percentage of par value ➢ Improve financial reporting to attract investors.
b. Specific monetary amount per share. • Steps in a Quasi-Reorganization:
1. Revalue Assets and Liabilities - Assets and liabilities are adjusted to their fair
Dividends recognized as expense
values, with gains or losses recorded in equity.
Dividends declared on equity instruments are charged to retained earnings. However,
2. Eliminate Retained Earnings Deficit - The retained earnings deficit is closed
dividends declared on financial liabilities such as redeemable preference shares, are
charged to profit or loss as interest expense. against additional paid-in capital (APIC) or other equity accounts.
3. Adjust Capital Accounts if Necessary - If APIC is insufficient, a reduction in stated
Liquidating Dividends capital (common stock) may be required.
Dividends declared out of capital. The wasting asset doctrine permits wasting asset
corporations to declare dividends out of capital during their existence. Feature Recapitalization Quasi-Reorganization
Purpose Improve capital structure Eliminate retained earnings deficit
Disclosure of dividends
Disclose either in the statement of changes in equity or in the notes. Changes in debt/equity Adjusts retained earnings and
Accounting Effect
composition asset values
Events after the reporting period Legal Process? No No
Not recognized as a liability at the end of the reporting period because no obligation exists at
that time. The dividends are disclosed only in the notes. Impact on Assets No direct impact Restated at fair value
Impact on Retained
Recapitalization No effect Eliminates deficit
Earnings
Change in the capital structure of an entity brought about by the cancellation of old shares
and issuance of new shares as replacement. Accomplished through any of the ff:
a. Change from par to no-par, or vice versa SHARE-BASED PAYMENT
b. Reduction of par value or stated value A share-based payment is a transaction in which the entity receives or acquires goods or
c. Share splits or reverse splits services either as consideration for its equity instruments or by incurring liabilities for
Note: Recapitalization does not affect assets, liabilities, or total SHE. amounts based on the price of the entity's shares or other equity instruments of the entity.
The accounting requirements for the share-based payment depend on how the transaction
will be settled, that is, by the issuance of
Share Split (recorded only through memo entry) 1. Equity-Settled Share-Based Payments
1. Split up or share split - Old shares are cancelled and replaced by a larger number of • In an equity-settled share-based payment transaction, the company grants shares
new shares but with a reduced par value (stated value) per share. or stock options to employees, suppliers, or other counterparties as compensation.
2. Spilt down or reverse share split - Old shares are cancelled and replaced by a smaller
Accounting Treatment:
number of new shares but with an increased par value (stated value) per share.
• Recognized as an expense over the vesting period (the period employees must
Quasi-reorganization serve before they can exercise the options).
• Accounting procedure whereby a financially troubled organization, but with favorable • Measured at the grant date fair value of the equity instruments (not remeasured
future prospects, is permitted, but not required, to revalue its assets and liabilities, after).
and realign its equity, subject to the provisions of relevant regulations, in order to 2. Cash-Settled Share-Based Payments
 • In a cash-settled share-based payment transaction, the company pays cash based Compensation Expense xxx
on the stock price or performance. Additional Paid-in Capital (APIC) – Stock Options xxx
Accounting Treatment: • At Exercise Date: (If employees exercise options at a strike price of $10, with par
• Recognized as a liability (instead of equity). value of $1/share)
• Initially measured at the fair value of the liability and remeasured at each Cash (received from employees) xxx
reporting date until settlement. APIC – Stock Options xxx
3. Choice between equity-settled and cash-settled Common Stock (par value) xxx
If the company gives the recipient (e.g., an employee) a choice between receiving cash or APIC – Common Stock xxx
shares, the accounting depends on whether the choice is made by the company or the • If Options Expire (Not Exercised):
recipient. APIC – Stock Options xxx
Accounting Treatment: APIC – Expired Options xxx
• If the company chooses the settlement method: Important Notes:
o It accounts for the transaction as either equity-settled or cash-settled, • Fair value is measured at grant date and remains fixed.
based on its decision. • Vesting conditions determine whether compensation is recognized.
• If the employee/recipient chooses: 2. Accounting for Share-Based Payments to Non-Employees
o It is accounted for as a compound financial instrument, with both an equity Share-based payments to non-employees (e.g., consultants, suppliers) are treated
and liability component. differently since they provide goods or services rather than employment.
Key Accounting Method: Fair Value of Goods/Services or Equity Instruments
Share-Based Recognition Measurement Adjustments Settlement • Measured at the fair value of the goods/services received, if reliably measurable.
Payment • If not measurable, use the fair value of the equity instruments issued, determined
Expense over Grant date fair Recognized in equity on the grant date.
Equity-Settled No adjustments • Expense is recognized immediately or over the service period.
vesting period value (APIC)
Important Notes:
Liability over Fair value Adjusted at each
Cash-Settled Paid in cash • Fair value is measured on the date the service is completed, not the grant date.
vesting period (remeasured) reporting date
• Transactions are recorded as expenses or asset costs rather than compensation
Cash Both equity and Depends on the Adjusted if cash expense.
Cash or shares
Alternatives liability choice made component exists
Factor Employees Non-Employees
Accounting Methods for Share-Based Payment Transactions
1. Fair Value of goods or
The accounting treatment for share-based payment transactions differs depending on 1. Fair Value of equity
services received
whether the recipient is an employee or a non-employee. Measurement instruments granted
2. Fair value of services
2. Intrinsic Value
received or equity granted
1. Accounting for Share-Based Payments to Employees
Share-based compensation for employees is typically used as an incentive (e.g., stock Measurement Date Grant date Service completion date
options, restricted shares, or performance-based awards). Over service period (or
Key Accounting Method: Grant Date Fair Value Approach Expense Recognition Over vesting period
immediately)
• Measured at the grant date fair value of the equity instrument (not remeasured).
Vesting Conditions Considered in recognition Not always applicable
• Expense is recognized over the vesting period (the service period employees must
complete). Possible if service period
Remeasurement No remeasurement
• At Grant Date: (No entry; disclosure only) changes
• During the Vesting Period: (Spreading expense over service years)
Share-Based Compensation Plans Employees are allowed to buy company shares at a discounted price (usually below
Share-based compensation plans are arrangements in which a company grants shares, market value).
stock options, or other equity-based instruments to employees or other parties in • Key Features:
exchange for services. These plans are primarily designed to align employees' interests with o Employees contribute from their salary to purchase shares.
shareholders and serve as an incentive for long-term performance. o The discount is considered compensation expense.
Types of Share-Based Compensation Plans: • Accounting Treatment:
1. Stock Option Plans o The discount amount is recorded as an expense.
Employees receive the right (option) to buy shares at a fixed price (exercise or strike price)
after a vesting period. Plan Type Employee Payment Required Vesting Conditions Expense Recognition
• Key Features:
Stock Options Yes (when exercised) Yes Over vesting period
o Employees must stay with the company until the vesting date to exercise
options. RSUs No Yes Over vesting period
o The fair value is measured at the grant date and expensed over the vesting Yes (performance- Over vesting period
period. Performance Shares No
based) with adjustments
• Accounting Treatment:
Yes (discounted
o Expense recognized over the vesting period using the fair value at grant ESPP No At purchase date
purchase)
date.
o No remeasurement after grant date.
2. Restricted Stock Units (RSUs) Cash-Settled Share-Based Payment Transactions
RSUs are company shares granted to employees but are subject to vesting conditions A cash-settled share-based payment transaction occurs when a company grants awards
(e.g., tenure or performance goals). Unlike stock options, RSUs do not require employees to employees or other parties that are based on the value of its shares but settled in
to pay to acquire the shares. cash rather than equity.
• Key Features: These transactions create a liability instead of equity because the company is obligated to
o Shares are not issued immediately. pay cash rather than issue shares.
o Employees receive shares after meeting vesting conditions.
o Fair value is determined at the grant date and expensed over the vesting Key Features of Cash-Settled Share-Based Payments:
period. ✔ The transaction is linked to the company’s share price.
• Accounting Treatment: ✔ The recipient does not receive shares—only a cash payment based on the stock's value.
o The fair value of RSUs is expensed over the vesting period. ✔ The company remeasures the liability at fair value until settlement.
o When vested, the company issues shares to employees.
3. Performance Share Plans (PSPs) Examples of Cash-Settled Share-Based Payments:
Employees receive shares if they achieve specific performance targets (e.g., revenue 1. Share Appreciation Rights (SARs)
growth, profit margins). • Employees receive the right to cash payments based on the increase in the
• Key Features: company's share price over a specified period.
o Compensation is contingent on meeting performance metrics. • No actual shares are issued; only the cash equivalent of the share price increase is
o Fair value is estimated at grant date, but adjustments are made if paid.
performance targets change. Accounting Treatment of Cash-Settled Share-Based Payments
• Accounting Treatment: Accounting follows these steps:
o If the likelihood of achieving targets changes, the expense is adjusted 1. Recognize the expense and liability over the vesting period.
accordingly. 2. Remeasure the liability at fair value at each reporting date.
4. Employee Stock Purchase Plans (ESPPs) 3. Settle the liability by paying cash when the award is exercised.
 Basic Earnings Per Share (EPS) measures the amount of net income available to each
outstanding common share. It is a key financial ratio used by investors to assess a
Factor Equity-Settled Cash-Settled Cash Alternative company's profitability.
Settlement Shares issued Cash paid Employee or company choice
Formula for Basic EPS:
Recognition Equity (APIC) Liability Both equity & liability Basic EPS= Net Income−Preferred Dividends
Fair Value Fixed at grant Remeasured until Equity fixed, liability Weighted Average Number of Common Shares Outstanding
Measurement date settlement remeasured Where:
Expense Recognition Over vesting period Over vesting period Over vesting period • Net Income = The company’s total profit after all expenses.
• Preferred Dividends = Dividends paid to preferred shareholders (deducted since
EPS measures earnings available to common shareholders).
Definition of Book Value Per Share (BVPS)
• Weighted Average Number of Common Shares Outstanding = Adjusts for
Book Value Per Share (BVPS) is a financial metric that represents the amount of a
changes in the number of shares over the reporting period.
company's net assets available to each share of common stock. It is calculated by dividing
the total equity available to common shareholders by the number of outstanding Adjustment Reason Impact on EPS
common shares. Preferred shareholders are
Deduct Preferred Dividends Reduces EPS
Formula for BVPS: paid first
Book Value Per Share=Total Shareholders’ Equity−Preferred Equity Use Weighted Average Provides accurate per-
Number of Outstanding Common Shares Shares change over time
Shares share earnings
Key Components:
• Total Shareholders' Equity – Includes common stock, additional paid-in capital Adjust past shares for
Stock Splits & Dividends Prevents misleading EPS
(APIC), retained earnings, and other reserves. comparability
• Preferred Equity – Represents preferred stockholders' claims, which must be
deducted since BVPS applies to common shareholders. Computation of Diluted Earnings Per Share (Diluted EPS)
• Outstanding Common Shares – The total number of common shares currently held Diluted Earnings Per Share (Diluted EPS) measures a company's profitability per share
by shareholders (excluding treasury shares). while considering the potential dilution from convertible securities, stock options, or
Importance of BVPS: other instruments that could increase the number of outstanding common shares.
✔ Measures the net worth of a company per share.
Formula for Diluted EPS:
✔ Helps investors assess whether a stock is overvalued or undervalued relative to its
Diluted EPS= Net Income−Preferred Dividends+Adjustments for Dilutive Securities
book value.
Weighted Average Common Shares Outstanding + Impact of Dilutive Securities
✔ Used in fundamental analysis, often compared with the market price per share (Price-to-
Where:
Book Ratio).
• Net Income = Total earnings after expenses and taxes.
Key Takeaways:
• Preferred Dividends = Deducted if the preferred shares are non-convertible.
✔ BVPS represents the net asset value per common share.
• Adjustments for Dilutive Securities = Add back interest (net of tax) on convertible
✔ Preferred stock equity is deducted since it belongs to preferred shareholders. bonds and preferred dividends if these are convertible.
✔ Treasury shares must be excluded to get the number of outstanding common shares. • Weighted Average Common Shares Outstanding = Adjusted for potential dilution
✔ A higher BVPS suggests strong financial stability, while a lower BVPS may indicate from convertible bonds, convertible preferred stock, stock options, and
financial challenges. warrants.

Computation of Basic Earnings Per Share (Basic EPS) Dilutive Instrument Impact on Net Income Impact on Shares Outstanding
 Increase shares for potential Purpose: Shows movements in equity during a reporting period due to profits,
Convertible Bonds Add back interest (net of tax)
conversion dividends, and capital changes.
Convertible Preferred Increase shares for potential Key Components:
Add back preferred dividends • Opening Equity
Shares conversion
• Net Profit or Loss
Stock Increase shares based on
No impact on net income • Dividends Paid
Options/Warrants Treasury Stock Method
• Changes in Share Capital
• Changes in Reserves (e.g., Revaluation Surplus, OCI Adjustments)
Key Takeaways: . Statement of Cash Flows
✔ Basic EPS only considers actual outstanding shares, while Diluted EPS considers Purpose: Reports how cash and cash equivalents changed over a period due to
potential dilution from options, bonds, or convertible securities. operating, investing, and financing activities.
✔ If diluted EPS > basic EPS, dilution is not occurring, and securities are anti-dilutive Key Sections:
(ignored in calculation). • Operating Activities – Cash flows from daily business operations (e.g., receipts
✔ Stock options and warrants are accounted for using the Treasury Stock Method. from customers, payments to suppliers).
• Investing Activities – Cash flows from buying/selling assets (e.g., equipment
Components of a Complete Set of Financial Statements purchases, investment income).
A complete set of financial statements, as required by IFRS (International Financial • Financing Activities – Cash flows from issuing/repaying debt or equity (e.g., issuing
Reporting Standards), provides a comprehensive overview of a company’s financial shares, dividend payments, loan repayments).
position, performance, and cash flows. Methods:
According to IAS 1 – Presentation of Financial Statements, a complete set of financial • Direct Method: Lists actual cash transactions.
statements includes the following components: • Indirect Method: Adjusts net income to derive cash flow.
5. Notes to the Financial Statements
1. Statement of Financial Position (Balance Sheet)
Purpose: Provides additional details and explanations for items in the financial
Purpose: Shows a company’s financial position at a specific date by listing its assets, statements.
liabilities, and equity.
Key Sections:
Key Components: • Accounting Policies (Revenue Recognition, Depreciation Methods)
• Assets (Current & Non-Current) • Breakdowns of Financial Statement Items (e.g., Debt Maturity Schedules)
• Liabilities (Current & Non-Current) • Contingent Liabilities & Commitments (Pending Lawsuits, Lease Obligations)
• Equity (Share Capital, Retained Earnings, Other Reserves)
2. Statement of Profit or Loss and Other Comprehensive Income (P&L and OCI Classification of Assets and Liabilities into Current and Non-Current
Statement) Assets and liabilities are classified into current and non-current based on their liquidity and
Purpose: Reports a company’s financial performance over a period, including settlement timeline. The classification helps stakeholders understand a company’s short-
revenues, expenses, and net income. term and long-term financial health.
Key Sections:
• Revenue (Sales, Service Income) 1. Classification of Assets
• Expenses (Cost of Goods Sold, Operating Expenses) (A) Current Assets
• Profit or Loss (Net Income or Net Loss) Definition: Assets expected to be converted into cash, sold, or consumed within
• Other Comprehensive Income (OCI) (Unrealized Gains/Losses on Investments, one year or the operating cycle (whichever is longer).
Foreign Currency Translation Adjustments) Examples of Current Assets:
3. Statement of Changes in Equity 1. Cash and Cash Equivalents – Cash on hand, bank balances, short-term deposits.
 2. Trade Receivables (Accounts Receivable) – Amounts due from customers. The Statement of Financial Position, also known as the Balance Sheet, provides a
3. Inventory – Raw materials, work-in-progress, and finished goods. snapshot of a company’s financial position at a specific date. It presents assets,
4. Prepaid Expenses – Payments made in advance for services (e.g., rent, insurance). liabilities, and equity, following the accounting equation:
5. Marketable Securities – Short-term investments expected to be sold soon. ✔ Assets = Liabilities + Equity (Always balanced).
6. Other Current Assets – Tax refunds, short-term loans receivable. ✔ Current vs. Non-Current Classification:
(B) Non-Current Assets • Current Assets/Liabilities: Expected to be used/settled within one year.
Definition: Assets that are not expected to be converted into cash within one year • Non-Current Assets/Liabilities: Held for longer than one year.
or the operating cycle. These assets provide long-term benefits to the company. ✔ Equity represents shareholders' claim on company assets after liabilities are
Examples of Non-Current Assets: settled.
1. Property, Plant, and Equipment (PPE) – Buildings, land, machinery, vehicles.
2. Intangible Assets – Patents, trademarks, goodwill, copyrights. Components of a Statement of Profit or Loss and Other Comprehensive Income (P&L
3. Long-Term Investments – Investments in stocks, bonds, or joint ventures. and OCI Statement)
4. Deferred Tax Assets – Future tax benefits arising from deductible temporary The Statement of Profit or Loss and Other Comprehensive Income (SPLOCI) presents
differences. a company’s financial performance over a specific period. It consists of two main sections:
5. Other Non-Current Assets – Long-term deposits, security deposits. 1. Statement of Profit or Loss (Income Statement) – Shows revenues, expenses, and
net profit/loss.
2. Classification of Liabilities 2. Other Comprehensive Income (OCI) – Includes gains and losses not realized in
(A) Current Liabilities profit or loss but affect total equity.
Definition: Obligations that are due within one year or the operating cycle (whichever
is longer). 1. Components of the Statement of Profit or Loss
Examples of Current Liabilities: This section reports a company’s core revenues and expenses that determine net profit or
1. Trade Payables (Accounts Payable) – Amounts owed to suppliers. loss.
2. Short-Term Loans & Borrowings – Bank overdrafts, lines of credit. Key Components:
3. Accrued Expenses – Salaries payable, interest payable. Revenue – Sales of goods or services.
4. Unearned Revenue (Deferred Revenue) – Advance payments from customers. Cost of Sales (Cost of Goods Sold - COGS) – Direct costs of producing
5. Dividends Payable – Declared but unpaid dividends. goods/services.
6. Current Portion of Long-Term Debt – The portion of long-term debt due within a Gross Profit – Revenue minus Cost of Sales.
year.
Operating Expenses:
(B) Non-Current Liabilities
• Selling & Distribution Expenses – Marketing, sales commissions.
Definition: Obligations that extend beyond one year and are settled over a long • Administrative Expenses – Salaries, rent, office expenses.
period.
Operating Profit (EBIT) – Profit before interest and taxes.
Examples of Non-Current Liabilities:
Finance Costs – Interest expenses on borrowings.
1. Long-Term Debt – Bank loans, bonds payable.
Profit Before Tax (PBT) – Earnings before tax.
2. Deferred Tax Liabilities – Taxes payable in future periods.
3. Lease Liabilities – Obligations under long-term lease agreements. Income Tax Expense – Taxes on profit.
4. Pension Liabilities – Retirement benefits owed to employees. Net Profit (or Net Loss) – Final profit after tax.
5. Other Non-Current Liabilities – Warranty obligations, long-term provisions. 2. Components of Other Comprehensive Income (OCI)
This section includes gains and losses not recognized in net income but still impact
Statement of Financial Position (Balance Sheet) equity.
Key OCI Components:
 Unrealized Gains/Losses on Investments – Revaluation of financial assets. Definition: Adjustments in pension obligations due to changes in actuarial assumptions
Foreign Currency Translation Adjustments – Gains/losses from foreign subsidiaries. (e.g., interest rates, employee turnover, or longevity estimates).
Revaluation Surplus on Property, Plant, and Equipment (PPE) – Increases in asset Example: A company revises its pension liability downward due to fewer expected
values. retirees.
Actuarial Gains/Losses on Pension Plans – Adjustments in employee benefit plans. Impact:
• A gain increases OCI.
Items of Other Comprehensive Income (OCI) • A loss decreases OCI.
Other Comprehensive Income (OCI) includes revenues, expenses, gains, and losses that (E) Unrealized Gains/Losses from Cash Flow Hedges
are not included in net income but directly affect shareholders' equity. These items are Definition: Changes in the fair value of hedging instruments (e.g., derivatives) used to
considered unrealized gains or losses, meaning they are not yet realized through sales or hedge future cash flows.
transactions. Example: A company uses futures contracts to hedge against rising oil prices.
OCI is presented separately from the Statement of Profit or Loss to reflect changes in Impact:
equity that are not from regular operations. • A gain from a hedge increases OCI.
• A loss from a hedge decreases OCI.
1. Key Items of Other Comprehensive Income (OCI)
(A) Unrealized Gains or Losses on Financial Assets Important Notes on OCI
Definition: Changes in the fair value of financial assets classified as Fair Value ✔ OCI items do not affect net profit or loss but impact equity.
through OCI (FVOCI) under IFRS 9.
✔ Some OCI items (e.g., FVOCI investments, hedge reserves) are reclassified to profit
Example: A company holds stocks or bonds whose value increases but has not yet sold or loss when realized.
them.
✔ Revaluation surplus (PPE) and actuarial gains/losses remain in OCI permanently
Impact: (never reclassified).
• Gain increases OCI and equity.
• Loss decreases OCI and equity. Acceptable Methods of Presenting Items of Income and Expenses
(B) Foreign Currency Translation Adjustments IAS 1 (Presentation of Financial Statements) allows companies to present items of
Definition: Gains/losses from converting financial statements of foreign subsidiaries into income and expenses using two main methods:
the parent company's reporting currency. 1. Single Statement Approach – Combines the Statement of Profit or Loss and
Example: A multinational company has operations in Europe, and the Euro appreciates Other Comprehensive Income (OCI) into a single statement.
against the U.S. Dollar. 2. Two-Statement Approach – Presents the Statement of Profit or Loss separately
Impact: from the Statement of Other Comprehensive Income (OCI).
• A foreign currency gain increases OCI.
• A foreign currency loss decreases OCI. 1. Single Statement Approach (Combined Statement)
(C) Revaluation Surplus on Property, Plant, and Equipment (PPE) • Includes both profit or loss and other comprehensive income in one
Definition: Under IAS 16 (Property, Plant & Equipment), a company can revalue PPE continuous statement.
to fair value, with the increase recorded in OCI. • Net profit is shown before OCI items.
• Total comprehensive income is the final result.
Example: A company revalues a building from $1,000,000 to $1,200,000, creating a
$200,000 revaluation surplus. ✔ Best for: Companies that want a concise report.
Impact: ✔ Downside: May make it harder to distinguish between realized and unrealized gains.
• The surplus increases OCI and is transferred to a revaluation reserve.
(D) Actuarial Gains and Losses on Defined Benefit Pension Plans 2. Two-Statement Approach (Separate Statements)
• The Statement of Profit or Loss is presented first, showing net profit.
 • The Statement of Other Comprehensive Income (OCI) is presented separately. • The good/service is separately identifiable from other promises in the contract.
✔ Best for: Companies that want to clearly separate profit/loss from OCI. Example:
✔ Downside: Requires two statements instead of one. • A telecom company sells a mobile phone and a data plan as a bundle.
• The phone and data plan are separate performance obligations because each
Key Differences Between the Two Methods provides value on its own.
Single Statement
Aspect Two-Statement Approach Step 3: Determine the Transaction Price
Approach
Definition: The transaction price is the amount of consideration (payment) the
Number of
One combined statement Two separate statements company expects to receive in exchange for transferring goods/services.
Statements
Adjustments to the transaction price may include:
Net Profit Before OCI in the same
In a separate Profit or Loss Statement • Variable consideration (bonuses, discounts, refunds).
Presentation statement
• Significant financing components (interest adjustments for deferred payments).
Less distinction between Clearer separation between realized and • Non-cash consideration (barter transactions).
Clarity
P&L and OCI unrealized gains
Example:
IAS 1 Compliance Allowed Allowed • A car dealership sells a vehicle for $30,000, offering a $2,000 cashback incentive.
Key Rule: The method chosen must be consistent across reporting periods. • The transaction price = $28,000 ($30,000 - $2,000 discount).

Five Steps in the Recognition of Revenue (IFRS 15 – Revenue from Contracts with Step 4: Allocate the Transaction Price to the Performance Obligations
Customers) Definition: The transaction price is allocated to each performance obligation based on
The five-step model under IFRS 15 provides a structured approach for recognizing revenue their standalone selling prices (relative fair value).
when goods or services are transferred to customers. Methods of allocation:
• Stand-alone selling price method (preferred).
Step 1: Identify the Contract with a Customer • Residual approach (used when selling price is uncertain).
Definition: A contract is an agreement between two or more parties that creates Example:
enforceable rights and obligations. • A software company sells a bundle of accounting software ($800) and a one-year
Criteria for a valid contract: tech support service ($200) for a package price of $900.
• The contract has commercial substance. • The total price ($900) is allocated based on the standalone selling price of each
• Rights and obligations are identifiable. item:
• Payment terms are clear. o Software: $720
• Collection of payment is probable. o Tech Support: $180
Example:
• A software company signs a 12-month subscription agreement with a customer. Step 5: Recognize Revenue When (or As) the Performance Obligation is Satisfied
• The contract is enforceable, and the customer agrees to pay $1,200 for the year. Definition: Revenue is recognized when control of the goods/services transfers to
the customer.
Step 2: Identify the Performance Obligations in the Contract Revenue recognition timing:
Definition: Performance obligations are distinct goods or services that the seller • At a point in time – When the customer gains control of the product (e.g., delivery
promises to deliver to the customer. of goods).
How to determine distinct performance obligations: • Over time – When benefits are consumed as services are provided (e.g.,
• The customer can benefit from the good/service on its own or with other construction contracts, SaaS subscriptions).
resources. Example:
 • A retail store sells a laptop. Revenue is recognized when the customer takes
possession of the laptop. 2. Types of Performance Obligations
• A construction company builds a bridge over two years. Revenue is recognized Single Performance Obligation – When a contract includes only one distinct
over time as progress is made. good/service.
Example:
Summary of the Five-Step Model • A bakery sells a cake. The entire sale is one performance obligation.
Step Key Concept Example Multiple Performance Obligations – When a contract includes multiple distinct goods
There must be a valid or services.
1. Identify the A gym signs a 12-month membership
contract with enforceable Example:
Contract contract with a customer.
terms. • A phone company offers a mobile phone + data plan as part of a bundle.
2. Identify Determine distinct o Phone and data plan are separate obligations since they provide
A phone company sells a handset +
Performance goods/services in the independent benefits.
monthly plan.
Obligations contract. Series of Performance Obligations – When a contract includes a set of identical
3. Determine Define the amount expected A car is sold for $30,000 with a $2,000 services delivered over time.
Transaction Price to be received. discount → Price = $28,000. Example:
Software ($800) + Tech Support • A cleaning service provides weekly office cleaning for 12 months.
4. Allocate Assign revenue to each
($200) sold as a $900 bundle →
Transaction Price performance obligation. 3. Factors That Indicate a Distinct Performance Obligation
Allocated: $720 + $180.
Recognize revenue when A streaming service recognizes Indicates Separate Performance
5. Recognize Factor
goods/services are revenue monthly over the subscription Obligation?
Revenue
delivered. period. Customer can use the good/service on its
Yes
own
Not highly dependent on other contract
Identification of Performance Obligations in a Contract (Step 2 of IFRS 15 Revenue Yes
items
Recognition) Significantly modifies/customizes another
A performance obligation is a distinct good or service (or a bundle of goods/services) that No
item
a company is obligated to deliver to a customer as part of a contract.
Not separately sold in the market No
1. Criteria for Identifying Performance Obligations
A good or service is considered a separate performance obligation if it meets both of the 4. Practical Considerations for Identifying Performance Obligations
following criteria: ✔ Review the contract carefully – Check whether goods/services are separately stated.
Capable of Being Distinct – The customer can benefit from the good/service on its ✔ Look at standalone pricing – If a company sells the item separately, it is likely a distinct
own or with other readily available resources. performance obligation.
Distinct in the Context of the Contract – The good/service is separately identifiable ✔ Check for interdependence – If one item depends on another, they may be a single
and not highly dependent on other promised goods/services in the contract. obligation.
Example: A laptop sold with a one-year warranty.
• Laptop = Distinct performance obligation (customer can use it on its own). Transaction Price Determination and Allocation to Performance Obligations (Steps 3
• Warranty = Separate obligation (if it provides additional service beyond legal & 4 of IFRS 15)
requirements). Under IFRS 15 – Revenue from Contracts with Customers, a company must:
1. Determine the transaction price (total consideration expected from the customer).
 2. Allocate the transaction price to performance obligations based on their (A) At a Point in Time – When control of the good/service is transferred immediately.
standalone selling prices. (B) Over Time – When control is transferred gradually over a contract period.
(A) Revenue Recognized at a Point in Time
Step 3: Determine the Transaction Price
Definition: Revenue is recognized once control transfers to the customer.
Definition:
Indicators of Control Transfer:
The transaction price is the total amount of consideration (payment) a company expects to
• Customer has physical possession of the asset.
receive in exchange for delivering goods or services.
• Customer has legal ownership.
Factors Affecting Transaction Price: • Seller has no further control or involvement.
1. Fixed Consideration – A fixed amount agreed in the contract.
2. Variable Consideration – Discounts, rebates, bonuses, penalties, or refunds. (B) Revenue Recognized Over Time
3. Significant Financing Component – If the payment timing significantly affects fair
Definition: Revenue is recognized gradually if any of the following conditions apply:
value.
1. The customer receives and consumes benefits as the seller performs.
4. Non-Cash Consideration – Payment received in goods or services instead of cash.
2. The seller’s performance creates an asset with no alternative use (e.g.,
5. Consideration Payable to Customer – Any amounts paid back to the customer
customized products).
(e.g., rebates) are deducted.
3. The seller has a legal right to payment for completed work.
Step 4: Allocate the Transaction Price to Performance Obligations
2. Measurement of Revenue
Definition: Revenue is measured based on the transaction price allocated to performance obligations.
If a contract has multiple performance obligations, the transaction price is allocated
Measurement Methods:
based on the standalone selling prices (SSP) of each obligation.
Output Method – Recognizes revenue based on results delivered (e.g., percentage of
Allocation Methods:
completion).
• Relative Standalone Selling Price Method (Preferred)
Input Method – Recognizes revenue based on costs incurred relative to total expected
• Residual Method (Used when the selling price of one component is highly variable
or uncertain). costs.

Step Description Example Timing of

When to Recognize? Example
Recognition
Identify total contract consideration $45,000 after a 10%
Step 3: Determine At a Point in Time Control transfers immediately Retail sales, one-time purchases
(fixed, variable, financing, non-cash discount on 100
Transaction Price Customer benefits Long-term contracts, SaaS
adjustments). smartphones. Over Time
continuously subscriptions
Step 4: Allocate to Assign revenue based on Software ($720) + Tech
Performance standalone selling prices (relative Support ($180) from a $900 Key Takeaways:
Obligations fair value method). contract. ✔ Immediate recognition for one-time sales.
✔ Gradual recognition for long-term projects or service contracts.
Timing of Revenue Recognition and Its Measurement (Step 5 of IFRS 15) ✔ Measurement uses output (completion) or input (costs incurred) methods.
Under IFRS 15 – Revenue from Contracts with Customers, revenue is recognized when
(or as) a company satisfies a performance obligation by transferring control of goods or Presentation of Contracts with Customers in the Statement of Financial Position
services to the customer. (IFRS 15)
Under IFRS 15 – Revenue from Contracts with Customers, companies must properly
1. Timing of Revenue Recognition: At a Point in Time vs. Over Time present contract-related assets and liabilities in the Statement of Financial Position.
Revenue can be recognized:
1. Key Contract-Related Accounts 2. Measurement of "Held for Sale" Assets
(A) Contract Assets After classification, the asset is measured at the lower of:
Definition: A company recognizes a contract asset when it has performed work but Carrying Amount or Fair Value - Costs to Sell
has not yet billed the customer. • If fair value minus selling costs is lower than the book value, an impairment loss
(B) Contract Liabilities is recognized.
Definition: A contract liability is recognized when a customer pays in advance for
3. Accounting Treatment for Held-for-Sale Assets
goods/services that have not yet been provided.
✔ Presented separately in the statement of financial position under "Assets Held for
(C) Accounts Receivable
Sale."
Definition: Represents amounts invoiced to customers but not yet collected.
✔ Depreciation stops once classified as held for sale.
How Contracts Are Presented in the Balance Sheet ✔ Liabilities directly associated with the asset are also classified separately.
Contract Item Presentation Example
Initial and Subsequent Measurement of "Held for Sale" Assets (IFRS 5)
Recorded as a current asset if expected to Work performed but not Under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, assets
Contract Asset
be collected within 12 months. yet billed. classified as held for sale are measured differently from other non-current assets.
Contract Recorded as a current liability if expected to Customer paid in
Liability be settled within 12 months. advance for services. 1. Initial Measurement of Assets Held for Sale
Accounts Invoice sent, payment Once an asset (or disposal group) meets the criteria for held for sale, it is initially measured
Presented separately as a current asset. at:
Receivable pending.
Lower of Carrying Amount or Fair Value Less Costs to Sell\text{Lower of Carrying Amount or
✔ Contract Assets: Work completed but not yet billed.
Fair Value Less Costs to Sell}Lower of Carrying Amount or Fair Value Less Costs to Sell
✔ Contract Liabilities: Advance payments for unfulfilled obligations.
Key Considerations:
✔ Accounts Receivable: Invoiced amounts awaiting payment.
Carrying Amount – The asset’s book value before classification.
✔ Clear balance sheet presentation enhances transparency in recognizing contract
Fair Value Less Costs to Sell – Estimated selling price minus transaction costs (e.g.,
performance.
legal fees, broker fees).
Requirements for Classifying Assets as “Held for Sale” (IFRS 5) Depreciation Stops – No further depreciation is recorded once classified as held for
Under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, an sale.
asset (or disposal group) is classified as held for sale when specific criteria are met. 2. Subsequent Measurement of Assets Held for Sale
After initial recognition, the asset is remeasured at:
1. Criteria for Classification as "Held for Sale" Lower of Previous Carrying Amount or Updated Fair Value Less Costs to Sell\text{Lower of
A non-current asset (or disposal group) must meet both of the following conditions: Previous Carrying Amount or Updated Fair Value Less Costs to
(A) The Asset Must Be Available for Immediate Sale Sell}Lower of Previous Carrying Amount or Updated Fair Value Less Costs to Sell
• The asset must be in a condition ready for sale. If Fair Value Declines Further (Additional Impairment Required)
• No significant modifications or additional activities are required before selling. If the fair value less costs to sell falls below the current book value, another impairment
(B) The Sale Must Be Highly Probable loss is recorded.
• A commitment to sell the asset must exist. If Fair Value Increases (Reversal of Impairment Allowed)
• The asset must be actively marketed at a reasonable price. • If the asset’s fair value recovers, an impairment reversal can be recognized.
• The sale must be expected to be completed within 12 months. • However, the increase cannot exceed the original carrying amount before
• There should be no significant changes in the plan to sell. classification.
Stage Measurement Basis Action Required • The group is classified as held for sale if the sale is highly probable within 12
months.
Initial Lower of Carrying Amount or Fair Value Recognize impairment if fair
• The group is measured at lower of carrying amount or fair value less costs to
Measurement Less Costs to Sell value is lower
sell.
Lower of Previous Carrying Amount 3. Discontinued Operations
Subsequent Measurement Recognize further
or Updated Fair Value Less Costs to Definition:
(Decrease in Fair Value) impairment loss
Sell A discontinued operation is a business segment or major line of business that is:
Subsequent Measurement Cannot exceed original Recognize impairment • Already disposed of, or
(Increase in Fair Value) carrying amount reversal (if applicable) • Classified as held for sale.
Depreciation Stops when classified as held for sale No further depreciation recorded Key Features:
Key Takeaways: • Must be a separate major business line or geographical area.
• Includes both assets and liabilities.
✔ Initial measurement is at the lower of carrying amount or fair value less costs to
• Results of discontinued operations are presented separately in the income
sell.
statement.
✔ Subsequent measurement ensures assets are not carried above recoverable value.
Income
✔ Further impairment losses are recognized if fair value drops. Includes
Category Definition Depreciation? Statement
✔ Impairment reversals are allowed but cannot exceed the original book value. Liabilities?
Impact?
✔ Depreciation stops once classified as held for sale.
No
Noncurrent Asset Individual asset to be
No Stops separate
Distinctions of (1) Noncurrent Asset Held for Sale, (2) Disposal Group, and (3) Held for Sale sold
disclosure
Discontinued Operations (IFRS 5)
Under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, assets Group of assets & No
are classified into different categories based on their nature and intended disposal. Disposal Group liabilities to be sold Yes Stops separate
together disclosure
1. Noncurrent Asset Held for Sale Entire business segment Shown
Discontinued
Definition: or major operation being Yes Stops separately in
Operations
A noncurrent asset held for sale is an individual asset that the company intends to sell discontinued P&L
within 12 months and meets IFRS 5 criteria for "held for sale" classification.
Key Features: Presentation Requirements of a Discontinued Operation (IFRS 5)
• The asset is available for immediate sale in its current condition. Under IFRS 5 – Non-Current Assets Held for Sale and Discontinued Operations, a
• The sale is highly probable within one year. discontinued operation must be presented separately in the financial statements to
• The asset is measured at lower of carrying amount or fair value less costs to provide clear information to investors and stakeholders.
sell.
• Depreciation stops upon classification as held for sale. 1. Definition of a Discontinued Operation
2. Disposal Group A discontinued operation is a component of a company that:
Definition: Represents a separate major business line or geographical area.
A disposal group is a group of assets and liabilities that are to be sold together as a Is classified as held for sale or already disposed of.
single transaction. Has been abandoned and will no longer generate future cash flows for the company.
Key Features: 2. Presentation in the Financial Statements
• Includes multiple assets and liabilities intended for sale. (A) Income Statement (Statement of Profit or Loss and OCI)
 Discontinued operations must be presented separately from continuing company’s equity changes due to net income, dividends, share issuances, and other
operations in the income statement. transactions.
Items Included in Discontinued Operations:
• Revenue and expenses from the discontinued segment. Key Components of the Statement of Changes in Equity
• Gains or losses from the sale of assets/liabilities. The SOCIE typically includes the following components:
• Any tax impacts related to the discontinued operation. 1. Opening Balance of Equity
(B) Statement of Financial Position (Balance Sheet) Definition: The equity balance at the beginning of the accounting period.
Assets and liabilities related to discontinued operations must be presented 2. Net Profit or Loss for the Period
separately. Definition: The company’s net income or loss for the period, transferred from the
Separate Classifications: Statement of Profit or Loss.
• "Assets Held for Sale" 3. Other Comprehensive Income (OCI)
• "Liabilities Held for Sale" Definition: Gains and losses not included in net profit but directly recorded in equity
(C) Cash Flow Statement (e.g., foreign currency translation gains, revaluation surplus).
Cash flows from discontinued operations must be disclosed separately in all three 4. Transactions with Owners
categories: Definition: Changes in equity due to shareholder transactions, such as dividends,
• Operating activities (cash inflows/outflows from operations). share issuances, or treasury stock purchases.
• Investing activities (sale or purchase of assets). (A) Issuance of New Shares
• Financing activities (debt repayment, equity transactions). • When new shares are issued, share capital and additional paid-in capital (APIC)
3. Additional Disclosure Requirements increase.
In the Notes to Financial Statements, companies must disclose: (B) Dividends Paid to Shareholders
Description of discontinued operations (nature of the segment, reason for disposal). • When dividends are declared, retained earnings decrease.
Date of disposal or expected sale. (C) Treasury Stock Transactions
Gain/loss recognized on disposal. • If a company buys back its shares, equity decreases.
5. Closing Balance of Equity
Major classes of assets/liabilities held for sale.
Definition: The total equity at the end of the period, carried forward to the next
Cash flow impact of discontinued operations.
accounting period.
Formula:
Financial Statement Presentation Requirement
Closing Equity= Opening Equity + Net Income + OCI + Owner Contributions – Dividends −
Discontinued operations reported separately below continuing Treasury Stock
Income Statement
operations.
Assets & liabilities of discontinued operations shown as "Held Difference Between the Statement of Profit or Loss and Other Comprehensive Income
Balance Sheet
for Sale". (SPLOCI) and the Statement of Changes in Equity (SOCIE)
Cash Flow Statement Discontinued operations' cash flows reported separately. The Statement of Profit or Loss and Other Comprehensive Income (SPLOCI) and the
Notes to Financial Additional details on the nature, financial impact, and status of Statement of Changes in Equity (SOCIE) are both key financial statements, but they serve
Statements the disposal. different purposes.

1. Statement of Profit or Loss and Other Comprehensive Income (SPLOCI)

Components of a Statement of Changes in Equity (SOCIE)
Purpose:
The Statement of Changes in Equity (SOCIE) is a financial statement that presents
• Reports a company's financial performance over a period.
movements in a company’s equity over a reporting period. It provides insight into how a
 • Shows revenues, expenses, net profit (or loss), and other comprehensive Statement of Profit or Loss and
income (OCI). Statement of Changes in Equity
Feature Other Comprehensive Income
• Helps stakeholders assess profitability and performance. (SOCIE)
(SPLOCI)
Components: Includes
1. Profit or Loss Section (Income Statement) No Yes, dividends reduce equity
Dividends?
o Revenue
Includes Share
o Expenses (COGS, operating expenses, interest, taxes) No Yes, increases equity
Issuances?
o Net Profit or Loss
2. Other Comprehensive Income (OCI) Section Total Comprehensive Income
Final Result Closing Equity Balance
o Gains/losses on foreign currency translation (Profit/Loss + OCI)
o Revaluation surplus on property, plant, and equipment
o Unrealized gains/losses on FVOCI financial assets 4. How the Two Statements Are Linked
o Actuarial gains/losses on pension plans • Net Profit from SPLOCI → Added to Retained Earnings in SOCIE.
✔ Key Focus: Measures earnings and financial performance. • OCI from SPLOCI → Transferred to OCI Reserves in SOCIE.
• Equity Transactions (Dividends, Issuances) → Only in SOCIE.
2. Statement of Changes in Equity (SOCIE)
Distinction of (1) Operating Activities, (2) Investing Activities, and (3) Financing
Purpose:
Activities
• Reports changes in equity over a period due to net income, OCI, share
In the Statement of Cash Flows, cash flows are classified into three main categories:
issuances, dividends, and treasury stock transactions.
1. Operating Activities – Related to day-to-day business operations.
• Explains how profit, loss, and other changes impact equity components.
2. Investing Activities – Related to buying/selling long-term assets and investments.
Components:
3. Financing Activities – Related to funding through debt or equity.
1. Opening Equity Balance Each category provides insight into how a company generates and uses cash.
2. Add Net Profit from SPLOCI
3. Add OCI items from SPLOCI 1. Operating Activities
4. Add Share Capital Issuance & Other Contributions
Definition:
5. Deduct Dividends & Treasury Share Buybacks
• Cash flows from the primary business operations of a company.
6. Closing Equity Balance
• Includes cash receipts and payments related to sales, expenses, and working
✔ Key Focus: Tracks equity movements and shareholder changes.
capital.
Examples of Operating Cash Inflows:
3. Key Differences Between SPLOCI and SOCIE
• Cash received from customers for sales.
Statement of Profit or Loss and • Interest and dividends received (under IFRS).
Statement of Changes in Equity
Feature Other Comprehensive Income • Refunds or rebates received.
(SOCIE)
(SPLOCI)
Examples of Operating Cash Outflows:
Measures profitability and Tracks changes in equity over • Payments to suppliers and employees.
Purpose
comprehensive income time • Cash paid for operating expenses (rent, utilities, wages).
Explains movements in equity • Interest paid and income taxes paid.
Reports revenues, expenses,
Focus (retained earnings, share capital, 2. Investing Activities
profit/loss, and OCI
dividends) Definition:
Includes OCI? Yes, in the OCI section Yes, transferred from SPLOCI • Cash flows related to the acquisition and disposal of long-term assets and
investments.
 • Indicates how a company invests in future growth. Item Operating Activities Investing Activities Financing Activities
Examples of Investing Cash Inflows: (a) Dividends Received Allowed Allowed Not Allowed
• Selling property, plant, and equipment (PPE).
• Selling long-term investments (stocks, bonds). (b) Dividends Paid Not Allowed Not Allowed Allowed
• Receiving cash from the sale of a subsidiary or business unit. (c) Interest Paid Allowed Not Allowed Allowed
Examples of Investing Cash Outflows: (d) Interest Received Allowed Allowed Not Allowed
• Purchasing property, plant, and equipment (PPE).
• Buying stocks or bonds of another company.
IFRS Flexibility:
• Issuing loans or advances to other entities. • Dividends received & interest received → Can be in operating or investing
3. Financing Activities activities.
• Interest paid → Can be in operating or financing activities.
Definition:
• Dividends paid → Must be in financing activities.
• Cash flows related to raising and repaying capital through equity or debt.
• Shows how a company funds its operations.
2. Classification Under US GAAP (Strict Rules)
Examples of Financing Cash Inflows:
Item Operating Activities Investing Activities Financing Activities
• Issuing shares (equity financing).
• Borrowing money (long-term loans or bonds). (a) Dividends Received Required Not Allowed Not Allowed
• Receiving capital contributions from owners. (b) Dividends Paid Not Allowed Not Allowed Required
Examples of Financing Cash Outflows:
(c) Interest Paid Required Not Allowed Not Allowed
• Paying dividends to shareholders.
• Repaying loans or bonds. (d) Interest Received Required Not Allowed Not Allowed
• Buying back treasury shares. US GAAP Strict Rules:
• Dividends received & interest received → Always operating activities.
Category Definition Examples of Inflows Examples of Outflows • Interest paid → Always operating activities.
Operating Cash from day-to-day Cash from customers, Payments to suppliers, • Dividends paid → Always financing activities.
Activities business operations dividends received salaries, interest paid Key Takeaways
✔ IFRS provides flexibility → Interest & dividends received can be operating or
Investing Cash from buying/selling Sale of PPE, Purchase of PPE,
investing, interest paid can be operating or financing.
Activities long-term assets investments, subsidiary investments
✔ US GAAP is strict → Interest & dividends received must be operating, interest paid
Financing Cash from debt and Issuance of shares, Loan repayments, dividends, must be operating, dividends paid must be financing.
Activities equity transactions borrowing loans treasury stock repurchase
✔ Dividends paid are always financing activities under both IFRS & US GAAP.

Classification of the Following Items in a Statement of Cash Flows Statement of Cash Flows – Operating Activities Using the Direct and Indirect Methods
Under IAS 7 – Statement of Cash Flows, the classification of dividends and interest The Statement of Cash Flows provides information on how a company generates and uses
depends on whether a company follows: cash, divided into three sections:
IFRS (International Financial Reporting Standards) – Allows flexibility in 1. Operating Activities – Cash from core business operations.
classification. 2. Investing Activities – Cash from buying/selling assets and investments.
US GAAP (Generally Accepted Accounting Principles) – Uses strict classifications. 3. Financing Activities – Cash from issuing shares, borrowing, and repaying debt.
For operating activities, companies can use either:
1. Classification Under IFRS (Allowed Options) (A) Direct Method – Reports actual cash transactions.
(B) Indirect Method – Starts with net income and adjusts for non-cash items.
1. Direct Method (Cash-Based Reporting) 3. Key Differences Between Direct and Indirect Methods
Definition: Feature Direct Method Indirect Method
• Reports actual cash inflows and outflows from operating activities. Reports actual cash Adjusts net income for non-cash
• Lists cash received from customers and cash paid to suppliers/employees Basis
transactions items
directly.
Net income from the income
Key Components: Starting Point Cash received and paid
statement
• Cash received from customers
Common Usage Less common Most widely used
• Cash paid to suppliers
• Cash paid to employees Ease of More complex (needs detailed Easier (based on existing accrual
• Cash paid for interest Preparation records) accounting)
• Cash paid for taxes Adjustments Yes (depreciation, working capital
No
✔ Pros: Needed? changes)
• Shows actual cash transactions.
• Easier for stakeholders to understand. Key Takeaways:
Cons: ✔ Direct Method = Reports actual cash movements (easier to interpret, harder to
• Requires detailed record-keeping. prepare).
• Less commonly used (most companies prefer the indirect method). ✔ Indirect Method = Adjusts net income for non-cash transactions (easier to prepare,
harder to interpret).
2. Indirect Method (Adjusting Net Income) ✔ Most companies use the indirect method because it aligns with accrual accounting.
Definition:
• Starts with net income from the income statement.
• Adjusts for non-cash items (e.g., depreciation, changes in working capital).
Adjustments Include:
1. Non-Cash Expenses (added back to net income):
o Depreciation & Amortization
o Loss on Sale of Assets
2. Non-Cash Gains (deducted from net income):
o Gain on Sale of Assets
3. Changes in Working Capital:
o Increase in Current Assets (e.g., Accounts Receivable) → Deducted
o Decrease in Current Assets → Added
o Increase in Current Liabilities (e.g., Accounts Payable) → Added
o Decrease in Current Liabilities → Deducted
✔ Pros:
• Easier to prepare using accrual-based accounting.
• More commonly used by companies.
Cons:
• Less intuitive than the direct method.
• Requires adjustments for non-cash items and working capital changes.