Core Principle: Inventories are measured at the lower of cost and net realisable value (NRV). Cost encompasses all expenditure incurred to bring inventories to their present location and condition.
Scope covers:
- Assets held for sale in the ordinary course of business (finished goods)
- Assets in the process of production for such a sale (WIP)
- Materials and supplies to be consumed in production (raw materials)
Included in Cost: Purchase price + import duties + non-refundable taxes, less trade discounts; conversion costs (direct labour + production overheads based on normal capacity); other directly attributable costs.
Excluded from Cost (expense as incurred): Abnormal waste, storage costs (unless necessary in production), administrative overheads, selling costs, borrowing costs (unless qualifying asset under IAS 23).
Normal Capacity Rule: Fixed overheads are absorbed based on normal (not actual) capacity. Under-absorbed overhead during low output periods is expensed — never deferred into inventory.
| Method | How It Works | Permitted? |
|---|---|---|
| FIFO | Oldest units assumed consumed first | ✔ Yes |
| Weighted Average | Cost averaged over all units; recalculated at each purchase | ✔ Yes |
| LIFO | Most recent units assumed consumed first | ✘ Not permitted under IFRS |
| Specific ID | Track actual cost of each individual item | ✔ Only for non-interchangeable items |
Consistency Rule: The same cost formula must be applied to all inventories of similar nature and use. LIFO is never permitted under IFRS.
- NRV write-downs recognized as expense in the period of write-down
- NRV is reassessed at each subsequent reporting date
- Reversals are required (not optional) when NRV subsequently increases — but only up to original cost
- For raw materials held for production: use replacement cost as proxy for NRV of finished goods, not the raw material in isolation
Definition: Tangible items held for use in production/supply of goods or services, for rental, or for administrative purposes; expected to be used during more than one period.
An item of PPE is recognized when:
| Criterion | Description |
|---|---|
| Probable FEB | Probable that future economic benefits will flow to the entity |
| Reliable Measurement | Cost of the asset can be measured reliably |
Note on Control: "Control" is a Conceptual Framework element of the definition of an asset — it is not a stated recognition criterion within IAS 16 itself and should not be cited as one in exam contexts.
Included: Purchase price (net of discounts) + import duties + non-refundable taxes + directly attributable costs (installation, testing, professional fees) + initial decommissioning provision (IAS 37).
Excluded: Administration overheads, operating losses before full capacity, staff training costs, abnormal waste during construction.
- Begins when asset is available for use — not when actually used
- Depreciable amount = Cost (or revalued amount) − Residual value
- Component accounting: Significant components with different useful lives depreciated separately
- Residual value and useful life reviewed at each year-end — any change is a change in estimate (prospective under IAS 8)
- Land is not depreciated (indefinite life) — but can still be impaired
Cost Model: Cost − Accumulated depreciation − Accumulated impairment losses.
Revaluation Model: Fair value at revaluation date − Subsequent accumulated depreciation − Subsequent accumulated impairment.
| Revaluation Movement | Treatment |
|---|---|
| Upward revaluation | OCI (revaluation surplus) — unless reversing a previous P&L decrease |
| Downward revaluation | First deducted from revaluation surplus; excess charged to P&L |
Class-by-class: All assets within a class must be revalued with sufficient regularity. On disposal, the revaluation surplus may transfer directly to retained earnings — it is not recycled through P&L.
Revaluation Model & IAS 21: PPE denominated in foreign currency under the revaluation model is a non-monetary asset measured at fair value. It is translated at the rate when fair value was determined. The exchange difference is embedded in the revaluation movement and recognized in OCI — it must NOT be separated as a standalone exchange gain/loss in P&L.
- IAS 16 ↔ IAS 36 (PPE impairment testing)
- IAS 16 ↔ IAS 40 (transfers to/from investment property)
- IAS 16 ↔ IAS 23 (borrowing costs capitalization)
- IAS 16 ↔ IFRS 5 (reclassification as held-for-sale)
- IAS 16 ↔ IAS 21 (FX on revalued PPE)
Core Principle: Government grants are recognized as income on a systematic basis over the periods in which the entity recognizes related costs. They shall not be credited directly to equity.
A grant is recognized only when there is reasonable assurance that:
- The entity will comply with all conditions attached, and
- The grant will be received
Grants received before conditions are met → recognized as deferred income (a liability). Repayment of a grant is treated as a change in accounting estimate — applied prospectively.
| Grant Type | Option A | Option B |
|---|---|---|
| Related to Assets | Deferred income (released to P&L over asset's useful life) | Deducted from asset's carrying amount (reduces future depreciation) |
| Related to Income | Presented as "other income" separately | Deducted from the related expense |
IAS 41 Override: Grants related to biological assets covered by IAS 41 follow IAS 41's rules — not IAS 20. Unconditional grants recognized in P&L when receivable; conditional grants when conditions are met.
Mandatory Capitalization: Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset must be capitalized. All other borrowing costs are expensed as incurred.
Qualifying Asset: An asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Examples: manufacturing plant, power generation facilities, investment property under construction, real estate developments. Routine inventory items are NOT qualifying assets.
| Phase | Condition |
|---|---|
| Commence | ALL three conditions met: expenditures are being incurred, borrowing costs are being incurred, AND preparatory activities are in progress |
| Suspend | During extended periods when active development is interrupted (not routine administrative delays) |
| Cease | When substantially all activities to prepare the asset for intended use or sale are complete |
- Specific borrowing: Actual borrowing costs incurred less investment income earned on temporary investment of those funds
- General pool: Apply weighted average capitalization rate to expenditure on the qualifying asset. Amount capitalized cannot exceed total borrowing costs incurred in the period
Impairment Exists When: Carrying amount > Recoverable amount.
Recoverable Amount = higher of (a) FVLCD and (b) Value in Use (VIU)
| Asset Type | When to Test |
|---|---|
| PPE / finite-life intangibles | Only when impairment indicators exist |
| Goodwill | Mandatory annual test |
| Indefinite-life intangible | Mandatory annual test |
| Intangible not yet available for use | Mandatory annual test |
- Present value of future cash flows expected from the asset in its existing condition
- Cash flows must NOT include future capex to improve or enhance performance
- Discount rate: Pre-tax rate — do NOT use a post-tax rate
- Beyond detailed 5-year projections: extrapolate using steady or declining growth rate
- Permitted for individual assets and non-goodwill CGU assets
- Reversal capped: carrying amount cannot exceed what it would have been (net of depreciation) had no impairment ever been recognized
- Goodwill impairment can NEVER be reversed
CGU Definition: The smallest identifiable group of assets that generates cash inflows largely independent of cash inflows from other assets or groups.
Impairment Allocation Order within a CGU:
(1) First allocate to goodwill — reduce to nil;
(2) Then allocate remainder pro rata to other assets.
No individual asset may be written below the highest of its own FVLCD, VIU, or zero.
| External | Internal |
|---|---|
| Significant decline in market value | Physical damage or obsolescence |
| Adverse technology / market / economic changes | Asset is idle, restructured or held for disposal |
| Market interest rate increases | Internal reports show worse-than-expected performance |
| Net assets exceed market capitalisation | Subsidiary acquired exclusively for resale |
- Individual asset: Charged to P&L — unless carried under revaluation model (first reduces revaluation surplus in OCI)
- After recognition: recalculate depreciation charge on new carrying amount over remaining useful life
Recognize a Provision when:
- A present obligation (legal or constructive) exists as a result of a past event
- It is probable (>50%) that an outflow of economic benefits will be required to settle the obligation
- A reliable estimate of the amount can be made
Constructive Obligation: Arises from established past practices, published policies or a sufficiently specific statement that creates a valid expectation in the minds of other parties — even without a legal duty.
- Best estimate of the expenditure required to settle the obligation at the reporting date
- Large populations (e.g., warranties): use expected value (probability-weighted outcomes)
- Single obligation: use the most likely outcome
- Time value: Where material, discount using pre-tax risk-free rate. Unwinding of discount = finance cost in P&L
- Reimbursements (e.g., insurance): recognize as separate asset only when virtually certain
| Item | Probability | Treatment |
|---|---|---|
| Provision | Probable (>50%) | Recognize in SOFP |
| Contingent liability | Possible | Disclose in notes only |
| Contingent liability | Remote | No disclosure required |
| Contingent asset | Probable | Disclose in notes only |
| Asset | Virtually certain | Recognize as an asset |
No provision for future operating losses — they do not constitute a present obligation from a past event.
Onerous Contracts: Provision = lower of (cost of fulfilling the contract) and (cost/penalty of terminating it).
Restructuring Provision: Arises only when a detailed formal plan exists AND a valid expectation has been raised in those affected by announcing or starting implementation. A board decision alone — without external communication — is insufficient.
Definition: Property held to earn rentals OR for capital appreciation OR both — NOT for use in production, supply, administration, or sale in the ordinary course of business.
Initial measurement: at cost, including transaction costs (same as IAS 16 initial measurement).
| Model | Depreciation? | Gains / Losses |
|---|---|---|
| Fair Value Model | None | All FV changes in P&L |
| Cost Model | Yes (per IAS 16) | FV disclosed in notes; gains/losses on disposal in P&L |
Critical Distinction from IAS 16: Under IAS 40 Fair Value Model, ALL FV gains and losses pass through P&L. Under IAS 16 Revaluation Model, gains pass through OCI. This is one of the most commonly confused treatments in professional exams.
| Transfer Direction | Measurement at Transfer Date |
|---|---|
| Investment Property → PPE (IAS 16) | FV at transfer date = deemed cost for IAS 16 |
| Investment Property → Inventories | FV at transfer date = cost for IAS 2 |
| PPE → Investment Property (FV model) | Revalue under IAS 16 first; OCI surplus remains in equity |
| Inventories → Investment Property (FV model) | Difference between FV and carrying amount → P&L |
Scope: Biological assets (living animals and plants), agricultural produce at the point of harvest, and government grants related to biological assets measured at fair value.
- Biological assets: measured at fair value less costs to sell at each reporting date; all changes in P&L
- If FV cannot be reliably measured (rare): use cost less depreciation and impairment
- Agricultural produce at point of harvest: FV less costs to sell = deemed cost under IAS 2 for all subsequent accounting
| Grant Type (IAS 41) | Recognition Timing |
|---|---|
| Unconditional grant (biological assets at FV) | P&L when the grant becomes receivable |
| Conditional grant (biological assets at FV) | P&L only when all conditions have been met |
Common Pitfall: IAS 41 overrides IAS 20 for grants related to biological assets measured at FV less costs to sell. Once produce is harvested, IAS 41 no longer applies — IAS 2 governs all subsequent accounting.
Definition: 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. This is an exit price — not an entry price.
Non-Financial Assets: FV assumes highest and best use from the perspective of market participants — even if the entity's current use differs. Rebuttable presumption: current use IS the highest and best use.
Principal vs Most Advantageous Market: Use the principal market (greatest volume) if accessible. If no principal market, use the most advantageous market (maximizes net proceeds after transport — but NOT transaction costs). FV is never adjusted for transaction costs.
| Level | Input Type | Example | Audit Risk |
|---|---|---|---|
| Level 1 | Quoted prices in active markets for identical assets/liabilities | Listed equity shares | Lowest |
| Level 2 | Observable inputs (other than Level 1) | Interest rate swap using observable yield curves | Medium |
| Level 3 | Unobservable inputs — entity's own assumptions | Unlisted entity valued by DCF model | Highest |
Level 3 measurements carry the highest audit risk — they require significant management judgement and are most susceptible to bias. Auditors should challenge key assumptions, request sensitivity analyses, and evaluate whether alternative valuation techniques were considered.
Measurement: Lower of carrying amount and fair value less costs to sell (FVLCTS) when an asset's carrying amount will be recovered principally through a sale transaction.
- Asset available for immediate sale in its present condition
- Sale is highly probable: management committed, active programme to locate a buyer, asset marketed at reasonable price
- Expected to complete within 12 months of classification (limited extensions permitted)
IAS 10 Interaction: If held-for-sale criteria are met after the reporting date but before authorization → non-adjusting event. Do NOT reclassify the asset in the current year's financial statements.
- Remeasure under the relevant standard (IAS 16/IAS 38) immediately before reclassification
- Then remeasure at lower of carrying amount and FVLCTS
- No depreciation or amortization while classified as held-for-sale
- Subsequent increases in FVLCTS: recognized as a gain only up to cumulative impairment previously recognized under IFRS 5
- Post-tax profit/loss presented as a single line item below profit from continuing operations
- Comparative P&L statements are restated to show the discontinued operation separately
- Assets and liabilities of disposal groups presented separately on the face of SOFP — never offset
Definition: An identifiable non-monetary asset without physical substance. Three elements: (1) identifiability — separable or arising from contractual/legal rights; (2) control; (3) future economic benefits.
| Acquisition Route | Initial Measurement |
|---|---|
| Separately purchased | Cost = purchase price + directly attributable costs |
| Business combination (IFRS 3) | Fair value at acquisition date |
| Internally generated | Subject to Research vs. Development rules |
| Government grant | At fair value OR nominal amount + directly attributable costs |
Research: Always expense as incurred — no exception.
Development: Capitalize ONLY when ALL six criteria are met:
- Probable future economic benefits
- Intention to complete and use or sell
- Resources available to complete development
- Ability to use or sell the intangible
- Technical feasibility of completing development
- Expenditure can be measured reliably
Never capitalize internally generated: goodwill, brands, mastheads, publishing titles, customer lists — these are specifically excluded by IAS 38.
| Useful Life | Model | Treatment |
|---|---|---|
| Finite | Cost model | Amortize over useful life; impairment test on indicators |
| Finite | Revaluation model | Only if active market exists (extremely rare) |
| Indefinite | Cost (no amortization) | Mandatory annual impairment test + indicator-based testing; review classification annually |
Indefinite ≠ Infinite: Indefinite means no foreseeable limit on the period of net cash inflows. Must be reviewed annually. If useful life becomes determinable → reclassify to finite (change in accounting estimate — applied prospectively).
IAS 38 does not prohibit ALL internally generated intangibles as a blanket rule. The standard draws a clear distinction: research costs must always be expensed, while development costs may be capitalized if all six PIRATE criteria are satisfied. The blanket prohibition applies only to specific categories: internally generated goodwill, brands, mastheads, publishing titles, and customer lists.
Scope: Expenditures incurred after obtaining legal rights to explore in a specific area, but before technical feasibility and commercial viability of extraction have been established.
- Entity determines its own accounting policy for which expenditures qualify as exploration and evaluation (E&E) assets — must be consistent (per IAS 8)
- E&E assets classified as tangible (e.g., drilling rigs) or intangible (e.g., drilling rights, licences) — subsequent measurement follows IAS 16 or IAS 38 accordingly
- Impairment test when facts and circumstances suggest carrying amount may exceed recoverable amount (IFRS 6 specifies its own indicators rather than full IAS 36 requirements)
Audit Insight: IFRS 6 is a temporary standard — entities must reclassify E&E assets once technical feasibility and commercial viability are established. At that point, normal IAS 16/IAS 38 rules apply. Auditors should challenge whether entities are deferring reclassification to avoid full IAS 36 impairment testing.
When Permitted: (a) Required by a new or revised IFRS, or (b) The change results in information that is more relevant and faithfully representative.
Treatment: Retrospective application — restate comparative information; adjust opening retained earnings of the earliest period presented.
- If impracticable to restate all prior periods: restate from earliest practicable date
Arise from: New information or developments — e.g., revision of useful life, changes in ECL estimates, revision of warranty provisions.
Treatment: Prospective — applied from current period and future periods only. No restatement of comparatives.
- Disclose nature and amount of the change, and expected impact on future periods where practicable
Definition: Omissions or misstatements arising from a failure to use, or misuse of, reliable information that was available when financial statements were authorized.
Treatment: Retrospective restatement — comparatives restated as if the error had never occurred; cumulative effect in opening retained earnings of the earliest period presented.
Distinguishing Estimate from Policy: If uncertainty was always present and you are refining the measurement → change in estimate (prospective). If you are changing the accounting treatment or basis → change in policy (retrospective). When the distinction is unclear, IAS 8 presumes it is a change in estimate.
Scope: Events (favourable and unfavourable) that occur between the reporting date and the date the financial statements are authorized for issue.
| Type | Definition | Treatment |
|---|---|---|
| Adjusting | Provides evidence of conditions that existed at the reporting date | Adjust carrying amounts in the financial statements |
| Non-Adjusting | Evidence of conditions that arose after the reporting date | Disclose if material (no adjustment) |
| Event | Classification |
|---|---|
| Settlement of lawsuit existing at year-end | Adjusting |
| Customer bankruptcy (balance at year-end) | Adjusting |
| Post year-end sale of inventory confirming NRV | Adjusting |
| Major restructuring announced after year-end | Non-Adjusting |
| Factory destroyed by fire after year-end | Non-Adjusting |
| Post-period dividends declared | Non-Adjusting |
Did the condition exist at the reporting date? Yes → Adjusting. Arose after → Non-Adjusting. Going concern is the exception: if going concern is no longer appropriate after year-end, restate the financial statements accordingly.
Objective: Ensure financial statements contain disclosures so users can understand the possibility that an entity's financial position and performance may have been affected by related party relationships and transactions.
- All members of a group (parent, subsidiaries, fellow subsidiaries, associates, joint ventures)
- Key Management Personnel (KMP) and their close family members — those having authority and responsibility for planning, directing and controlling the entity (includes executive and non-executive directors)
- Entities controlled, jointly controlled or significantly influenced by KMP or their close family
- Post-employment benefit plans for employees of the entity or a related entity
- Name of the parent and, if different, the ultimate controlling party
- KMP compensation in total and by five categories: short-term, post-employment, other long-term, termination, share-based payments
- For each type of related party transaction: nature, amounts, outstanding balances, terms and conditions, provisions for irrecoverable balances
- Disclose related party relationships even when no transactions have occurred
Key Rule: Disclosures are required even if no monetary consideration is exchanged. Statements that transactions were conducted at arm's length must NOT be made unless this assertion can be substantiated.
Core Principle: Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled.
Correct Treatment: Variable consideration is estimated using the expected value method or most likely amount method. It is included in transaction price only to the extent it is highly probable that a significant reversal of cumulative revenue recognized will NOT occur when the uncertainty is resolved.
Revenue recognized over time if ANY ONE criterion is met:
- Customer simultaneously receives and consumes benefits as entity performs
- Entity's performance creates or enhances an asset the customer controls as it is created
- Entity's performance does not create an asset with alternative use AND entity has an enforceable right to payment for performance completed to date
If none met → point-in-time recognition when control transfers to the customer.
| Item | Arises When |
|---|---|
| Contract Asset | Revenue recognized exceeds amounts billed (performance has outpaced billing) |
| Contract Liability | Cash received exceeds revenue recognized (deferred revenue / advances) |
| Receivable | Unconditional right to payment exists (only time passage required) |
Lease Definition: A contract that conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Control requires: (1) right to obtain substantially all economic benefits from use, AND (2) right to direct the use of the identified asset.
Lease Term: Non-cancellable period + optional extensions if reasonably certain to exercise + optional terminations if reasonably certain NOT to terminate. Reassess on significant events within lessee's control.
Exemptions (straight-line expense): Short-term leases (term ≤ 12 months) and leases of low-value assets.
| Type | In Lease Liability? |
|---|---|
| Linked to an index or rate (e.g., CPI) | Yes — at commencement rate; reassess on trigger events |
| NOT linked to index or rate (e.g., % of sales) | No — expense in the period incurred |
- Lease liability: Accrue interest using effective interest method; reduce by cash payments
- ROU asset: Depreciated on straight-line basis over shorter of lease term and useful life — unless ownership transfer or purchase option exercise is reasonably certain (then over full useful life)
- ROU asset subject to impairment testing under IAS 36
Current Portion of Lease Liability: Represents the principal repayment expected within the next 12 months — i.e., the reduction in the liability's carrying amount over the coming year. Finance costs are a separate P&L charge and do NOT determine the current/non-current split.
Genuine Sale (IFRS 15 satisfied): Derecognize the original asset; recognize ROU asset and lease liability; recognize gain only in relation to rights transferred to the buyer.
NOT a Genuine Sale: Treat as a financing arrangement — asset remains on SOFP; cash received = financial liability.
| Finance Lease | Operating Lease | |
|---|---|---|
| Test | Substantially all risks and rewards transferred to lessee | Lessor retains risks and rewards |
| SOFP | Derecognize asset; recognize net investment (lease receivable) | Keep asset on SOFP; depreciate |
| Income | Finance income — effective interest basis | Lease income — straight-line basis |
Measured at FV of equity instruments at grant date — never remeasured subsequently. Total charge spread over the vesting period on a cumulative basis. Credit entry → equity (share-based payment reserve).
| Condition Type | Reflected in Grant-date FV? | Adjust for Non-Achievement? |
|---|---|---|
| Service condition | No | Yes — adjust number expected to vest |
| Non-market performance (e.g., EPS target) | No | Yes — adjust number expected to vest |
| Market condition (e.g., share price target) | Yes — via option pricing model | No — recognize full charge regardless |
Recognize a liability (not equity). Remeasure at FV at each reporting date and at settlement date — changes recognized in P&L. Same cumulative cost spreading logic as equity-settled. On settlement: derecognize liability; any difference recognized in P&L.
- Beneficial modification (e.g., reduction in exercise price): recognize incremental FV at modification date; spread over remaining vesting period
- Detrimental modification (e.g., increase in exercise price): continue recognizing original grant-date FV — never reduce the total charge
- Cancellation: Accelerate remaining unrecognized charge — recognize immediately in P&L
| Capital Event | Treatment |
|---|---|
| Bonus issue / scrip dividend | Treated as always in issue — restate prior period EPS retroactively |
| Rights issue (with bonus element) | Adjust for bonus fraction (TERP ÷ actual cum-rights price); restate comparative EPS |
| Issue at full market price | Time-apportion from date of issue; no retrospective adjustment |
| Share buyback | Remove from weighted average from date of buyback |
- Assumes all dilutive potential ordinary shares converted at start of period (or date of issue if later)
- Numerator adjustment: Add back interest/dividends saved on convertibles (net of tax)
- Denominator adjustment: Add notional shares issued on conversion/exercise
- Treasury stock method (options): Notional proceeds used to buy shares at period's average market price; only the excess (dilutive increment) added to denominator
- Diluted EPS disclosed only if it is lower than basic EPS — antidilutive instruments always excluded
Presentation Rule: Both basic and diluted EPS must be shown on the face of the P&L for both continuing operations and total profit/loss. EPS figures based on OCI items must NOT be presented on the face of financial statements — OCI items do not affect EPS.
| Type | Condition | Deferred Tax |
|---|---|---|
| Taxable TD | CA of asset > Tax base | DTL (Deferred Tax Liability) |
| Deductible TD | CA of asset < Tax base | DTA (Deferred Tax Asset) |
| Item | Rule | Exceptions |
|---|---|---|
| DTL | Recognize for ALL taxable TDs | Initial recognition exception; goodwill |
| DTA | Only to extent probable sufficient taxable profit available | Reassess recoverability at every reporting date |
- Both DTAs and DTLs always presented as non-current
- Net only when legally enforceable right to set off AND same tax authority
| Tax Relates To | Recognized In |
|---|---|
| Items in P&L | P&L |
| Items in OCI (e.g., revaluation gain, actuarial gains) | OCI |
| Equity transactions | Equity |
Management Approach: Segments are identified and reported based on how the CODM internally reviews and manages the business — even if that basis differs from full IFRS measurement principles.
CODM (Chief Operating Decision Maker): The function — not necessarily a single person — that allocates resources and assesses performance. Often the CEO, Board, or Executive Committee.
An operating segment is reportable if it meets any one of:
- Revenue (internal + external) ≥ 10% of combined revenue of all segments
- Reported profit or absolute loss ≥ 10% of combined profit/loss of all profitable/loss-making segments
- Assets ≥ 10% of combined assets of all segments
75% Floor Test: Reportable segments must in aggregate account for at least 75% of total external revenue. If not met, additional segments must be designated as reportable even if they fail the 10% tests.
- Revenue (internal and external), interest income/expense, depreciation and amortization, material items, equity-method income, income tax, capital expenditure
- Segment assets and liabilities — if regularly provided to the CODM
- Reconciliation of each segment total to the corresponding financial statement total
Entity-wide Disclosures: Revenue by product/service line; revenue by geography; major customer information — if ≥ 10% of total external revenue comes from a single external customer.
Defined Contribution: Entity's obligation limited to fixed contributions to a separate fund. All investment and actuarial risk rests with the employee. Contributions payable = expense in P&L; unpaid = accrual.
Defined Benefit: Entity promises a specified retirement benefit. Both actuarial and investment risk rest with the entity. Requires actuarial valuations using the Projected Unit Credit Method.
| Component | Recognized In | Notes |
|---|---|---|
| Current service cost | P&L — operating cost | Benefits earned in the current period; increases DBO |
| Past service cost | P&L — immediately | Plan amendment or curtailment; no spreading |
| Net interest cost | P&L — finance cost | Net DB liability × discount rate |
| Actuarial remeasurements | OCI — never recycled | Experience adjustments + assumption changes |
Past Service Cost: Recognized immediately in P&L on the date of the plan amendment or curtailment. There is no longer any corridor approach or vesting-period spreading under IAS 19 (post-2011 amendment).
Key Distinction: Monetary items → closing rate. Non-monetary items at historical cost → historical rate (no retranslation, no exchange difference).
| Item Type | Year-End Rate | Exchange Difference |
|---|---|---|
| Monetary items | Closing rate | P&L |
| Non-monetary (cost model) | No retranslation | None |
| Non-monetary (FV/revaluation) | Rate when FV was determined | OCI (IAS 16) or P&L (IAS 40/41) |
Revaluation Model & IAS 21: Exchange difference on revalued non-monetary FX assets is embedded in the revaluation movement. It must NOT be separated as a standalone exchange gain or loss in P&L — the entire movement (including the currency element) is recognized in OCI. This is frequently misapplied.
| Item | Rate Used |
|---|---|
| Assets and liabilities | Closing rate |
| Income and expenses | Transaction date rate (or average rate as practical approximation) |
| Exchange differences | Recognized in OCI — foreign currency translation reserve (FCTR) |
Disposal of Foreign Operation: The cumulative translation reserve (FCTR) is recycled to P&L on disposal of the foreign operation.
| Category | Business Model | SPPI? | Gains/Losses |
|---|---|---|---|
| Amortised Cost | Hold to collect contractual cash flows | Passes | Interest income in P&L only; FV changes not recognized |
| FVTOCI (Debt) | Hold to collect AND sell | Passes | Interest in P&L; FV in OCI; OCI recycled to P&L on disposal |
| FVTPL | Other / hold to sell / trading | Fails or N/A | All FV changes in P&L |
- Default: FVTPL — all gains/losses in P&L; transaction costs expensed immediately
- Irrevocable election (non-trading only): FVTOCI — gains/losses in OCI; NEVER recycled to P&L; dividends still in P&L
Critical Distinction: Debt at FVTOCI → OCI IS recycled to P&L on disposal. Equity at FVTOCI → OCI is NEVER recycled to P&L. Frequently tested.
| Stage | Condition | ECL Allowance |
|---|---|---|
| Stage 1 | No SICR since initial recognition | 12-month ECL; interest on gross |
| Stage 2 | SICR — but not credit-impaired | Lifetime ECL; interest on gross |
| Stage 3 | Credit-impaired (objective evidence of default) | Lifetime ECL; interest on net |
Trade Receivables: Simplified approach — always lifetime ECL without stage assessment. Provision matrix permitted.
Financial assets: Derecognize when contractual rights expire, OR when transferred AND substantially all risks and rewards transferred to the transferee. If neither transferred nor retained → assess control.
Financial liabilities: Derecognize when the obligation is discharged, cancelled or expires. Substantial modification (≥10% PV difference using original EIR) → derecognize old; recognize new at FV.
| Type | Hedged Item | Effective Portion |
|---|---|---|
| Fair Value Hedge | Exposure to FV changes of recognized asset/liability or firm commitment | Both instrument and hedged item adjusted to FV → P&L (offsetting) |
| Cash Flow Hedge | Exposure to variability in future cash flows | OCI (cash flow hedge reserve); reclassified to P&L when hedged item affects P&L |
| Net Investment Hedge | Currency risk in net investment in foreign operation | OCI — recycled to P&L on disposal of investment |
Qualifying Criteria: Formal documentation at inception; economic relationship between instrument and hedged item; credit risk does not dominate the relationship; hedge ratio consistent with risk management.
Significant Influence: The power to participate in financial and operating policy decisions — but not control or joint control. Presumed at 20–50% ownership (rebuttable). Indicators include: board representation, material intercompany transactions, interchange of managerial personnel.
Equity Method: Investment initially at cost; subsequently adjusted for: investor's share of post-acquisition profits/losses (P&L), share of OCI, and dividends received (which reduce carrying amount).
Goodwill within Investment: Goodwill embedded in the investment is not separately tested — the entire investment carrying amount is tested as a single asset under IAS 36.
| Direction | Description | Treatment |
|---|---|---|
| Upstream | Associate sells to investor | Eliminate unrealized profit to the extent of investor's % interest |
| Downstream | Investor sells to associate | Eliminate unrealized profit to the extent of investor's % interest |
Losses Exceeding Investment: Recognize losses until investment (and long-term interests forming part of net investment) is reduced to nil. Further losses recognized as a liability only when a legal or constructive obligation exists to fund the associate.
Definition: An arrangement over which two or more parties have joint control — where decisions about relevant activities require the unanimous consent of all parties sharing control.
| Joint Operation | Joint Venture | |
|---|---|---|
| Structure | Usually no separate legal entity; parties have direct rights to assets and obligations for liabilities | Structured through a separate legal entity |
| Rights | Rights to assets and obligations for liabilities directly | Rights to net assets only |
| Accounting | Each party recognizes its own share of assets, liabilities, revenues and expenses line by line | Equity method per IAS 28 |
No Proportionate Consolidation: A joint venture structured through a separate entity must be accounted for using the equity method — proportionate consolidation is NOT permitted under IFRS 11.
Classification Note: A separate legal entity does not automatically make the arrangement a joint venture. The legal structure AND the substance of contractual arrangements together determine classification.
Core Principle: All business combinations use the acquisition method. The acquirer recognizes all identifiable assets, liabilities and contingent liabilities of the acquiree at fair values at the acquisition date.
| Method | NCI Measured At | Effect |
|---|---|---|
| Full Goodwill | Fair value of NCI (includes NCI's share of goodwill) | Higher goodwill + higher NCI equity |
| Partial Goodwill | NCI's proportionate share of FVNA | Lower goodwill + lower NCI equity |
| Cost Type | Treatment |
|---|---|
| Direct costs (professional fees, due diligence) | Expense in P&L |
| Costs of issuing debt instruments | Deducted from carrying amount of liability |
| Costs of issuing equity instruments | Deducted from equity (share premium) |
Bargain Purchase (Negative Goodwill): Reassess all FVs and consideration. If still negative after reassessment → recognize as a gain in P&L immediately.
Contingent Consideration: Recognized at FV at acquisition date. Subsequent changes: if equity → not remeasured; if financial liability → remeasured at FV through P&L at each reporting date.
Measurement Period: Provisional FVs may be adjusted retrospectively within 12 months of acquisition date if new information comes to light about facts existing at acquisition date. Adjustments restate goodwill. After 12 months → all adjustments recognized through P&L.
Core Principle: An investor controls an investee — and must consolidate — when it is exposed to variable returns AND has the ability to affect those returns through its power over the investee.
| Element | Description |
|---|---|
| Power | Existing rights giving the current ability to direct relevant activities that significantly affect returns |
| Variable Returns | Investor's returns can vary — positively or negatively (dividends, residual interests, credit risk) |
| Linkage | Investor uses its power to affect the amount of its returns from the investee |
- Combine assets, liabilities, equity, income, expenses and cash flows line by line
- Eliminate all intragroup balances, transactions, income and expenses in full
- Uniform accounting policies: Adjust subsidiary accounts to parent's policies before consolidation
- Reporting date: Same date for all entities; if unavoidable, maximum gap of three months
Non-Controlling Interests (NCI): Presented within equity in consolidated SOFP, separately from parent shareholders' equity. Losses continue to be allocated to NCI even when this results in a negative NCI balance.
Common Pitfall: Majority shareholding (>50%) does not automatically mean control — it can be overridden by contractual restrictions. Conversely, an investor may control with less than 50% if it has practical control (e.g., widely dispersed shareholding of remaining shares).
Status: The Conceptual Framework is NOT an IFRS Standard. Where a conflict exists between the Framework and a specific IFRS Standard, the Standard always prevails.
| Element | Framework Definition |
|---|---|
| Asset | A present economic resource controlled by the entity as a result of past events |
| Liability | A present obligation of the entity to transfer an economic resource as a result of past events |
| Equity | The residual interest in the assets after deducting all liabilities |
| Income | Increases in assets or decreases in liabilities resulting in increases in equity, other than contributions from equity holders |
| Expenses | Decreases in assets or increases in liabilities resulting in decreases in equity, other than distributions to equity holders |
Framework vs. Individual Standards: "Control" appears in the Framework as part of the definition of an asset. It is NOT carried forward as a recognition criterion within IAS 16 or IAS 38. Recognition criteria within standards are typically: (1) probable future economic benefits, and (2) reliable measurement.
| Fundamental | Enhancing |
|---|---|
| Relevance (including materiality) | Comparability |
| Faithful Representation (complete, neutral, free from error) | Verifiability |
| Timeliness | |
| Understandability |
- Integrity — Honest and straightforward in all professional relationships
- Objectivity — Do not allow bias or conflict of interest to override professional judgement
- Professional Competence & Due Care — Maintain knowledge and skill; act diligently
- Confidentiality — Respect confidentiality; do not disclose without proper authority
- Professional Behaviour — Comply with laws and regulations; avoid actions that discredit the profession
- Historical cost — entry price; what was paid
- Fair value — exit price (IFRS 13)
- Value in Use / Fulfilment value — entity-specific PV of cash flows
- Current cost — current entry price for equivalent asset
Purpose: IFRS 18 improves comparability by requiring standardized income statement categories, mandatory subtotals, and regulated disclosure of Management Performance Measures (MPMs).
| Category | Content |
|---|---|
| Operating | Revenue and expenses from main business activities — all items not classified as investing or financing |
| Investing | Returns on investments in associates, JVs; income on cash and investments not integral to operations |
| Financing | Finance costs on liabilities (interest on borrowings, lease interest); FV changes on financial liabilities at FVTPL due to own credit risk |
- Operating profit or loss
- Profit or loss before financing and income tax
- Profit or loss before income tax
- Profit or loss from continuing operations
- Profit or loss (total)
MPMs — Permitted but Regulated: Entities may continue using entity-specific measures (e.g., Adjusted EBITDA). However, MPMs must be disclosed in a single dedicated note — not on the face of financial statements — accompanied by: (i) description and reason for use; (ii) reconciliation to the most directly comparable IFRS-defined subtotal; (iii) tax and NCI effects of each MPM.
- Choose: nature of expense (materials, staff, depreciation) OR function (cost of sales, distribution, administration) OR a mixed presentation
- If function chosen → nature information (staff costs and depreciation at minimum) required in the notes
- P&L is the default for all income/expenses unless a specific IFRS requires OCI recognition
EPS (IAS 33) is calculated on profit or loss — OCI items do NOT affect EPS. Restatement of comparative financial statements is required when an entity changes classification of income or expenses between the three categories.
Objective: Require disclosure of sustainability-related risks and opportunities that could reasonably be expected to affect the entity's cash flows, access to finance, or cost of capital over the short, medium or long term.
| Pillar | What is Disclosed |
|---|---|
| Governance | How the governing body oversees, and management manages, sustainability-related risks and opportunities |
| Strategy | How identified risks and opportunities affect the entity's business model, strategy, and financial position; scenario analysis |
| Risk Management | Processes to identify, assess, prioritize and monitor sustainability-related risks; integration with overall risk management |
| Metrics & Targets | Performance metrics and quantitative targets used to measure, monitor and manage material sustainability-related risks |
Connected Information: IFRS S1 requires sustainability disclosures to be made in the same report as the related financial statements, enabling users to understand the connections between sustainability information and financial information.
| Risk Category | Sub-type | Examples |
|---|---|---|
| Physical | Acute | Extreme weather: hurricanes, floods, wildfires |
| Physical | Chronic | Sea level rise, rising temperatures, shifting precipitation |
| Transition | Policy & legal | Carbon pricing, emission trading schemes, litigation |
| Transition | Technology | Shifts to lower-emission tech; stranded asset risk |
| Transition | Market & reputational | Changing customer/investor preferences; brand value impact |
Scope 1: Direct GHG emissions from sources owned or controlled by the entity.
Scope 2: Indirect GHG emissions from the generation of purchased or acquired electricity, heat or steam.
Scope 3: All other indirect GHG emissions in the entity's upstream and downstream value chain (supply chain and product use by customers). Required if material — may involve significant estimation uncertainty.
Purpose: Allows eligible subsidiaries to apply reduced disclosure requirements while retaining full IFRS recognition, measurement and presentation requirements.
An entity is eligible when:
- The entity is a subsidiary (not a parent, associate or JV)
- No public accountability: instruments are NOT traded in a public market AND the entity is NOT a financial institution regulated to hold public assets
- An ultimate or intermediate parent produces IFRS-compliant consolidated financial statements that are publicly available and include the subsidiary
Disclosure-only Standard: IFRS 19 does NOT modify recognition, measurement or presentation requirements — full IFRS Recognition and Measurement continues to apply.
IFRS 19 does NOT reduce disclosure requirements for: IAS 33 (EPS), IFRS 8 (Operating Segments), or IFRS 17 (Insurance Contracts). The election to apply IFRS 19 must be explicitly disclosed.
Eligibility: For entities that do not have public accountability AND publish general purpose financial statements for external users. Eligibility is determined by a test of public accountability — NOT by quantitative size thresholds.
Exam Trap: A listed (publicly traded) entity can NEVER use IFRS for SMEs — regardless of its actual size. Public accountability (listing status, or being a financial institution regulated to hold public assets) is the sole disqualifier. Size thresholds are irrelevant.
- Interim financial reporting
- Segment reporting (IFRS 8 equivalent)
- Earnings per share (IAS 33 equivalent)
- Insurance contracts (IFRS 17 equivalent)
- Assets classified as held-for-sale (IFRS 5 equivalent)
| Area | Full IFRS | IFRS for SMEs |
|---|---|---|
| R&D costs | Research expensed; development capitalized if PIRATE criteria met | All R&D expensed as incurred — no capitalization |
| Goodwill & indefinite intangibles | Annual impairment test; no amortization | Amortized over useful life (max 10 years if not determinable) |
| PPE & Intangibles | Cost or revaluation model | Cost model only — revaluation not permitted |
| Investment property | FV model or cost model | FV if reliably measurable without undue cost/effort; otherwise cost model |
| Financial instruments | Full IFRS 9 — SPPI test, ECL model | Simplified — amortised cost or FV; incurred loss model (not ECL) |
| Borrowing costs | Capitalize on qualifying assets (mandatory) | All borrowing costs expensed as incurred |