The Conceptual Framework is not a standard; it is a foundational document.
It contains 8 chapters and clarifies the purpose and objectives of the conceptual framework.
Purpose: To provide financial information about the reporting entity to existing and potential investors, debtors, creditors, and all stakeholders.
Objective: To assist the IASB in developing standards, to assist preparers in developing accounting policies when preparing financial statements, to assist all parties in understanding financial statements.
It provides clear recognition and measurement criteria for elements of financial statements.
IAS 2 Inventories is relevant to this case.
IAS 2 classification requires sufficient future benefits, measurable cost, and control.
IAS 2 requires recognition at cost, including all costs necessary to bring the asset to its intended use.
Subsequently, IAS 2 requires comparing the carrying amount of the asset with the net realizable value and recognizing the lower amount.
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors is relevant to this case.
A policy is the rules, principles, and ideas used when preparing financial statements.
Any entity must have policies based on IFRS, other transactions, the conceptual framework, or other standard-setting bodies.
Once selected, policies must be applied consistently, but changes are allowed if required by a new IFRS, or if the entity can justify that the change provides more relevant information and faithful representation.
If changed, you must apply the change retrospectively - change comparative figures.
Any cumulative effect is recognized in Retained Earnings (net of tax) and presented in comparative figures in the opening balance.
Accounting Estimate
Made to implement accounting policy. When changed, the effect is prospective; comparative figures are not changed, only future periods are affected.
Must be disclosed.
Examples: change in useful life, change in fair value.
IAS 10 deals with events occurring after the reporting date but before the financial statements are authorized for issue.
IAS 10 classifies events into adjusting events and non-adjusting events.
Adjusting events: Events that provide evidence of conditions that existed at the end of the reporting period.
IAS 10 requires adjusting events to be recognized in the financial statements.
Non-adjusting events: Events that are indicative of conditions that arose after the reporting period.
IAS 10 requires that non-adjusting events are not recognized in the financial statements but should be disclosed if material, unless they affect going concern.
In Case 1, it is considered an adjusting event, so recognize the liability.
In Case 2, it is a non-adjusting event since the fire occurred after the reporting date; it does not affect going concern but should be disclosed if material.
In Case 3, it is non-adjusting as it occurred after authorization for issue; no disclosure required.
This explains the different accounting treatments.
IAS 12 Income Taxes is relevant to this case.
Tax base is the amount attributed to an asset or liability for tax purposes.
IAS 12 states that a Deferred Tax Liability (DTL) is the amount of income tax payable in future periods in respect of taxable temporary differences.
IAS 12 also defines a Deferred Tax Asset (DTA) as the amount of income tax recoverable in future periods in respect of deductible temporary differences.
IAS 12 requires that DTAs are recognized only to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized.
In this case, apply the balance sheet approach to identify temporary differences.
IAS 12 states that temporary differences are identified by comparing the carrying amount and the tax base.
IAS 16 Property, Plant and Equipment is relevant to this case.
IAS 16 applies to assets held for use in production or administration.
Subsequently, IAS 16 allows two models (applied on a class-by-class basis):
Cost model: Cost less accumulated depreciation equals carrying amount.
Revaluation model: Gains are reported in OCI unless reversing a previous revaluation loss recognized in profit or loss. Deficits are recognized in profit or loss, and any balance in the revaluation surplus for that asset is first reduced.
A change in the depreciation method or useful life is a change in accounting estimate.
IAS 16 allows two subsequent measurement models:
- Cost model (for assets with finite useful lives): Cost less accumulated depreciation equals carrying amount.
- Revaluation model: Measured periodically; gains in OCI unless reversing a previous loss.
IAS 16 states that when both models are used, they are applied on a class-by-class basis.
So, we can use different models for different classes of assets based on their nature.
This explains the different accounting treatments between the two cases.
IAS 19 Employee Benefits is relevant to this case.
IAS 19 requires that an entity may have a legal obligation to manage pension plans or a constructive obligation for the plan.
IAS 19 distinguishes two types of plans: defined contribution plans are always recognized as an expense in the Statement of Profit or Loss (SOPL).
For defined benefit plans in this case, IAS 19 obligates entities to recognize a pension asset or pension obligation in the Statement of Financial Position (SOPF).
IAS 19 states that current service cost increases the pension liability and is always recognized as an expense in SOPL.
Net interest, using the discount rate at the start of the year, increases the pension liability and is recognized as an expense in SOPL.
Also, IAS 19 requires that the net obligation is recognized as a non-current liability in the SOPF.
Any remeasurements, including actuarial gains and losses, are recognized in OCI.
IAS 24 Related Party Disclosures is relevant to this case.
IAS 24 requires that if there is a related party relationship between key management personnel and their close family members, transactions MUST be disclosed.
This applies regardless of the size or amount of the transaction if the relationship could influence the financial statements.
Since you are considered key management personnel and your brother has control over the entity, this is a related party relationship.
IAS 24 requires disclosure of this transaction.
IAS 28 Investments in Associates is relevant to this case.
IAS 28 applies when the share of investment is between 20% to 50% and there is power to participate in operating and financial policies (significant influence).
The right to appoint 2 out of 6 directors demonstrates the exercise of significant influence.
IAS 28 requires that in consolidated financial statements, the equity method is applied.
Under the equity method, the investment is initially recognized at cost, increased by the investor's share of profit, and decreased by dividends received.
So, initially 6,000, increased by share of profit (10,000 * 35% = 3,500).
The investment will be presented in the statement of financial position as 'Investment in Associate' (non-current asset).
For the question about whether it can be a subsidiary: No.
IFRS 10 requires that a subsidiary involves control, not just significant influence. In case of control, it is part of the group in consolidation.
In this case, it is significant influence, so apply IAS 28, not IFRS 10.
(i) IAS 36 requires that an impairment test is applied when indicators of impairment exist.
IAS 36 states that the impairment test compares the carrying amount of an asset with its recoverable amount.
Recoverable amount is the higher of fair value less costs to sell and value in use.
Value in use is the present value of future cash flows.
IAS 36 requires recognizing an impairment loss if the carrying amount exceeds the recoverable amount.
Also, IAS 36 states that regardless of indicators, the following must be tested for impairment annually:
- intangible assets with an indefinite useful life
- intangible assets not yet available for use
- goodwill
(ii) IAS 36 states that impairment indicators may be internal or external.
Internal indicators: physical damage, obsolescence, worse economic performance than expected.
External indicators: decline in market value, significant adverse changes in technology, markets, economy, or laws, increases in market interest rates, and the entity's net assets being higher than its market capitalization.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets is relevant to this case.
IAS 37: A provision is recognized when there is a present obligation (legal or constructive), a probable outflow of resources (more than 50%), and a reliable estimate can be made.
A provision is measured at the best estimate of the expenditure required.
For Customer X, recognize a provision as it is probable.
For Supplier Y, consider a contingent asset; IAS 37 does not allow recognition of a contingent asset in the statement of financial position unless virtually certain, but it can be disclosed.
This explains the different accounting treatments.
For restructuring:
A provision for restructuring is recognized only when a detailed formal plan exists and the entity has raised a valid expectation in those affected that it will carry out the restructuring.
In Case 1, a provision is recognized as the conditions are met.
In Case 2, there is only a formal plan announced after the reporting date (31 March 2017), so no provision is recognized and no disclosure is required if it's non-adjusting.
This explains the different accounting treatments.
IAS 38 Intangible Assets is relevant to this case.
An asset is defined as a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. Cost must be reliably measurable.
IAS 38 covers assets without physical substance. The key issue is how the asset arose.
It can arise from purchase, grant, exchange of assets, or internally generated assets.
IAS 38 allows recognition of internally generated intangible assets ONLY if they meet specific criteria, generally excluding internally generated brands, publishing titles, etc.
Research costs are expensed; development costs are capitalized only if specific criteria are met (technical feasibility, intention to complete, ability to use/sell, economic viability, and ability to measure expenditure reliably).
A parent cannot recognize an internally generated brand in its individual financial statements.
In consolidation, it is possible to recognize an intangible asset (like a brand) acquired in a business combination (IFRS 3).
In this case, the brand is measured at fair value at the acquisition date, so it is recognized along with goodwill in the consolidated financial statements.
If there is an active market, the revaluation model can be applied.
IAS 40 Investment Property applies to property held to earn rentals or for capital appreciation or both.
IAS 40 allows two subsequent measurement models (chosen for all investment property): cost model OR fair value model.
Under the cost model, investment property is measured at cost less accumulated depreciation and impairment. Fair value must be disclosed.
Under the fair value model, investment property is measured at fair value at each reporting date. Changes in fair value are recognized in profit or loss. No depreciation is charged.
Fair value is defined by IFRS 13 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
IAS 41 Agriculture is relevant to this case.
IAS 41 deals with agricultural produce resulting from biological transformation and biological assets (living plants and animals).
IAS 41 requires recognition of a biological asset when it is probable that future economic benefits will flow to the entity and the fair value or cost can be measured reliably.
Biological assets are initially and subsequently measured at fair value less costs to sell, with changes recognized in profit or loss. If fair value cannot be measured reliably, use the cost model.
Agricultural produce at the point of harvest is measured at fair value less costs to sell. After harvest, IAS 2 Inventories applies.
Other standards apply to related assets: IAS 16 for bearer plants, IAS 2 for inventories, etc. Grants related to biological assets measured at fair value are recognized in profit or loss when the grant becomes receivable.
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations is relevant to this case.
A non-current asset (or disposal group) is classified as held for sale if its carrying amount will be recovered principally through a sale transaction rather than through continuing use.
IFRS 5 criteria for classification as held for sale:
- The asset must be available for immediate sale in its present condition.
- Its sale must be highly probable.
- Management must be committed to a plan to sell.
- An active program to locate a buyer and complete the plan must have been initiated.
- The sale should be expected to qualify for recognition as a completed sale within one year.
- The asset is being actively marketed for sale at a price reasonable in relation to its fair value.
Before reclassification, compare carrying amount with fair value less costs to sell. If carrying amount is higher, recognize an impairment loss.
Once classified as held for sale, the asset is not depreciated and is presented separately on the face of the statement of financial position.
So, a building planned for sale must be treated differently from other buildings.
IFRS 6 Exploration for and Evaluation of Mineral Resources is relevant to this case.
IFRS 6 allows entities to choose an accounting policy for expenditures to be capitalized or recognized as an expense in SOPL. Each entity determines the degree of expenditure capitalization.
Once selected, the policy must be applied consistently (IAS 8). This can lead to different accounting treatments between entities.
For development costs, IFRS 6 prohibits considering development as part of the exploration and evaluation asset; such costs are addressed by IAS 38 Intangible Assets.
IFRS 6 allows two subsequent measurement models for E&E assets: cost model or revaluation model. Each entity can apply its policy.
This explains the different accounting treatments between entities.
IFRS 8 Operating Segments is relevant to this case.
IFRS 8 is mandatory for listed entities and optional for unlisted entities.
So, a new subsidiary may not be required to disclose segment information.
For the parent (Omges), since it is listed, it must disclose segment information.
An operating segment is a component that engages in business activities, whose operating results are reviewed by the chief operating decision maker (CODM - a function, not a position), and for which discrete financial information is available.
IFRS 8 requires identifying reportable segments based on quantitative thresholds (e.g., 10% of total revenue, profit/loss, or assets).
Reportable segments must represent at least 75% of total external revenue.
IFRS 8 allows disclosure by product or geographical area.
For non-listed entities, disclosure of revenue, expenses, profits, assets, and liabilities is encouraged.
This explains why we disclose for Omges and may not disclose for the new subsidiary.
IFRS 9 Financial Instruments is relevant to this case.
For debt investments, IFRS 9 requires assessing the asset's contractual cash flow characteristics (Solely Payments of Principal and Interest - SPPI).
If the SPPI test is passed and the business model is to hold to collect contractual cash flows, use Amortized Cost.
If the business model is to both collect contractual cash flows and sell, use Fair Value through Other Comprehensive Income (FVOCI).
Otherwise, use Fair Value through Profit or Loss (FVTPL).
IFRS 9 requires recognizing expected credit losses (ECL) on financial assets, even if no default has occurred.
For amortized cost and FVOCI assets (excluding those measured at FVTPL), a three-stage ECL model is applied:
- Stage 1: 12-month ECL, interest revenue on gross carrying amount.
- Stage 2: Lifetime ECL, interest revenue on gross carrying amount.
- Stage 3: Lifetime ECL, interest revenue on net carrying amount (after ECL).
Credit loss is the difference between the present value of contractual cash flows and the present value of expected cash flows.
A simplified approach (lifetime ECL) is required for trade receivables, lease receivables, and contract assets.
IFRS 9 Financial Instruments is relevant to this case.
IFRS 9 allows the use of hedge accounting after meeting specific conditions:
- There is an economic relationship between the hedging instrument and the hedged item.
- The effect of credit risk does not dominate the value changes.
- The hedge ratio is the same as that used for risk management.
- Formal documentation must be in place at the inception of the hedge, including the nature of the risk, the hedging instrument, the hedged item, and how effectiveness will be assessed.
The hedging instrument is typically a derivative designated in a hedging relationship (derivatives are generally measured at FVTPL).
IFRS 10 Consolidated Financial Statements is relevant to this case.
IFRS 10 requires the use of uniform accounting policies and reporting dates for all entities in the group.
IFRS 10 allows a practical expedient if the reporting dates differ by less than three months. Adjustments should be made for significant transactions or events in the gap period.
Since the difference is three months, the subsidiary is required to provide adjustments for significant information occurring between its reporting date and the group's reporting date.
IFRS 11 Joint Arrangements is relevant to this case.
A joint arrangement is an arrangement where two or more parties have joint control.
Joint control is the contractually agreed sharing of control, which requires unanimous consent for relevant activities.
Joint arrangements are classified as either joint operations or joint ventures.
In this case, it is a joint operation, meaning Delta has rights to the assets and obligations for the liabilities relating to the arrangement.
IFRS 15 Revenue from Contracts with Customers establishes a comprehensive framework for determining when and how much revenue to recognize.
The core principle is to recognize revenue when (or as) a company transfers control of goods or services to a customer, in an amount that reflects the consideration the company expects to receive.
The five-step model is:
- Identify the contract(s) with a customer.
- Identify the performance obligations in the contract.
- Determine the transaction price.
- Allocate the transaction price to the performance obligations.
- Recognize revenue when (or as) the entity satisfies a performance obligation.
IFRS 18 (issued in 2024, effective 2027) replaces IAS 1. It introduces new requirements for the structure of the statement of profit or loss and disclosure of management-defined performance measures.
Key changes include:
- Mandatory defined subtotals in the income statement (e.g., operating profit).
- Stricter rules and transparency for management-defined performance measures (non-GAAP measures).
- Enhanced aggregation and disaggregation guidance.
- Improved classification of expenses (by nature or function with expanded disclosures).
The standard aims to improve the comparability and transparency of financial reporting.
IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
- Provides a comprehensive global baseline for sustainability disclosures
- Requires entities to disclose information about their sustainability-related risks and opportunities
- Based on the four pillars: Governance, Strategy, Risk Management, Metrics and Targets
IFRS S2 Climate-related Disclosures
- Specifically addresses climate-related risks and opportunities
- Requires disclosure of climate-related physical risks and transition risks
- Includes greenhouse gas emissions metrics (Scope 1, 2, and 3)
- Mandates climate-related target setting and transition plans
Both standards are effective for annual reporting periods beginning on or after January 1, 2024.
This topic is relevant to this case.
Full IFRS is required for listed entities and financial institutions.
Other entities are permitted, but not required, to apply the IFRS for SMEs Standard.
The IASB reviews the IFRS for SMEs Standard approximately every three years. It is a simplified and tailored version of Full IFRS.
For example, IAS 23 Borrowing Costs under the SME standard allows an accounting policy choice to expense all borrowing costs immediately.
When consolidating, IFRS 10 requires uniform consolidation policies. Therefore, adjustments are needed when preparing consolidated financial statements if a subsidiary uses the SME standard.
There is no need for the subsidiary to apply Full IFRS in its individual financial statements; adjustments are made only on consolidation.
This explains the different accounting treatments between the two cases.
You are in danger of breaching the fundamental ethical principle of Professional Competence and Due Care, since you required trainees to make cuts not allowed according to IFRS.
You are in danger of breaching the fundamental principle of Integrity, as the accountant was required to increase profit and use incorrect information.
You are also breaching the principle of Objectivity. The accountant was required to follow your instructions and faced the threat of intimidation linked to their annual appraisal.
There is also a threat of Self-Interest, as increasing profit leads to a bonus.