Masaryk University
Faculty of Economics and Administration
Department of Finance
ACCOUNTING (BASICS) WORKBOOK
Oleksandra LEMESHKO
Brno 2014
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Content
IFRS for SMEs............................................................................................................................................................................ 3
Concepts and Principles........................................................................................................................................................ 5
Financial statements presentation.................................................................................................................................12
Consolidated financial statements .................................................................................................................................18
Accounting policies, estimates and errors..................................................................................................................22
Property, plant and equipment........................................................................................................................................24
Intangible assets other than Goodwill..........................................................................................................................27
Business combinations and Goodwill ...........................................................................................................................30
Leases.........................................................................................................................................................................................34
Impairment of assets............................................................................................................................................................38
Inventories...............................................................................................................................................................................43
Provisions and Contingencies ..........................................................................................................................................47
Basic and other financial instruments..........................................................................................................................49
Equity and liabilities.............................................................................................................................................................54
Revenue.....................................................................................................................................................................................58
Income tax................................................................................................................................................................................62
Foreign currency transactions.........................................................................................................................................65
Transition to IFRS..................................................................................................................................................................68
Literature..................................................................................................................................................................................69
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IFRS for SMEs1
Quiz 1: What are not the IASB objectives?
 to develop and to promote the use and rigorous application a single set of high quality,
understandable and enforceable global accounting standards that require high quality,
transparent and comparable information in financial statements and other financial
reporting to help participants in the world’s capital markets and other users make
economic decisions
 while developing a single set of high quality, understandable and enforceable global
accounting standards and promoting their use to take account of the special needs of small
and medium-sized entities and emerging economies
 to strive for worldwide use of International Accounting Standards instead of national
accounting standards.
Quiz 2: What is the primary function of IASB?
 to develop and publish IFRS
 to develop and publish IFRS and strive for their worldwide use instead of national
accounting standards
 to develop and publish IFRS and strive for their convergence with national accounting
standards
 to develop and publish IFRS and strive for their worldwide use in general purpose financial
statements and other financial reporting.
Quiz 3: What is the primary objective of IFRS?
 IFRS set out recognition, measurement, presentation and disclosure requirements dealing
with transactions and other events and conditions that are important in general purpose
financial statements
 IFRS provide a set of high quality, understandable and enforceable global accounting
standards aimed to replace national accounting standards
 IFRS provide a tool for achieving highest relevance, representational faithfulness,
transparency and comparability of accounting information provided by profit-oriented and
nonprofit-oriented entities.
Quiz 4: What is the major difference between IFRS and US GAAP?
 IFRS are more principles-based, objective-oriented and with emphasis on professional
judgment than US GAAP
 IFRS are more rules-based, procedure-oriented with emphasis on best practice than
US GAAP
 IFRS are more principles-based, procedure-oriented without any emphasis on either best
practice or professional judgment than US GAAP.
1
On the basis of IFRS for SMEs (IASB, 2009), Preface and Section 1. See Lecture 1.
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Quiz 5: Which indicators are used by EC to define small and medium sized entities (SMEs)?
 total value of balance sheet, total turnover, total number of employees during the financial
year
 net assets, total turnover, total number of employees during the financial year
 total value of balance sheet, net turnover, average number of employees during the financial
year
 net assets, net turnover, average number of employees during the financial year.
Quiz 6: Which categories of entities can use IFRS for SMEs?
 stock exchange listed entity (i.e. company without subsidiaries)
 stock exchange listed parent
 stock exchange listed subsidiaries
 stock exchange not listed subsidiaries
 subsidiaries without public accountability and whose parent uses full IFRSs
 entities holding assets in a fiduciary capacity for a broad group of outsiders as their primary
function (asset under management – e.g. banks, credit unions, insurance companies,
securities brokers/dealers, mutual funds and investment banks).
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Concepts and Principles2
Quiz 1: What is the primary objective of financial statements of SMEs?
 to insure the highest relevance, representational faithfulness, transparency and
comparability of accounting information presented in financial reports which are provided
by the entity for a broad range of users
 to provide information about the financial position, performance and cash flows of the
entity that is useful for economic decision-making by a broad range of users who are not in
a position to demand reports tailored to meet their particular information needs
 to provide information about the financial position, performance and cash flows of the
entity that is useful for economic decision-making by a broad range of users, both entitled
and not entitled to require financial reports tailored to meet their particular information
needs.
Quiz 2: What does qualitative characteristics “reliability” mean?
 information presented in financial statements should be precise (e.g. little or no uncertainty
in a measurement)
 information presented in financial statements should be free from material error and bias
and insure a faithfully representation of the economic phenomenon
 information presented in financial statements should be relevant (i.e. its omission or
misstatement could influence the economic decisions of users made on the basis of the
financial statements)
 information presented in financial statements should be comprehensive (i.e.
understandable by users who have a reasonable knowledge of business and economic
activities and accounting and a willingness to study the information with reasonable
diligence)
Quiz 3: Decide which of the following statements are true?
 The financial position of an entity is the relationship of its assets, liabilities and equity as of
a specific date as presented in the statement of financial position.
 The financial position of an entity is the relationship of its income and expenses during a
reporting period.
 Performance of an entity is the relationship of its assets, liabilities and equity as of a specific
date as presented in the statement of income.
 The financial position of an entity is “stock” amount (i.e. it is measured as of a specific date)
while financial performance of an entity is “flow” amount (i.e. it is measured during a
specific period).
2
On the basis of IFRS for SMEs (IASB, 2009), Section 2.. See Lecture 1.
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Quiz 4: What are the basic recognition criteria for an item being recognized in financial statements
of an entity?
 it is certain that any future economic benefit associated with the item will flow to or from
the entity and item’s cost or value that can be measured reliably
 it is probable that any future economic benefit associated with the item will flow to or from
the entity and item’s cost or value that can be measured approximately
 it is probable that any future economic benefit associated with the item will flow to or from
the entity and item’s cost or value that can be measured reliably
 it is certain that any future economic benefit associated with the item will flow to or from
the entity and item’s cost or value that can be measured approximately.
Quiz 5:What are the two basic measurement bases applied to items recognized in financial
statements of an entity?
 one – historical cost
 one – fair value
 two – historical cost and fair value.
Quiz 6: Decide which of the following statements are true?
 The requirements for recognizing and measuring individual items in its financial statements
an entity should apply pervasive principles that are derived from the IASB Framework for
the Preparation and Presentation of Financial Statements.
 The requirements for recognizing and measuring individual items in its financial statements
an entity should apply pervasive principles that are derived from the IASB Framework for
the Preparation and Presentation of Financial Statements and from full IFRSs.
 An entity shall prepare its financial statements using the accrual basis of accounting, under
which individual items in its financial statements are recognized as assets, liabilities, equity,
income or expenses when they satisfy the definitions and recognition criteria for those
items.
 An entity shall prepare its financial statements using the accrual basis of accounting, under
which individual items in its financial statements are recognized as assets, liabilities, equity,
income or expenses regardless of degree of uncertainties associated with future economic
benefits flowing to or out from the entity.
Example 1: Divide the following items into current and non/current assets, owner’s equity and
liabilities:
Item
Assets Equities
Current Non-current Liabilities
Owner’s
equity
Car
Technological line
Building
Inventories
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Parcel
Merchandise
Software
Capital shares
Animals
Own products
Cash
Incomplete production
Trade receivables
Bank credits and assistance
Cash on bank account
Securities held for sale
Trade payables
Issued long-term bonds
Liabilities to employees
Liabilities to social institutions
Deferred income tax
Reserves
Computers
Common stocks
Net profit
Retained earnings
Reserves
Non-controlling interest
Example 2: Decide whether the following items can be recognized as assets?
Item Yes/No
Patent bought by an entity that makes possible to increase the volume of profit on
CU150,000 annually
Booked material for production of products
New director of an entity. It is expected that he will increase net cash flows of the
entity of CU135,000 during next 3 years
Purchase of new machinery from financial leasing
Parcel obtained from the state
Minority interest in an associate
Brand name of an entity valued for CU170,000
Customer list
Example 3: Decide whether the following items can be recognized as liabilities?
Item Yes/No
Bill of exchange issued by an entity
Advance payments received by an entity
Deferred payment into state budget for mineral extraction
Retirement benefits for employees in excess of strict legal obligations
Product warranties provided for buyers by a manufacturing entity
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Outstanding lawsuits
Example 4: Decide about recognition of the following items as current asset or non-current assets
Item CA Non-CA
Unneeded material at the stock
License bought for 3 years
New car in value CU10,000 from manufacturer
Trade receivables with term of payment longer than 1 year
Cash in bank
Capital shares
Software
Investments in associates
Capital shares
Securities held for trade
Bill of exchange received by customers
Building, plant and equipment
Bought goods
Advance payment paid to company that guarantees the delivery of
goods
Example 5: Decide what impact the following operations have on entity’s balance (notice, that every
operation should be accounted on two accounts – debiting one account and crediting another
account):
Item
Assets (+/-) Equities (+/-)
Current Non-current Liabilities
Owner’s
equity
Owner invests cash
Entity pays wages with cash
Entity buys equipment with
cash
Entity purchases supplies on
credit
Owner withdraws cash
Entity sells services on credit
Entity sells goods for cash
Entity sells extra equipment for
cash
Entity acquires services on
credit
Entity sells services for cash
Entity borrows cash with note
payable
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Entity pays rent with cash
Entity collects (cashes)
receivables
Entity buys land with note
payable
Entity discovers shortage in
inventories
Entity pays dividends
Entity pays trade payables with
bank loan
Entity acquires a stake in
associate with cash
Entity pays bank interest with
cash on bank account
Entity issues common stocks
Entity acquires a bank loan
Example 6: For the following items determine the amount of total assets and total equities. Divide
total assets into current and non-current (fixed) assets. Divide equities into owner’s equity and
liabilities:
Item Value (CU)
Material at the stock 100,000
Property, plant and equipment 1,000,000
Trade receivables 50,000
Securities held for sale 200,000
Cash 5,000
Business brand name 150,000
Cars 500,000
Cash on the bank account 200,000
Common stocks 1,065,000
Trade payables 40,000
Long-term bank loan 1,000,000
Reserves 100,000
Assets: Value (CU)
Current assets
Non-current assets
Total assets
Equity and liabilities:
Short-term liabilities
Short-term bank loan
Long-term bank loan
Owner’s equity
Total equity and liabilities
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Example 7: Decide whether following operations represent revenues or expenses and decide what
impact they have on entity’s economic result and balance (notice, that every operation should be
accounted on two accounts – debiting one account and crediting another account):
Operation
Revenue
/ Cost
Impact
on
economic
result
(+/-)
Assets (+/-) Equities (+/-)
Current
Non-
current
Liabilities
Owner’s
equity
Revenue from sale of
merchandise
Decrease of merchandise
sold
Supplier’s invoice bill for
repairs
Consumption of material
Invoice bill for consumption
of energy
Travel costs
Revenue from sale of
services
Representation costs
Revenues from sale of
material
Paid credit interests
Bank fees for organizing an
account
Revenues from sale of longterm
property
Revenue from financial
investment
Cashed interests from
account
Cashed fees
Paid fees
Securities sold
Example 8: Compile a statement of income and estimate the amount of business result for the year
(EAT):
Item Value (CU)
Sale of merchandise to customers 550,000
Interests received 100,000
Merchandise sold 300,000
Dividends received 80,000
Depreciation 50,000
Paid interest from short-term credit 65,000
Consumption of office needs 30,000
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Extraordinary costs 70,000
Road tax 25,000
Consumption of wages 120,000
Extraordinary revenues 10,000
Tax rate for income is 25%.
Sales
Sale of merchandise
Total sales
Cost of sales
Merchandise sold
Total cost of sales
Gross margin
Operating expenses
Depreciation
Consumption of office needs
Consumption of wages
Road tax
Operating income (EBIT)
Dividends received
Interests received
Paid interest from short-term credit
Income from ordinary activity (EBT)
Tax for income from ordinary activity
Extraordinary revenues
Extraordinary costs
Income for extraordinary activity
Tax for income from extraordinary activity
Business result (EAT)
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Financial statements presentation3
Quiz 1: What is does principle “fair presentation” mean?
 fair presentation requires an entity to disclose comparative information in respect of the
previous comparable period for all amounts presented in the current period’s financial
statements
 fair presentation requires an entity to make an assessment of the entity’s ability to continue
its operations in the future
 fair presentation requires the faithful representation of the effects of transactions, other
events and conditions in accordance with the definitions and recognition criteria for assets,
liabilities, income and expenses
 fair presentation requires an entity to present a complete set of financial statements at least
annually.
Quiz 2: What are recognition criteria for an item being recognized as a current asset?
 an entity expects to realize an item, or intends to sell or consume it, in the entity’s normal
operating cycle
 an entity holds such item primarily for the purpose of trading
 an entity expects to realize such an item within twelve months after the reporting date
 an entity does not have an unconditional right to defer settlement of such an item for at
least twelve months after reporting date.
Quiz 3: Decide which of the following items should be at minimum included by an entity into the
statement of comprehensive income:
 revenue, finance costs, share of the profit or loss of investments in associates and jointly
controlled entities, tax expense, each item of other comprehensive income, total
comprehensive income
 revenue, finance costs, share of the profit or loss of investments in associates and jointly
controlled entities, tax expense, the post-tax profit or loss of a discontinued operation, the
post-tax gain or loss from sell or on disposal of net assets constituting the discontinued
operation, each item of other comprehensive income, total comprehensive income
 revenue, finance costs, share of the profit or loss of investments in associates and jointly
controlled entities, tax expense, the post-tax profit or loss of a discontinued operation, the
post-tax gain or loss from sell or on disposal of net assets constituting the discontinued
operation, each item of other comprehensive income, extraordinary income
Quiz 4: Decide which of the following items should be included by an entity into the statement of
change in equity:
 an entity’s profit or loss for a reporting period, items of income and expense recognized in
other comprehensive income for the period, the amounts of investments by, and dividends
and other distributions to, equity investors during the period
3
On the basis of IFRS for SMEs (IASB, 2009), Section 3-8. See Lecture 2.
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 an entity’s profit or loss for a reporting period, items of income and expense recognized in
other comprehensive income for the period, retained earnings at the beginning and at the
end of reporting period, the amounts of investments by, and dividends and other
distributions to, equity investors during the period
 an entity’s profit or loss for a reporting period, items of income and expense recognized in
other comprehensive income for the period, the effects of changes in accounting policies
and corrections of errors recognized in the period, the amounts of investments by, and
dividends and other distributions to, equity investors during the period
Quiz 5: Decide which of the following are cash and cash equivalents?
 cash receipts from the sale of goods and the rendering of services
 cash payments to suppliers for goods and services
 money market instruments, e.g. T-bills and commercial loans
 cash payments or refunds of income tax
 demand deposits and demand loans
 term deposits and term loans.
Quiz 6: What are the primary objectives of notes to financial statements?
 to present information about the basis of preparation of the financial statements and the
specific accounting policies used
 to provide information on relationship between entity’s assets, liabilities and equity
 to provide information that is not presented elsewhere in the financial statements but is
relevant to an understanding of any of them
 to present fair value measurement of entity’s revenues and expenses.
Example 1: For the following items determine the amount of total assets and total equities. Divide
total assets into current and non-current (fixed) assets. Divide equities into owner’s equity and
liabilities:
Item Value (CU)
Building, plant and equipment 500,000
Amortization for building, plant and equipment 175,000
Materials 130,000
Merchandise 150,000
Cash 35,000
Receivables 100,000
Correcting for receivables 5,000
Company’s brand name 45,000
Short-term bank loan 50,000
Long-term bank loan 100,000
Payables 75,000
Common stocks 350,000
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Reserves 120,000
Retained earnings 30,000
Business result (profit or loss) of the current period 55,000
Assets: Value (CU)
Current assets
Non-current assets
Total assets
Equity and liabilities:
Short-term liabilities
Short-term bank loan
Long-term bank loan
Owner’s equity
Total equity and liabilities
Example 2: For the following items determine the amount of profit of the year, other
comprehensive income for the year and total comprehensive income for the year:
Item Value (CU)
Revenue 750,000
Own production 450,000
Sales of unused equipment 200,000
Recovery amount of unused equipment sold 175,000
Sales of securities 180,000
Securities held for sale 185,000
Loss for the year from discontinued operations 25,000
Income tax expense for comprehensive income 18,000
Exchange differences on translating foreign operations, net of tax 15,000
Actuarial gains on defined benefit pension obligations, net of tax 20,000
Share of associates’ other comprehensive income 12,000
Income tax expense for other comprehensive income 3,000
Item Value (CU)
Profit/Loss for the year from continuing operations (before tax)
Profit/Loss for the year from discontinued operations (before tax)
Income tax expense for comprehensive income
Profit/Loss for the year
Other comprehensive income (before tax)
Income tax expense for other comprehensive income
Other comprehensive income for the year
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Total comprehensive income for the year
Example 3: Find changes in owner’s equity for the entity presented below:
Item Value (CU)
Total equity
Common stocks 500,000
Reserves 250,000
Fond for remeasurement 170,000
Retained earnings 120,000
Profit for the year from current period 50,000
Operations Value (CU)
Creation of reserves 70,000
Share of retained earnings distributed to shareholders (20,000)
Remeasurement of securities 50,000
Net profit for current period 30,000
Share
capital
Reserves
Fond for
remeasurement
Retained
earnings
Restated
balance
Balance at the
beginning of the
period
Creation of reserves
Distribution to
shareholders
Remeasurement of
securities
Net profit
Total
Example 4: Compile statement of cash flow for entity the presented below:
Chosen items from statement of financial position:
Item 01.01.20X1 31.12.20X1
Software 32,000
Tangible assets 29,000
Corrections for software 1,400
Corrections for tangible assets 5,600
Material at stock 14,000
Merchandise in shops 10,800
Cash at cash box 24,800
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Cash at bank account 100,000 75,000
Receivables from buyers 12,800
Receivables from employees 8,200
Payables 15,500
Deferred income tax 4,000
Deferred expences 1,000
Accrued expences 2,300
Common stocks 100,000 122,800
Long-term bank loan 54,000
Chosen items form statement of comprehensive income:
Item Value (CU)
Revenues
Revenues (sales of merchandise) 125,000
Other revenues 16,400
Interests received 1,200
Expenses
Cost of sales (merchandise sold) 86,000
Repairing and maintenance 12,000
Other services (rent) 800
Wage costs 3,100
Social insurance 800
Other costs 1,400
Depreciation of non-current assets 7,000
Interests paid 1,700
Income tax 5,000
Cash flow statement – indirect method:
Item Sum
Cash flows from operating activity:
Profit for the year (before taxes)
Adjustments:
Depreciation of non-current assets
Exchange difference loss
Interests received
Interests paid
Cash flows before taxes and changes in working capital:
Change in receivables
Change in inventories
Change in payables
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*Cash flow from operating activity
Income tax paid
Interests paid
**Net cash flows from operating activity
Cash flows from investing activity:
Consideration transferred for acquisition of subsidiary, net from cash
and cash equivalents
Consideration transferred for purchase of building, plant and
equipment
Revenue from sale of equipment
Interest received
Dividends received
**Net cash flows from investing activity
Cash flows from financing activity:
Sale of common stocks
Long-term loans received
Payment of financial leasing
Dividends paid
**Net cash flows from financing activity
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the reporting period
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Consolidated financial statements4
Quiz 1: Decide in which cases consolidated financial statements of an entity cannot be complied:
 when the parent entity is itself a subsidiary
 when the parent entity is itself a subsidiary and when the ultimate parent entity produces
consolidated general purpose financial statements that comply with full IFRSs or with IFRS
for SMEs
 when an entity has no subsidiaries other than one that was acquired with the intention of
selling or disposing of it within one year.
Quiz 2: Decide in which cases control is presumed to exist:
 when the parent owns, directly or indirectly through subsidiaries, half of the voting power
of an entity
 when the parent owns, directly or indirectly through subsidiaries, more than half of the
voting power of an entity
 when the parent owns half or less of the voting power of an entity but it has power over
more than half of the voting rights by virtue of an agreement with other investors
 when the parent owns half or less of the voting power of an entity but it has power to
govern the financial and operating policies of the entity under a statute or an agreement
 when the parent owns half or less of the voting power of an entity but it has power to
appoint or remove the majority of the members of the board of directors or equivalent
governing body and control of the entity is by that board or body.
Quiz 3: Decide in which order individual procedures which are presented below should take place
while compiling consolidated financial statements:
(i) eliminate the carrying amount of the parent’s investment in each subsidiary and the parent’s
portion of equity of each subsidiary;
(ii) combine the financial statements of the parent and its subsidiaries line by line by adding
together like items of assets, liabilities, equity, income and expenses;
(iii) measure and present non-controlling interest in the net assets of consolidated subsidiaries
separately from the parent shareholders’ equity in them;
(iv) measure and present non-controlling interest in the profit or loss of consolidated subsidiaries
for the reporting period separately from the interest of the owners of the parent;
 (i), (ii), (iii), (iv)
 (iv), (iii), (ii), (i)
 (ii), (i), (iv), (iii)
 (iv), (iii), (ii), (i).
4
On the basis of IFRS for SMEs (IASB, 2009), Section 9 and Hyblova (2007). See Lecture 2.
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Quiz 4: Decide which statements are true:
 Intragroup balances and transactions, including income, expenses and dividends, are
eliminated only partly.
 The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall be prepared as of the same reporting date and using
uniform accounting policies for like transactions and other events and conditions in similar
circumstances.
 The income and expenses of a subsidiary are excluded from the consolidated financial
statements.
 An entity shall disclose non-controlling interest in the profit or loss of the group separately
in the statement of comprehensive income.
Quiz 5: What information should be disclosed in consolidated financial statements?
 the basis for concluding that control exists when the parent does not own, directly or
indirectly through subsidiaries, more than half of the voting power
 any difference in the reporting date of the financial statements of the parent and its
subsidiaries used in the preparation of the consolidated financial statements
 intragroup balances and transactions, including income, expenses and dividends between
parent and subsidiary.
Quiz 6: Decide which statements are true:
 IFRS for SMEs requires a parent to present consolidated financial statements.
 IFRS for SMEs requires a parent or a group of subsidiaries to present separate financial
statements.
 IFRS for SMEs do does not require a group of two or more entities to present combined
financial statements.
Example 6: Compile consolidated statement of financial position for entity the presented below:
Parent (P) acquires 100% of subsidiary (S)
Goodwill = …
Item Parent (CU) Subsidiary (CU)
Consolidated
statement of
financial position
(CU)
Non-current
tangible assets
750,000 210,000
Consideration
transferred
(acquisition cost)
by Parent (P)
300,000
Goodwill
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Current assets 350,000 70,000
Total assets 1,400,000 280,000
Legal capital 1,100,000 220,000
Retained earnings 300,000 60,000
Total equity and
liabilities
1,400,000 280,000
Example 7: Compile consolidated statement of financial position and account for goodwill for the
entity presented below:
Parent (P) acquires 100% of subsidiary (S)
Goodwill = Consideration transferred – Fair value of acquired assets
Goodwill = …
Item Parent (CU) Subsidiary (CU)
Consolidated
statement of
financial position
(CU)
Non-current tangible
assets
750,000 210,000
Consideration
transferred
(acquisition cost) by
Parent (P)
300,000
Goodwill
Current assets 350,000 70,000
Total assets 1,400,000 280,000
Legal capital 1,100,000 220,000
Retained earnings 300,000 60,000
Total equity and
liabilities
1,400,000 280,000
Example 8: Compile consolidated statement of financial position and account for goodwill and
controlling interest for the entity presented below:
Parent (P) acquires 80% of subsidiary (S)
Controlling interest (80%) = …
Goodwill = …
Item Parent (CU) Subsidiary (CU)
Consolidated
statement of
financial position
(CU)
Non-current tangible 750,000 210,000
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assets
Consideration
transferred
(acquisition cost) by
Parent (P)
300,000
Goodwill
Current assets 350,000 70,000
Total assets 1,400,000 280,000
Legal capital 1,100,000 220,000
Retained earnings 300,000 60,000
Non-controlling
interest
Total equity and
liabilities
1,400,000 280,000
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Accounting policies, estimates and errors5
Quiz 1: Decide which statements are true:
 Entities are not allowed to deviate from basic requirements imposed by IFRS for SMEs
while accounting for particular transactions, events or conditions.
 Entities are allowed to deviate from basic requirements imposed by IFRS for SMEs while
accounting for particular transactions, events or conditions if IFRS for SMEs do not directly
address to such particular transactions, events and/or conditions.
 Entities are allowed to deviate from basic requirements imposed by IFRS for SMEs while
accounting for particular transactions, events or conditions if the effect of following the
existing under IFRS for SMEs guidance will not be material.
Quiz 2: What changes are treated as changes in accounting policy?
 application of new accounting policy which is aimed to improve quality of accounting for
particular transactions, events or conditions
 application of new accounting policy which is aimed to raise reliability, relevance and
faithfulness of compiled financial statements
 application of new accounting policy for transactions, other events or conditions, which
differ in substance from those previously occurring
 application of new accounting policy for transactions, other events or conditions, which did
not occur previously or were not material.
Quiz 3: What changes are treated as changes in accounting estimates?
 application of new accounting estimates for adjustment of the carrying amount of an asset
or a liability, or the amount of the periodic consumption of an asset on the basis of new
information or new developments and, accordingly, are not corrections of errors
 application of new accounting estimates for recognition of an asset or a liability, or the
amount of the periodic consumption of an asset on the basis of existing information (i.e.
information which was available in previous periods) which may help to improve existing
quality of financial statements prepared
 application of new accounting estimates for measurement of the new carrying amount of an
asset or a liability, or the amount of the periodic consumption of an asset on the basis of
existing information (i.e. information which was available in previous periods) which may
help to improve existing quality of financial statements prepared.
Quiz 4: Prior period errors are results of:
 a failure to use, or misuse of, reliable accounting information
 mathematical mistakes and mistakes in applying accounting policies
 oversights or misinterpretations of facts and fraud
 all mention above.
5
On the basis of IFRS for SMEs (IASB, 2009), Section 10, and Hyblova (2007). See Lecture 3.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Example 1: Account for a change in estimate
An entity bought a fixed asset for CU2,500, the defined period of depreciation was 10 years. In the
6th year on the basis of new information the entity changed the period of depreciation for 8 years.
Original depreciation plan:
Year 1 2 3 4 5 6 7 8 9 10
Depreciation
(CU)
Change in estimate:
Year 1 2 3 4 5 6 7 8
Depreciation
(CU)
Example 2: Account for a correction of prior period errors
In the 2d year an entity found, that in the 1st year there was an expense of CU50,000, which was not
accounted. Balance of retained earnings at the beginning of the 1st year was CU200,000 and at the
beginning of the 2st year – CU350,000.
1 year 2 year
Revenues (CU) 250,000 500,000
Expenses (CU) 100,000 300,000
Profit (CU) 150,000 200,000
Corrected statements
CIS in 1 year CIS in 2 year
Revenues
Expenses
Revenues
Expenses
Profit Profit
Correction of retained earnings:
Item 1 year 2 year
Retained earnings at the
beginning of the period (CU)
Correction of errors (CU)
Corrected retained earnings at
the beginning of the period
(CU)
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Property, plant and equipment6
Quiz 1: Which of the following categories of assets can be recognized as PPE?
 assets held for use in the production or supply of goods or services
 assets held for rental to others
 assets held for administrative purposes
 assets expected to be used in <1 period.
Quiz 2: Decide which statements are true:
 Spare parts and servicing equipment are usually carried as part of property, plant and
equipment, and they are depreciated together with the main asset to which they belong.
 If the major components of an item of property, plant and equipment have significantly
different patterns of consumption of economic benefits, an entity shall allocate the initial
cost of the asset to its major components and depreciate each such component separately
over its useful life.
 Land and buildings shall be accounted together.
Quiz 3: At initial measurement the cost of an item of property, plant and equipment comprises all of
the following:
 purchase price
 legal and brokerage fees
 non-refundable and refundable import duties and purchase taxes
 trade discounts and rebates
 costs of site preparation as well costs of dismantling and removing the item and restoring
the site on which it is located
 initial delivery and handling, installation and assembly
 costs of advertising and promotional activities
 administration and other general overhead costs
 borrowing costs.
Quiz 4: At subsequent measurement the cost of an item of property, plant and equipment is
estimated in the following way:
 initially recognized cost minus accumulated depreciation and minus accumulated
impairment loss
 initially recognized cost plus accumulated depreciation and minus accumulated impairment
loss
 initially recognized cost minus accumulated depreciation, plus impairment loss and minus
impairment loss reversal
 initially recognized cost minus accumulated depreciation, minus impairment loss and plus
impairment loss reversal.
6
On the basis of IFRS for SMEs (IASB, 2009), Section 17, and Hyblova (2007). See Lecture 3.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
25
Quiz 5: The depreciation charge for each period shall be recognized in
 statement of financial position
 statement of comprehensive income
 statement of change in equity
 statement of retained earnings
 statement of cash flow
Quiz 6: Change in annual depreciation charge on the basis of new information is accounted as:
 change in accounting policy
 change in accounting estimate
 correction of prior period error.
Example 1: Costs of acquisition an item and restoring the site after dismantling and removing the
item acquired
On 1.1.20X1 an entity bought a building for CU200,000. Expected lifetime of the building is 5 years
and after the end of this lifetime it will be necessary to restore the site on which the building is
located. Estimated costs of site restoring are CU50,000, average interest rate is 10% p.a.
Present value entity’s costs for site restoration (CU)
Acquisition cost of building (CU)
Interest amortization schedule:
Year
Initial value of
reserve (CU)
Interest (CU)
Final value of
reserve (CU)
20X1
20X2
20X3
20X4
20X5
Example 2: Estimate annual amounts of component depreciation
An entity has equipment with balance value CU250,000, lifetime period of which is 6 years. As part
of this equipment there is a spare part with balance value CU50,000, which is replaced every 3
years.
Estimation of depreciation and recoverable amount:
Depreciation of equipment (CU)
Depreciation of spare part (CU)
Recoverable amount in the 1st year (CU)
Recoverable amount in the 2st year (CU)
Recoverable amount in the 3st year (CU)
Recoverable amount in the 4st year (CU)
Recoverable amount in the 5st year (CU)
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
26
Recoverable amount in the 6st year (CU)
Depreciation and recoverable amount:
1 year 2 year 3 year 4 year 5 year 6 year
Depreciation of
equipment without
spare part (CU)
Depreciation of
spare part (CU)
Total depreciation
(CU)
Recoverable amount
(CU)
Example 3: Estimate annual amounts of depreciation
An entity has equipment with balance value CU2,500. Lifetime is defined as 4 years, recoverable
amount is CU100. It is assumed that equipment will produce 20 units in the first two years of its
lifetime and 30 units of the remaining last two years of its lifetime.
Estimated annual amount of depreciation under straight-line method, method of double declining
balance and production method will be:
Year
Straight-line
depreciation (CU)
DDB (CU)
Production
depreciation (CU)
1
2
3
4
Total
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Intangible assets other than Goodwill7
Quiz 1: What are the recognition criteria for intangible assets?
 it is probable that the expected future economic benefits that are attributable to the asset
will flow to the entity
 the cost or value of the asset can be measured reliably
 the asset is the result of internal activity of an entity.
Quiz 2: Which of the following items can be recognized as intangible assets?
 internally generated brands and publishing titles
 acquired logos and customer lists
 start-up activities (i.e. start-up costs)
 training activities
 purchased software
 advertising and promotional activities
 relocating or reorganizing part or all of an entity
 internally generated goodwill
 acquired in a business combination goodwill.
Quiz 3: An intangible asset, which was acquired in a business combination, is not recognized when:
 it arises from legal or other contractual rights
 its fair value cannot be measured reliably
 its cost cannot be measured reliably.
Quiz 4: At initial measurement the cost of an item of property, plant and equipment comprises all of
the following:
 purchase price
 legal and brokerage fees
 non-refundable and refundable import duties and purchase taxes
 trade discounts and rebates
 initial delivery and installation
 costs of advertising and promotional activities
 administration and other general overhead costs
 borrowing costs.
Quiz 5: At subsequent measurement the cost of an item of property, plant and equipment is
estimated in the following way:
 initially recognized cost minus accumulated depreciation and minus accumulated
impairment loss
7
On the basis of IFRS for SMEs (IASB, 2009), Section 18. See Lecture 4.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
28
 initially recognized cost plus accumulated amortization and minus accumulated impairment
loss
 initially recognized cost minus accumulated amortization, plus impairment loss and minus
impairment loss reversal
 initially recognized cost minus accumulated amortization, minus impairment loss and plus
impairment loss reversal.
Quiz 6: Decide which statements are true:
 All intangible assets shall be considered to have a finite useful life.
 The useful life of an intangible asset that arises from contractual or other legal rights can
exceed the period of the contractual or other legal rights.
 The residual value of an intangible asset is always zero.
 If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the
life shall be presumed to be 10 years.
Example 1: Estimate the initially recognized amount for software
On 1 January 20X1 an entity purchased a new software package to operate its production
equipment for CU400,000, including CU50,000 refundable purchase taxes. The purchase price was
funded by incurring a loan of CU405,000 (including CU5,000 loan origination fees). The loan is
secured against the software licenses. In January 20X1 the entity incurred the following costs in
customizing the software so that it is more suited to the systems used by the entity:
Item Value (CU)
Labor 50,000
Depreciation of plant and equipment used to
perform the modifications
7,000
In January 20X1 the entity’s production staff were trained in how to operate the new software.
Training costs included:
Item Value (CU)
Cost of an expert external instructor 3,000
Labor 1,000
In February 20X1 the entity’s production team tested the software and the information technology
team made further modifications necessary to get the new software to function as intended by
management. The following costs were incurred in the testing phase:
Item Value (CU)
Material, net of CU3,000 recovered from the
sale of the scrapped output
11,000
Labor 5,000
Depreciation of plant and equipment while it
was used to perform the modifications
2,000
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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The new software was ready for use on 1 March 20X1. However, because of low initial order levels,
the entity incurred a loss of CU4,000 on operating the software during March.
What is the cost of the software at initial recognition?
Example 2: Estimate the carrying amount of franchise licence
On 1 January 20X1 an entity acquired a franchise licence for CU450,000. Management measured the
amortisation of the licence at CU150,000 per year. At 31 December 20X3 in response to the entry
into the market of a competing franchisor the entity assessed the recoverable amount of the
franchise licence at CU120,000.
What is the recognized carrying amount of franchise licence at 31 December 20X3?
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Business combinations and Goodwill8
Quiz 1: Decide in which order individual procedures which are presented below should take place
while accounting for a business combination (“purchase method” under IFRS for SMEs and
“acquisition method” under full IFRS):
(i) identifying an acquirer and acquisition date;
(ii) recognizing the assets acquired and liabilities assumed at fair value;
(iii) recognizing any difference between the cost of the business combination and the fair value of
assets acquired and liabilities assumed;
(iv) allocating, at the acquisition date, the cost of the business combination to the assets acquired
and liabilities and provisions for contingent liabilities assumed;
(v) measuring the cost of the business combination as aggregate of the fair value of assets given,
liabilities assumed and equity issued including transaction costs.
 (i), (ii), (iii), (iv), (v)
 (ii), (i), (iv), (iii), (v)
 (iii), (ii), (i), (v), (iv)
 (i), (ii), (v), (iv), (iii).
Quiz 2: Decide which statements are true:
 An acquirer shall be identified for all business combinations.
 An acquiree shall be identified for all business combinations.
 The acquisition date is the date on which the acquirer effectively obtains control of the
acquire.
 The acquisition date is the date on which the acquiree effectively obtains control of the
acquirer.
Quiz 3: Which indicators are used for identification an acquirer:
 comparison of fair value of net assets of combining entities
 identification of transfer of cash or cash equivalents from one combining entity to another
one
 comparison of net annual turnovers of combining entities
 comparison of combining entities’ powers to select management team of the resulting
combined entity
 comparison of average number of employers average during the financial year.
Quiz 4: The cost of a business combination as the aggregate of:
8
On the basis of IFRS for SMEs (IASB, 2009), Section 19. See Lecture 4.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
31
 the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued by the acquirer, in exchange for control of the acquire, minus any
costs directly attributable to the business combination
 the fair values, at the date of exchange, of assets given, liabilities incurred or assumed, and
equity instruments issued by the acquirer, in exchange for control of the acquiree, plus any
costs directly attributable to the business combination
 the carrying amounts, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the acquirer, in exchange for control of the
acquire, minus any costs directly attributable to the business combination
 the carrying amounts, at the date of exchange, of assets given, liabilities incurred or
assumed, and equity instruments issued by the acquirer, in exchange for control of the
acquiree, plus any costs directly attributable to the business combination.
Quiz 5: When a business combination agreement provides for an adjustment to the cost of the
combination contingent on future events, the acquirer:
 shall include the estimated amount of that adjustment in the cost of the combination at the
acquisition date if the adjustment is probable and can be measured reliably
 shall not include the estimated amount of that adjustment in the cost of the combination at
the acquisition date even though if the adjustment is probable and can be measured reliably
 shall include the estimated amount of that adjustment in the cost of the combination at the
acquisition date even though if the adjustment is not highly probable and can be measured
only approximately.
Quiz 6: Goodwill is recognized and measured as:
 any difference between the cost of the business combination and the acquirer’s interest in
the total fair value of the identifiable assets, liabilities and provisions for contingent
liabilities so recognized
 any difference between the cost of the business combination and the acquirer’s interest in
the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities
so recognized
 any difference between the cost of the business combination and the acquirer’s interest in
the carrying amounts of the identifiable assets, liabilities and provisions for contingent
liabilities so recognized.
Example 1: Compile the consolidated statement of financial position
SME A purchased a competitor’s (SME B) taxi business for CU 42 000, which was paid in cash on the
date of acquisition. The business combination was effected by the assets, obligations and operations
of the taxi business being transferred to SME A. Information about the assets, liabilities and
contingent liabilities of the acquired business at the acquisition date:
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
32
Item
Carrying amount in SME
B’s financial statements
(CU)
Fair value (CU)
Taxis 15, 000 20,000
Taxi licenses 5,000 15,000
Brand (registered trade name) - 6,000
Possible obligation for a court case - (1,000)
Total 20,000 40,000
Item SME A Carrying amount (CU)
Assets
Non-current assets
Property, plant and equipment - taxis 35,000
Intangible asset - taxi licenses 10,000
Current assets
Cash 60,000
Total assets 105,000
Equity
Share capital 5,000
Reserves 100,000
Total equity 105,000
Therefore, immediately after the acquisition, SME A’s statement of financial position was as follows:
Item
Before
acquisition
(CU)
Effect of
acquisition
(CU)
After
acquisition
(CU)
Assets
Non-current assets
Property, plant and equipment -
taxis
Intangible asset - goodwill
Intangible asset - taxi licenses
Intangible asset - brand
Current assets
Cash
Total assets
Current liabilities
Liability - court case
Equity
Share capital
Reserves
Total equity
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Example 2: Estimate cost of a business combination
SME A acquires 100 per cent of the equity interests in SME B in exchange for cash of CU230,000. In
addition, SME A paid the following costs that are related directly to the business combination:
Item Value (CU)
Advisory services 85,000
Legal assistance 15,000
Accounting services 10,000
Valuation services 5,000
What is the cost of a business combination?
Example 3: Estimate the recognized amount of goodwill
At 1 January 20X5 SME A acquired 100 per cent of the equity interests in SME B in exchange for
cash of CU230,000. The fair value of SME B’s identifiable assets acquired and liabilities assumed are
as follows (no contingent liabilities exist):
Item Value (CU)
Equipment 75,000
Inventory 35,000
Accounts receivable 20,000
Patents 15,000
Accounts payable 30,000
What is the value of goodwill that the entity should recognize?
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Leases9
Quiz 1: The major difference between financial and operating lease is:
 substantial transfer of all the risks and costs incidental to ownership
 substantial transfer of all the risks and rewards incidental to ownership
 substantial transfer of all the risks and uncertainties incidental to ownership
 substantial transfer of all the rewards and costs incidental to ownership.
Quiz 2: A lessee shall recognize its financial lease as:
 rights and obligations of use its statement of financial position at amounts equal to the
carrying amount of the leased property or, if lower, the present value of the minimum lease
payments, determined at the inception of the lease
 rights and obligations of use its statement of financial position at amounts equal to the
recoverable amount of the leased property or, if lower, the present value of the minimum
lease payments, determined at the inception of the lease
 rights and obligations of use its statement of financial position at amounts equal to the fair
value of the leased property or, if lower, the present value of the minimum lease payments,
determined at the inception of the lease.
Quiz 3: A lessor shall recognize assets held under a finance lease in:
 in its statements of financial position and present them as a receivable at an amount equal
to the net investment in the lease
 in its statements of financial position and present them as a receivable at an amount equal
to its fair value
 in its statements of financial position and present them as a receivable at an amount equal
to its carrying amount.
Quiz 4: A lessee shall recognize lease payments provided under operating lease:
 as an expense in its first statement of comprehensive income when the contract on
operating lease was signed
 as a revenue in its first statement of comprehensive income when the contract on operating
lease was signed
 as an expense on a straight-line basis in all its statements of comprehensive income
throughout the whole life of the contract on operating lease
 as a revenue on a straight-line basis in all its statements of comprehensive income
throughout the whole life of the contract on operating lease.
Quiz 5: A lessor shall recognize lease payments received under operating lease:
 as an expense in its first statement of comprehensive income when the contract on
operating lease was signed
9
On the basis of IFRS for SMEs (IASB, 2009), Section 20, and Hyblova (2007). See Lecture 5.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
35
 as a revenue in its first statement of comprehensive income when the contract on operating
lease was signed
 as an expense on a straight-line basis in all its statements of comprehensive income
throughout the whole life of the contract on operating lease
 as a revenue on a straight-line basis in all its statements of comprehensive income
throughout the whole life of the contract on operating lease.
Example 1: Compile financial statement of financial lessee
On 1 January 20X1 an entity entered, as lessee, into a three-year non-cancellable lease of a machine.
At the end of the lease term ownership of the machine passes to the lessee. There were made three
lease payments for CU5,000 always paid by 31 December. The interest rate implicit in the lease is
15 per cent per year. Real value of machine is CU13,000. Estimated lifetime of machine is 5 years,
estimated residual value at the end of lifetime is CU700.
Present value of lease payments is: …
The initially measured value of machine is: …
Schedule of lease payments:
Year % rate
Payment
(CU)
Liability
(CU)
Interest
(CU)
Reduction
of liability
(CU)
Liability
at the end
of the
reporting
period
(CU)
1
2
3
Total
Depreciation of leased machine is: ...
Balance 20X1 (CU)
Non-current assets
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X1 (CU)
Depreciation
Interest
Business result for current period
Balance 20X2 (CU)
Non-current assets Business result for
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
36
previous period
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X2 (CU)
Depreciation
Interest
Business result for current period
Balance 20X3 (CU)
Non-current assets
Business result for
previous period
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X3 (CU)
Depreciation
Interest
Business result for current period
Example 2: Compile financial statement of financial lessor
Given info – see Example 1, except of the interest rate implicit – 13.5 per cent.
Schedule of lease payments:
Year % rate
Payment
(CU)
Liability
(CU)
Interest
(CU)
Reduction
of liability
(CU)
Liability
at the end
of the
reporting
period
(CU)
1
2
3
Total
Depreciation of leased machine: …
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Balance 20X1 (CU)
Non-current assets
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X1 (CU)
Depreciation
Interest
Business result for current period
Balance 20X2 (CU)
Non-current assets
Business result for
previous period
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X2 (CU)
Depreciation
Interest
Business result for current period
Balance 20X3 (CU)
Non-current assets
Business result for
previous period
Business result for
current period
Cash Liability
Total assets
Total equity and
liabilities
Income statement 20X3 (CU)
Depreciation
Interest
Business result for current period
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Impairment of assets10
Quiz 1: Impairment test for inventories is carried out by:
 comparing the carrying amount of each item of inventory (or group of similar items) with
its selling price less costs to complete and sell
 comparing the carrying amount of each item of inventory (or group of similar items) with
its fair value
 comparing the carrying amount of each item of inventory (or group of similar items) with
its recoverable amount.
Quiz 2: Impairment test for assets other than inventories is carried out by:
 comparing the carrying amount of each item of inventory (or group of similar items) with
its selling price less costs to complete and sell
 comparing the carrying amount of each item of inventory (or group of similar items) with
its fair value
 comparing the carrying amount of each item of inventory (or group of similar items) with
its recoverable amount.
Quiz 3: If there is an indication that an asset may be impaired, this may indicate that the entity
should review:
 the remaining useful life of such asset
 the depreciation (amortization) method used for such asset
 the residual value for such asset
 all mentioned above.
Quiz 4: If asset’s fair value less costs to sell and its value in use exceed asset’s carrying amount,
then:
 such asset is not impaired
 such asset is impaired
 it is not necessary to estimate both asset’s fair value less costs to sell and its value in use.
Quiz 5: Impairment loss shall be allocated to reduce the carrying amount of the assets of the unit in
the following order:
 first, to reduce the carrying amount of all assets other than goodwill, which comprise a
cash-generating unit, and then to any goodwill allocated to the cash-generating unit
 first, to reduce the carrying amount of any goodwill allocated to the cash-generating unit,
and then, to the other assets of the unit pro rata on the basis of the carrying amount of each
asset in the cash-generating unit
 to reduce the carrying amount of all assets, which comprise a cash-generating unit.
10
On the basis of IFRS for SMEs (IASB, 2009), Section 27. See Lecture 5.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
39
Example 1: Perform impairment test and estimate the recognized amount of impairment loss
A retailer holds three items of inventory (X, Y, and Z) at 31 December 20X0. It is likely that all items
of inventory will be sold. Based on the information provided in the table below, is the entity
required to record any impairment loss at 31 December 20X0?
Carrying amount (CU)
Selling price
estimated at
31/12/20X0 (CU)
Costs to sell estimated at
31/12/20X0 (CU)
Item X 35,000 40,000 2,000
Item Y 50,000 50,000 5,000
Item Z 75,000 85,000 15,000
Impairment test:
Item X Item Y Item Z
Carrying amount (CU)
Selling price estimated at 31/12/20X0
(CU)
Costs to sell estimated at 31/12/20X0
(CU)
Selling price less cost to sell (CU)
Impairment loss for the year ended
31/12/20X0 (CU)
Carrying amount of the inventory after
recognition of impairment loss (CU)
Example 2: Perform impairment test and estimate the recognized amount of impairment loss
On 31 December 20X1 an entity holds raw materials to be consumed in the manufacturing of
product A. Before testing for impairment the entity carries the raw materials at their cost of
CU100,000. At 31 December 20X1 the replacement cost of the raw materials is CU80,000.
On 31 December 20X1 management estimate that it will cost CU60,000 to convert the CU100,000 of
raw material into finished goods. Furthermore, they estimate that CU25,000 will be incurred to sell
those finished goods. The finished goods are expected to be sold for CU200,000.
Must the entity record an impairment loss?
Example 3: Perform impairment test and estimate the recognized amount of impairment loss
On 30 September 20X6 a fire destroyed inventory that had a carrying amount of CU500,000. The
entity immediately registered a claim of CU700,000 for the replacement cost of the inventory with
an insurance company. However, the insurance company disputed the claim, citing negligence on
the part of the entity. On 15 November 20X6, the fire authorities completed their investigation and
found an electrical fault to be the cause of the fire. As a result of these findings the insurance
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
40
company notified the entity that its claim for CU700,000 would be settled in full. The insurance
company paid the entity CU700,000 on 30 November 20X6.
How would the entity account for its inventories for the year ended 31 December 20X6?
Example 4: Perform impairment test, estimate the recognized amount of impairment loss and
impairment loss reversal
A retailer holds three items of inventory (X, Y, and Z) at 31 December 20X0. All three inventories
stay unsold at 31 December 20X1.
Cost (CU)
Accumulated
impairment
loss at
31/12/20X0
(CU)
Carrying
amount at
31/12/20X1
before
impairment
reversal test
(CU)
Selling price
estimated at
31/12/20X1
(CU)
Costs to sell
estimated at
31/12/20X1
(CU)
Item X 35,000 - 35,000 35,000 5,000
Item Y 45,000 5,000 45,000 50,000 2,000
Item Z 70,000 5,000 70,000 80,000 5,000
Decide about reversal of impairment and calculate the values:
Item X Item Y Item Z
Carrying amount (CU)
Accumulated impairment loss at
31/12/20X0 (CU)
Carrying amount at 31/12/20X1 before
impairment test (CU)
Selling price estimated at 31/12/20X1 (CU)
Costs to sell estimated at 31/12/20X1 (CU)
Selling price less cost to sell (CU)
Impairment loss for the year ended
31/12/20X1 (CU)
Reversal of impairment loss for the year
ended 31/12/20X1 (CU)
Example 6: Estimate value in use
At the end of 20X0 an entity tests a machine for impairment. The machine was bought five years
earlier for CU300,000, when its useful life was estimated to be 15 years and the estimated residual
value was nil. At 31 December 20X0, after recognizing the depreciation charge for 20X0, the
machine’s carrying amount was CU200,000 and its remaining useful life was estimated at 10 years.
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The machine’s value in use is calculated using a pre-tax discount rate of 14 per cent per year.
Budgets approved by management reflect expected cash inflows net of the estimated costs
necessary to maintain the level of economic benefit expected to arise from the machine in its
current condition
Assume, for simplicity, that the expected future cash flows occur at the end of each reporting
period. The discounted cash flow will be:
Year
Estimated
future cash
flow (CU)
Probability
Probability-
weighted
future cash
flow (CU)
Present
value factor
14%
Discounted
cash flow
(CU)
20X1 23,939 0.95
20X2 27,878 0.9
20X3 31,522 0.85
20X4 44,371 0.8
20X5 53,313 0.75
20X6 59,941 0.7
20X7 66,865 0.65
20X8 78,907 0.6
20X9 85,976 0.55
20X0 93,148 0.5
Value in use
Carrying amount before impairment loss: …
Recoverable amount: …
Impairment loss: …
Carrying amount after impairment loss (i.e. recoverable amount): …
Example 7: Perform impairment test for goodwill and estimate the recognized amount of
impairment loss
On 31 December 20X1, Entity T acquires 100% of voting rights in Entity M for CU10,000. Entity M
has manufacturing plants in three countries. The data below relates to the end of 20X1
Allocation of
purchase price
(CU)
Fair value of
identifiable assets
(CU)
Goodwill (CU)
Activities in Country A 3,000 2,000
Activities in Country B 2,000 1,500
Activities in Country C 5,000 3,500
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Goodwill arising on the acquisition of Entity M has been allocated to three cash-generating units
(Countries A, B and C).
During 20X2, a new government is elected in Country A. It passed legislation that significantly
restricts exports of the main product produced by Entity T and its subsidiaries (ie Group T). As a
result, and for the foreseeable future, Group T’s production in Country A will be cut by 40 per cent.
The significant export restriction and the resulting production decrease require Group T to
estimate the recoverable amount of Country A’s cash-generating unit at the end of 20X2.
Management estimates cash flow forecasts for Country A operations and determines the cashgenerating
unit’s recoverable amount to be CU1,360.
Goodwill (CU)
Identifiable
assets (CU)
Total (CU)
Historical cost
Accumulated amortization/depreciation
(20X2)
Carrying amount
Impairment loss
Carrying amount after impairment loss
At the end of 20X2, Entity T compares the carrying amount of Country A’s assets CU2,633 with their
recoverable amount CU1,360 and records an impairment loss of CU1,273. The impairment loss is
recorded first against the carrying amount of goodwill CU800 and next against the carrying amount
of identifiable assets CU473.
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Inventories11
Quiz 1: Which of the following categories of assets can be recognized as inventories
 assets held for sale in the ordinary course of business (finished goods)
 assets being in the process of production for further sale (work in process)
 assets in the form of materials or supplies to be consumed in the production process or in
the rendering of services (raw materials & consumables)
 assets expected to be used in >1 period.
Quiz 2: Inventories should be measured at :
 cost
 purchase price
 the lower of cost and estimated selling price less costs to complete and sell
 the lower of cost and fair value less costs to complete and sell.
Quiz 3: Cost of inventories is the sum of:
 costs of purchase and costs of conversion
 direct costs, indirect costs and other costs (allocated production overheads)
 costs of purchase, costs of conversion (e.g. allocated production of overheads) and other
costs incurred in bringing the inventory to their present location and condition
 salaries of factory staff and storage costs necessary in the production process before a
further production stage and selling costs
 abnormal amounts of wasted materials and selling costs.
Quiz 4: Impairment test for inventories is carried out by:
 comparing the carrying amount of each item of inventory (or group of similar items) with
its selling price less costs to complete and sell
 comparing the carrying amount of each item of inventory (or group of similar items) with
its fair value
 comparing the carrying amount of each item of inventory (or group of similar items) with
its recoverable amount.
Quiz 5: When inventories are sold, the entity shall recognize the carrying amount of those
inventories as:
 an expense in the period in which the related revenue is recognized
 a revenue in the period in which the related expense is recognized
 an expense in the period in which the related receivable is paid off
 a revenue in the period in which the related payable is settled.
11
On the basis of IFRS for SMEs (IASB, 2009), Section 13. See Lecture 6.
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Example 1: Estimate the cost of purchase
A retailer imported goods at a cost of CU 200, including CU 35 non-refundable import duties and CU
10 refundable purchase taxes. The risks and rewards of ownership of the imported goods were
transferred to the retailer upon collection of the goods from the harbour warehouse. The retailer
was required to pay for the goods upon collection. The retailer incurred CU15 to transport the
goods to its retail outlet and a further CU 10 in delivering the goods to its customer. Further selling
costs of CU 5 were incurred in selling the goods.
What is the recognized cost of purchase of inventories?
Example 2: Estimate the cost of purchase
A retailer buys a good priced at CU350 per unit. However, the supplier awards the retailer a 10 per
cent discount on orders of 100 units or more.
The retailer buys 100 units in a single order. What is the recognized cost of purchase of
inventories?
Example 3: Estimate the cost of purchase
A retailer buys a good priced at CU350 per unit. However, the supplier awards the retailer a 10 per
cent discount on orders of 100 units or more. Furthermore, when the retailer has purchased 1,000
or more units in a calendar year, the supplier awards the retailer a further volume discount of 5 per
cent of the list price. The additional volume discount applies to all units acquired by the retailer
during the calendar year.
On 1 January 20X1 the retailer buys 1,000 units from the supplier in a single order. What is the
recognized cost of purchase of inventories?
Example 4: Estimate overhead costs per unit of production
An entity incurred fixed production overheads of CU900,000 during a one-month period in which it
manufactured 250,000 units of production. When operating at normal capacity the entity
manufactures 250,000 units of production per month.
What is the recognized amount of fixed production overhead cost to each unit produced during the
month?
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Example 5: Estimate per unit costs for by-products
An entity manufactures a chemical ‘A’ for use in the agriculture industry. The production process
requires a mixture of base chemicals followed by a maturation process, and from which, a product
‘A’ and a by-product ‘C’ are produced.
The total costs of a production run (i.e. including direct costs and the allocation of overheads) are
CU100,000.
Each production run produces:
 5,000 litres of product A, sales value = CU250,000
 1,000 litres of (by-product) C, sales value = CU2,000
The entity accounts for the by-product by deducting its selling price from the cost of the main
product. In this example, the costs to complete and sell the by-product are negligible and have been
ignored.
What are the per unit costs of product A?
Example 6: Joint product
The facts are the same as in example 5. However, in this example, instead of the by-product there is
another joint product ‘B’ resulting from the maturation process. Furthermore, the total costs (i.e.
including direct costs and the allocation of overheads) of a production run are CU300,000.
Each production run produces:
 5,000 litres of product A, sales value = CU250,000
 4,000 litres of product B, sales value = CU400,000
The entity allocates the joint process costs to the products produced on the basis of their relative
sales values.
What are the per unit costs of by-products A and B?
Example 7: Cost formulas
An entity sells fiber cables. It measures the cost of inventories by using the FIFO method and the
weighted average cost formula calculated at the end of the period (i.e. the periodic method). The
following movements in inventory occurred in 20X5.
Date Description Units Total cost Cost per unit
01-Jan Opening balance 1,000 10,000 10
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02-Feb Sold 200
25-Feb Purchased 400 6 000 15
02-Mar Purchased 200 4 000 20
25-Mar Sold 900
Closing
inventories
500
Using the FIFO cost formula the cost of the inventories sold in the period and the cost of inventory
held at the end of the period are determined by assuming that units that were purchased first are
sold first, as follows:
Date Description Units Cost per unit
Inventory
cost
Cost of goods
sold
01-Jan
Opening
balance
02-Feb Sold
Balance
25-Feb Purchased
02-Mar Purchased
25-Mar Sold
Balance
Using the weighted average cost formula the cost of the inventories sold in the period and the cost
of inventory held at the end of the period are as follows:
Date Description Units Cost per unit Inventory cost
01-Jan Opening balance
25-Feb Purchased
02-Mar Purchased
Total goods available for sale in the
period
Total goods sold in the period
Closing inventory
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Provisions and Contingencies12
Quiz 1: What are the criteria for provisions and contingencies being recognized?
 the entity has an obligation at the reporting date as a result of a past event
 the entity has a corresponding receivable at the reporting date as a result of a past event
 it is probable (i.e. more likely than not) that the entity will be required to transfer economic
benefits in settlement
 it is probable (i.e. more likely than not) that the entity will be receive a transfer of economic
benefits in settlement
 the amount of the obligation can be estimated approximately
 the amount of the obligation can be estimated reliably.
Quiz 2: A provision should be measured at:
 cost
 fair value
 best estimate of the amount required to settle the obligation at the reporting date.
Quiz 3: Decide which statements are true:
 When the provision involves a large population of items, the estimate of the amount reflects
the weighting of all possible outcomes by their associated probabilities.
 When the provision arises from a single obligation, the individual most likely outcome may
be the best estimate of the amount required to settle the obligation.
 At subsequent measurement an entity can charge against a provision any expenditures,
even those for which the provision was not originally recognized.
Quiz 4: An entity:
 shall recognize contingent assets and liabilities
 shall not recognize contingent assets and liabilities.
 shall not recognize contingent assets, but shall recognize contingent liabilities
 shall recognize contingent assets, but shall not recognize contingent liabilities.
Example 1: Initial measurement of provisions
An entity’s production process causes contamination to the land on which the entity’s plant is built.
The entity is required by law to restore the environment at the end of its plant’s useful life. The
estimated lifetime of the plant is 5 years. The entity envisages costs for site restoration varying
from CU200,000 with 55% of probability and to CU275,000 with 45% probability. Adjustment for
uncertainties is 5% and appropriate discount factor for risk-adjusted cash flows is 10%.
What is the recognized amount of the provision, if any, in this case?
12
On the basis of IFRS for SMEs (IASB, 2009), Section 21. See Lecture 6.
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Example 2: Initial measurement of provisions
An entity sells 1,000 units of a product with warranties under which the entity will repair any
manufacturing defects that become apparent within the first six months after purchase. If a minor
defect is detected in a product, estimated repair costs of CU100 will result. If a major defect is
detected in a product, estimated repair costs of CU400 will result. The entity’s experience together
with its future expectations indicate that 75 per cent of the goods sold have no defects, 20 per cent
of the goods sold have minor defects and 5 per cent of the goods sold have major defects.
For the purpose of this example, the risks specific to the liability and the time value of money have
been ignored.
What is the recognized amount of the provision, if any, in this case?
Example 3: Initial measurement of provisions
A customer has initiated a lawsuit against an entity associated with personal injury when using one
of the entity’s products. The entity’s lawyers estimate from experience that at the reporting date
(31 December 20X1) the entity has:
a) a 30 per cent chance of being ordered to pay the customer compensation of CU2 million and
a 70 per cent chance of being ordered to pay compensation of CU300,000. The ruling is
expected to take place in two years’ time. The entity determines that a discount rate of 4 per
cent is appropriate to adjust for the risks specific to the liability.
b) a 25 per cent chance of being ordered to pay the customer compensation of CU100,000, a 50
per cent chance of being ordered to pay compensation of CU300,000 and a 25 per cent
chance of being ordered to pay compensation of CU500,000. For the purpose of this
example, the risks specific to the liability and the time value of money have been ignored.
c) a 75 per cent chance of winning the lawsuit and thereby avoiding the payment of
compensation. Furthermore, the entity’s lawyers estimate that the entity has a 10 per cent
chance of being ordered to pay the customer compensation of CU2 million and a 15 per cent
chance of being ordered to pay compensation of CU300,000. For the purpose of this
example, the risks specific to the liability and the time value of money have been ignored.
What is the recognized amount of provision, if any, in every of these cases?
Example 4: Expenditures charged against a provision
An entity recognized a CU40,000 provision for a lawsuit at 31 December 20X1. In March 20X2 the
case was dismissed without the right to appeal. In April 20X2 the entity undertook an advertising
campaign costing CU40,000. The entity made the following entry in its accounting records to
recognize the advertising campaign:
Db: Provision for lawsuit (liability) = CU40,000
Cr: Cash = CU40,000
Is such accounting (journal entry) correct?
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Basic and other financial instruments13
Quiz 1: Which categories of financial instruments are basic ones?
 cash
 demand and fixed-term deposits when the entity is the depositor, e.g. bank accounts.
 commercial paper and commercial bills held
 asset-backed securities, such as collateralised mortgage obligations, repurchase agreements
and securitised packages of receivables
 options, rights, warrants, futures contracts, forward contracts and interest rate swaps that
can be settled in cash or by exchanging another financial instrument
 accounts, notes and loans receivable and payable
 bonds and similar debt instruments
 financial instruments that qualify and are designated as hedging instruments
 investments in non-convertible preference shares and non-puttable ordinary and
preference shares.
Quiz 2: At initial measurement basic financial instruments should be measured at:
 transaction price including transaction costs unless the arrangement constitutes, in effect, a
financing transaction
 fair value through profit or loss unless the arrangement constitutes, in effect, a financing
transaction
 transaction price including transaction costs except in the initial measurement of financial
assets and liabilities that are measured at fair value through profit or loss unless the
arrangement constitutes, in effect, a financing transaction
 transaction price including transaction costs except in the initial measurement of financial
assets and liabilities that are measured at fair value through profit or loss.
Quiz 3: At initial measurement other financial instruments should be measured at:
 fair value
 carrying amount
 historical cost
Quiz 4: At subsequent measurement basic financial instruments should be measured at:
 initially recognized amount minus any repayments of the principal minus the cumulative
amortization, and plus, in the case of a financial asset, any reduction for impairment or
uncollectibility
 initially recognized amount minus any repayments of the principal minus the cumulative
amortization, and minus, in the case of a financial asset, any reduction for impairment or
uncollectibility
13
On the basis of IFRS for SMEs (IASB, 2009), Section 11-12. See Lecture 7.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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 initially recognized amount minus any repayments of the principal minus the cumulative
amortization, and plus, in the case of a financial liability, any reduction for impairment or
uncollectibility.
Example 1: Initial measurement, fin assets
An entity incurred CU10 broker transaction fees to buy 50 non-puttable ordinary shares for cash of
CU500 in:
a) a listed company
b) an unlisted company
What is the recognized value of ordinary shares acquired in case of listed company and in case of
unlisted company?
Example 2: Initial measurement, fin assets
An entity provides services to a customer and charges the customer CU200 with payment due
within 60 days. Payment terms of 30–90 days are normal in the industry.
What is the recognized value of the receivable?
Example 3: Initial measurement, fin assets
An entity deposits CU20,000 into a 120-day notice deposit account with a bank. The entity will
receive fixed interest at 1.644 % for the 120-day period (i.e. equivalent to 5 per cent per year
ignoring compounding), payable at the end of the deposit period. The market rate for this type of
deposit with the bank is 1.644 % per 120-day period.
What is the recognized value of the deposit?
Example 4: Initial measurement, fin liabilities
An entity buys goods from a manufacturer for CU400 with 120 days’ interest-free credit, the normal
business terms in the industry.
What is the recognized value of the payable?
Example 5: Initial measurement, fin liabilities
An entity utilizes CU1,500 of an interest-free overdraft facility it has with a bank to pay an amount
outstanding to a supplier. The overdraft is repayable on demand. The bank has not indicated that it
will request repayment in the near future. The entity does not expect to pay off the amount during
the year.
What is the recognized value of the loan?
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Example 6: Initial measurement, fin liabilities
A bank provides an entity with a four-year loan of CU5,000 on normal market terms, including
charging interest at
a) a fixed rate of 8 % per year. Interest is payable at the end of each year. The figure of 8 % is
considered the market rate for similar four-year fixed-interest loans with interest paid
annually in arrears.
b) a variable rate of LIBOR plus 250 basis points, with interest payments receivable annually
in arrears.
What is the recognized value of the loan charged at a fixed rate and at a variable rate?
Example 7: Subsequent measurement, fin assets
An entity bought 50 non-puttable ordinary shares during the year for cash of CU500 and incurred
broker transaction fees of CU10 in:
a) a listed company. At the year-end the shares are quoted at CU11 per share.
b) an unlisted company. The shares are not publicly traded and the fair value of the shares
cannot otherwise be measured reliably.
What is the recognized and subsequently measured value of ordinary shares acquired in case of
listed company and in case of unlisted company?
Example 8: Subsequent measurement, fin liabilities
An entity buys goods from a manufacturer for CU400 on 1 November 20X2 with 120 days’ interestfree
credit, which are normal business terms in the industry. At the entity’s financial year-end (31
December 20X2) it has not yet paid the manufacturer.
What is the recognized and subsequently measured value of the payable?
Example 9: Subsequent measurement, fin liabilities
An entity has an interest-free overdraft facility with a bank. The overdraft is repayable on demand
by the bank. However, the bank has not indicated that it will request repayment in the near future.
At the entity’s financial year-end CU2,000 is outstanding on the overdraft. The entity does not
expect to pay off the amount during the year.
What is the recognized and subsequently measured value of the loan?
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Example 10: Subsequent measurement, fin liabilities (amortization)
A bank provides an entity with a five-year loan for CU1,000. The first two years of the loan are
interest-free. After that, interest is payable monthly in arrears at the variable quoted market
interest rate in the jurisdiction as quoted at the start of each month. The entity is charged an
upfront fee of CU70 for the interest-free period.
The estimated annual effective interest rate is 3.695%. What is the recognized and subsequently
measured value of the loan?
Example 11: Subsequent measurement, fin assets (amortization)
On 1 January 20X0, an entity acquires a bond for CU900, incurring transaction costs of CU50.
Interest of CU40 is receivable annually, in arrears, over the next five years (31 December 20X0-31
December 20X4). The bond has a mandatory redemption of CU1,100 on 31 December 20X4.
The estimated annual effective interest rate is 6.9583%. What is the recognized and subsequently
measured value of the bond acquired?
Example 12: Impairment loss measurement
At the end of a financial reporting period an entity has an outstanding balance of CU1,000 due from
a customer. This balance was not discounted as the transaction took place on normal business
terms (short-term credit) with no hidden financing transaction.
a) Because of financial difficulties being experienced by the customer, the entity does not
expect the customer to repay any of the CU1,000.
b) The entity has given the customer extra time to pay off the debt. The entity expects the
customer will be able to pay about one year after the reporting date.
What is the recognized amount of the impairment loss in both cases?
Example 13: Impairment of fin instruments, reversal
The facts are the same as in previous example, however, in this example, after the prior year
financial statements were authorized for issue the entity received CU200 from the customer. The
entity does not expect to receive the remaining CU800.
What is the recognized amount of the impairment loss reversal?
Example 14: Valuation techniques
Entity A owns 250 ordinary shares in company XYZ, an unquoted company. Company XYZ has a
total share capital of 5,000 shares with nominal value of CU10.
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a) Entity XYZ's after-tax maintainable profits are estimated at CU70,000 per year. An
appropriate price/earnings ratio determined from published industry data is 15 (before
lack of marketability adjustment). Entity A’s management estimates that the discount for
the lack of marketability of company XYZ’s shares and restrictions on their transfer is 20
per cent. Entity A values its holding of company XYZ shares on the basis of earnings.
b) An entity A estimates the fair value of the shares it owns in company XYZ using a net asset
valuation technique. The fair value of company XYZ’s net asset including those recognized in
its statement of financial position and those that are not recognized is CU850,000.
What is the recognized value of the entity A’s investment in company XYZ’s shares in both cases?
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Equity and liabilities14
Quiz 1: Equity includes:
 investments by the owners of the entity plus additions to those investments earned through
profitable operations and retained for use in the entity’s operations, minus reductions to
owners’ investments as a result of unprofitable operations and distributions to owners
 investments by the owners of the entity minus additions to those investments earned
through profitable operations and retained for use in the entity’s operations, plus
reductions to owners’ investments as a result of unprofitable operations and distributions
to owners
 investments by the owners of the entity minus additions to those investments earned
through profitable operations and retained for use in the entity’s operations, minus
reductions to owners’ investments as a result of unprofitable operations and distributions
to owners.
Quiz 2: Which financial instruments are recognized as equity:
 a financial instrument entitling the holder to a pro rata share of the entity’s net assets in the
event of the entity’s liquidation
 a financial instrument which is subordinate to all other classes of instruments
 a financial instrument entitling the holder to a pro rata share of the entity’s net assets in the
event of the entity’s liquidation, however these payments are subject to a maximum amount
(a ceiling)
 a financial instrument entitling the holder to a pro rata share of the entity’s net assets in the
event of the entity’s liquidation, and these payments are required to be provided before
liquidation (e.g. a mandatory dividend).
Quiz 3: Ordinary shares issued shall be measured at:
 at carrying amount of the cash or other resources received or receivable, excluding direct
costs of issuing the equity instruments
 at carrying amount of the cash or other resources received or receivable, including direct
costs of issuing the equity instruments
 at fair value of the cash or other resources received or receivable, excluding direct costs of
issuing the equity instruments
 at fair value of the cash or other resources received or receivable, including direct costs of
issuing the equity instruments.
Quiz 4: Option issued shall be accounted for:
 as for original issue of ordinary shares and other equity instruments
 as for original issue of bonds and other debt instruments
 as for original issue of forwards and other derivatives
14
On the basis of IFRS for SMEs (IASB, 2009), Section 22. See Lecture 8.
MPF_AACC ACCOUNTING (BASICS) Autumn 2014/2015
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Quiz 5: While accounting for treasury share reaquirement an entity shall:
 include into equity the fair value of the consideration given for the treasury shares
 deduct from equity the present value of the consideration given for the treasury shares
 deduct from equity the fair value of the consideration given for the treasury shares.
Example 1: issue of shares
SME A has issued share capital of CU100,000, which was contributed at par value of CU1 per share
on incorporation of SME A.
 At a later date SME A issued further 50,000 ordinary shares at par value CU1 per share and
sold them at a price of CU5 per share. The shares are issued for cash. (issued-subscribed
and paid)
 At a later date SME A issued further 50,000 ordinary shares at par value CU1 per share and
intended to sell them at a price of CU5 per share. The issue was subscribed by investors in
total amount but cash for SME A was not delivered yet. (issued-subscribed, not yet paid)
 At a later date SME A intended to issue further 50,000 ordinary shares at par value CU1 per
share and to sell them at a price of CU5 per share. The additional 50,000 ordinary shares
have been subscribed for and paid for, but are yet to be issued. SME A does not have any
obligation to refund the cash received (not yet issued-subscribed and paid)
 At a later date SME A intended to issue further 50,000 ordinary shares at par value CU1 per
share and to sell them at a price of CU5 per share. The additional 50,000 ordinary shares
have been subscribed for, but are yet to be issued and paid. (not yet paid-subscribed, not yet
paid)
What is the accounting for issue of additional ordinary shares in every of the presented above
cases? Compile extract from the statement of financial position.
Example 2: issue of shares
On 1 January 20X1 SME B issues 150,000 ordinary shares in exchange for 1,000 ounces of gold. The
par value of the shares is CU2 per share when gold was trading at CU800 per ounce.
What is the accounting for issue of ordinary shares? Compile extract from the statement of financial
position.
Example 3: issue of shares
SME A issues 200,000 ordinary shares at CU1.25 per share. The par value of the ordinary shares of
the entity is CU1 per share. The shares are issued for cash and CU1,000 share issue costs are
incurred.
What is the accounting for issue of ordinary shares?
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Example 4: issue of shares, sales of options
At 31 December 20X0 as a year-end SME A has ordinary share capital of CU100,000, which was
contributed at par on incorporation of SME A. The par value of the shares of the entity is CU1 per
share.
On 1 January 20X1 the entity issues a further 150,000 ordinary shares at CU5 per share. The shares
are issued for cash.
Also on 1 January 20X1, as an incentive to encourage investment, each shareholder is permitted to
buy one share option for every share purchased on 1 January 20X1 at CU0.5 per option. Each option
allows the holder to buy one share on 31 January 20X2 at CU4 per share. 100,000 share options are
purchased.
On 31 January 20X2 100,000 share options are converted into ordinary shares. The commercial law
to which the entity is subject requires to account for depletion of share option reserve as share
premium.
What is the accounting for conversion of options into ordinary shares? Compile extract from the
statement of financial position.
Example 5: bonus issue of shares
On 31 December 20X0 SME A’s statement of financial position included the following items:
Item Value (CU)
Share capital (10,000 ordinary shares at CU10 par value each) 100,000
Share premium 20,000
Retained earnings 1,080,000
Total equity attributable to owners 1,200,000
On 1 January 20X1 SME A gave its existing shareholders one bonus share for every two shares held.
The commercial law to which the entity is subject requires bonus issues to first be accounted for as
a depletion of share premium, if any.
What is the accounting for issue of bonus shares? Compile extract from the statement of financial
position.
Example 6: treasury shares
On 31 December 20X0 SME A’s statement of financial position included the following:
Item Value (CU)
Share capital (10,000 ordinary shares at CU10 par value each) 100,000
Share premium 500,000
Retained earnings 600,000
Total equity attributable to owners 1,200,000
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On 1 January 20X1 SME A reacquires 4,000 shares in itself from its shareholders for cash
consideration of CU75 per share.
What is the accounting for treasury shares? Compile extract from the statement of financial
position.
Example 7: cash distributions to owners
In 20X1 SME A declares and pays a dividend of CU0.5 per share to the owners of SME A in respect of
the year ended 31 December 20X1. SME A has 100,000 ordinary shares in issue.
What is the accounting for cash distributions to owners?
Example 8: non-cash distributions to owners
On 31 December 20X1 SME A declares and distributes to its owner (who owns 100 per cent of SME
A) a tract of land (classified as property, plant and equipment) with a carrying amount of CU1,000
and a fair value of CU100,000.
What is the accounting for non-cash distributions to owners?
Example 9: change in a parent’s interest without loss of control
Since SME Z was formed it has been owned 75 per cent by SME A and 25 per cent by SME B. On 31
December 20X5, when the carrying amount of SME Z’s net assets was CU100,000, SME A reduced its
holding in SME Z to 60 per cent by selling 15 per cent of SME Z’s shares to SME B for CU20,000.
What is the accounting for change in SME A’s interest in SME Z?
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Revenue15
Quiz 1: An entity shall recognize revenue when:
 goods are sold or services are exchanged for similar goods or services
 goods are sold or services are exchanged for similar goods or services in a transaction that
has commercial substance
 goods are sold or services are exchanged for dissimilar goods or services in a transaction
that has commercial substance.
Quiz 2: An entity shall include in revenue:
 only the gross inflows of economic benefits received and receivable by the entity on its own
account, including all amounts collected on behalf of third parties such as sales taxes, goods
and services taxes and value added taxes
 only the gross outflows of economic benefits paid and payable by the entity from its own
account, including all amounts paid on behalf of third parties such as sales taxes, goods and
services taxes and value added taxes
 only the gross outflows of economic benefits paid and payable by the entity from its own
account, excluding all amounts paid on behalf of third parties such as sales taxes, goods and
services taxes and value added taxes
 only the gross inflows of economic benefits received and receivable by the entity on its own
account, excluding all amounts collected on behalf of third parties such as sales taxes, goods
and services taxes and value added taxes.
Quiz 3: An entity shall measure the revenue transaction at:
 the fair value of the goods or services received adjusted by the amount of any cash or cash
equivalents transferred
 the present value of the goods or services given up adjusted by the amount of any cash or
cash equivalents transferred
 the acquisition cost of the goods or services given up adjusted by the amount of any cash or
cash equivalents transferred.
Quiz 4: An entity shall measure the revenue from transaction involving the rendering of services
and construction contracts
 by reference to the percentage of completion method applied at the end of the reporting
period
 by reference to the effective interest rate method applied at the end of the reporting period
 by reference to the discounting method applied at the end of the reporting period.
15
On the basis of IFRS for SMEs (IASB, 2009), Section 23. See Lecture 8.
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Example 1: revenue from the sale of goods
A manufacturer sells one of its products for CU500 per unit.
 However, the manufacturer gives customers a 20 per cent discount on orders of 100 units
or more. A customer buys 100 units in a single order.
 However, the manufacturer gives customers a 20 per cent discount on orders of 100 units
or more. Furthermore, when the customer has purchased 1,000 or more units in a single
annual financial reporting period, the retailer awards the customer a further volume
discount of 10 per cent of the list price for all units acquired by the customer in that
financial year. A customer buys 100 units of the product each month for one annual
financial reporting period.
 A manufacturer sells its product on credit. To encourage early settlement the retailer
awards its customers a 10 per cent early settlement discount provided that the customer
settles within 30 days of buying the goods. Normal credit terms are 60 days. Customer 1
pays within 30 days of the date of purchase to settle the amount owing for 90 units bought
from the entity. Customer 2 pays within, 60 days after the date of purchase, to settle the
amount owing for 90 units bought from the entity.
What is the recognized amount of revenue in each of the presented above cases?
Example 2: revenue from rendering of services
A calibration engineer entered into a contract to calibrate a manufacturer’s machine at six-month
intervals over a two-year period ending 31 December 20X2. On 1 January 20X1 the manufacturer
paid the calibration engineer CU10,000. The cost to the calibration engineer of performing each
calibration is approximately CU1,000.
What is the amount of revenue recognized at 31 December 20X1?
Example 3: revenue from rendering of services
An entity provides maintenance services to a third party under a contract for a fixed price of
CU100,000. The entity initially estimated that its total costs under the contract will be CU60,000. At
the end of the reporting period (20X1) the entity has incurred CU50,000 costs and it expects to
incur a further CU15,000 costs to complete the maintenance services.
The entity determines the stage of completion of the contract by reference to the proportion that
costs incurred for work performed to date bear to the estimated total costs.
What is the amount of revenue recognized at the end of the reporting period 20X1?
Example 4: revenue from rendering of services
A security firm enters into contracts to provide armed responses to homeowners when their alarm
systems are triggered. The security firm has a 30 June year-end. On 1 January 20X1 one homeowner
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paid the security firm CU10,000. In return for the fixed fee, the security firm is contractually obliged
to provide its armed response services to the homeowner for a two-year period.
What is the amount of revenue recognized at the end of each reporting period during the lifetime of
the contract?
Example 5: revenue from rendering of services
A vehicle dealer enters into contracts to maintain its customer’s new vehicle for a three-year
period.
On 1 January 20X1 a customer paid the dealer CU10,000. Experience has shown that the costs to the
dealer of maintaining new vehicles of the model owned by the customer are on average CU1,000 in
the first year of ownership, CU1,000 in the second year and CU3,000 in the third year.
What is the amount of revenue recognized at the end of each reporting period during the lifetime of
the contract?
Example 6: revenue from construction contracts
Under a construction contract, a contractor agrees to a fixed contract price of CU2,000 to refurbish
the kitchen of a residential flat. The contractor’s initial estimate of contract costs at 1 February
20X1, the date the contract is agreed, is CU1,200. The contract price will be paid to the contractor
on completion of the refurbishment. The refurbishment was completed on 31 July 20X1 at a cost of
CU1,250 (i.e. actual costs incurred under the contract as at 31 July 20X1 are CU1,250).
 The contractor has a 31 December year-end.
 The contractor has a 30 June year-end. As at 30 June 20X1 contract costs incurred for work
performed to date are CU800 and the contractor estimates that costs to complete the
contract will be CU400 (i.e. total contract costs will be CU1,200). The contractor determines
the stage of completion of the contract by calculating the proportion that contract costs
incurred for work performed to date bear to the latest estimated total contract costs.
What is the amount of revenue recognized at the end of each reporting period during the lifetime of
the contract in each of the presented above cases?
Example 7: revenue from construction contracts
Under a construction contract, a contractor agrees to receive a 40 per cent fixed return on its direct
contract costs from the customer. The contractor’s initial estimate of contract costs at 1 January
20X1, the date the contract is agreed, is CU2,000 (all of which are considered direct costs).
Therefore, expected revenue under the contract is CU2,800. The contract is expected to last two
years. The contractor has a 31 December year-end.
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At 31 December 20X1 contract costs of CU1,045 have been incurred and the contractor expects
total contract costs to be CU1,900 (all considered direct costs). At 31 December 20X2 actual costs
are CU2,000. However, only CU1,800 meet the criteria in the contract to be considered direct costs
when determining the 40 per cent fixed return.
The contractor determines the stage of completion of the contract by calculating the proportion
that contract costs incurred for work performed to date bear to the latest estimated total contract
costs.
What is the amount of revenue recognized at the end of each reporting period during the lifetime of
the contract?
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Income tax16
Quiz 1: Income tax consists of:
 domestic taxes that are based on taxable profits
 foreign taxes that are based on taxable profits
 taxes that are payable by a subsidiary, associate or joint venture on distributions to the
reporting entity
 all of the above.
Quiz 2: Decide in which order individual procedures which are presented below should take place
while accounting for a deferred tax (the first four steps of the deferred tax methodology)
(i) Compute any temporary differences, unused tax losses and unused tax credits;
(ii) Determine the tax basis at the reporting date of all those assets and liabilities, and of other items
that have a tax basis;
(iii) Recognize deferred tax assets and liabilities arising from the temporary differences, unused tax
losses and unused tax credits;
(iv) Identify which assets and liabilities are expected to affect taxable profit if they were recovered
or settled for their carrying amount.
 (i), (ii), (iii), (iv)
 (iv), (ii), (i), (iii)
 (ii), (iv), (i), (iii)
 (ii), (i), (iii), (iv).
Quiz 3: Decide which statements are true:
 An entity shall recognize a current tax liability for tax payable on taxable profit for the
current and past periods.
 An entity shall measure a current tax liability (asset) at the amounts it expects to pay
(recover) using the tax rates and laws that have been enacted or substantively enacted by
the reporting date.
 An entity shall not recognize changes in a current tax liability or current tax asset.
 An entity shall not include in the amounts recognized the effect of the possible outcomes of
a review by the tax authorities.
Quiz 4: Deferred tax arises from:
 the difference between the amounts recognized for the entity’s assets and liabilities in the
statement of financial position and the recognition of those assets and liabilities by the tax
authorities, and the carryforward of currently unused tax losses and tax credits
16
On the basis of IFRS for SMEs (IASB, 2009), Section 29. See Lecture 9.
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 the difference between the amounts recognized for the entity’s assets and liabilities in the
statement of financial position and the recognition of those assets and liabilities by the tax
authorities
 the difference between the amounts which were recognized by an entity and which were
paid by an entity in current and past periods.
Example 1: current tax
An entity has a year-end of 31 March. The tax year in the jurisdiction runs from 1 April to 31 March.
The relevant income tax rate for 20X7/20X8 is 15 per cent. The entity has an accounting profit of
CU150,000 for the year ended 31 March 20X8. The rules determining the determination of taxable
profit in the jurisdiction are identical to the IFRS for SMEs for the year ended 31 March 20X8,
except for the following income and expenses:
 CU20,000 royalty revenue recognized in 20X8 is exempt from income tax.
 No tax deduction is permitted for entertainment expenses of CU5,000.
 No tax deduction for bad debts is allowed until the debtors are derecognized from the
financial statements. The bad debt provision, which is offset against trade receivables, was
CU4,000 on 31 March 20X7 and CU4,500 on 31 March 20X8.
 The building is depreciated at a faster rate for tax purposes. The amount of tax depreciation
deductible in the year ended 20X8 was CU43,000. The amount of accounting depreciation in
the financial statements for the same building for the year was CU35,000.
The deferred tax impact of the transactions above is ignored in this question. What is the
recognized amount of current income tax?
Example 2: current tax
An entity calculates its taxable profit to be CU100,000 for the tax year 20X7/20X8 determined in
accordance with the relevant tax rules in its jurisdiction. The tax year in the jurisdiction runs from 1
April to 31 March. The appropriate income tax rate for 20X7/20X8 is 20 per cent. The current tax
payable for the tax year 20X7/20X8 is payable by 30 September 20X8 and the entity makes the
payment on 15 September 20X8. The entity has a 31 March financial year end (end of the reporting
period).
What is the recognized amount of current income tax? How should it be accounted for?
Example 3: carryback for current tax loss
In accordance with the relevant tax rules in its jurisdiction, an entity estimates its taxable loss for
the tax period 20X7/20X8 at CU9,000. The tax legislation in the jurisdiction permits entities to
carry back losses three tax years into the past. Taxable income in 20X6/20X7 was CU7,000, in
20X5/20X6 it was CU5,000 and in 20X4/20X5 it was CU3,000. The entity has a 30 September
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financial year-end (end of the reporting period) and this coincides with the entity’s tax year. The
relevant income tax rates are as follows:
 18 per cent in 20X6/20X7 and 20X7/20X8
 20 per cent in 20X5/20X6
 17 per cent in 20X4/20X5.
What is the recognized amount of carryback for current tax loss if:
 The tax legislation in the jurisdiction permits entities to carry back losses three tax years
into the past and there is no requirement on which of the three years the loss is set off
against first.
 The tax legislation in the jurisdiction permits entities to carry back losses three tax years
into the past and there is a requirement that the entity should set the losses against the
most recent period possible, i.e. 20X6/20X7 first, 20X5/20X6 second and 20X4/20X5 last.
Example 4: deferred tax
The only difference between an entity’s accounting profit and its taxable profit arises from the laws
permitting the cost of a particular type of machinery with a useful life of three years to be fully
deductible for tax purposes in the year of purchase. For financial reporting purposes, the entity
depreciates the machine on a straight-line basis over three years to a nil residual value. The entity
acquired the machine for CU600 on 1 January 20X1. Its accounting profit is CU1,000 for each of the
years 20X1–20X3. The entity incurs income tax at the rate of 30 per cent of its taxable profit.
What is the recognized amount of current tax and deferred tax liabilities in every of three years?
Example 5: deferred tax
An entity has an item of equipment that is depreciated faster for tax purposes than for financial
reporting purposes. On 31 December 20X1 a temporary difference of CU1,000 arises related to this
equipment that is expected to increase taxable profit in the future. The temporary difference is
expected to reverse in five years’ time. In the entity’s jurisdiction, tax is payable at 20 per cent on
the first CU100,000 of taxable profit earned, 25 per cent on the next CU200,000 of taxable profit
earned, 30 per cent on the next CU200,000 of taxable profit earned, and 35 per cent on any
remainder (ie excess above CU500,000). In 20X1 the entity earned taxable profit of CU400,000. In
20X6 the entity expects to earn taxable profit of CU650,000.
What is the recognized amount of differed tax liability?
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Foreign currency transactions17
Quiz 1: An entity’s functional currency is:
 the currency in which the financial statements are presented
 the currency of the primary economic environment in which the entity operates
 the currency in which sales prices for the entity’s goods and services are denominated and
settled
 always the local currency of the country in which the entity is based.
Quiz 2: Which of the following factors is not a primary indicator of an entity’s functional currency:
 the currency that mainly influences labor, material and other costs of providing goods or
services
 the currency that mainly influences sales prices for goods and services
 the currency in which funds from investing activities are generated
 the currency of the country whose competitive forces and regulations mainly determine the
sales prices of the goods and services.
Quiz 3: Entity’s net investment in that foreign operation is:
 a long-term monetary item that is receivable from or payable to a foreign operation in the
foreseeable future
 a long-term monetary item that is receivable from or payable to a foreign operation, but not
in the foreseeable future
 a short-term monetary item that is receivable from or payable to a foreign operation, but
not in the foreseeable future.
Quiz 4: The effect of a change in functional currency is accounted for:
 prospectively
 retrospectively
 both variants mentioned above.
Quiz 5: An entity may present its financial statements in:
 any currency (or currencies)
 functional currency only.
Example 1: reporting foreign currency transactions in the functional currency, initial recognition
An entity with a functional currency of CU sells inventory with a carrying amount of CU10,000 to a
customer on credit for FCU30,000. The spot exchange rate when the sale is recognized is CU1 =
FCU2.
17
On the basis of IFRS for SMEs (IASB, 2009), Section 30. See Lecture 9.
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What is the recognized amount of sale? How it should be accounted for?
Example 2: reporting foreign currency transactions in the functional currency, initial recognition
An entity with a functional currency of CU borrows FCU100,000 from a bank when the spot
exchange rate is CU1 = FCU2.5.
What is the recognized amount of borrowing? How it should be accounted for?
Example 3: reporting foreign currency transactions in the functional currency, initial recognition
An entity with a functional currency of CU buys a machine (property, plant and equipment) from an
overseas supplier for cash of FCU10,000. The spot exchange rate is FCU1 = CU2 on the date the
machine is initially recognized.
What is the recognized amount of machine? How it should be accounted for?
Example 4: reporting foreign currency transactions in the functional currency, subsequent
recognition and measurement
On 24 December 20X1 an entity with a functional currency of CU buys raw materials from a
supplier on credit for FCU100,000. The entity pays the supplier on 17 January 20X2. The entity has
a financial year-end of 31 December 20X1.
The spot exchange rates are as follows:
 24 December 20X1: CU2 = FCU1
 31 December 20X1: CU2.1 = FCU1
 17 January 20X2: CU2.05 = FCU1
What is the recognized amount of purchase of inventories? How it should be accounted for?
Example 5: reporting foreign currency transactions in the functional currency, subsequent
recognition and measurement
On 1 January 20X1 a bank transfers FCU5,000 to an entity in return for a promise to pay fixed
interest of 8 per cent per year for two years (due at the end of each year of the loan period, i.e. 31
December) and a payment of FCU5,000 at the end of the two-year period.
At the inception of the loan 8 per cent is the market rate for similar two-year fixed-interest FCUdenominated
loans.
The entity’s functional currency is CU.
Exchange rates over the loan are:
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 1 January 20X1: CU1 = FCU5
Average exchange rate in 20X1: CU1 = FCU5.06
 31 December 20X1: CU1 = FCU5.1
Average exchange rate in 20X2: CU1 = FCU4.9
 31 December 20X2: CU1 = FCU4.8
In this example, the average currency exchange rate for the year is not materially different from the
actual rate.
What is the recognized amount of loan during its lifetime? How it should be accounted for?
Example 6: reporting at the end of the subsequent reporting periods, overseas investment property
On 1 June 20X0 an entity based in country A with a functional currency of CU buys an investment
property in country B (local currency FCU) for FCU500,000.
The fair value of the investment property is reliably measurable in FCU without undue cost or effort
on an ongoing basis. Consequently, in accordance with Section 16 Investment Property, the entity
measures its investment property, after initial recognition ,at fair value through profit or loss.
The entity has a year-end of 31 December.
The spot exchange rates and fair values of the investment property (FVIP) are as follows:
 1 June 20X0: CU1 = FCU1.1 and FVIP = FCU500,000
 31 December 20X0: CU1 = FCU1.05 and FVIP = FCU520,000
 31 December 20X1: CU1 = FCU1.2 and FVIP = FCU540,000
On 1 April 20X2 the investment property is sold for FCU570,000 when the exchange rate is CU1 =
FCU1.1.
What is the recognized amount overseas investment property during its lifetime? How it should be
accounted for?
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Transition to IFRS18
Quiz 1: Financial statements prepared in accordance with these IFRS are an entity’s first such
financial statements if, for example, the entity:
 did not present financial statements for previous periods
 presented its most recent previous financial statements under national requirements that
are consistent with these IFRS in all respects
 presented its most recent previous financial statements in conformity with full IFRSs.
Quiz 2: Decide in which order individual procedures which are presented below should take place
while compiling entity’s opening statement of financial position as of its date of transition to the
IFRS for SMEs (i.e. the beginning of the earliest period presented):
(i) reclassify items that it recognized under its previous financial reporting framework as one type
of asset, liability or component of equity, but are a different type of asset, liability or component of
equity under these IFRS;
(ii) apply this IFRS in measuring all recognized assets and liabilities;
(iii) recognize all assets and liabilities whose recognition is required by the IFRS for SMEs;
(iv) not recognize items as assets or liabilities if these IFRS does not permit such recognition.
 (i), (ii), (iii), (iv)
 (iv), (iii), (ii), (i)
 (iii), (iv), (i), (ii)
 (ii), (i), (iv), (iii).
Quiz 3: An entity that had never presented financial statements decided to adopt the IFRS for SMEs
in 20X8. The entity’s financial statements for the year ended 31 December 20X8 conformed to the
IFRS for SMEs. Full comparative information is provided for one year. What is the entity’s date of
transition to the IFRS for SMEs?
 1 January 20X5
 1 January 20X6
 1 January 20X7
 1 January 20X8.
18
On the basis of IFRS for SMEs (IASB, 2009), Section 35. See Lecture 10.
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