IAS 8 Best summary policies estimates and errors

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IAS 8 Best summary policies estimates and errors comprises a high level summary of the three items in this standard:

  1. Accounting policies,
  2. Accounting Estimates
  3. Errors

1. Accounting policies

Definition:

Accounting policies are the specific principles, bases, conventions, rules and practices applied by an entity in preparing and presenting financial statements.

Selection and application of accounting policies:

  • If a standard or interpretation deals with a transaction, use that standard or interpretation
  • If no standard or interpretation deals with a transaction, judgment should be applied. The following sources should be referred to, to make the judgement:
    • Requirements and guidance in other standards/interpretations dealing with similar issues
    • Definitions, recognition criteria in the framework
    • May use other GAAP
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Consolidated financial statements

IFRS 10 Definition of consolidated financial statements

The financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent and its subsidiaries are presented as those of a single economic entity.

ParentAn entity that controls one or more entities.

The other types of financial statements are unconsolidated financial statements (or company accounts) and combined financial statements.

Single economic entity concept

The concept of a single economic entity is illustrated in the example below:

Example – Single economic entity concept

A subsidiary buys an asset from a third party for CU 100. It subsequently sells the asset on to its parent for CU 130. The subsidiary records a profit

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11 Best fair value measurements under IFRS 13

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11 Best fair value measurements under IFRS 13 – Several IFRS standards provide guidance regarding the scope and application of the fair value option for assets and liabilities. Here they are from 1 to 11…….

1 Investments in associates and joint ventures

Investments held by venture capital organizations and the like are exempt from IAS 28’s requirements only when they are measured at fair value through profit or loss in accordance with IFRS 9. Changes in the fair value of such investments are recognized in profit or loss in the period of change.

The IASB acknowledged that fair value information is often readily available in venture capital organizations and entities in similar industries, even for start-up and … Read more

Compound financial instruments

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Compound financial instruments – An incredible shift in accounting concepts

Compound financial instruments contain elements which are representative of both equity and liability classification.

A common example is a convertible bond, which typically (but not always, see ‘2 Convertible bonds‘ below) consists of a liability component in relation to a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, Compound financial instruments to convert the bond into a fixed number of ordinary shares of the entity).

Other examples of possible compound financial instruments include instruments with rights to a fixed minimum dividend and additional discretionary dividends, and instruments with fixed … Read more

Impairment of intangible assets

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Possible impairment of intangible assets has to be assessed on a periodical basis. Intangible assets are tested for impairment when there is indication that they might be impaired. Indicators of impairment include legal restrictions, business restructuring, development of new technology, economic changes, etc. Impairment of intangible assets

Impairment test for intangible assets is the same as that for a tangible fixed asset:

  1. comparing the carrying amount of the asset, and Impairment of intangible assets
  2. the higher of fair value (less cost to sell) and value in use. Impairment of intangible assets

If b) is lower than a) that difference is recognized as impairment. Impairment of intangible assets

Impairment test for goodwill is a little more complex. The … Read more

Reclassification of financial assets

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Reclassification of financial assets – This section looks at the circumstances in which financial assets are reclassified, and their measurement on reclassification. Financial liabilities cannot be reclassified. [IFRS 9 4.4.2]

Reclassification of financial assets – requirements

Under IFRS 9, reclassification of financial assets is required if, and only if, the objective of the entity’s business model for managing those financial assets changes. [IFRS 9 4.4.1] Reclassification of financial assets

Such changes are expected to be very infrequent, and are determined by the entity’s senior management as a result of external or internal changes. These changes have to be significant to the entity’s operations and demonstrable to external parties. Accordingly, a change in … Read more

General model of measurement of insurance contracts

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General model of measurement of insurance contracts – Insurance contracts may be highly complex bundles of interdependent rights and obligations and combine features of a financial instrument and features of a service contract. As a result, insurance contracts can provide their issuers with different sources of income – e.g. underwriting profit, fees from asset management services and financial income from spread business (when insurers earn a margin on invested assets) – often all within the same contract. [IFRS 17 IN5, IFRS 17 BC18]

The general measurement model introduced by IFRS 17 provides a comprehensive and coherent framework that provides information reflecting the many different features of insurance contracts and the ways in which the issuers of insurance … Read more

Equity method

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Equity method is used to account for investments in associates and joint-ventures. Simply put, the equity accounting method is a simplified form of consolidation (IAS 28 27), with one major difference: items are not added line-by-line, but a single asset (investment in associate or joint-venture) is recognised in the statement of financial position and single lines are presented in P/L and OCI.

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.

The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income … Read more

Held-to-maturity financial assets Example

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Held-to-maturity financial assets Example – Held-to-maturity financial assets have passed the SPPI test (solely payment of principal and interest) and the business model test (Held to collect). Held-to-maturity financial assets are measured at amortized cost, using the effective interest method, less any impairment.

Only debt investments can be classified as held to maturity because they have a definite maturity. Equity securities, on the other hand, have no maturity and hence they cannot be classified as held to maturity.

A held to maturity investment is initially recognized at cost including any transaction costs. When the market interest rate differs from the stated interest rate of the securities, purchase price of the investment is different from its … Read more

Property plant and equipment Example

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Property plant and equipment Example – Accounting policy example

Property plant and equipment is stated at cost, less accumulated depreciation and accumulated impairment losses. The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bringing the asset into the location and condition necessary for it to be capable of operating in the manner intended by management, the initial estimate of any decommissioning obligation, if any, and, for assets that necessarily take a substantial period of time to get ready for their intended use, directly attributable finance costs.

The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given … Read more