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8/2/2019 IFRS %28SessionII-1%29

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IAS-1 Illustrative Example-Critical AccountingEstimates and Judgements

Estimates and judgements are continually evaluated and are based onhistorical experience and other factors, including expectations of futureevents that are believed to be reasonable under the circumstances.Critical accounting estimates and assumptionsThe company makes estimates and assumptions concerning the future. Theresulting accounting estimates will, by definition, seldom equal the relatedactual results. The estimates and assumptions that have a significant risk ofcausing a material adjustment to the carrying amounts of assets and liabilitieswithin the next financial year are discussed below.(a) Estimated impairment of goodwill

The company tests annually whether goodwill has suffered any impairment,in accordance with the accounting policy stated in Note --. The recoverableamounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates (Note --).If the revised estimated gross margin at 31 December 2006 had been 10%lower than management’s estimates at 31 December 2005, the companywould need to reduce the carrying value of goodwill by Rs50 and property,plant and equipment by Rs350.



If the revised estimated pre-tax discount rate applied to the discountedcash flows had been 10% higher than management’s estimates, thecompany would need to reduce the carrying value of goodwill by Rs50and property, plant and equipment by Rs250. If the actual gross marginhad been higher or the pre-tax discounted rate lower than management’s

estimates, the company would not be able to reverse any impairmentlosses that arose on goodwill.(b) Income taxes The company is subject to income taxes in numerous jurisdictions.Significant judgment is required in determining the worldwide provisionfor income taxes. There are many transactions and calculations for

which the ultimate tax determination is uncertain during the ordinarycourse of business. The company recognises liabilities for anticipated taxaudit issues based on estimates of whether additional taxes will be due.Where the final tax outcome of these matters is different from theamounts that were initially recorded, such differences will impact theincome tax and deferred tax provisions in the period in which such

determination is made. Were the actual final outcome (on the judgementareas) to differ by 10% from management’s estimates, the companywould need to: – increase the income tax liability by Rs120 and the deferred tax liabilityby Rs230, if unfavourable; or – decrease the income tax liability by Rs110 and the deferred tax liabilityby Rs215, if favourable.



IAS-1 Illustrative Example-Critical judgementsin applying the entity’s accounting policies

Revenue recognition

The company has recognised revenue amounting to Rs950for sales of goods to Leatherex & Co in Lebanon during2005. The buyer has the right to rescind the sale if there is5% dissatisfaction with the quality of the first 1,000 pairs ofshoes sold. The profit recognised for this sale was Rs665.The company believes that, based on past experience withsimilar sales, the dissatisfaction rate will not exceed 3%. Itis therefore appropriate to recognise revenue on thistransaction during 2005. The company will suffer an

estimated loss of Rs700 in its 2006 financial statements ifthe sale is cancelled, Rs665 being the reversal of 2005profits and Rs35 of costs connected with returning thestock to the warehouse.



1 Budgeted gross margin2 Weighted average growth rate used to extrapolate cash flows beyond the budget period

3 Pre-tax discount rate applied to the cash flow projections

These assumptions have been used for the analysis of each cash generating unit (CGU)within the business segment. Management determined budgeted gross margin based onpast performance and its expectations for the market development. The weighted averagegrowth rates used are consistent with the forecasts included in industry reports. Thediscount rates used are pre-tax and reflect specific risks relating to the relevant segments.

The impairment charge arose in a CGU in Swaziland (included in ‘Other’ countries)following a decision to reduce the manufacturing output allocated to these operations (seealso Note --). This was a result of a redefinition of the company’s allocation ofmanufacturing volumes across all CGUs in order to benefit from advantageous marketconditions. Following this decision, the company reassessed the depreciation policies of itsproperty, plant and equipment in this country and estimated that their useful lives will not beaffected following this decision.

Key assumptions used forvalue-in-use calculations:

Eurozone US UK OthersGross margin1 60.0% 59.0% 60.0% 56.0% Growth rate2 1.8% 1.8% 1.8% 1..9%

Discount rate3 10.5% 10.0% 10.7% 12.8%



Choice of model-Cost or Revaluation

What if company has already revalued assets but wants toadopt cost model under revised IAS?

Treat opening balance of valuations as cost (noretrospective adjustment required)

Leave surplus untouched on the balance sheet

Amortise surplus in accordance with the CompaniesOrdinance requirements

When asset disposed of, reverse surplus to equity

IAS 16 …contd.



Property, plant and equipment

Land &Building

Vehicles &Machinery

FurnitureFittings &

Equipment

Total

At 1 January 2005Cost or valuation XXX XXX XXX XXXAccumulated depreciation (XXX) (XXX) (XXX) (XXX)Net book amount XXX XXX XXX XXX

Year ended 31 December 2005

Opening net book amount XXX XXX XXX XXXExchange differences XXX XXX XXX XXXRevaluation surplus XXX XXX XXX XXXAdditions XXX XXX XXX XXXDisposals (XXX) (XXX) (XXX) (XXX)Depreciation charge (XXX) (XXX) (XXX) (XXX)Closing net book amount XXX XXX XXX XXX

At 31 December 2005Cost or valuation XXX XXX XXX XXXAccumulated depreciation (XXX) (XXX) (XXX) (XXX)Net book amount XXX XXX XXX XXX



4 Categories of Financial Assets

* If FV cannot be measured reliably, then use cost.

Loans and receivables Amortised cost

Held to maturity Amortised cost

Fair value through P&L Fair value*, value changesto P&L

Available for sale Fair value*, value changesto equity

IAS 39 Financial Instrument Recognitionand Measurement



Overview of Derecognition

Situation Accounting

Substantially all risks andrewards are transferred

Derecognize the oldasset

Transferredand retained

risks andrewards are

bothsignificant

Control istransferred

Continuing involvementapproach

Control isretained

Substantially all risks and

rewards are retained

Continue to recognize the

old asset

IAS 39 Financial Instrument Recognitionand Measurement

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