SBRR
SBRR
SBRR
Example 1.1
The Lease term is 3 years (2+1), Fixed lease term of 2 years + 1 year
extension option which is certain to be exercised.
Total Payments:
o Year Payment DR Present value
o 1 1000 0.952 952
o 2 1000 0.907 907
o 3 700 0.863 604
Total PV = 2463
The Present value of the 2700 in the future is 2463 today
Initial accounting ( on the date of the lease ) 1st January 2020
o The initial liability will be $2463, this is the present value of future
lease payment obligations.
o The Value of the right of use asset initially will be $2463, but there is
a direct cost/cash outflow ( commission paid to agents ) of $420
which will add on the value of the RUA. The Final Initial value of the
RUA will be $2883
o Dr Right of use Asset 2883
o Cr Lease Liability 2463
o Cr Cash A/cb 420
o The right of use asset will be depreciated over the lesser of either 1.
The useful life or 2. The Lease term. In this case the lease term will be
taken into consideration ( 3 years )
o The depreciation of the asset at the end of the will be 2883/3 = 961,
and the value of the RUA at the will be 2883-961 = $1992
o The depreciation of $961 will be charged to the P/L, and the RUA will
be recorded at the SOFP
Example 1.2
(a) It is a service contract rather than a lease contract. Starbucks does not have
right of use to the mentioned space as Dubai airport ( the lessor ) has
substantive substitution rights and can shift the location of the space at any
time and does not incur any significant costs and therefore it is also
economically beneficial. The amounts paid by starbucks will be recorded in
the P/L statement
(b) This is a lease contract rather than a service contract. The Lessee ( building
material company ) has Right of use of the underlying asset ( ship ) and can
direct its use ( where it will sail to ) and gain economic benefits. The lessor
does not possess substantive substitution rights ( cannot replace a ship with
another one if it is economically beneficial to do so ) Even though the lessor
has placed restrictions, the lessee has the entire right to direct its use
throughout the lease term. The Bldg. material will company will record RUA
(ship) in the SOFP and a corresponding lease liability
Example 1.3
The Lease liability will be accounted as the present value of future lease
payments, and a cash outflow will also be recorded as the effective interest
Example 1.4
LESSOR ACCOUNTING
Example 1.5
This contract is a finance lease. The lease period which is 4 years is equal to
the useful life of the asset ( greater than the majority of the useful life )
The PV of future payments is equal to the fair value of the leased asset ( it is
substantially all of the PV )
Accounting
o Step 1 : Derecognize the leased asset ( NBV) $60,000
o Step 2 : Record a receivable that will be the PV of lease payments -
$68,253
o Step 3 : The difference is recorded in the P/l Statement as a gain or
loss
o DR Recievable 68,253
o CR Leased Asset 60,000
o CR Cash inflow/Profit 8,253
Subsequent Accounting:
The receivable must be recorded at amortised cost
Year Opening Balance Interest 11% Payment Closing Balance
1 68,253 7507 (22000) 53,760
Example 1.6
This is an operating lease. The Plant will be returned to Ajay at the end of
the lease period which is 4years ( much less than the useful life of the
leased asset which is 25 years ). Also the total contract value is $380,000
which is only 43% of the original cost and does not cover all value of the
plant substantially
Ajay will keep the asset and depreciate it over 25 years ( 880,000/25 =
35200). This will be recorded in the P/l
The Contract rental income of $380,000 will be recorded throughout the 4
year period in a straight line basis ( 380,000/4 = $95,000) and will be
credited in the P/L Statement
Example 1.7
Seller/Lessee
Step 1 : Derecognize the CV of the asset
Step 2 : record the proceeds at FV
Step 3 : record the Lease Liability at the PV of Lease Payments
Step 4 : Record the Rights of use asset at the proportion of rights retained
CV x PV/FV
1.2 x 1.9/1.3 = 0.76
Step 5 : The balancing figure is the gain or loss on disposal
Dr. Cash $3m
De. ROU $0.76m
Cr. PPE $1.2m
Cr. Lease Liability $1.9m
Cr. Gain disposal $0.66M
Richard will have a ROU asset of $760,000 that will depreciate over 5 years.
760,000/5 = 152,000. This depreciation expense will be recorded in the P/L
Sheet
The Lease liability will amortize by incurring finance cost ( 1.9 x 10% = 0.19 )
$190,000 which will increase the lease liability. The lease liability will be
reduced by annual payments of $500,000 as cash outflow
1,900,000 + 190,000 – 500,000 = $1,590,000
Branson Buyer/lessor:
Step 1 : Recognize the asset and cash outflow
Dr. PPE 3M
Cr. Cash 3M
Step 2 : Identify if its financial leas or operating lease
o Lease term < useful life
o PV of payments 1.9/3 = 63% doesn’t substantially cover the entire
fair value
o This is a operating lease
Rental Income of $500,000 will be recorded as the P/L as income on
straight line basis (500,000/5 = 100,000)
Share Based Payments IFRS 2
Example 2.1
Explanation
Share Options issued to employees by the company are recorded as an
extra expense and a corresponding credit to be issued in equity
The expense has to be spreadover the vesting period (3 years ) and takes
into account the actual leavers and the employees expected to leave in the
future
The Share options are valued using the fair value of the option at the grant
date and remains unchanged throughout the vesting period
The entity will record $212,500 as an equity in 2021. $227,500 in 2022 and
$224,500 in 2023. Once the shares are vested, this is then transferred to
shares capital and premium.
Example 2.2
2021
o (500-20-20) x 200 x $5 x 1 / 2 = $230,000
o Dr. Expense 230,000
Cr. Liability 230,000
o Share Appreciation rights are given to employees with the promise to
pay cash based on the share price in the future.
o The number of eligible employees will be considered and valued at
the fair value at the end of each year. This is spread throughout the
vesting period and recorded as an expense with a corresponding
entry as Liability.
2022
o (500-20-24) x 200 x 7 = 638,400
o Expense for the year = 638,400 – 230,000 = $408,400
o Dr. Expense 408,400
Cr. Liability 408,400
20th December 2023 -> Employees will exercise their SAR’s -> (500-20-24) x
200 x $8 = $729,600
The difference of $91,200 will be recorded in the P/L statement
Dr. Liability 638,400
Dr. Expense 91,200
Cr. Cash outflow 729,600
Example 7.3
The increase in the pension settlement from 10% to 15% is a past service cost and
has to be recorded in the P/L.
Example 3.1
10% Test
Revenue = $100,00
Asset = $1,000,000
Lexus 270,000
Yaris 160,000
Corolla 330,000
Lexus 3,400,000
Corolla 3,800,000
Lexus 98,000
Yaris 47,000
Corolla 121,000
Avalon (29,000)
Lexus
Yaris
Corolla
Avalon
Example 3.2
As per IFRS 8, the operating segment is a component of an
entity that:
o earns revenue and incurs expenses, and
o whose performance is regularly reviewed by a Chief
Operating Decision Maker.
o It should also have separate financial information
available.
A Segment is reportable if it qualifies the 10% test which
means that either the revenue, assets or profits of the
segment must be above 10% of the total of the entity
Two or more segments can be aggregated together if they
have similar economic characteristics.
Example 4.1
As per the standard relating to financial instruments, a
liability is a contractual obligation to deliver cash or
another financial instrument to another entity.
1
In case of B shares, SKYE has no right to oblige to transfer
cash to or another asset to the holders of the instruments.
2
In case of preference shares, the holders have the right to
ask for repayment of the principal at any time.
o Even though Skye is only obliged to payback if they
have sufficient reserves, the obligation still exists and
they must accept the holders’ request in the future
when they possess sufficient reserves. Therefore
contractual obligation still exists and this preference
shares is classified as a financial liability.
Example 4.2
Example 4.3
Example 4.4
Year Payments DR PV
1 800,000 0.909 727,200
2 (800,000 + 20m) 0.826 17,180,800
(Coupon+Principal)
Total PV 17,908,000
A
If David wants to hold the bonds till redemption date, the
bond will be amortized
Initially on 1 January 2021, David will record cash outflow (
investing activity ) of $100,000, representing the
investment and a corresponding entry as financial asset.
Dr. Financial Asset 100,000
Cr. Cash 100,000
Subsequently as David’s model is to hold the bond till
maturity, the bonds will be amortized
Year Opening Interest Cash Inflow Closing
1 100,000 (7000) 5,000 102,000
Example 4.6
A
Initially these shares purchased will be recorded as a
financial asset at fair value $ 40 Million. The Cash will be
treated as cash outflow from investing activities.
At the year end 31st Dec 2021, the fair value of the
financial asset must be recorded as $60 million. The
difference of $20m will be recorded in Other
Comprehensive Income.
B
Initially these shares purchased will be recorded as a
financial asset at fair value $ 40 Million. The Cash will be
treated as cash outflow from investing activities.
At the year-end 31st Dec 2021, the fair value of the
financial asset must be recorded as $60 million. The
difference of $20m will be recorded in the P/L statement.
Example 4.7
Example 4.8
Example 5.1
Bing must disclose its parent companies (G) and should
also disclose its ultimate parents, ie., Roberto Duffy
The company in which Franchesca Tribianni has a 23%
shareholding rather significant influence is related to Bing
as its significantly influenced by a close family of the
ultimate president. As result the sales, any outstanding
balances, bad and doubtful debts must be disclosed even if
the sales were held at market price
Bing can lose this sale in the future, if Roberto’s wife were
to sell her shares in company x. This need to be disclosed
to the users of Bing’s financial statements since its not a
organic transaction
Interest free loans on its own are not a related party
transaction even though it’s a benefit to the employees.
Therefore, no disclosure needs to be done.
Bing is dependent upon R plc as 30% of their revenue
comes from transaction with them. However its not a
related party issue since the relationship is organic and a
significant customer cannot be a related party just due to
the volume of business.
Example 5.2
The accounting standard IAS
\ 24 is to ensure that an entity’s financial statements
contain any disclosure which are necessary to draw the
attention of the users towards any possibility that the
company’s profit/loss or financial position has been
affected by the existence of a related party.
If there has been any related party transactions there
should be a disclosure of the nature, amounts and
description along with any other outstanding balances.
The Director is a key management personnel of Abby and
therefore is a related party
Arwight is jointly owned by the director and his wife and
therefore Arwight and his wife is a related party to Abby
Even though the transaction is made at an arms length
basis the disclosure is still required.
The Director is incorrect in his reasoning that other entities
also do not disclose such information. This either brings
the director’s integrity in question or brings his
professional knowledge regarding the accounting
standards in question.
The accountant should discuss with the director to the
risks relating to not making a disclosure however given to
the fact the accountant is a working under the finance
director he might be rather tempted to hide the disclosure
to keep the job.n
TAX
Example 6.1
1. Accounting : The investment initially recorded at $10
million. At the year end, a gain of $8m will be recorded
2m x 30% = 600,000
Dr. Deferred Tax Asset 600,000
Cr. Tax Expense 600,000
Example 6.2
Share Option that are equity settled are recorded in the p/l as
an expense over the vesting period with a corresponding entry
on equity – shares to be issued
5000 x 3 x ½ = 7500
The value of the options will take into account the fv of the
options at grant date that will not change and and will also
consider the number of employees and potential leavers and it
will be spread over the vesting period
Dr. Expense 7500
Cr. Shares to be issues 7500
Example 6.3
Example 7.3
Step 1:
Identify the Principal market (industry). The market with the
highest sales volume throughout the industry is Asia selling
750,000 vehicles. Even if it’s not the subsidiary’s primary
market or the market with the highest sales, it’s still the
principal market.
Example 8.2
Fair value on asset is based on the highest and best use of the
asset. And the current usage of the land is considered the
highest and best use as long as no other evidence states
otherwise. If so then the agricultural value of the land is it sfair
value
However if an alternate exists that is legally permissible , then
that would be taken as the best use
There are potential buyers for the land if it was for residential
purposes and the planning permission is expected to be given.
Also the govt. is also encouraging the use of farm land for
residential purposes
Therefore the fair value of the assets will be based on the
residential value as it is the highest and best use and Twiggy
will record PV of the land at this value
There is no enough information to make certain that if the land
can be used for commercial purposes with legal purposes, and
therefore the FV will still be recorded as it s residential value.
If there were no restrictions set in place for commercial
projects, given that it would be the higher price . Then the FV of
the land will recorded on the basis if the commercial value
Example 8.3
O inventory:
For the first package the customer gets to buy the hardware,
professional service, and hosting services. Based on this
package each of these services can be sold separately under
separate contracts and are distinct to each other.
Also each of them are frequently sold on their own and do not
need to be integrated, and therefore there are 3 separate
performance obligations on this package.
For the hosting and professional services that are provided over
time, and as the customers benefit from them as they are
provided, the revenue would be spread throughout the terms
of the contract.
Inventory X:
Example 8.4
Johny does not expect that they will meet the target as they
have not usually achieved this in the past and most of the work
is outside is their control. Therefore the $4 million will not be
recognized and the transaction price will amount to $12 million
Exsmple 8.5
Example 8.6
Example 8.7
Group Accounting
Example 9.3
Refer to spreadsheet:
The FV of $20m shares given by Kutchen in exchange of
purchasing the 70% shares in House is $40m (20m*2)
The contingent consideration should be considered at its fair
value on the date of acquisition after taking account of the
probability of Kutchen meeting the profit target
The FV of contingent consideration is $2m (20%*5*2). This will
be recorded at acquisition and the goodwill will not change if
the actual value of shares is different in the future
The contingent consideration will be shown with other
components of equity ( shares to be issued)
The 20m shares will be recorded in the Share capital with
nominal value and the share premium will be shown as the
difference of the nominal value and the market price ie., 20m
(20*1)
Example 9.4
Example 9.5
Example 9.6
Refer to spreadsheet
Example 9.7
Example 10.2
The sale of shares in Doyle results in loss of control. Therefore,
the goodwill, net assets
Example 10.4
Refer to the spreadsheet
Example 11.1